Life insurer sales of guaranteed investment contracts (GICs) and other institutional, spread-based investment products stopped during the recent credit crisis and have just started to show faint signs of life.
Analysts at Moody's Investors Service, New York, discuss insurers' role as institutional lenders in a commentary.
Insurers provided more than $150 billion in GICs and other institutional lending products, such as funding agreement-backed notes, in 1999. Assumption of institutional lending liability peaked at $413 billion in 2007, according to Moody's.
The credit crisis that hit in 2008 and 2009 hurt both supply and demand for the products, and the Moody's analysts say they expect balances to drop by 10% or more per year over the next two years as existing arrangements mature.
"We believe companies are looking to reallocate capital to less capital intensive, more profitable business lines," the analysts say.
Some U.S. subsidiaries of European insurers may be preparing for higher Solvency II capital requirements by edging away from the institutional lending market, the analysts say.
The value of the liabilities associated with the products amounted to about 13% of life company general account reserves in late 2010 and probably will drop to 7.2% of reserves in 2012, the analysts say.
About 10% of insurers have projected maximum cash-flow shortfalls associated with the liabilities at over 15% of total institutional lending product liabilities, the analysts report.
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