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"You Don't Manage by Models."

An astute judgment call helped the nation's largest life insurer steer clear of the subprime crisis. An interview with William J. Wheeler, EVP and CFO, MetLife Inc.

Edward Teach, CFO Magazine
December 1, 2009

Time Horizon is Critical

Yes, Wheeler did a good job, as did MetLife, including their bright Chief Investment Officer. What I would like to add is the the insurance industry generally did a good job regarding the financial crisis, excluding AIG, the financial guarantors, and the mortgage insurers. Why did the insurance industry do well? 1) They avoided complex investments with embedded credit leverage. They did not trust the concept that a securitized or guaranteed AAA was the same as a native AAA. Even a native AAA like GE Capital many insurers knew to avoid, because the materially higher spread indicated high risk. 2) They focused on the long term. The housing bubble was easy to see with long-term perception -- where one does stress tests, and looks at the long term likelihood of loss, rather than risk measures that derive from short-term price changes. Actuarial risk analysis beats financial risk analysis in the long run. 3) The state insurance regulators did a better job than the Federal banking regulators -- the state regulators did not get captured by those that they regulated, and were more natively risk averse, which is the way regulators should be. 4) Having long term funding, rather than short term funding is critical to surviving crises. The banks were only prepared to maximize ROE during fair weather. I know of some banks that prepared for the crisis, but they were an extreme minority, and regarded by their peers as curmudgeonly. I write this to give credit to the insurance industry that I used to for, and still analyze. By and large, you all did a good job maneuvering through the crisis so far. Keep it up.

Posted by David Merkel | December 30, 2009 11:09 am

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