With the U.S. Treasury sounding the siren for the possible U.S. default and potential effects of even postponing a debt ceiling increase deal, the life insurance industry is saying, “meh,” at least with regard to their investment in Treasury securities being affected by the talks.
"In the event of a default, the U.S. economy could be plunged into a recession worse than any seen since the Great Depression,” the Treasury warned Thursday. “The U.S. dollar and Treasury securities are at the center of the international finance system. In the catastrophic event that a debt limit impasse were to lead to a default on Treasury securities, financial markets could be shaken to their core as was seen in late 2008, which resulted in a recession worse than any seen since the Great Depression.”
The Treasury issued a report on the potential macroeconomic effect of debt brinksmanship and Secretary Jack Lew has taken to the press to urge Congress to “raise the debt limit immediately to avoid self-inflicted wounds that could impede economic growth and create uncertainty for families and businesses.”
Life insurers are monitoring the situation closely, but don’t want to comment on hypotheticals. However, investment surveys of the life insurance industry’s general account assets show that they are mostly in fixed-income securities like corporate bonds and mortgage loans.
“Only 8 percent of our general account assets are held in long-term government bonds. In comparison, about half of our general account assets are in corporate debt,” said Jack Dolan, a spokesman for the American Council of Life Insurers (ACLI).
The bond portfolios of the companies surveyed were heavily weighted toward corporates, which accounted for 62 percent of the total bond holdings, according to a report by Fitch released last month.
For example, among U.S. agencies at year-end 2012, Prudential Financial had about $17.4 billion in fair value U.S. Treasury securities and obligations available for sale, up from the previous year, but it had $159.33 billion in corporate securities, also up from the previous year, among its fixed maturities, available for sale.
The credit quality of corporate bonds was generally high with an average credit rating in the 'A'/'BBB' range. Approximately 9 percent of corporate securities were below investment-grade. And foreign government exposure was minimal at less than 2 percent, Fitch said, for the life insurers it surveyed. These insurers represent approximately two-thirds of the total life insurance industry's general account invested assets and include 15 of the largest 20 life insurance groups in the U.S. based on total admitted assets.
“When it comes to life insurers and their investments, always keep in mind that we’re in it for the long term. We don’t see this brinksmanship causing significant issues for the industry. This is especially true as it relates to our bond holdings,” Dolan said.
Prudential Insurance was quoted early this year by the New York financial press after a closed interview saying it would be underweighting Treasuries and other government-related bond sectors in 2013 while it eyes riskier fixed income markets in this low interest rate environment. However, investment executives said earlier this year, according to Reuters, that any significant doubt about Treasury not paying interest and principal on its securities is basically a whole other ball of wax from a macroeconomic perspective.
At any rate, for the life insurance surveyed universe, structured securities represented 25 percent of the investment portfolio. This included agency pass-throughs, commercial mortgage-backed securities (CMBS), non-agency RMBS and asset-back securities.
Overall quality of commercial loan portfolios remains solid, according to Fitch, with 94 percent of commercial loans with loan-to-values below 80 percent at year-end 2012, up from 91 percent at year-end 2011.
Rep. Jeb Hensarling, R-Texas, the chairman of the House Financial Services Committee, countered the Treasury stance on the debt ceiling impasse by stating in a press release, “Washington Democrats are the only ones talking about default because it is the only way they can continue their reckless spending spree. We will never default on our nation’s sovereign debt and House Republicans are the only ones who have acted to ensure our obligations are met. This debate has been and always will be about our fiscal priorities, not default.”