Insurance Companies in Distress

EastCoast asked me about insurance companies the other day. I have some connections. I am still licensed in life and health insurance. I am not involved in selling because there are so many teaching jobs available I turn down the excess.

A few months ago I could have signed up to sell annuities from AIG. I knew it was a big company, but no one knew at the time that they were ready to go belly up from mortgage investments. I was not so sure that any given company was a good bet. I want my insurance company to live longer than I do.

Now the feds are going to prop up insurance companies, too. They already shoveled $100 billion toward AIG alone. This is madness. The piglets will rush to the sow.

All insurance companies sit on a pile of assets. In the Great Depression they had a lot of mortgages, which were distressed and kept down earnings for many years. The Empire State Building was finished just before the Depression, and it was built with insurance money. That was another lead balloon.

Property and health insurance companies also stash their cash in various investments. I recall a time when the property insurance companies bought all the way up during a stock market boom. Then it popped and they raised rates to cover their losses in the market.

Some of the market crashing is probably due to fears of Obama winning. Much of it is from massive fear, getting out of positions to gather cash or cash equivalents (federal obligations).

Everyone is going to lose from the meltdown. Universities have lost endowment totals. Insurance companies will be as strapped as banks. General Electric is both a finance and manufacturing company. Some think GE is more dangerous than a bunch of AIGs at once. I do not know enough to say.

Annuities are a good idea in certain cases. I arranged for some for my mother, and they turned out very well. Ben Stein said they worked well for his father. It is possible to get a good, secure return and leave the remainder for the estate (refund annuity, or options like the 10 year certain).

The main thing is starting with a secure insurance company. I would not even consider one lower in ratings than Northwestern Mutual or Mass Mutual. Huge insurance companies can tank as fast as a large bank. There are rumors about Met, for instance. What a salesman promises is second to a company's financial future.

Many insurance companies will consolidate, following the example of banks. In the past I have seen enormous companies get merged into credit-worth ones: Executive Life, Mutual Benefits, Equitable, General Life. Executive Life paid big dividends based on junk bonds alone, until they nose-dived.

Investments are down. Home prices are down. Prices will stay down. Look at oil. Probably the big speculators were all tied up in futures contracts betting on oil going up. Once demand went down globally, those contracts were losers. So oil prices are going down, down, down. Mrs. Ichabod asked about "the danger of inflation." We are in deflation, which is really more dangerous.