I don't agree. Almost all the life insurance companies suffered huge losses in 2008, and 2009. While common stock holders and even many preferred shareholder suffered almost complete losses in hundreds of failed banks, senior debt holder of failed banks for the most part were unaffected. This was because of many factor including the existence of the FDIC fund,and TARP, plus fed actions.
Some of the biggest holders of bank senior debt are in insurance companies portfolio. Insurance companies losses would have been even worse but for those actions.
The bull market of the last 4.5 years has bailed out a lot of portfolio including both mine and the insurance companies.
The failure of a single large insurance company Executive Life in the 1991 stressed the state guaranty fund system to the limits. It resulted in many policy holder losing 20% of their money in California. Perhaps even more problematic for retiree was seeing their payments reduced and/or suspend while the court system worked out the details of the bankruptcy.
There is a reason that most (perhaps all states) prohibit insurance companies from a making any mention of the guaranty fund in their marketing literature. It provides adequate protection for a single insurance company going bust due to incompetent or reckless behavior by management. It does nothing to cushion the consequences of systemic failure in the industry.
I figure the insurance industry is one black swan event away from some deep dodo.
I guess we'll have to agree to disagree.
2008 and 2009 were indeed stressful days for the industry, and some players reported huge losses. The losses were probably a bit exaggerated in that, like many other public companies, once you know you're going to be reporting a big loss you really clean out the closets - if you're going to take a bath it is best to take a big bath and get it over with.
I concede that insurers are big investors in corporate bonds and financial sector corporate bonds in particular so the taxpayer bailout of the banks was helpful, but it was also helpful to pension plans, university endowments and other entities that have heavy bond investments. If the stuff hits the fan and corporate America defaults on its debt obligations, there will be an adverse affect on insurers - AND on all corporate bond investors. If that were to happen then insurer insolvencies would only be a sizeable piece of a cataclysmic pie.
The bull market helps but not much because life insurer general accounts are not typically big common stock investors, in part because of the impact of investing in common stock on RBC and required surplus.
Executive Life (and Mutual Benefit Life and other insolvencies) led to significant reforms in the solvency monitoring approach in the 1990s, notably RBC requirements, which have greatly improved solvency monitoring by regulators.
[Interesting, and true story on Executive Life. Our mutual company was going through a ratings review with one of the major rating agencies and the people from the rating agency were questioning the conservativeness of our investment portfolio and questioning how we could be competitive if we weren't more aggressive (ie; buy junkier bonds). Our CMO got a bit heated and pounded on the table and told them that we would be around long after Executive Life went belly up. EL went belly up a few years later.]
Could there be a calamity that hurts the economy so much that the investments backing insurance liabilities default and the insurers are unable to pay on their obligations and the guaranty associations go belly up as well? I guess anything is possible. But it seems equally probable that Martians will land in my driveway tonight.
