Ohio National - Demutualization

[scagnt83]

Still not sure how a hedge fund can buy a Life & Annuity block of business that the carrier that manufactured the policies cant keep to make a profit, but a hedge fund can somehow invest & make money on.....................................who is going to service all those policies & clients.

Stop new sales.
Cut rates to the minimum guaranteed
Increase expenses to the max allowed.
Create the crappiest products possible for conversion purposes (so all the term expires)
Have a bare bones customer service team.

Premiums are a steady and predictable stream of income... which can be used to secure capital. Part of the carrier assets are diverted into the hedge funds assets to manage... boosting their overall leverage.

Keep in mind, we are not talking about books of biz that are underwater or not underwritten properly... there is a reason Genworth couldnt find a buyer for their LTCI biz.

New sales are expensive; inside reps, outside reps, regional reps, new business dept, underwriting dept, contracting/licensing dept., compliance dept., etc.

And customer service on a life insurance block of biz is extremely minimal compared to other lines such as health insurance.

 

[Allen Trent]

Stop new sales.
Cut rates to the minimum guaranteed
Increase expenses to the max allowed.
Create the crappiest products possible for conversion purposes (so all the term expires)
Have a bare bones customer service team.

Premiums are a steady and predictable stream of income... which can be used to secure capital. Part of the carrier assets are diverted into the hedge funds assets to manage... boosting their overall leverage.

Keep in mind, we are not talking about books of biz that are underwater or not underwritten properly... there is a reason Genworth couldnt find a buyer for their LTCI biz.

New sales are expensive; inside reps, outside reps, regional reps, new business dept, underwriting dept, contracting/licensing dept., compliance dept., etc.

And customer service on a life insurance block of biz is extremely minimal compared to other lines such as health insurance.

Agree with all points. But why is that worth more to a hedge fund/private equity to pay to buy that. But it isn't worth it for the company that already owns it for free. Couldn't they make all those same changes you mention?

My guess is laws restrict a carrier In terms of how the carrier can invest surplus/reserves, but hedge fund/private equity can invest exact same funds more aggressively

 

[somarco]

VC firms (think Bain and Romney) operate from the perspective the sum of the parts are greater than the whole.

Buy a business, sell off the non-profitable lines, make the final product more profitable, then sell it.

Romney became wealthy with this strategy. Blackrock does the same.

 

[Allen Trent]

VC firms (think Bain and Romney) operate from the perspective the sum of the parts are greater than the whole.

Buy a business, sell off the non-profitable lines, make the final product more profitable, then sell it.

Romney became wealthy with this strategy. Blackrock does the same.

Yup. So why do regulators let it happen if the history is there that consumers in force products get worse in these insurance deals.

 

[somarco]

Yup. So why do regulators let it happen if the history is there that consumers in force products get worse in these insurance deals.

Regulators don't care about consumers. So-called consumer protection agencies have other agendas and are often beholding to lobbyists and capitalists that provide funding.

The Chamber of Commerce was once an advocate for small business. Somewhere along the line they lost direction and succumbed to pressures (and money) of big business. Now they promote "importing" low wage workers, including those who come here illegally. Small businesses have lost their voice in the C of C.

 

[scagnt83]

Agree with all points. But why is that worth more to a hedge fund/private equity to pay to buy that. But it isn't worth it for the company that already owns it for free. Couldn't they make all those same changes you mention?

My guess is laws restrict a carrier I'm terms of how the carrier can invest surplus/reserves, but hedge fund/private equity can invest exact same funds more aggressively

The types of investments hedge funds make are not something most carrier investment managers are experienced with doing. When carriers want hedge fund like returns, they go to hedge funds, they dont do it in-house.

Also, the hedge fund is trading on margin. More assets equals more margin to trade on. Insurers dont do that, so they do not get the benefit the hedge fund does in that scenario.

And you are probably correct that insurers legally are not structured to do certain things, such as using future premiums to secure trading capital, etc.

Essentially, anything over cost/reserves is considered a "boost to trading capacity" for the hedge fund.

At least that is what I have understood about the process.

 

[scagnt83]

Yup. So why do regulators let it happen if the history is there that consumers in force products get worse in these insurance deals.

Because the consumers agreed to the contract and its corresponding minimums and guarantees. Regulators are not in the business of regulating non-guaranteed returns or expenses. And any premium increase must be approved by the state regulators regardless.

With life insurance, I would agree it often is not great for existing customers. Not sure that is the case completely with other product lines. Honestly I dont really know the history there.

Some advocates of private equity buying insurers say the policy holders can benefit from the deal, since hedge funds can generate larger returns than the insurer can by themselves. However, I have not seen that happen on the life side, and Ohio National is a prime example of that.

 

[DWPCL]

I think Mass is now a Mutual Holding Company. Which allows them to easily spin off to demutualize if they want to. It also allows them to own non-mutual insurers under their "umbrella". So they could hypothetically acquire a publicly traded insurer, and use them to raise money... or use them to "fold up" into the parent company upon demutualization.

You would have to look at the annual report to see if all the subsidiaries flow up to contribute to the dividend. To a certain extent I think they would if they turn a profit. But if they are losing money, it seems it would be a 2 way street.

Mass now owns Great American Annuity as a subsidiary. Are those profits flowing up to help dividends? I have no clue to be honest.

I do know that the more Mass diversifies, the more "worried" I get about them remaining fully mutual. They have a very large advisory business now that has grown a lot over the past decade. Strong DI, and now really strong Annuities. Seems like they could drop the CV life insurance now and not skip a beat... and lets face it... the main reason agents/clients want a mutual insurer is for CV focused life insurance.

Mass is still 100% mutual. a lot of their executives cam over from met so who know how long that is going to go for.

just curious what competitive annuities are you talking about? great american?

 

[scagnt83]

just curious what competitive annuities are you talking about? great american?

Yes, Great American. Certainly not Mass branded annuities.

 

[walthamny]

While I'd bet on Penn too, the people at ONL kept saying the same things... until it didn't matter anymore.

It would be interesting if PennMutual can claim on the record publicly if they never seeked an IRS opinion on if they demutualize what the tax consequences would be. New York Life, MassMutual, NorthWestern Mutual can't claim that. Interesting if Penn Mutual really was clean and had never seeked an IRS opinion, you would think they would use that in their press releases and advertising. Instead, we get wow we will fight to remain mutual. Penn Mutual has a number where they would consider public. May be the high level executive does not know it. Or he is also drinking the kool aid. We all did at some point.