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Insurers Monitor Shocks to Collateral: Micro Evidence from Mortgage-backed Securities

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  • Thiemo Fetzer
  • Benjamin Guin
  • Felipe Netto
  • Farzad Saidi

Abstract

This paper uncovers if and how insurance companies react to shocks to collateral in their portfolio of securitized assets. We address this question in the context of commercial real estate cash flow shocks, which are informationally opaque to holders of commercial mortgage-backed securities (CMBS). Using detailed micro data, we show that cash flow shocks during the COVID-19 pandemic predict CRE mortgage delinquency, especially those stemming from lease expiration of offices, reflecting lower demand for these properties. Insurers react to such cash flow shocks by selling more exposed CMBS - mirrored by a surge in small banks holding CMBS - and the composition of their CMBS portfolio affects their trading behavior in other assets. Our results indicate that institutional investors actively monitor underlying asset risk, and even gain an informational advantage over some banks.

Suggested Citation

  • Thiemo Fetzer & Benjamin Guin & Felipe Netto & Farzad Saidi, 2024. "Insurers Monitor Shocks to Collateral: Micro Evidence from Mortgage-backed Securities," CRC TR 224 Discussion Paper Series crctr224_2024_590, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2024_590
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    File URL: https://www.crctr224.de/research/discussion-papers/archive/dp590
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    More about this item

    Keywords

    Insurance Sector; Risk Management; Mortgage Default; Commercial Real Estate; CMBS; Workfrom-home;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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