The Tycoon Report

"What a Revoltin' Development This Is!" - Jimmy Durante

That was a favorite quote of Jimmy’s, from his early days in television. Later on, there was the “Jimmy Durante and Garry Moore Show,” in which every performance was graced by a tongue-twister byplay between Jimmy and Garry, which Jimmy always lost when he tried to say “This is the self-same spot where sad old Scott got shot” three times in a row without making a mistake.

And now we learn that even the life insurance companies are in the self-same spot where sad old Scott got shot. What a revoltin’ development this is.

Frankly, I’ve been waiting for this shoe to drop. Historically, life insurance companies have invested in conservative stocks and bonds. During my working lifetime in the shopping center development industry – on both the landlord’s side and on the tenant’s side – the definition of the term “shopping center” evolved from that of tiny little bank-loan-financed strip centers with no parking of their own to the weather-enclosed model with its own parking to gigantic enterprises such as the Mall of America, South Coast Plaza, and Sawgrass. One or two life insurance companies took an early lead in dipping their toes in the water by providing long-term financing for this growing new breed of retailing. As time went on, more and more life insurance companies and pension managers joined the fray, and more and more the banks became simply construction loan providers, with a “takeout” loan at the ready from a life company upon completion of the project. It even grew to the point where actual 50-50 joint ventures were formed between developers and life companies, in which the life insurance company supplied 100% of the capital and the developer supplied 100% of the work.

I remember one “early warning” during a period of very high interest rates decades ago when one of our permanent lenders (a large life insurance company; you would recognize the name) defaulted on its “takeout” obligation to us while the project was under construction, which jinxed the flow of construction money from our short-term bank lender, whereby construction stopped. The reason for the life company’s default was that it had run out of money! How in the world could a life insurance company run out of money? Because, in a period of high interest rates, policy holders had descended en masse on the company to take advantage of their right, under the terms of their life policies, to borrow against the loan value of the policies - at 4% per annum!

Now, in a period of economic decline, defaults in rent payments, and disappearing tenants, the life companies are discovering for the first time that shopping center loans which seemed so secure and tasty just a short time ago are something less than solid Gold. It’s not just shopping centers, either; it’s office buildings, too. One of the first signs of real trouble in that quarter was the collapse, a year or two ago, of the Macklowe office building enterprise in New York City and the “reallocation of its assets” (including the marquee General Motors Building, oddly enough) among a group of lenders.

Not all of the life insurance companies are deeply involved in commercial real estate lending, of course; and in any event those loans are only part of the problem. The value of their more conventional investments – say, stocks – has declined since the stock market high of October 2007, along with everyone else. It becomes a question of capitalization and reserves sufficient to meet State standards when compared with present and anticipated obligations. The life companies – and insurance companies in general – have unique regulatory compliance problems, in that the insurance industry is regulated by the individual States, not by the Federal government. The complexities must be enormous.

It is unthinkable that a life insurance company would be allowed to fall into a position in which it could not pay off on a life insurance policy. Of all of the contracts which a person undertakes during his lifetime, none, I would venture, is held by him to be more sacred and more sure of performance by the other side than an insurance policy on his own life for the benefit of his wife and children. As solid as the Rock of Gibraltar. Indeed.

So when the biggest life insurance companies come now, standing on the bailout line, a very special case is presented, and a very special worry. Life insurance policies must pay off, period. Otherwise, there will be social upset far, far beyond the disrepute and scorn now being directed toward the banks.

Failure to pay off on a life insurance policy would be as personal as it gets. It cannot be allowed to happen. “Whatever it takes,” it cannot be allowed to happen.

William Kurtz

April 9, 2009

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