Tom Cochrane

Cheating Death: Possible Winners and Losers in Life Extension Strategies

Flipside for most life insurers is dealing with longevity risk. It is a systemic risk which--at this point--is relatively difficult to hedge since their are no natural counterparties on the long side.

Long on healthcare services and financial planning and product distribution as it pertains retirement/post retirement sector?

How Investors Can Lose with Annuities and Whole Life Policies

Why doesn't someone develop an empirical measure of credit risk that is based on historical insurer defaults and the actual damage (net of state guarantee funds) that has been done to annuity owners?

AM Best, Fitch, etc solvency ratings are fine, but really falls short in addressing the sort of catch-all and extraordinarily common refrain that "the annuity is only as safe as the insurer providing it."

There really has not been much actual $$ damage to policyholders over the years on an aggregate basis--particularly when compared to the damage that has resulted from capital markets risk.

Would be great to simply point to a single probability that captures the potential risk that insurer default presents to annuity owners.

Maybe something like this exists? If so, please provide a link.

How Investors Can Lose with Annuities and Whole Life Policies

I think the article is outstanding Bruce.

The info about dealing with lack of transparency/credit risk of privately held insurers such as Standard Life of Indiana is great.

I also thought the comments regarding other vulnerable players such as Hartford were very worthwhile.

There were a couple follow-ups commenting on state guarantee funds. Not sure all states cover and not all of those that do up to $100K.

Might be worth noting that diversification among insurers (e.g. spreading a $300K annuity among 3-4 insurers) and time diversification (e.g. laddering annuity purchasing over time) are worthwhile risk mitigation approaches.

Annuities Providers Eyed As Takeover Targets

Agreed that Phoenix is extraordinarily attractive at a $184 million market cap. TARP funds rejection could also be viewed as a signal of strength. An innovative company that, in many ways, is well positioned in the market you describe above.

Although around 20X as expensive as Phoenix, Principal is such as strong, well managed company. Agreed on the level of attraction here.

Conseco IMO deserves its price to sales.

TARP for Insurers: Blessing or a Curse?

MetLife was the buy of a lifetime (probably still is). Interesting to see what happened very recently with rejection of TARP funds. Obviously a sign of strength.

MetLife is incredibly well positioned for the next 20 years. Again, one boomer retiring every 3 seconds for the next 10 years in this country. Similar demographic characteristics in many other developed countries and China.

Markowitz mean-variance model is--thankfully--incred... vulnerable. Samuelson-Merton life-cycle model could very possibly emerge as new/competing paradigm.

Life-cycle means more hedging and especially more insurance. Companies that can efficiently produce and distribute these products have a strong secular trend underlying their efforts. Even better for those who have clear pricing power in this growth market. MetLife would be a leader there.

TARP for Insurers: Blessing or a Curse?

Great post with some interesting points Gloria. I tend to agree overall on the downsides of government involvement--both from the company and consumer perspective.

While TARP funding may be temporarily reassuring for consumers, the long-term effects would likely include increased product costs, decreased selection, etc. The many downsides (dilution, decreased operating flexibility/autonomy, etc.) of TARP funding from any company's perspective should be obvious.

While I or anyone else in the industry would agree on the need to scale-back and re-price the guarantees within many of the variable annuity living benefits, the reality is that the annuity/decumulation is and will continue to be a significant source of growth for life insurers. 80 million boomers starting to retire this year and over $1 trillion per year in retirement assets (DC, DB and IRA) that will be distributed and require some form of decumulation by 2012 (McKinsey).

Also, not all companies in the annuity space are created equal when it comes to the variable annuity guarantees. Milliman has indicated that there were over $40 billion in gains from life/annuity insurer hedging programs in 2008. These gains were not distributed evenly. Everyone is hedging and re-pricing now, but pre-meltdown, there were basically 3 classes of life insurers: 1) those that hedged very little; 2) those that hedged moderately, and; 3) those that hedged aggressively.

The effects of the above are sort of playing-out now. It will be interesting to see who among the eligible life insurers takes the TARP funding. With Goldman considering a public offering to pay back TARP funds, it's clear to everyone that companies should do everything possible to avoid accepting funds. There are certain life/annuity companies (maybe MetLife) that could be in very strong positions relative to the competition (think Wells) in the near-term if they can avoid TARP funds.