General American Learns About Risk the Hard Way Brian Graney (TMF Panic)
August 11, 1999
Life reinsurer Reinsurance Group of America (NYSE: RGA) and insurance company asset manager Conning Corp. (Nasdaq: CNNG) tumbled today on news that the General American Life Insurance unit of majority owner and mutual insurer GenAmerica Corp. is having trouble raising enough cash to meet a recent flurry of obligation recalls by investors. As a result, General American is now operating under an administrative supervision order from the Missouri Department of Insurance, giving the state agency powers over certain business decisions. Fearing the worst, investors bailed out of anything that had to do with General American today.
Essentially, there's been a run on General American by its investors. The story centers on $3.5 billion of seven-day investment contract assets and related liabilities that the insurer bought or "recaptured" from troubled ARM Financial (NYSE: ARM) after that company put itself up for sale in June. The contracts or "funding agreements" work like certificates of deposit and are sold primarily to pension funds and mutual funds. More or less, General American was making a big bet that it could recapture the very short-term agreements unscathed and without fanfare. However, that bet has turned against it.
The size of the deal combined with ARM Financial's currently shaky situation was enough to spook the Moody's credit rating agency, which subsequently lowered its financial strength rating for General American. In a chain reaction, investors in General American started asking for their money back -- a total of $6.8 billion of it, according to reports. Finding itself unable to cough up that kind of money in such a short amount of time, General American sought help from the regulators.
What this means for RGA and Conning is unclear. New clients might be scared away by the uncertainties and the companies' connections to General American, although a Conning executive told Bloomberg News that "it's business as usual" at the company. Meanwhile, speculation abounds that RGA, which is the country's second-largest life reinsurer, may join ARM Financial on the selling block in order to help parent General American meet its commitments. General American itself is already in talks with suitors, according to reports.
Whatever results from this situation, the past few days have shed light on the gaps that still exist in the reinsurance market and the risks that mutual insurance companies are willing to take with their policyholders' money. While the demutualization of the insurance industry may do quite a bit to reduce these investment hazards by making the companies accountable to shareholders, the industry itself is based entirely on the concept of risk quantification. Investors interested in the industry should approach insurers with the same skepticism that insurers approach their own businesses.
-- Fool on the Hill, "Know Business Risk Like an Insurer," 02/08/99