Financial Investing, have we not learned from our past?

The other day I came across an A.M. Best TV news article that was describing how insurers are responding to the prolonged low interest rates by exploring alternative investments.  They are bracing themselves for higher interest rates in 2015.  Due to these interest rate increases, they want to keep their investment portfolios shorter in life.  It was reported, insurers have increasingly looked to commercial mortgages and private placement bond offerings for a higher yield, but they are doing it in a more conservative way.  I don’t know about you, but doesn’t this sound familiar?  With these too big to fail insurance companies, and being just a few years out of one of the most devastating financial times in our history.  One of the main financial reasons was the investments in mortgage back securities.  They made themselves believe they knew what they were doing, and they were experts in investing.  I’m not sure that happened in 2008-2009, but leading up to those years, the insurance companies continued to push their underwriting rates down and took more market share, and invested in “non-safe” bonds, that lead to their failure.  These bad investment ideas caused several insurance companies to fail, some limped along for years, and some ended up buying smaller banks to tap into and receive TARP money.

What does this mean?  Right now, nothing, but wait and watch.  These companies could once again witness a downward trend in the commercial mortgage market.  I read another article discussing a very weak commercial real estate market, and read another article discussing the vacancy rates in the Twin Cities.  What caught my attention with the vacancy article tied directly to the A.M. Best TV article.  The article stated that vacancy rates in the Twin Cities could increase over the next 18 months or so to somewhere around 24% from 14%.  If this is true, and let’s hope it is not, what do you think that will do to those commercial mortgages?  Make them stable, I doubt it.  It is possible this will cause insurance companies to once again start pushing up rate again to make up their investment losses.

I hope “this small conservative investing”, as they put it, doesn’t start taking on a bigger role for these insurers as our economy limps along.

If you have any questions, please contact me, and thank you for reading.