Insurance Cos. show renewed real estate interest.Interest in real estate lending is up selectively among the nation's leading life insurance companies drawn to niche markets that offer attractive yields, according to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. the national accounting and consulting firm Noun 1. consulting firm - a firm of experts providing professional advice to an organization for a fee consulting company business firm, firm, house - the members of a business organization that owns or operates one or more establishments; "he worked for a of Kenneth Leventhal & Company (KLCO). This renewed interest, at a time of mounting real estate losses by some companies, varies significantly by the insurers' strength, asset mix and capital requirements Capital requirements Financing required for the operation of a business, composed of long-term and working capital plus fixed assets. , according to Dennis Yeskey, managing director in the KLCO New York New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of office. Yeskey surveyed 20 major life companies that account for more than 50 percent of the industry's total real estate holdings. "Yield spreads on commercial mortgages have been very appealing through mid-1993 and, even though they've narrowed, remain attractive in the face of declining interest rates on fixed-income securities Fixed-income securities Investments that have specific interest rates, such as bonds. ," said Yeskey, who directs the firm's insurance industry practice. "Insurers have been pressured to improve their portfolio performance, so even though commercial mortgages and their derivatives have high capital requirements, insurers with healthy balance sheets are drawn to real estate yields of 150 to 250 basis points over Treasuries, depending on asset quality," added Yeskey. He predicts that well-positioned insurers will lend on apartments, retail centers and industrial properties in strong markets, providing borrowers with much-needed, lower-cost capital. Need to Improve Solvency Prompts Sales "Some insurers, however, underestimated the full impact of new risk-based capital rules so they are actively studying or pursuing several strategies for existing portfolios such as bulk sales, individual loan sales or securitizing loans to lower their reserve requirement," Yeskey explained. Yeskey's survey also showed another group of insurers packaging some commercial properties and mortgages for sale through real estate investment trusts (REITs), taking back preferred stock Stock shares that have preferential rights to dividends or to amounts distributable on liquidation, or to both, ahead of common shareholders. Preferred stock is given preference over common stock. Holders of preferred stock receive dividends at a fixed annual rate. and issuing warrants. These moves respond to the need for companies to improve their solvency. "Preferred stock holdings require only two to nine percent risk-based capital compared to the 30 percent required for common stock. Stock warrants require no capital reserves," he added. It's estimated that more than $3 billion in properties and mortgages have been sold this year by Travelers, Prudential, Equitable, Metropolitan Life and others, with almost $2 billion in sales announced in the past few months. "This is the tip of the iceberg tip of the iceberg n. pl. tips of the iceberg A small evident part or aspect of something largely hidden: afraid that these few reported cases of the disease might only be the tip of the iceberg. as insurers start offering more product well into 1994," Yeskey pointed out. New risk-based capital rules, which will come into effect at year-end, were formulated by the National Association of Insurance Commissioners The National Association of Insurance Commissioners (NAIC) is an Internal Revenue Code Section 501(c)(3) non-profit organization which seeks to organize the regulatory and supervisory efforts of the various state insurance commissioners from around the United States. . As a result, companies will have to reserve significantly more capital against the value of commercial properties and mortgages. The rules, however, favor holding mortgage-backed real estate securities. Investment Strategies Shifting Yeskey also found that life companies' competitive positioning is being influenced by investment strategies. As capital requirements rise, solvency ratings fall, causing alarm among stock and policy holders alike. He believes insurers will incur more losses this year due to increased loan restructuring and foreclosures plus the overhead needed to carry these assets. This 1oss trend will likely continue into 1994, "There is going to be increased pressure on earnings and dividends because of mounting losses from real estate and operations. Many companies will not meet their 1993 projections," he predicted. "And many of the mutuals that have been slow to recognize real estate losses will be pressured to start doing so by regulators more closely scrutinizing accounting standards - both statutory and GAAP GAAP See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (GAAP). ," he added. Insurance Industry Reconfigures "We're on the verge On the Verge (or The Geography of Yearning) is a play written by Eric Overmyer. It makes extensive use of esoteric language and pop culture references from the late nineteenth century to 1955. of a slow-motion shakeout Shakeout A situation in which many investors exit their positions, often at a loss, because of uncertainty or recent bad news circulating around a particular security or industry. Notes: During the dotcom boom and bust, numerous shakeouts occurred. in the insurance industry. Some larger insurers will take this opportunity to expand while others will shrink," Yeskey predicted. |
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