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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 li

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.

jshaqaw 8y ago
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.
- sfifs 8y ago
  > 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.
  - Retric 8y ago
    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.
  - nradov 8y ago
    Most life insurance policies have exceptions for war.
  - paganel 8y ago
    > 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.
    - sfifs 8y ago
      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 https://www.investopedia.com/articles/economics/09/american-investment-group-aig-bailout.asp https://www.investopedia.com/articles/economics/09/american-...
      - paganel 8y ago
        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.
TuringNYC 8y ago
>> 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-part-nobody-likes-to-talk-about https://www.americanbanker.com/opinion/aigs-collapse-the-par...
sagichmal 8y ago
Felix Salmon unquestionably knows what he's talking about.
- CPLX 8y ago
  This comment should be higher. Felix is arguably the most respected and level headed financial reporter in the country.
- gimmeThaBeet 8y ago
  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.
johnwyles 8y ago
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.

jshaqaw 8y ago

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.

sfifs 8y ago
> 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.
- Retric 8y ago
  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.
- nradov 8y ago
  Most life insurance policies have exceptions for war.
- paganel 8y ago
  > 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.
  - sfifs 8y ago
    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 https://www.investopedia.com/articles/economics/09/american-investment-group-aig-bailout.asp https://www.investopedia.com/articles/economics/09/american-...
    - paganel 8y ago
      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.

TuringNYC 8y ago

>> 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-part-nobody-likes-to-talk-about https://www.americanbanker.com/opinion/aigs-collapse-the-par...

sagichmal 8y ago

Felix Salmon unquestionably knows what he's talking about.

CPLX 8y ago
This comment should be higher. Felix is arguably the most respected and level headed financial reporter in the country.
gimmeThaBeet 8y ago
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.

johnwyles 8y ago

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.