Not Exactly Condition Titanic : Insurance business in better shape than it looks
And now insurance companies too?
Not necessarily. Most insurers are solvent because their investments are more diversified and less risky than the disastrous ones of the savings and loan outfits. Still, serious questions are arising about the health of the insurance industry. So now its major problem is not cash flow but public perception.
THE CULPRIT: Public confidence was badly shaken when New Jersey authorities seized Mutual Benefit Life Insurance Co. last week after jittery customers sought to cash out policies and annuities en masse, in what amounted to a run on the nation’s 18th-largest life insurer. And, in banking, the proposed merger of Chemical Banking Corp. and Manufacturers Hanover Corp., which will result in thousands of layoffs, shook that industry.
The culprit in both cases is the sour real estate market. It’s taking a toll on insurance companies and banks: pay-back time for their excesses in the real estate game.
Market dynamics are forcing a disruptive restructuring, and that in turn is causing Angst and insecurity in the lives of thousands of workers, investors and retirees.
The depreciation of commercial real estate and the rising number of problem loans are the sources of these wrenching changes. When the business went bad, many banks adjusted their books to reflect the lower real estate values but insurance firms did not.
Traditionally, life insurers sold simple policies with highly predictable cash refunds and policy payouts at death. But in recent years, many firms favored selling annuities and creating exotic products that tapped pension funds by guaranteeing a high rate of return. That put pressure on insurers to seek high-yielding investments, in some cases high-risk junk bonds.
THE REALITY: Real estate lending was a moneymaker until values skidded, region by region. Mutual Benefit, for example, had planted 40% of its assets in real estate, compared to the industry average of 20%. The high proportion of hard-to-convert property assets triggered concerns about Mutual’s “asset quality” and solvency, causing the run by customers. New Jersey authorities stepped in to rescue Mutual in what was the sixth failure of a life insurer this year and the industry’s largest ever.
It was a similar story with the big banks, many of which chased real estate. Increasingly, however, problems with real estate loans, not to mention costly Third World debt, have caused a retrenchment in banking. To get a competitive boost, Chemical, the sixth-largest bank, and Manufacturers, the ninth-biggest, are merging, subject to regulatory approval, to create the second-largest bank (after Citicorp). That move is expected to prefigure a wave of consolidation in the industry. In fact, this is long overdue and should help the banks cut costs and increase profits. Chemical and Manufacturers predict a $650-million annual savings achieved through 6,200 layoffs and the closing of 70 branches.
As painful as these realignments are, they are necessary to adjust to new realities.
