jeff,peter,joan,armin - u may have seen my posts on Anthony@Pacific about Conseco, CNC, and a few of the facts & best guesses as to the situation at/with CNC.
1. Disagree with bank/ins co reason for not investing since:
(a) assets are not the only item to consider
(b) u can chk into the assets by reading the NAIC statement blank, AM Best, S&P, etc publications
(c) u go long in a co b/c of the overall situation - most times there are both +ve & -ve factors
2. Failures of ins co's such as Mutual Benefit, Executive Life, Confederation Life, were due to a large extent LIQUIDITY crises. This takes into account both assets and liabilities. The Liabilities and Assets were not well "matched".
Aggressive real estate investing is not necessarily a bad thing, but when there is a heavy concentration of it in a particular area, a particular type, etc, that can be a contributing factor.
On the liability side, these companies got into trouble with the GICs and other "spread" savings products (ie short term liabilities) they sold. These products have an implicit put option for the buyer (buyer of insurance product can cancel at any time) and there may be few or no risk mitigating product features such as MVA's and surrender charges. To the extent these products were sold by brokers (vs career agents aka company emplyees) the cancellation risk could be more significant.
Add it all up, if a customer wants their money the ins. co may need to sell assets prematurely and if those assets are longer in term/duration than the liabilities together with rising interest rates, the ins co will take a capital loss.
If there is any hint of financial trouble, you can bet more of the ins. product customers will want their money. Institutional investors are typically first to request/put the ins contract back to the ins co. This could create a "run on the bank".
So, why didn't the ins co's just buy some shorter term assets? B/c the yield curve was "normal" shaped (yields for shorter term assets were smaller than for longer term assets) for most of the period, the market was very competitive and margins were shrinking so the only way to achieve profit goals and meet market demand for higher rates for customers was to invest in higher yielding assets.
3. Good point on good will
4. CNC also has arrangements with potential investors whereby funds were lent out and having a strike price near "$20" and a penalty CNC was to pay if price below "$20". Guess what, price was below $20 in Dec.
5. Anyone rem PennCorp, which tried to be a CNC and grow by acquisition. PFE made acquisitions but the businesses were (in hindsight) underevaluated, requiring reserve increases, and not integrated that well ie less synergy, and admin systems were poor, likely not noticing the underreserved problem for some time.
6. CNC had been known as a good acquirer until the mobile home financing co purchase. Admin systems likely better than PennCorp situation.
Prudent investment? Don't let me start ... |
