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What happened to mutual insurance companies after the recession?


Graham Osborn
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Recently I met a MassMutual agent at a networking event who tried to sell me a whole life insurance policy.  The dividends were "not guaranteed, but had been paid every year for 150 years." I started reading on mutual insurance companies and found that they have few formal disclosure requirements and limited accountability to anyone except management itself and the BOD.  In addition there have been some fairly extravagant scandals of CEO pay over at Liberty Mutual that remind me a bit of what happened at ENE/ VRX/ UDF/ etc.

 

One claim the agent made was "MassMutual has never had an unprofitable year since its inception 150 years ago." This led me to believe MICs may not be following GAAP for their internal controls.  During the financial crisis a great many publically traded insurers were forced to write down the value of crappy assets and take big charges to earnings from the surplus account.  Although some MICs manage portfolios nearing the trillion-dollar mark, it occurred to me there was little incentive for them to make such writedowns.  And of course there have been more minor incidents like the Bernie Madoff investment by a MassMutual subsidiary.

 

My question is: how likely is it that these MICs are sitting on hundreds of billions in crappy assets that were never written down - charges that will hit the future dividends of cash value policyholders?  After two mammoth bear markets in the past two decades and with a potential third in the offing, it seems to me like this pool of future cash flows may be headed the way of the dinosaur - also known as the 401k :) Any thoughts or industry insights?

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  • 3 weeks later...

The plot thickens..

 

http://www.wsj.com/articles/german-life-insurers-feel-pain-of-negative-rates-1460547975

 

I'm just trying to imagine the ramifications if life insurers were default on policyholder obligations in any sort of widespread/ synchronous fashion.  The % of the US population > 65 is around 15%.  These cash value policies were supposed to be the "safe" backstop when markets fail to deliver.  Too bad they were themselves dependent on GDP growth and historical bond yield assumptions!

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I don't know what the answer to your question is but have you looked at the statutory filings of the mutuals?  It may help you answer your question?

 

I think the big guys got into trouble on their annuity businesses - not their straight life insurance.  Maybe the mutuals haduch less exposure? But I know f-all about life insurance.

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At a high level, insurance companies put their investments into 2 buckets - held to maturity and held for trading.  The held for trading ones are market to market, so can cause investment losses and profits, but the help to maturity are held at cost and amortized over the life of the contract, so when we had the financial crisis, their earnings were less affected than most companies that hold investments.

 

Also, insurance is typically priced using an assumed interest rate of around 3%, so even though government bonds are much less than this, it is still possible to achieve this return in a good portfolio of investment grade bonds.

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