Value Investing

Risk Manager Education: Now Versus Then

Risk Manager Education: Now Versus Then

This is likely to be the last series describing how I learned my skills that I still apply today.  I hope you enjoy it.


It was mid-1988, and I had just earned my Associate in the Society of Actuaries [ASA] credential.  After my boss congratulated me, he told me I was now invited to the monthly management meetings.

In insurance terms, this era was the “bad old days.”  Risk-based capital regulations had not yet been developed, and aggressive companies like First Executive and Pacific Standard Life [my company] invested almost entirely in junk bonds.  These were some of the pigs Michael Milken was feeding junk bonds to.

What initially impressed me was that monthly income was so variable, and that most of the variation came from asset performance.  Now, as an actuary, I had more asset knowledge than most, but seeing the variation made me say to myself that if actuaries are risk managers in life insurers, the syllabus for teaching actuaries is wrong, because it focuses on liabilities, not assets.

Pardon this excursus — the Society of Actuaries in the US needs to be more like The Institute and Faculty of Actuaries in the UK.  Investing should be a core skill, not a peripheral skill.  Actuaries have the capability of exceeding the skill of CFA charterholders by a wide margin.  Assets vary far more than liabilities in an insurance company, most of the time.  Focus on what varies, and improve management skills there.

I was low enough in the hierarchy that there was nothing I could do to prevent Pacific Standard from failing in 1989.  That said, I accelerated my job search so that I left two months before Pacific Standard was taken into conservation by the California Department of Insurance.  But for me, that was out of the frying pan, and into the fire, because I went to work for AIG.

PS — I learned a few more things as well:

  • Highly levered companies are dangerous.  Southmark, which owned Pacific Standard, needed everything to go right because of the high degree of leverage.
  • When ever you hear of a management team that is highly litigious, stay away.  Phillips & Friedman surrounded themselves with a phalanx of lawyers, and got away with everything short of murder.  They will get it on Judgment Day, but not likely before.
  • When you interlace the capital of subsidiaries, it is a sign of desperation, indicating likely failure.  If you have subsidiary A buy the preferred stock of subsidiary B, and subsidiary B buy the preferred stock of subsidiary A, in the same amount, they both look a lot healthier, but nothing has happened, aside from an accounting ploy.  Pacific Standard died when the California Department of Insurance refused to accept some preferred stock as an admitted asset.
  • My first project was to set the GAAP reserve factors for Universal Life.   In hindsight, my boss manipulated me into creating the best profit stream in hindsight, which produced lousy future profits.  He stripped profitability out of the future for then present management bonuses.

By David Merkel, CFA of Aleph Blog