Life insurers still dogged by real estate investments: A.M. Best

Despite an improving economy, losses and investment risks continue to loom ahead for life insurers' investment portfolios, according to a report from ratings firm A.M. Best Co. Inc. The report did reveal that the top 16 publicly traded U.S. life and annuity carriers had a boost in profit during the third quarter of 2009. Those companies raked in some $1.51 billion in net income, up from a loss of $217 million in the second quarter. Net realized losses slimmed down to $5.02 billion in the third quarter, an improvement from the $7.13 billion loss in the second quarter. But A.M. Best noted that commercial real estate loans, property holdings and bundles of commercial mortgages — commercial-mortgage-backed securities — continue to present carriers with risk. The ratings specialist added that the real threat for life insurers lies in a lengthy period of economic weakness along with a low interest rate environment. Puny interest rates could raise insurers' cost of fulfilling guaranteed rates of return or the rate paid out on annuities, according to A.M. Best. Further, while carriers raised money by issuing debt or equity offerings last year, realized losses and increased reserve requirements for variable annuities will eat up some of those proceeds, according to the report. In terms of the actual investment portfolios themselves, A.M. Best notes that carriers have pulled back their exposure to alternative asset classes to safeguard themselves from volatility. Life insurers also stressed the need for liquidity, raising positions in cash and short-term investments — Treasury securities and open market paper — throughout the first half of 2009. A.M. Best maintained its bleak outlook on commercial mortgages and the structured securities comprised of them. Life carriers' exposure to direct commercial mortgages and CMBS equates to about 17% of their invested assets. Those investments will feel the impact of increased vacancy rates, high unemployment figures and rising bankruptcy filings, the rating agency noted.