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North American Life Insurers "Accidentally" Pile Up Massive Distressed Debt Holdings
08-13-2016, 08:37 AM,
North American Life Insurers "Accidentally" Pile Up Massive Distressed Debt Holdings
North American Life Insurers "Accidentally" Pile Up Massive Distressed Debt Holdings

<p>Accommodative monetary policy by the Fed has crushed bond income for insurers.&nbsp; According to <a href=";utm_campaign=socialflow-organic&amp;utm_source=twitter&amp;utm_medium=social&amp;cmpid%3D=socialflow-twitter-business">Bloomberg</a>, 2015 investment income at North American insurers dropped below 2011 levels.</p>
<p><a href=""><img alt="Insurer Yields" height="275" src="" width="500" /></a></p>
<p>Unsurprisingly, in their stretch for yield, insurers added to energy bond positions in 2015 to offset the funding gap.&nbsp; Now, the collapse of oil prices has apparently left North American life insurers in a bit of a pickle with distressed debt holdings having doubled in a matter of 6 months as IG energy bonds turned to junk.&nbsp;</p>
<blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>North American life insurers have <strong>accidentally doubled their distressed-debt holdings in just six months</strong>. In the future, they are poised to build on that mound by design.</p>
<p>Companies including Prudential Financial Inc. and MetLife Inc. held <strong>$1.32 billion of bonds that were in default, or close to it, at the end of the second quarter, their highest level since the middle of 2011,</strong> according to Bloomberg Intelligence data.</p>
<p><strong>They did not intend to buy distressed debt</strong>: In many cases they bought investment-grade bonds from energy drillers and retailers that ended up heading south. Insurance companies&rsquo; trouble with these bonds underscores how even conservative investors have been hurt by plunging oil prices.</p>
<p><a href=""><img alt="Energy Risk" height="265" src="" width="500" /></a></p>
<p>Per a portfolio manager at Prudential, energy bonds appeared cheap back in 2014 due their conservative debt-to-asset ratios.&nbsp; Well, that's <strong>probably true if you just assume that prevailing market prices for commodities are right and ignore long-term supply/demand fundamentals</strong>.</p>
<blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p><strong>Energy bonds looked fairly safe to many insurers because oil and gas companies had high levels of assets relative to their debt,</strong> according to Mike Collins, a portfolio manager at Prudential&rsquo;s fixed income unit, which oversees $652 billion for external investors. <strong>But as oil prices have plunged, so has the value of the assets,</strong> and the bonds have proven to be far riskier than they appeared, Collins said. He was speaking generally and not about Prudential in particular.</p>
<p>&ldquo;I don&rsquo;t think anybody expected oil to fall as much as it did,&rdquo; Collins said, referring to the price of a barrel of oil, which plunged from more than $100 in 2014 to less than $26 in February. &ldquo;That caught a lot of people by surprise, and<strong> a lot of companies have gone from looking like they&rsquo;re in great shape to distressed very quickly.</strong>&quot;</p>
<p>But don't worry about the rising risk of bond portfolios at the insurers.&nbsp; <strong>Regulators are already working on a plan to relax capital requirements to accommodate increasing risk appetites at America's insurers.&nbsp; </strong>Guess moving down the quality curve is one way to combat a low-interest rate environment.</p>
<blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>Even if distressed holdings are largely accidental now, <strong>regulators are considering proposals that could ease the amount of capital life insurers can use to fund junk bonds</strong>, which makes it more profitable for the companies to increase their investment risk. Life insurance companies are seeking more income as low bond yields globally corrode their investment returns.</p>
<p>Under current rules from the National Association of Insurance Commissioners, which sets standards for the U.S. industry, <strong>a bond with a rating four steps below junk needs to be funded with capital equal to at least 10 percent of the bond&rsquo;s value before taxes. The NAIC is considering a proposal to lower that to around 6 percent</strong>.</p>

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