This post is by David Merkel from The Aleph Blog
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I was driving home from some event with the youngest five of my children — it was a long and tiring event, so my kids were quiet, and a thought came to me… what of the companies that I have worked for in the past?
So, I started down the list. Pacific Standard Life — biggest life insurance insolvency of the 1980s. (That you have never heard of it tells you the ’80s were kind to life insurers.) I was a great place for me to start. More than doubled its size every year for the 3.5 years that I was there. My responsibilities grew as rapidly. It was like taking a drink from a firehose. I became indispensable, and then as I realized that the probability of company failure was growing, I looked elsewhere. I ended up with two offers — Midland National, and AIG.
Pacific Standard was eventually sold to the Hartford, and exists no more today.
I took AIG, and am not sad that I did, even though the Midland National offer was better in hindsight, and AIG cheated me by placing me on the domestic side rather than the international side. The church that I went to while working for AIG more than made up for the difference.
That said, my life at AIG was miserable. What a political, unprofitable place — that is, the domestic life companies, prior to the purchase of SunAmerica. I really hated myself as I got more recognition for closing down unprofitable lines, than building profitable lines. That said, I learned a lot there — you had to do everything — price products, value results, risk control, and even poke around at the investments.
But I knew I was a short-termer there; my conscience bothered me regularly. Why so much effort on an unprofitable division, where every day was a battle? I interviewed many places, eventually Conning made made me an offer (and then withdrew it). Provident Mutual was more honorable, and so I became their investment actuary in the Pension Division.
Wait, what of AIG today? It is being chopped up and sold off. I suspect the name will disappear in entire before 2020.
As part of a six member group of officers over a 30+ staff in Provident Mutual’s Pension Division, I made and helped make significant changes that improved profitability and lowered risk. By the time I was done, projects that I executed accounted for 5% of Provident Mutual’s net present value of profits. The Pension Division went from being a backwater to the star division of the company.
Mid-way through my time at Provident Mutual, senior management asked me to be the line actuary for the Annuity Division. I did that, changing the investment and crediting strategies. I still remember telling the investment department to invest 25% of their assets in 30-year bonds. Doesn’t sound right when the crediting rate reprices each year, but when you have floor crediting rate guarantees, it makes a lot of sense. That call has paid off.
But, all humanly good things come to an end. Senior management at Provident Mutual took a dislike to actuaries who were too competent. They fired my boss, and gave me less and less to do. I could read the writing on the wall, so I looked elsewhere.
Where is Provident Mutual today? It is a part of Nationwide Mutual. Management sold the company for a piddling amount of compensation to the management team, and reasonable compensation to the dividend-receiving policyholders. As I have said to my children, “That is stupid-greedy. When you sell the company and receive only three times your annual salary as a bonus, you are trading away something more valuable, for something less valuable.” But the real loser was Nationwide, who had to write off a large portion of the purchase price stemming from the adjustments made to the earnings statements from Provident Mutual management.
I took a job at USF&G as it was being acquired by The St. Paul. The St. Paul wanted an actuary that understood how to invest life insurance assets, because they hadn’t had a life insurance subsidiary in over 25 years. I explained the theory to them — maximize interest spreads over the life of the business. Very different from the P&C version — premium reserves get invested in cash, claim reserves in bond of the proper duration for payout. Surplus assets get invested in risk assets, like equities.
USF&G is gone, but so is The St. Paul, which is now subsumed in The Travelers. I could go on over how the CFO of The St. Paul ruined the balance sheet by buying back too much stock, or how The St. Paul increased its leading market share in Medical Malpractice by buying crummy medium sized competitors in the wrong point of the pricing cycle. But I won’t; they are gone now.
Now the operating life company that I used to manage money for is still alive, if not kicking. Old Mutual plc owns them, and the underperformance of the life subsidiary led to the dismissal of the CEO of Old Mutual. I would not be surprised if that subsidiary were sold off.
The investment management subsidiaries that I worked for survived better, but where operating management is marginal, the pressure comes to replace investment management. It is easy to blame the operating management, but much harder to eject the investment management.
Two more takeaways for me: first, the insurance insustry, for all its complexity, has done very well with taking over complex liabilities and corporatations, leaving policyholders relatively unaffected. Second, my own career has been marked by working for companies that tried to grow too quickly. Using my fictional story as a template, I worked most of my insurance career for the aggressive guy. As an asset manager, I’ve spent most of my time investing in conservative management teams. I guess I learned what works by working for what doesn’t work, again and again.
I’m not disappointed; I learned a lot, and it made me better with both risk control and investing. May we all make lemonade if we get a lot of lemons.