Insurance companies have been taking action to solidify their cash reserves since the start of the economic crisis, and have been working to decrease the number of high-risk investments within their investment portfolios, for example collateralized debt obligations.
According to life insurance analyst Steven Schwartz, from Raymond James & Associates Inc., if they are not capable of borrowing money, holding companies are keeping notably more cash in order to cover their debts. In fact, they are currently holding twice to three times the amount that had been held in past years.
Equally, vice president Andrew Edelsberg from A.M. Best Co. Inc., said that over the last year and half to two years “companies have been proactive in selling out of riskier securities, like [collateralized-debt obligations], and giving up some yield for safety.”
The stock prices for insurance companies are clearly reflecting the distance that companies have travelled since the worst times in the global economic crisis. For example, the KBW Insurance Index is currently 134 percent higher than it was in March 2009.
Following the downgrade of the American credit rating by Standard & Poor, the KBW Insurance Index dropped by 9.83 percent on the next day, closing at 96.52. Similarly, the wider Dow Jones Industrial Average tumbled by 5.5 percent or 634.76 points, to reach 10,809.85.
That said, not all insurers are faring as well. With the possibility of a second recession ahead, analysts are closely watching the financial position of insurance companies, especially those that have just taken on mortgage-backed securities and other forms of higher risk assets in the attempt to gain more yield.