The U.S. federal government has rushed to create generous, permanent social welfare programs — for big companies that can raise capital on Wall Street.
Several speakers gave that assessment of the U.S. economy Wednesday, at S&P Global’s 36th annual insurance conference, which was conducted through a videoconferencing system.
Roger Crandall, the chief executive officer of Massachusetts Mutual Life Insurance Company, said during a CEO panel that he thinks federal policymakers have been a lot quicker to tackle the COVID-19 pandemic crisis than they were to address the 2007-2009 Great Recession.
This time around, he said, he’s not having any meetings focusing on whether major financial transaction counterparties will fail.
Two investment managers who appeared in an earlier panel, for life insurance industry chief investment officers, said they’d like to see a lot more concern about the risk of counterparty failures.
Scott Minerd, the global chief investment officer at Guggenheim Partners, and Peter Gailliot, the chief investment officer for the financial institutions group at BlackRock Inc., said they worry that the Federal Reserve Board and the U.S. Treasury Department are encouraging big companies to take too much risk, and investors to overlook big companies’ weaknesses, by being too quick to by struggling companies’ bonds and commercial paper.
‘Too Big to Fail’ Returns
Some of the companies getting help may simply have problems related to the pandemic, but others had taken on too much debt before the pandemic started, and they have contributed to their own problems, Minerd said.
But the federal government has been stepping in to save large companies since the 1980s, when it rescued Continental Illinois, a large bank, Minerd said. The concept of “too big to fail” came back during the Great Recession.
“It’s very difficult when you establish programs like ‘too big to fail’ to ever them,” Minerd said.
Gailliot suggested that bailouts aimed mainly at giant corporations may aggravate income inequality and wealth inequality, by helping companies like Amazon borrow huge sums at low rates, without doing much to help small and midsize companies get capital.
“Those that don’t necessarily need it [capital] can take advantage,” Gailliot said.
Those large, cash-rich companies may stockpile the capital they’ve raised, rather than spending it on activities that could save or create jobs, Gailliot said.
An audience member asked the speakers if the United States is moving toward socialism.
“I would say the short answer is yes,” Minerd said. “I think this drift toward socialism in some form will continue.”
At another point, he quipped, “We have more confidence… in our government’s willingness to print money.”
Timothy Schmidt, the chief investment officer at Prudential Financial Inc., had a different take on the Fed’s efforts to buy bonds, commercial paper and other commercial financial instruments, to keep the markets for those instruments moving.
“I think they’ve appropriately sidestepped the moral hazard concern so far,” Schmidt said.
Schmidt, who works for a company with $1.4 trillion in assets under management, said he was pleased the Fed had done such a good job at stabilizing the market but sounded a little disappointed that a chance to earn more on bonds had ended so quickly.
“Insurance companies are not, generally, in need of liquidity,” Schmidt said. “They’re very liquid.”
In the spring, when the bond market was growing sluggish, the gap between the interest rates that weak companies pay and the rates strong companies pay was growing wider.
Wider spreads on corporate bonds help increase life insurers’ investment earnings.
“We could be a source of liquidity,” Schmidt said, wistfully.
When the spreads widened, “for a lot of insurance companies, that looked like a ‘get out of jail’ card,” Minerd said.
But, because the Fed announced its bond buying program so quickly, investor confidence soared, and spreads narrowed too quickly for most insurers to do much to realign their portfolios, Minerd said.
The CEO Panel
For the CEOs, some of the hot topics were COVID-19 claims, recession effects, interest rates and deals.
Richard Bielen, the CEO of Protective Life Corp., said his company has now analyzed a pile of early COVID-19-related death claims.
The average age of the insured was 79, the average insured who died had owned a policy for 24 years, and the average death claim was about $150,000, Bielen said.
“I’m pretty optimistic about the [life insurance] industry’s ability to get through this,” Bielen said.
The CEOs were more cautious when they talked about the effects of the recession and rising unemployment on policy persistency, but, at this point, they said, they have seen little change in persistency or related indicators.
“We have not seen a pickup in surrenders or lapses, or even in policyholder loans,” Crandall said.
Roy Gori, the CEO of Manulife Financial Corp., said he’s seen no increase in policy surrenders, and few requests for permission to make payments late.
The CEOs expressed much more concern about prolonged low interest rates.
Schmidt, the Prudential chief investment officer, predicted during the earlier panel that interest rates could stay low “for the rest of our careers.”
Gori said, “We’ll need to pivot.”
Gori and Crandall suggested that life insurers may have to focus more on personal protection products, and less on investment-oriented products.
Gori said the right kinds of critical illness insurance and long-term care benefits hybrid products might work in a low-rate environment.
If very low rates persist, “it will hard to sell a fixed annuity,” Bielen said.
Gori and other speakers looked unhappy about the possibility that the United States could end up with negative interest rates on government bonds, just like Japan and some European countries.
“Negative rates have not been a strategy of great success,” Gori said.
Crandall said he thinks mergers and acquisitions will be scarce for now, because pandemic-related travel restrictions make getting people together difficult.
But Crandall said he thinks deals will be coming.
“Scale is going to be more important than ever,” Crandall said.
One major reason, he said, is the need to invest in information technology systems, including the kinds of systems needed to protect against state-sponsored cyberattacks.
— Read 3 Hot Sources of Life and Annuity Sector Terror, on ThinkAdvisor.