S&P on Insurers and CRE

Some insight from S&P on the health of insurers in the face of looming troubles in commercial real estate.

In February we conducted stress tests that simulated two depressed real estate markets between 1988 and 1995. In these tests, we paid special attention to the capital that might be needed to support the three largest components, overall, of life insurers’ own portfolios:

• Corporate bonds, which make up a roughly 70% share.

• Whole commercial real estate loans (10%).

• Commercial mortgage-backed securities (CMBS), which are about 5%.

Various other investments make up the remaining 10%.

With this testing, we found the recession, upon its completion, will definitely take its toll on required capital levels appropriate for certain rating levels. The impact of the capital stress test was central in affecting ratings. Within the capital stress test, however, corporate bonds played the major role in affecting projected defaults on an insurer’s capital, while commercial mortgages and CMBS projected losses had less of an impact.

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Despite these potential dangers, we believe the life insurance industry remains generally well-capitalized. Although we lowered the ratings on 18 issuers following our February tests, only two companies—Conseco Life Insurance (CNO) (S&P rating, BB-) and Security Benefit Life Insurance (S&P rating, BB)—carry a speculative-grade financial strength rating.

Given the dour economy, however, 14 of these 18 companies have negative outlooks or ratings on CreditWatch with negative implications. Trouble in their commercial mortgage holdings, just by itself, might not lead to downgrades. But that trouble could easily be a contributing factor if life insurers’ other portfolio holdings, along with the economy, continue to head south.

Similar Posts:

• Life Insurers 2010 Losses Estimated at $10B
• Fitch: Life Insurers To Face More Losses
• Next Wave of Stress Tests To Focus on CRE
• Prudential CRE US Quarterly Update
• CMBS Ratings Being Reviewed – It’s a Slippery Slope

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