Subprime Blogger

Back in December we wrote the article First the Subprime Mortgage Crisis; Now the “Exotic” Mortgage Crisis? The article illustrated how we could see another wave of mortgage failures when “exotic” adjustable rate mortgages reset in the next two years.  We are slowly starting to see this play out as foreclosures remain at extremely high levels.  The free falling housing market with the bear market on Wall Street has many wondering if the next shoe to fall will be the Life Insurance industry.  Will the Life Insurance Crisis rear its ugly head?

Life insurers Hartford Financial, Principal Financial and Lincoln National have great exposure to mortgage-backed securites and other risky debt investments.  All three of these companies have seen a 50% decline in their stock price in the last month alone.  Is this a sign of things to come for the life insurance industry?

Life insurance companies are invested in stocks and bonds to meet cash-flow needs years from now.  With the addition of mortgage-backed securites to their investment portfolio many insurers are piling up huge losses.  To compound matters, many of the insurers were invested in the subprime and real-estate loan industry.  In February, Hartford Financial and Lincoln National each reported a loss of over $200 million for the previous quarter.  Many analysts believe that some large life insurance companies are sitting on billions of dollars of losses that have yet to be reported.

Now that these companies are publicly reporting steep losses, credit agencies are lowering the insurers credit ratings.  If their ratings get lowered repeatedly it is likely large corporate customers could discontinue their business.  Once large corporations stop doing business with the insurers, it is only time until individuals pull all their money out as well.

If all of this happens and the credit rating agencies Fitch, Moody’s and S&P downgrade the current credit ratings, we may lose most life insurance companies.  To check the credit rating of your insurer you can go here.  Is it really possible that your entire life insurance policy could disappear?  Not all of it; you will definitely get up to $100,000 from the government, but anything above that will be lost if the life insurance industry goes into a crisis.

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