Tuesday, February 24, 2009

(No.15) Demutualization: Does a fish need a bicycle?

By way of preface and in the interests of disclosure: I began my career in the life insurance business when I joined the Mutual Life Assurance Company of Canada in the field as a financial planner in the 1970s, later moving to its head office in Waterloo, Ontario where -- at the time its demutualization was announced on Dec 8,1997 -- I was an officer of the company. I was also among many Mutual Life staff at the time who still believed that mutuality was a superior form of organization, one  that best served the interests of the company's par policyholder owners (and virtually all of the company's hundreds of thousands of policyholders held policies designated by Mutual Life as participating, even its univeral life policies). 

Notwithstanding my status as an officer of the company I refused to speak in support of the company's demutualization either within or without the company, believing as I did then -- and still do -- that 
1. the demutualization was unnecessary and undesirable,
2. mutuality is a superior form of organization for policyholders,
3. Mutual Life had a culture and record of mutuality from its founding in 1870 that made it a model of how a life insurance company ought to be operated, and
4. a life insurance policyholder needs the company issuing that policy to be run with shareholder interests as the priority like a fish needs a bicycle.

It should be obvious to even the most ardent cheerleaders for stock life insurance companies that their senior managements tend to become so much the captives of a quarterly results perspective and the servants of rating agency 'group think' that they often preclude and frequently seem incompatible with an intelligent, longer term approach to (among other things) building, renewing and investing in that core activity for life insurance companies: distributing their products or, expressed somewhat less elegantly but more realistically, 'selling stuff'.

This reality, this generally ignored elephant in the corner of the life insurance industry conference room, was nicely underlined by the CEO of New York Life, a mutual company with one of the top agency systems in the world. In an interview with the New York Times (July 5, 2008) Theodore Mathas said that "if someone came in [to see me] with a proposal and said 'I'm going to cost you some money this year but it's the right thing to do in the long run', I was able to say, 'Do it. It's the right thing.' I didn't say, go calculate earnings per share and tell me how my share price might drop and tell me what analysts are going to get on our case. I didn't have to do that. It made it possible to do the right thing. Our business model permits us to do the things that are in the best long term interests of our policyholders. It doesn't mean we aren't issuing quarterly profits. Of course we are. But it means it doesn't take an undue importance in our calculations."

In another interview (New York Times, Oct 3, 2008) Edward Zore, the CEO of that great mutual company (and the one to which Mutual Life was most often likened) Northwestern Mutual, the largest direct provider of individual life insurance in the US, observed that "We're a triple-A-rated company. I don't have to worry about meeting the ideals of a Wall Street analyst or some hedge fund manager who has a 60 day time horizon. I don't have to worry about short-sellers. Our investment portfolio is very well balanced, very well diversified. It's a portfolio I could not have as a stock company. The earnings effect of what we have would be less predictable than what would be required by stockholders. So we couldn't do what we do. We have no intention to become a stock company." 

To which I say 'amen', even more so in light of the meltdown on Wall Street and events which reinforce the cogency of what these 2 CEOs said last year. One need look no further for an example of what can happen when a stock life insurance company succumbs to a frantic pursuit of ever greater profits and increasing share price to impress investors than AIG (American International Group) and its life insurance operations. AIG has already received $150 billion or so of US government 'bailout' money and, as I write this, is expected to announce soon a 4th quarter 2008 loss of perhaps $60 billion.

If, dear readers, you had to pick a large North American life insurance company on the books of which you wanted to have your life insurance coverage, which would you pick: New York Life, Northwestern Mutual or AIG?   QED

Alastair Rickard,

Friday, February 20, 2009

(No.14) An Unhealthy Situation: Life Reinsurance

Almost as far back as when I started writing my editor's column in the Canadian Journal of Life Insurance and devoted attention to "The Reinsurance Wars" I have been concerned by the role and impact on the life insurance business of reinsurance companies, 'the pros', which write reinsurance and are not in the retail marketplace selling individual life insurance policies. They have exerted a profound impact on the shape, texture and pricing of these products and indirectly on the agency systems which the industry uses to distribute them.  

Over the years I have written and spoken frequently about the steadily increasing concentration of individual life insurance risk on the books of a very few reinsurance companies. This trend was accelerated in Canada by several industry developments including the demutalization in the past decade of 4 large retail life companies (Sun, Manulife,Canada and Mutual), a process which produced a move to reinsure significantly more of not just risk amounts from new sales but also blocks of business in force. It was a way for the ex-mutuals to write business but reduce the amount of reserves otherwise required to support the new business on company books and therefore a way to improve apparent performance as stock companies -- along with ceasing to sell participating life insurance policies, the profits from which are, in terms of a stock life insurance company's allowable share, limited by law in Canada.

The massive shift to reinsurance companies of so much of the risk generated by retail life insurance companies issuing life insurance policies has produced an unhealthy pattern. Before 1970 I estimate that less than 1% of the amount of new individual life insurance sold in Canada ended up on the books of (then) more than a dozen exclusive reinsurers active in Canada, several of them Canadian-controlled. Today it is in the range of 70-75%, almost all going on the books of just a few foreign-owned reinsurance companies, most prominently Swiss Re, Munich Re and RGA.

Most of this increase has happened within the past 20 or so years. It is an  unhealthy concentration of a massive amount of risk, all the more so given the recent financial meltdown in the US and western Europe of very large financial institutions risking collapse without massive government support. The reaction over the years, private and public, to my expressed concerns about the implications for policyholders and retail life companies from excessive concentration of reinsurance risk has in the main been to minimize them if not dismiss them. Unfortunately Swiss Re has recently illustrated a major reason for my longstanding concern.

Swiss Reinsurance, currently the world's second largest reinsurance company, had -- among other errors -- jumped (like the now deeply troubled AIG in the US, among others) into the deep end financially with credit default swaps. These were actually a form of unregulated insurance, unregulated since great care was taken not to use the words 'insurance' and 'premium' so as to avoid having insurance regulators -- especially in the New York Department of Insurance -- have any formal basis on which to seek regulatory access to this activity.

In 2008 Swiss Re had to write off over 9 billion Swiss francs and in the 4th quarter of 2008 the company lost, measured by net income, 1.75 billion francs (US$1.5 billion). Its rating has been cut, its CEO fired and its stock price rests at its lowest ever price. Warren Buffett, using Berkshire Hathaway, has pumped US$2.5 billion into Swiss Re and the company may be looking for another $2 billion.  And this financial mess resides with one of the trinity of reinsurance companies that have come over time to dominate the Canadian life reinsurance business.

On the books of the 'big 3 pros' sit billions of dollars of ordinary (individual) life insurance risk issued on the lives of millions of Canadians, a fact of which they -- and apparently the financial media and analysts as well -- remain blissfully unaware. The amount of the reserves (assets) backing this Canadian risk business which are actually located in Canada and to which federal regulators would have -- if required -- easy, quick, direct and certain access could not begin to cover all of the in force risk in the event of need prompted by financial failure. I leave to one side the question of how likely it would be in such circumstances that a large reinsurance company's world wide assets would be sufficient to meet its obligations in all countries in which it solicited and accepted risk. 

The time is long past due for life insurance companies, especially the largest retail operations, to return to the business of actually retaining more of the life insurance risk represented by the policies they sell to the public rather than being so heavily into the business of generating huge volumes of risk they pass to one or more of only a few very large reinsurance companies.

One recent and perhaps hopeful note, at least for Canadian policyholders:  the federal Office of the Superintendent of Financial Institutions (OSFI) finally produced in December last year a discussion paper for consultation involving reinsurance in Canada and its supervision. A serious regulatory revisiting of the operation and supervision of life reinsurance in Canada should have happened long ago -- but better late than never. 

Something useful may come of it, especially if those who provide input as well as those who consider it are not all singing from the same tattered page in the same old life industry hymn book.  

Alastair Rickard,

Tuesday, February 10, 2009

(No.13) Distilled Wisdom

Many of us enjoy a well-turned phrase and a pithy quote. Here are several I have noted recently.

  • Ignorance and a sense of community                                                                                 From an essay by Mark Slouka in the Feb.2009 issue of Harper's Magazine writing about the US electorate:                                                                                                         "Ignorance gives us a sense of community: it confers citizenship; our [elected] representatives either share it or bow down to it or risk our wrath.  ...   One out of every four of us believes we've been reincarnated; 44% of us believe in ghosts; 71%, in angels. Forty percent of us believe God created all things in their present form sometime during the last 10,000 years. Nearly the same number -- not coincidentally, perhaps -- are functionally illiterate. Twenty percent think the sun might revolve around the earth. ... But doesn't this past election then sound the all clear? .. For starters consider how easily things might have gone the other way had the political and economic climate not combined into a perfect political storm for the Republican Party.... Truth is, we got lucky; the bullet grazed our skull.  ... a significant number of our fellow citizens are now as greedy and gullible as a boxful of puppies; they'll believe anything;... Nothing about this [presidential] election has changed that fact."                                                                                   
  • Dying is a matter of pratfalls                                                                                              English writer and barrister John Mortimer, who died age 85 on Jan 16, 2009, in his book "The Summer of a Dormouse: A Year of  Growing Old Disgracefully" (2000):                                                                          "Dying is a matter of slapstick and pratfalls. The aging process is not gradual or gentle. It rushes up, pushes you over and runs off laughing. No one should grow old who isn't ready to appear ridiculous."                                                                                                                              
  • Stupid economic behavior                                                                                                             New York Times columnist David Brooks writing in the Jan.16,2009 issue of that newspaper:                                                                                                                             "Economic behavior can be accurately predicted through elegant models. This view explains a lot [about the financial problems in the US] but not the current financial crisis --  how so  many people could be so stupid, incompetent and self-destructive all at once. The crisis has delivered a blow to classical economics and taken a body of psychological work that was at the edge of public policy thought and brought it front and center. In this new body of thought, you get a very different picture of human nature."                                                                                                                                                                                                        
  • Obama's challenge                                                                                                                            From the new book by David E. Sanger, "The Inheritance" (2009). Sanger is a Washington correspondent for the New York Times:                                                                                         The U.S. "pursued a path that has left us less admired by our allies, less feared by our enemies, and less capable of convincing the rest of the world that our economic and political model is worthy of emulation. ...  Not only does [Obama] need to re-establish our economic influence, he needs to restore the leverage that comes from backing up diplomacy with the explicit or implicit threat of military action. ...  When the biggest threat looks more like loose nukes that escape Pakistan than launched nukes out of Russia, all the old tricks for avoiding Armegeddon don't work. Our nuclear arsenal has become the Maginot Line of the age of terror: big, scary, and fundamentally useless as a deterrent."                                                                                                                                                                                                    
  • The elderly & the company of the young                                                                                 From the new memoir "Somewhere Towards the End" by the 91 year old English book editor Diana Athill:                                                                                                                              The elderly, she writes, can find great enjoyment in the company of younger people. But she warns that "One should never, never expect them to want one's company or make the kind of claims on them that one makes on a friend of one's own age. Enjoy whatever they are generous enough to offer, and leave it at that."                                                                                                                                                                                                                                         
  •  High-paid oxymorons                                                                                                                      Toronto Globe & Mail columnist Rex Murphy, writing in that newspaper on                 Jan 3,2009:                                                                                                                                                                  "Celebrity reportage, witlessness in full genuflection to tackiness, has exploded the meanings of flattery and self-abasement. Entertainment reporters, as they deliriously regards themselves, are high-paid oxymorons. They all but lick the shoes of those they cover, and even that exemption is, I'm fairly confident, not total. Till very recently , the worship of celebrities was more or less confined to high-gloss, low-IQ entertainment magazines and their TV equivalents. But with the advent of Barack Obama -- and I should insist, not at his prompting -- it has done a worrisome crossover."                                               
  • Devotion to an institution                                                                                                               In 2005 American baseball player Ryne Sandberg was inducted into the Baseball Hall of Fame. Political scientist Hugh Heclo, in his book "On Thinking Institutionally" (2008), cites Sandberg's acceptance speech as an example of how people talk when they are defined by their devotion to an institution:                                                                                      " I was in awe every time I walked to the field. That's respect. I was taught you never, ever disrespect your opponents or your teammates or your organization or your manager and never, ever your uniform. ...  [Sandberg motioned to those inducted before him] Those guys sitting up here did not pave the way for the rest of us so that players could swing for the fences every time up and forget how to move a runner over to third. It's disrespectful to them, to you and to the game of baseball that we all played growing up. ... Respect. A lot of people say this honor validates my career, but I didn't work hard for validation. I didn't play the game right because I saw a reward at the end of the tunnel. I played it right because that's what you're supposed to do, play it right and with respect. ... If this validates anything, it's that guys who taught me the game ... did what they were supposed to do, and I did what I was supposed to do."                                                                                                                                                                                                                                                                                                                                                                                                                                     

Sunday, February 8, 2009

(No.12) What happens in Vegas ....

Pat and I recently revisited Las Vegas to see some shows and experience what is a unique American monument to excess. 

We stayed at the Flamingo Hotel located on the central part of what is referred to as 'the Strip', the heart of this Nevada destination for millions of punters every year. The Flamingo is the successor to the first of the Las Vegas 'destination' hotel/casinos. It was conceived and built with mob money in the 1940s by the gangster Bugsy Siegel, an event given prominence in Warren Beatty's movie "Bugsy".

The Flamingo has a feature unusual among today's Strip hotels: it retains large outdoor gardens with waterfalls and pools  (enclosed on 3 sides by wings of the hotel). These are populated by various birds including Chilean pink flamingos, Australian black swans, African crowned cranes plus several Sacred Ibis. Given its location in the heart of the Strip it is a surprisingly quiet and pleasant oasis.

We enjoy theatre and Pat's wide-ranging interests include the Cirque du Soleil shows which are, in their size, inventiveness, technology as well as the new theatres in which they are staged, unique to Las Vegas. Currently there are 5 Cirque shows playing in purpose-built theatres at 5 different hotels on the Strip. Each of the shows is markedly different. The engineering and technology required for and on display in each of the shows is not only impressive but could not be accommodated in ordinary theatres, no matter how large. They are spectacular entertainment and, as the hotels intend, are a magnet helping to attract millions to the city. Unlike the old days, when organized crime ran the Strip hotels/casinos, only half of Vegas hotel revenues now come from gambling.

Of the Cirque shows we have attended Pat rates as equally impressive (for different reasons)"O" at the Bellagio Hotel, "Ka" at the MGM Grand and "Love" at the Mirage. I agree. The latter is the newest Cirque show with the Beatles and their music as the theme. "Le Reve" at Wynn's is a Cirque-style show designed by an ex-Cirque chap who seems to have set out to incorporate into a single show as many different effects as possible derived from the Cirque shows. It is staged in a large pool but does not quite achieve the Cirque standard.

The broadway hit some years ago, "Phantom of the Opera", has been remounted by its English creators at the Venetian Hotel but at the usual Las Vegas show length of 90 minutes (hence time to do 2 shows per evening). The Las Vegas "Phantom" is publicized as a more expensive and impressive staging of the Broadway version which also played for several years in Toronto. It isn't but it is still worth seeing.

There are many other types of shows to see in Vegas, large and small, for every interest: from standup comics of whom one has never heard to 'name' show business entertainers through burlesque shows and 'tribute' performers. In this latter category the city must offer at least a dozen Elvis Presley imitators performing in various venues at any particular time. 

The "Legends" show at the Imperial Hotel on the strip is entirely a 'tribute' show, a long running one, with performers (backed by dancers and singers) doing their versions of people like Ann Margaret, Jay Leno,Elton John and Cher  and -- of course -- Elvis. It is so-so entertainment in what is more of a nightclub setting.

The "Jubilee" stage show at Bally's has been a fixture for 25 years. It is the last of the big, Paris-inspired Vegas stage shows, formerly a staple of the Vegas entertainment scene pre-Cirque, featuring platoons of showgirls with various acts sprinkled between the musical numbers. "Jubilee" is a clear echo of the very impressive stage shows one can still see in Paris at the Lido and the Moulin Rouge. The Vegas version is worth seeing but is not of the same calibre as the Parisian shows it imitates.

Las Vegas also overflows with entertainers of greater and lesser fame and followings presenting shows large and small.  After 5 years with Celine Dion performing in the 4000 seat theatre Caesar's Palace built for her, the hotel replaced Dion with (primarily) Bette Midler who gets time off periodically and is relieved by Elton John or Cher. Midler's show is flashy and fast-paced, features backup singers and dancers but is mainly a showcase for Midler's considerable talent as a singer and comedian. The night we were there the audience, including Pat, clearly enjoyed the show very much, in fact somewhat more than I did.

Among the curious social features of Las Vegas: some of the tourists walking up and down the Strip drinking from bottles of beer or cocktails from long, oddly shaped glasses sometimes suspended from their necks. Also, while the city has put in place a ban on smoking it exempted the casinos in response to their argument that a total ban would hurt gambling since so many who play the slots also smoke. Hence in the hotels one walks through the casino areas (and hotels are laid out so one has no choice but to walk through the casino to get from almost anywhere to anywhere) with smoke wafting around. Except for the casinos the ban seems fairly tightly enforced.

There is a widely held but erroneous view that prostitution is legal in Nevada and therefore in Las Vegas. That is not the case. In the state of Nevada prostitution can be legal in counties (if the county so decides) but only if the county has a population of less than 400,000. That requirement therefore excludes the cities of Reno and Las Vegas from the option of legalizing prostitution -- not that the absence of that permission seems to have interfered all that much with the conduct of the world's oldest profession. 

The example of this reality most visible to us was the tolerance of open solicitation along the sidewalksof the central Strip, not by prostitutes themselves but by curious teams or crews of 10-15 Latinos hired by some entity or other. They line up side by side along the sidewalk and try to get passing males (with or without female spouses or companions) to accept from EACH of them 2 or 3 cards about the size of playing cards. On both sides of each card is a colour picture of a young woman with little or nothing on but with a telephone number imprinted.  

As one walks along a stretch of such activity each member of the crew snaps his cards and if one so much as glances in his direction the cards are thrust forward. Most wear t-shirts promising female companionship "within 20 minutes".  One Las Vegas resident told us the city had tried to prohibit this activity but, if so, with no apparent effect. 

The handing out of the cards is not intimidating to passersby or even hard to ignore. On one occasion, much to Pat's amusement, I set out to accept with spoken thanks all the cards offered to me, in turn, by each member of a crew as I walked past them. One after another they were only too happy to share so many cards with me, presumably because they get paid only if they manage to hand out all the cards they are given to distribute that day. By the end of my 'passage' in front of them I had received the equivalent of at least 3 decks of playing cards. 

This curious feature of Las Vegas, like others one encounters, may be tolerated or even encouraged by the Las Vegas establishment perhaps because its members believe it contributes to the promotion of the current 'naughty' Las Vegas brand and slogan: "What happens in Vegas stays in Vegas". 



Tuesday, February 3, 2009

(No 11)Like A Hospital Gown: the incidental sale of insurance

There is a category of insurance activity in Canada classified by provincial insurance regulators under the heading of "the incidental sale of insurance" (ISI), i.e., incidental to some other transaction like buying a car or taking out a mortgage. The biggest part by far of this ISI insurance activity belongs to creditors group insurance related to the banks' mortgages and loans.

The big life insurance companies in Canada which 'manufacture' creditors group products for the banks (the leaders in this being Sun, Manulife and Great-West) make a very nice profit on this stuff as well as other ISI-related product. They have been reluctant to give serious public attention to correcting the problems for insurance consumers arising from the incidental sale of insurance which they -- the life companies -- manufacture for sale by, for example, travel agents, car dealers and bank branch staff.  

The provincial insurance regulators, because of all the complaints they were getting from ISI buyers, turned their attention to ISI -- and so they should have done. Last year, after some effective proactive work by the companies' trade association -- the Canadian Life & Health Insurance Association [CLHIA] --  the industry managed to dodge several potential ISI-related regulatory bullets. In effect the regulators' gave the industry the chance to address ISI-related problems so that regulators will not be forced to revisit the subject carrying new regulations. However I think it likely that they will have to do so.

The fact of the matter was and is that too many Canadian consumers signing up for this or that form of insurance incidental to arranging for a mortgage or car financing or a trip to Veradero simply do not understand what they have purchased and its limitations. Too often for the consumer this ISI-type coverage is like a hospital gown  -- you only think you are covered. 

Life insurance agents have long been the objects of criticism (often unfairly) for sales practises involving individual insurance and asset products. Therefore it is worth noting that ISI products and sales activity constitute a laundry list of products NOT sold by 'traditional' agents and brokers. Indeed one step regulators should take is to require that all persons involved in the sale of ISI-type products be required to meet the same licensing standards as 'traditional' life insurance agents, i.e., they should hold full agent licenses before they are allowed near buyers of any type of insurance.

Consumer concerns and complaints about ISI are often well-founded and reflect badly upon the entire insurance industry, not just on those banks, travel agencies and car dealers operating in the ISI corner of the business.  It is past time for the larger life insurance companies in Canada to step up publicly (as well as within the CLHIA) and show some real leadership in solving a problem for Canadian insurance consumers.