Risky real estate loans trouble insurance industry


NEW YORK -- Insurance regulations are expected by year-end that will require capital reserves against risky mortgages and real estate investments, state insurance regulators said earlier this month.

Having clamped down on risky "junk bond" investments, officials at the National Association of Insurance Commissioners said they now are considering setting similar measures for mortgages and real estate.

The association, the official organization of state insurance commissioners, is quizzing about 5,400 life insurance, property and casualty, and reinsurance companies about their real estate and mortgage portfolios, said Robert Klein, the NAIC's director of research. A questionnaire due back at the NAIC by June 30 asks the companies to quantify their holdings and give some information about how risky the loans are.

The NAIC will use the data to develop a new rating system for real estate and mortgage loans. It will then recommend an increase in the capital reserves that insurance companies are required to keep against risky loans, and perhaps a cap on the riskiest investments, said Larry Gorsky, an actuary with the Illinois Department of Insurance.

Insurance companies currently reserve cash for a bad real estate loan "once [they] already know that the loan is bad," Mr. Gorsky said. The new regulations would rate the loans as they come onto the company's books, and adjust reserves accordingly, he said.

PD "We're talking about a mechanism that would, in effect, pre-fund

the default," Mr. Gorsky said.

The insurance industry is virtually unregulated nationally. Although most state insurance laws conform to NAIC guidelines, the NAIC does not have any regulatory power.

There are accounting guidelines governing real estate investments, but state commissioners are given wide discretion to waive them, officials said. The new rules would make state laws more uniform and narrow the commissioners' discretion.

Along with junk bonds, real estate and mortgages have been getting increasing attention from people concerned about the solvency of insurance companies.

According to a study soon to be released by Weiss Research Inc., 16 life and health insurance companies with assets of at least $2 billion have more than 40 percent of their capital tied up in non-performing mortgages.

Concern about real estate investments sharpened recently after Massachusetts officials seized Monarch Life Insurance Co. because of bad real estate loans at its parent company.

"I think commercial real estate is a real problem," said Robert Hogue, senior insurance analyst at Moody's Investors Service. "There's a lot of problem real estate in this country, and a lot of it HTC is owned by insurance companies, or at least they have the mortgage loans."

Favorable tax laws and deregulation of the savings and loan industry led to vast overbuilding in the 1980s. Insurance companies were among the leaders in providing long-term financing for real estate development, analysts said.

The loans did well as long as the economy was booming. But when the recession began gutting real estate values, the industry sharply cut back its real estate lending. Some life insurance companies stopped making any real estate loans, said Henri Bersoux, a spokesman for the American Council of Life Insurance.

Insurance companies, concerned that Congress may impose federal regulations, are publicly supporting the NAIC's efforts.

"If the NAIC or anybody else is doing something that seems to be good for the strength of the industry, we're supportive of that," said John Gustavsen, a spokesman for The Travelers Corp.

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