Insurers Are Very Careful Nonbank Lenders: Economists

Insurers may be a bad alternative for corporate borrowers who think bankers are bunch of boring old fuddy-duddies.

Insurers are very careful lenders themselves, and the maturities of their loans tend to be much longer, according to three economists who have studied nonbank lending.

The economists — Sergey Chernenko of Purdue University, Isil Erel of Ohio State University, and Robert Prilmeier of Tulane University — put their findings in a working paper that’s now available, behind on a paywall, on the website of the National Bureau of Economic Research.

A working paper is a preview version of a research paper. It may not have gone through the full academic peer review process.

Banks must give detailed lending reports to bank regulators, in part because the Federal Deposit Insurance Corp. gets a say over bank operations in exchange for insuring bank customers’ deposits.

Nonbank lenders do not have to file the same kinds of reports.

Some researchers have tried to look at nonbank lending in the United States in the past, but the economists who wrote the new paper say they got a broader, more detailed look by creating a random sample of 750 publicly traded, U.S.-based middle-market firms.

The researchers then obtained copies of the loan and credit agreements the middle-market companies filed with the U.S. Securities and Exchange Commission from 2010 through 2015.

The researchers excluded documents related to bonds underwritten by investment banks and placed with multiple investors. That means all of the loans in the economists’ data involved one borrower and one main lender.

The economists did not distinguish between life insurers and other insurers in their analysis, but they note that most of the insurance company loans in their data came from affiliates of Prudential Financial Inc.

Typical nonbank lenders often lend to smaller, less profitable middle-market companies than banks do, but insurers are different, the economists write.

Companies that borrow from insurers tend to have higher values of plant, property and equipment, and low levels of spending on research and development, the economists found.

Companies borrowing from insurers also had loans with average maturities that were about five years longer than average bank loan maturities.

“These results are consistent with insurance companies lending to firms with long duration assets in an effort to match the long duration of insurance policies,” the economists write.

“In addition,” the economists write, “controlling for borrower characteristics, insurance companies also make smaller loans than banks.”

But those smaller loans might have been relatively inexpensive: loans from insurers were associated with announced returns that were 2.9% lower than loans from other nonbanks.

Resources

A copy of the financial vignette paper is available here.