The Determinants and Potential Effects of Life Insurer Mortgage Backed Securities Exposure

Journal of Insurance Issues, Vol. 33, No. 1, pp. 1-30, 2010

30 Pages Posted: 8 Apr 2009 Last revised: 15 Oct 2010

See all articles by Andre P. Liebenberg

Andre P. Liebenberg

University of Mississippi - School of Business Administration

L. Lee Colquitt

Auburn University - Harbert College of Business

Harris Hollans

Auburn University - College of Business

Date Written: January 29, 2010

Abstract

Our study examines two aspects of life insurers’ exposure to the troubled residential mortgage backed securities (RMBS) market. First, we develop and estimate a model that explains cross-sectional variation in RMBS exposure in terms of firm characteristics. We find that firms least likely to invest in RMBS tend to be small, have high separate accounts ownership, and large investments in common stocks and cash and short-term investments. Among firms that do invest in RMBS, publicly traded firms and those with a relatively high proportion of separate accounts assets, have lower levels of RMBS exposure. We then estimate the effect of a change in RMBS risk ratings on insurer surplus via the asset valuation reserve. We find that, while there is a measurable exposure to RMBS, this exposure and its resulting effects on the asset valuation reserve are unlikely to have a major impact on most insurers’ balance sheets. However, a dramatic downgrade of aggregate (residential plus commercial) mortgage backed securities could result in a decrease in surplus of almost 10% for the largest U.S. life insurers.

Keywords: Mortgage Backed Securities, Life Insurance Companies, Asset Valuation Reserve

JEL Classification: G22, G28

Suggested Citation

Liebenberg, Andre P. and Colquitt, Larry Lee and Hollans, Harris, The Determinants and Potential Effects of Life Insurer Mortgage Backed Securities Exposure (January 29, 2010). Journal of Insurance Issues, Vol. 33, No. 1, pp. 1-30, 2010. Available at SSRN: https://ssrn.com/abstract=1374023

Andre P. Liebenberg (Contact Author)

University of Mississippi - School of Business Administration ( email )

PO Box 3986
Oxford, MS 38677
United States

Larry Lee Colquitt

Auburn University - Harbert College of Business ( email )

415 Magnolia Ave.
303 Lowder Business Building
Auburn, AL 36849
United States
334-844-3010 (Phone)
334-844-4960 (Fax)

Harris Hollans

Auburn University - College of Business ( email )

Department of Finance
303 Lowder Business Bldg.
Auburn University, AL 36849
United States
(334) 844-3009 (Phone)
(334)844-4960 (Fax)

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