Insurance firms latest lenders to face trouble


With real estate values going downhill and banks nationwide struggling to avoid being buried in the slide, anxieties are focusing on yet another group of lenders: life insurance companies.

Some analysts warn that troubled assets have grown so large at dozens of insurance companies that they could face the prospect of bankruptcy -- especially if the economy weakens further.

But most experts think that a wave of bankruptcies putting large numbers of policyholders at risk remains unlikely. Even a lesser crisis of confidence in the life insurance industry, however, could tighten the credit noose on many business borrowers, deepening and lengthening the now likely recession.

"It would be disaster to lose a major source of capital," concludes Eden Sarfaty, the head of the National Organization of Health and Life Insurance Guarantee Associations.

Until the last decade, life insurance was the most predictable of financial industries. Much premium income was invested in bonds, mortgages and real estate, all of which were susceptible to fluctuations in value.

But the death benefits and minimum investment returns promised to policyholders were based on such conservative assumptions that honestly managed insurance companies ran little risk of being unable to pay their obligations.

But since the early 1980s, said Terry Lennon a senior official in New York state's Department of Insurance, "life insurers have been forced to change because other financial institutions changed."

Companies guaranteed higher returns to policyholders, cutting margins for investment error. Yet, in an effort to maintain profits, they sank more money in riskier assets.

IDS Financial Services in Minneapolis estimates that "junk" bond holdings now account for 6.4 percent of life insurers' assets -- a sum equal to the industry's net worth.

IDS concludes that life insurers are highly vulnerable to economywide shocks that raise interest rates, or force corporate borrowers into bankruptcy or undermine the value of commercial real estate.

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