
The Looming Danger of Non-Banks - rafaelc
https://www.axios.com/prudential-non-banks-future-financial-crises-f21319bf-7104-4109-9f11-a8d369110e0c.html
======
chicken_littl2
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.

~~~
sagichmal
Felix Salmon unquestionably knows what he's talking about.

~~~
gimmeThaBeet
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.

------
peterburkimsher
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])

[1]
[https://en.wikipedia.org/wiki/Influenza#Epidemic_and_pandemi...](https://en.wikipedia.org/wiki/Influenza#Epidemic_and_pandemic_spread)

[2] [https://ourworldindata.org/grapher/fatalities-from-
terrorism...](https://ourworldindata.org/grapher/fatalities-from-
terrorism?country=USA)

[3]
[https://en.wikipedia.org/wiki/Vietnam_War](https://en.wikipedia.org/wiki/Vietnam_War)

[4] [https://www.engadget.com/2018/05/14/google-project-maven-
emp...](https://www.engadget.com/2018/05/14/google-project-maven-employee-
protest/)

~~~
chrisseaton
Does private life assurance pay out if you are killed war-fighting?

~~~
mattr47
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.

Pretty much any insurance company does the same.

~~~
yold__
I price life insurance for a living. Combat death riders are not common.

~~~
wbl
I'm going to look at my policy, but I don't think it has any exclusion for
combat deaths.

~~~
chrisseaton
It almost certainly excludes any claims at all from any war between major
powers - even your car insurance probably says that.

------
nostromo
I don't buy it.

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.

~~~
TuringNYC
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.)

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...](https://www.americanbanker.com/opinion/aigs-collapse-the-part-nobody-
likes-to-talk-about)

------
lordnacho
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.

~~~
cheez
what are the major sources of new debt since the GFC?

~~~
Armisael16
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).

~~~
cheez
I don't think corporate bonds are in that much trouble.
[https://fred.stlouisfed.org/graph/?g=lGQL](https://fred.stlouisfed.org/graph/?g=lGQL)

~~~
Armisael16
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.

~~~
cheez
Yes, it could be a very quick chain reaction. Good point.

------
anonymous_ch
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.

~~~
JoeAltmaier
They're both dollars. Not making a good argument here.

~~~
ssivark
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.

~~~
JoeAltmaier
It tells you how soon a debt could be paid. The speed of 150mph tells you how
quickly you would travel 1000 miles.

------
tptacek
_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"?

~~~
patio11
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).

~~~
rocqua
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?

~~~
patio11
_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.)

~~~
rocqua
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.

------
awinder
“Millions of policyholders would start moving their life insurance”

Is that practically feasible though, there’s a great cost favorability loss in
reinsuring in a new policy years / decades after initiating a policy

~~~
TuringNYC
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.

------
notananthem
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.

------
thoughtstheseus
Bigger picture here is that govt. oversight is creeping back slightly while
financial risk taking is expanding to less regulated business.

------
DoreenMichele
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.

[1][https://en.m.wikipedia.org/wiki/Fukushima_Daiichi_nuclear_di...](https://en.m.wikipedia.org/wiki/Fukushima_Daiichi_nuclear_disaster)

~~~
nradov
There's no reason to expect a significant increase in Japanese cancer cases
due to the Fukushima incident.

