Actuaries and Managing Risk

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Actuaries and Managing Risk
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Actuaries and Managing Risk

Sometimes you have to do odd stuff for your client.  My boss and I were asked to come to a client meeting where there would be games (and a dopey speaker, I will leave that out).  As it was I found myself in a game where the one who moves his feet amid pushing loses.  I came in 4th (amid 60), I eventually lost to the tax guy… a very clever guy who should never be underestimated.  I ended up beating him in a game where we were all blindfolded, and those that were touched were out (we were the last two).

But the best part of the contest  was the square game.  We were blindfolded, and rope was around us, and they told us we had five minutes to form a square.  When the official said, “Go!” a marketing guy shouted out, “I know there has to be an actuary in our group.  What do we do?”

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I shouted out, “I’m an actuary!”  “To the right of me, counterclockwise, count off, I am number one!” And so I heard, “two, three, four… fifteen.”

Fifteen? Uh-oh, that does not divide by four, so I shouted, “Okay, listen to me!  Five, Nine, and Thirteen, put your arms at right angles, and pull out.  You are the corners of the square.  Everyone else, put no pressure on the ropes.  Fourteen and Fifteen, make sure that you are not touching.”

After that, I shouted, “Has everyone complied with what I said!”  After agreement, I shouted to the judges, “Okay, we’re done!”

When we took off our blindfolds, behold, a square!  Way ahead of the other teams, who looked like blobs.

All actuaries are bright, but many lack courage.  I have courage, and a desire to learn more in areas where I am not an expert.

I needed all of my skills and my courage working for that difficult client. Here’s an example: I did not invest in a hedge fund structured note, with a guarantee from the AA insurer who was pushing it.  I said to them, “most hedge funds are short liquidity.  Why should I invest there?”  He disputed that hedge funds were short liquidity, but he dropped the case and we did not buy.

Here’s another example: A guy called me, asking me to let him pay at par a premium mortgage that we needed to fulfill our liabilities.  I said to him, “I can’t do that, we need the payment over time so that our shareholders are not badly affected.”  Then I said, “Why not get a second mortgage if you need to take money out?”  He said, “A second mortgage? Those guys wear ‘panky rangs.’”

I had the same experience on the most prominent building in Baltimore — the TransAmerica Building, which was the Legg Mason building when I was dealing with it.  Toward he end of my tenure at Dwight, they called me, asking to buy out the second mortgage, which was now the first mortgage.  They offered a slight premium to par, and I said no.  I told them that we needed 125% of par to make us whole, and we would be done.  They offered 110%, and I told them to go away; I would not counteroffer.

I had a strong position, and so I did not have to move.  Sadly, when I left, the company made a bad deal with the borrower, and lost a lot of money.

What can I say? I did my best, and they lost due to their stupidity.  They got more interest due to my intransigence at minimum.

By David Merkel, CFA of Aleph Blog

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

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