The Looming Danger of Non-Banks
axios.com
axios.com
Long story short, this is really sensationalist back of napkin math from a reporter talking about a very regulated and complicated industry that they seem to know nothing about. No wonder is such garbage.
Edit: Upon further reflection, this doesn't even cover reinsurance that they might have that cover abnormal losses across individual, blocks of business, and across the entire company.
Even in the event they didn't have the capital to pay off their life insurance liabilities due to loss, they would probably liquidate their inforce blocks of business by auctioning them off to other insurance companies to cover their remaining losses.
There's just so much ignorance and sensationalism here, it's hard to comprehend.
If you have an adverse mortality rate problem big enough to shake a highly regulated industry like life insurance (there's no reason to believe mortality would be selective by insurance company), you probably have far bigger problems in your country than insurance - war, mega natural disaster, mega epidemic and the like.
On it’s own that’s not a big deal, but if something like a slightly unusual seasonal flu happens to hit that segment unusually hard and suddenly they have a huge liability.
It's mentioned in the article, but AIG's fall in October 2008 was as dangerous and big as Lehman's, and afaik none of the conditions mentioned in your comment were in place.
Like the OP says, there have been regulations put in place to try to avoid a similar thing happening in the banking sector but the same thing hasn't happened with the big insurance companies in a consistent manner. Again, afaik the US putting some big insurance companies on this "too big to fail" list was the only such measure taken to avoid a new AIG, but with them now being off the list I see no such strong checks in place. And this should be done at the federal level, you can't expect state legislations (even if applied in the majority of the states) to put a check on an entity that has ~USD 1.4 trillion under quite active management.
https://www.investopedia.com/articles/economics/09/american-...
Honest question -- has this changed since 2008? If not, how is this different from AIG in 2008? Because putting aside AIG's sensational Credit Default Swap issues, the bigger story was AIG Investments' Securities Lending fiasco where huge portions of the reserves were lent out (short term) and the funds were used to buy illiquid mortgage backed securities which went down in value precipitously. https://www.americanbanker.com/opinion/aigs-collapse-the-par...
>Prudential could be forced to start liquidating its assets at fire-sale prices, which could set off a chain reaction in the rest of the financial markets and even the economy as a whole.
Makes me question that. He gets through all of his scenario without once mentioning the Orderly Liquidation Authority, which despite the Dodd-Frank rollback is still in the toolbox, and is this is basically exactly what it was made for. So to be blunt, imo best case he's made a critical error of omission, unintentional or otherwise.
And this is not to say it's a sure thing. It's the government. It would be far from perfect, it would be far from clean, but most everyone involved is on the same page in terms of what we don't want happening, which is more than I can say about most things.
Of all the things that the crisis taught us and we have in fact learned from, is that failure of a large financial institution is terrible; an uncontrolled liquidation of a failed financial institution is way worse.
How many deaths? Based on their acquisition of The Hartford $135 billion = 700,000 in force life insurance policies, each policy is worth $192,857. The article claims Prudential could be bankrupted by losses of $42 billion = 217,778 policies.
That's a lot of deaths for peacetime. Flu only kills about 36,000 people in the US each year [1]. Terrorism killed only 3191 people in the US in between 2000 and 2016 [2]. However, it's not a lot in a war. The Vietnam War claimed 1.3-4.2 million lives. [3]
Conclusion? Stop American politicians from trying to start a war. Please work for peace, even if it costs your job (c.f. Project Maven military AI at Google [4])
[1] https://en.wikipedia.org/wiki/Influenza#Epidemic_and_pandemi...
[2] https://ourworldindata.org/grapher/fatalities-from-terrorism...
[3] https://en.wikipedia.org/wiki/Vietnam_War
[4] https://www.engadget.com/2018/05/14/google-project-maven-emp...
Anyway, avoiding this kind of war does not depend on benevolence of America only. It's not helping when your senile opponent professes visions of nuclear martyrdom on TV.
Of whom 58,318 were American. Over many, many years. In an era of mass conscription, very different to today.
Pretty much any insurance company does the same.
That's only half the question.
The other half of the question is: do the people who die in war-fighting typically have private life insurance?
From my experience, the answer is a huge no. Most people go to war with government life insurance, simply because it's heavily pushed on them. They don't have a need for life insurance because they're unmarried 18-22 year old men, so I highly doubt that they have many non-SGLI policies.
The biggest reason people buy life insurance is because they're married and they have a mortgage. That disqualifies almost all of the military. Even if service members are married, they typically live in on-base housing and don't carry a mortgage.
The US lost approximately 60K that's 30K a year.
Isn't that just a feature of insurance companies. My understanding is most large insurance companies are too big to fail and are an unexpected event from being insolvent and needing a taxpayer bailout.
As long as everything runs within the parameters they set up, they are fine raking in the premiums. Anything out of bounds and they are bankrupt. And as they tighten the parameters to squeeze out more profits, the less room they have for error.
Whether we like it or not, private insurers are backstopped by the government. A prime case of privatized profits and socialized risk.
Especially since insurance is more likely to cover automotive death than death in war.
Furthermore, the amount of assets under management by Prudential, mentioned in the article as a reason to fear trouble at the company, is irrelevant to the mortality fluctuation argument, as those assets are largely in separate accounts walled-off from the life insurance business.
Life insurance doesn't have a contagion effect like housing.
If a small percent of people can't pay their mortgages at the same time, that causes housing prices to fall. Falling housing prices cause people who recently purchased houses to walk away from their mortgages. Suddenly mountains of money disappears from bank balance sheets and the economy crashes.
Life insurance doesn't have this feedback loop. If a large number of Americans suddenly and unexpectedly die for some reason, it seems like the type of situation the government would step in to resolve anyway.
Yes they do because insurance companies invest their "float" in other assets. To me it is concievable that a large enough forced seller of debt instruments could cause a) movement in prices b) readjustments of the balance sheets of anyone holding those instruments on a "mark-to-market" basis.
I feel like the attitude that "the government would step in" is doubtful (at least in the UK, the history of insurance insolvencies is that the government lets them go to the wall, particularly as a lot of insurance is unlimited liability - meaning creditors come for the partner's houses) and alternatively just a tacit acknowledgement that Prudential Financial is systemically important.
Another way to put this is privatize the premiums and socialize the risk. If we the people are going to provide a reinsurance backstop we should be compensated for it appropriately.
- An insurance business where they hope to underwrite risk intelligently to pay out less than they make in premiums.
- An investment company where they investment insurance reserves (to keep them safe, but also to gain extra $ beyond what is required for reserves)
The insurance reserves follow state insurance "stat" guidelines and are usually spread across corporate bonds, government bonds, and real estate debt (with a bit in riskier assets.)
A housing crisis very much affects insurance companies. AIG's Securities Lending fiasco of 2008 is a perfect case study of this. https://www.americanbanker.com/opinion/aigs-collapse-the-par...
Like the AIDS crisis?
It's already been regulated, due to there being a fairly obvious risk if left to decide its own reserves: You could just write loads of insurance in a limited liability company and go bankrupt if you had too many claims. So there are rules to stop that happening.
What would be interesting would be something like the shadow banking system. Various vehicles that aren't banks but are major financial players (esp lenders) anyway. It covers a lot of different things.
I'm not a fan of dismissive & judgmental comments, but the parent HN comment is correct on the technical aspect.
Is this a meaningful comparison? A company's market cap is simply a measure of how many shares it has outstanding and the price those shares command. In what sense does a loss "wipe it out"?
So, if the liabilities exceed the assets by a significant margin, will shareholders trust the company enough for the market value of the share to not move towards zero?
I keep asking what the connection between market capitalization and significance of a particular loss, and, respectfully, you keep begging the question. "It could break the company". Ok, I mean, that sounds pretty plausible; it would be a world-historic loss. But what is it about Prudential's market cap that makes it one? Market value isn't book value.
Assuming a somewhat rational market, a market cap above zero means that the present value of future cash flows is greater than (or equal to) the debts owed. In practice this means the company can borrow against those cash flows, and continue to meet capital requirements - avoiding potential liquidation.
Book value doesn't necessarily march in lockstep with market value, which (as you point out) is set by actors' marginal propensity to buy the stock.
A more interesting thing to note would have been that financial firms trading at a marked discount to book value are effectively being judged by the market as being in distress. Financial firms can be analyzed as two things: an operating business and also as a big pot of money. The market is saying "Well, that certainly does look like an attractive pot of money, but you'd have to pay me quite a bit to own that operating business (and the attendant risks of it)."
Unexpected losses on a large life insurance portfolio seem very, very unlikely, absent a mass casualty event (in which case they're likely to get at least partially socialized).
Perhaps it's also relevant in partial sales of the company?
Publicly traded companies are obligated to file quarterly reports which prominently list this number; Googling "$NAME book value" will bring it up for any publicly listed company in the US. A particular retail investor may not notice this, but this is approximately "What is the difference between a number and a string?" for professionals.
In the majority of cases, shareholders don't attempt to extract book value. So-called "value" investors preferentially invest in companies which trade at a discount to book value; this tends to correct trading prices towards it, without the nuclear option of cracking open the company to sell off its juicy innards. (Which does happen, very occasionally, generally via private equity buyouts.)
Is that practically feasible though, there’s a great cost favorability loss in reinsuring in a new policy years / decades after initiating a policy
I used to work at Aflac. I left in part because I began having nightmares that I was on a sinking ship. I was having nightmares that made me feel that if I didn't leave, the company was going to go under and my life was going to go under with it.
Part of that was that I joined at the height of their success. They were adding on to the building to move my department because we really didn't have enough space. They would give out pens and stuff at all kinds of events. They were obviously flush with cash and growing.
Shortly after I joined, the recession hit. After the addition was completed and my department moved, my department shrank in size. They had consolidated a bunch of land to add two buildings. The first one got built. The second was not started while I was there. I think it was put on hold, or possibly canceled. They stopped giving out pens at every freaking thing. I ran out of Aflac pens and had to buy my own.
They cut janitorial service. They did interdepartmental swaps on office supplies to save money. The job listings shrank from pages and pages to a few.
Etc.
Meanwhile, we were continuing to be inundated with positive PR releases. We "flew" up the Fortune 500 list. It's a relative ranking. Our valuation actually shrank. I went to meetings where the outlined how proud they were of successfully mitigating that or it would have been worse. So flying up the charts meant other companies fell like stones faster than us. They didn't really admit that part. Just lots of glowing reports about how awesome the company was.
But, I mean, it was a recession. Things were tough all over and the company was doing better than most other companies.
No, the thing that really convinced me this big company was likely in serious trouble was the Fukushima nuclear incident in Japan in 2011. [1]
A lot of people seem to have no idea, but most of Aflac's revenue is from its Japanese division. When I started working there, it was 75% of their profit. By the time I left, it was 80%, mostly because the American division was doing so poorly.
They fired Gilbert Gottfried as the voice of the duck in their commercials because he made a tasteless joke about it. I felt that was a mistake.
But more importantly they sell accident, sickness and cancer policies. Radiation can make you sick. It can even cause cancer.
It's not clear to me what their exact exposure is due to the ongoing radiation leaks in Japan from that incident. This could be a major health catastrophe for Japan and a major financial debacle for Aflac.
I've read a little about the history of the industry. Hurricane Andrew in Florida was a major crisis for the insurance industry and permanently changed it. We've had multiple serious hurricanes since then.
I don't remember the information about Andrew's effect on the industry well enough to really comment on it here. But I remember it well enough to know that a single major incident can have significant widespread impact.
With climate change, the rise of drug shortages and antibiotic resistant infections etc, there is a lot of unprecedented stuff happening. Insurance is about risk management. If you don't understand the risks involved, you can't lay odds accurately. This causes havoc in this industry.
[1]https://en.m.wikipedia.org/wiki/Fukushima_Daiichi_nuclear_di...