Large life insurance companies have been selling billions of dollars in junk-bond holdings to free themselves from a ball and chain that they say is weighing more heavily on their image than on their balance sheets.
Ten insurers, each with assets of at least $4 billion, reduced their exposure to the risky corporate IOUs an average of 26% in the first six months of 1991, Weiss Research Inc. says. The West Palm Beach, Fla., concern rates the financial strength of insurance companies.
United Pacific Life Insurance Co., a subsidiary of Reliance Insurance Co., sold $800 million worth of its junk portfolio in a two-month period when the market for junk was more favorable than before.
Jackson National Life Insurance Co. of Lansing, Mich., lightened its junk holdings by $700 million in a similar time span.
Elsewhere, Kemper Investors Life Insurance Co. said $394 million of the junk bonds it held were sold, redeemed or matured in the first half of the year. Sun Life Insurance Co. of America said it sold $218 million in junk bonds at "little or no loss."
Insurers are responding to pressure from the public as well as the agencies that evaluate and rate their financial health.
United Pacific, for example, saw its credit rating downgraded earlier this year partly because junk bonds made up about a third of its investment portfolio.
Concern over insurance companies' investment mix intensified after the failure of Executive Life Insurance Co. in April. The California-based company, the largest unit of First Executive Corp., had 68% of its assets tied up in junk bonds, which played a major role in its downfall.
The effect of that failure and a handful of others rippled through the industry. "All of a sudden, everybody wanted to know the percentage of junk bonds (we had)," said William Gray, a spokesman for Jackson National. "You hear from everybody you know--agents, policyholders, prospective holders."
Chief Executive Terry Kendall said United Pacific decided to halve its junk holdings because of a public perception that the bonds were dangerous. "There's fear and panic right now" on the part of policyholders, he said.
Kendall called it "ludicrous and inappropriate" that healthy insurers were painted with the same brush as companies found to be financially unsound just because both had investments in junk bonds.
Since it is virtually impossible in today's marketplace to duplicate the double-digit returns that junk bonds promise, insurance executives say policyholders will face higher premiums as insurers seek alternate ways to make money.
Most companies Weiss cited as having sold junk bonds were able to break even or make a small profit. In most cases the proceeds were reinvested in higher-grade corporate securities at far lower yields.
Jackson National, for example, had been earning 14.32% annually on its RJR Nabisco junk bonds, which have largely outperformed the junk-bond market. The insurer reinvested the proceeds in securities yielding 10%.
Jackson National, a subsidiary of Prudential Corp. of London, made about $500,000 on the sale of the Nabisco bonds, but broke even on its total junk bond sales, Gray said.
"We would not have sold any bonds purely on an investment-decision basis," he said. "The bonds we sold were performing."
United Pacific also sold RJR Nabisco bonds, reducing its holdings from about $100 million to $50 million. Kendall estimated that his company will forgo about $25 million in income this year alone that would have been received as interest on the junk bonds the company sold.
At the end of 1990, roughly a third of United Pacific's invested assets were tied up in junk bonds; by the end of June, that figure had dropped to 17%.
Several state insurance commissioners have recommended that junk bonds make up no more than 20% of an insurer's investment portfolio.
"We have been critical of these large junk bond holdings," said Mike Silverman, a spokesman at Weiss. "We hope to see a continued reduction."
Rating agencies rely partly on documents insurers file quarterly with the government, and thus there is a delay in assessing changes companies make. What the sale of junk bonds "does to their overall portfolio and safety ratings remains to be seen," Silverman said.
But he conceded that while "a lot of people do regret junk bonds in hindsight, they can produce good returns."
Junk bonds, along with delinquent mortgages and bad real estate investments, have posed major financial problems for some insurance companies, which like many other investors were attracted by their higher yields in the 1980s. With the failure of several insurers, policyholder faith in the security of their futures has been shaken.
Selling Off Junk Bonds Large life insurance companies are reducing their holdings in the junk bond market.
Percentage of invested assets in junk bonds
6/30/91 12/31/90 United Pacific Life Ins. Co. 17.2%* 32.9% Anchor National Life Ins. Co. 15.8% 22.6% Kemper Investors Life Ins. Co. 15.5% 22.4% Northwestern National Life Ins. Co. 15.5% 16.9% Jackson National Life Ins. Co. 11.0%** 19.3% Pruco Life Ins. Co. 10.2% 12.3% Sun Life Ins. Co. of America 9.9% 14.4% Fidelity & Guaranty Life Ins. Co. 9.7% 12.9% Keyport Life Ins. Co. 9.5% 11.1% Allstate Life Ins. Co. 8.7% 10.1%
Source: Weiss Research Inc. * Reflects data as of July 31. ** Reflects data as of Aug. 29.