Completely glosses over the fact that whatever subsidiary they run their life insurance and annuities out of is going to have to hold a statutory reserve for liabilities like this that would fall under their "assets under management". It also glosses over the fact that they are state regulated by all states they run business out of, not just NJ. I'm sure they issue policies in NY, the NY insurance commissioner typically will oversee their valuation methods for stat reserves to make sure they meet industry standards. I would be very surprised if they took a loss on their life line of business that puts them out of business, statutory reserves are a very conservative valuation method, where you use NAIC prescribed mortality tables, so there's no fudging around the numbers very much.
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.
It is hard to believe that an adverse mortality shock big enough to rock Pru could be absorbed by reinsurance capital. The story is a bit sensational but as an investor in both banks and insurance companies it is stark how regulated (post 08) banks are and how little serious regulation there is on the insurance side. A lot of it is how state level insurance is regulated which allows states to shop themselves (ie race to the bottom) as the loosest regulator.
> It is hard to believe that an adverse mortality shock big enough to rock Pru could be absorbed by reinsurance capital.
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.
> war, mega natural disaster, mega epidemic and the like.
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.
AIG's collapse had nothing to do with life insurance. It was driven by a division called AIG Financial Products which wrote the infamous credit default swaps together with equity based lending. Arguably it reinforces the learning that integrated financial giants shouldn't be allowed
I know it had nothing to do with life insurance and I also think that the article is wrong when focusing on that part of the business, but it is correct when saying that a company like Prudential should have remained on that too-big-to-fail list. When you’re handling ~USD 1.4 trillion you are at the center of the financial system.
This assumes the companies are all equally competent. It’s easy for a company to misprice a segment and then gain over exposure as they are the cheapest option for that segment.
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 also glosses over the fact that they are state regulated by all states they run business out of, not just NJ. I'm sure they issue policies in NY, the NY insurance commissioner typically will oversee their valuation methods for stat reserves to make sure they meet industry standards. I would be very surprised if they took a loss on their life line of business that puts them out of business
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...
I'm not going to make a snap judgment based on one article but his last line:
>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.
I clicked to the comments to find this very explanation. Albeit I know next to zero of the industry or complicated financial structures surrounding the topic that even I as a layman felt it grossly sensationalist.
The article is about Prudential life insurance being too big to fail, because their assets are worth $3.7 trillion = 20% of US GDP. The article also claims that "unexpected mortality" of 1.1% of its portfolio could bankrupt it. If a lot of people die suddenly, this could cause another economic crisis in the US.
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])
I don't know about Prudential in particular, but most companies offering life insurance are also in the business of selling life annuities -- so an epidemic which triggers large insurance payouts might also dramatically cut their annuity liabilities.
Any mortality fluctuation big enough to mean Prudential is paying off on an extra 1.1% of its policies is going to hit just about every other big ordinary life and group life direct writer or reinsurer in the US similarly, and maybe even the large foreign reinsurers. The argument that the mortality fluctuation risk is a reason for breaking up Prudential depends on the either the premise that its insureds, in aggregate, may be significantly different from those of the other insurance companies, or on the fear that life insurance, a business around 200 years old, is a bad idea because most of the companies could be simultaneously impaired by a not implausible mortality fluctuation.
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.
There is an argument to be made that some defense projects, perhaps Maven included, help to maintain the balance of power and thereby keep the peace. I would not rush to assume either position on the matter.
The total U.S. deaths in the Vietnam war+ from 1950-1975 were 58,209 over 25 years time (from the time the first U.S. 'military advisors' and funding arrived to the end of the war). That's not far from our maximum _annual_ automotive deaths (54,589). In recent years, with better automotive safety, we're down to 37,461 per year, but clearly the conclusion is to outlaw automobiles since they're far more dangerous than war.
Especially since insurance is more likely to cover automotive death than death in war.
In the kind of conflict with sudden death of at least 700,000 American civilians, financial crisis would be really down on the list of concerns.
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.
> The article also claims that "unexpected mortality" of 1.1% of its portfolio could bankrupt it. If a lot of people die suddenly, this could cause another economic crisis in the US.
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.
I thought insurance companies confusingly yet sensibly has whole networks of meta-insurance in place for if they have to pay out more than they have in operating reserves for unexpected expenses.
A repeat of the Spanish flu would be one thing, and honestly I don't know how likely it is. Unlikely but hugely destructive would be one way to say it -- I also doubt there would be another potential candidate, because the only way for new super destructive diseases that don't burn themselves out before they spread would be to create the kind of European medieval city that for centuries killed more people than were born there and which was full of filth.
Yes they can. It all depends on the policy. For example USAA routinely insures service members and those policies have a rider for dying in combat. And it is only a couple buck for a month on a normal $500k policy. When I retired I took that rider off.
> Does private life assurance pay out if you are killed war-fighting?
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.
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.
Every insurance company actually has two businesses in one:
- 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.)
> 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.
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.
> Life insurance doesn't have a contagion effect like housing.
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.
> I don't buy it . . . 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.
There IS a looming danger from non-banks, but I wasn't expecting insurance to be it.
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.
In the housing sector there’s a lot of dubious mortgages being written by non-bank originators. But for better or for worse almost all that risk is being laid off on the federal government.
Corporate bonds (since debt was and still is super cheap as a result of QE) and student debt (most kinds of debt slowed down at least briefly during the GFC; student debt did not).
Certainly not at present; all the analysis I've seen is simply on the raw quantity of outstanding corporate debt right now. The concern (where it exists) is universally about the ability of businesses to handle their debt load if some other shock suddenly makes it less cheap.
I stopped reading as soon as the author compared Prudential’s liability size to the US GDP. Just because numbers are similarly large does not make them comparable. Its like comparing Bezo’s $147B fortune to the 147B grains of sand on a 100 yard stretch of Rainier beach in Seattle. Not apples to apples.
The number refers to annual GDP which is dollars per year. Comparing assets/liabilities to annual GDP makes about as much sense as comparing distance to speed, eg: "The speed of 150 miles per second is tiny compared to the distance of 1000 miles"
I'm not a fan of dismissive & judgmental comments, but the parent HN comment is correct on the technical aspect.
Prudential's entire market capitalization could be wiped out with $42 billion of unexpected losses
Is this a meaningful comparison? A company's market cap is simply a measure of how many shares it has outstanding and the price those shares command. In what sense does a loss "wipe it out"?
The relevant thing would be shareholder equity (book value; assets minus liabilities) rather than market cap, in that impairment of assets at a financial firm is supposed to hit shareholders before it hits debt or depositors, that being a pretty major responsibility of equity in financial firms.
Book value doesn't necessarily march in lockstep with market value, which (as you point out) is set by actors' marginal propensity to buy the stock.
A more interesting thing to note would have been that financial firms trading at a marked discount to book value are effectively being judged by the market as being in distress. Financial firms can be analyzed as two things: an operating business and also as a big pot of money. The market is saying "Well, that certainly does look like an attractive pot of money, but you'd have to pay me quite a bit to own that operating business (and the attendant risks of it)."
Unexpected losses on a large life insurance portfolio seem very, very unlikely, absent a mass casualty event (in which case they're likely to get at least partially socialized).
How exactly does a shareholder notice the 'book value' of a company? Sure, they have a 'claim' on a share of that, but that only really matters if the company defaults, in which case it would surprise me if the actual book value is payed back to shareholders.
Perhaps it's also relevant in partial sales of the company?
How exactly does a shareholder notice the 'book value' of a company?
Publicly traded companies are obligated to file quarterly reports which prominently list this number; Googling "$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.)
Obviously, the book value is public and not arbitrary. However, I don't see the direct reasoning behind a "value investor". By that I mean reasoning that doesn't involve guessing what other shareholders will do.
Yes, but more precisely it’s a signifier of the market’s belief about the (current value of) future cash flows of the company (for investors) and future price movements of the share (for speculators).
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?
My question is what that number has to do with the ability to absorb a loss (either with assets under management or with reservs or with cash flow). To compare: JPMC has something like $2.5T(!) under management, but a market cap of something like $350B.
It means that a relatively tiny (~1%) forecasting error in the long-term values of assets/liabilities, and how the future might play out, can make or break the company. That means that the predictive model for the future better be very good, and "black swan" surprises unanticipated by the model will have nasty consequences.
While I'm sure a $99B loss would be devastating (after all, it would be more than double the combined insurance claims from 9/11, and close to 3x the combined claims from Hurricane Sandy), it's not at all clear to me how the materiality of that loss relates to Prudential's market cap, which is simply the floating value of all Prudential's outstanding shares.
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.
The company will be put into receivership when it can no longer meet capital requirements imposed by regulators, this may not be a company breaking event - the receivership proceedings will determine if the insured and creditors are best served by liquidation, conservancy, or rehabilitation.
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.
Good point. To clarify, many people buy Term Life when they are healthy. You lock in long-term savings for 5, 10, or 20yrs. Renewing term life 10yrs or 15yrs in is hard -- you now have high cholesterol, diabetes, risk, etc., so your premiums go up massively. It defeats the point of term life.
An aside, Prudential is the most scummy insurance company ever. I don't know how many times I've reported their lies to my work or the state insurance regulatory body.
I only skimmed the article. But, yes, I can well imagine insurance being a point of vulnerability.
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.
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.