This article is an excerpt from Insider Weekly, the global investment newsletter focused on identifying asymmetric investment opportunities.
When you think of insurers, you conjure up images of slick talking salesmen with stern faces telling you in no uncertain terms that your loved ones will surely eat baked beans and live on a park bench should that parachute cord get stuck.
But really insurance is just about numbers and probabilities. And it is here where in truth insurance is about actuaries, not the suited folks who turn up on your doorstep reeking from too much aftershave. These are people who find math more interesting than sex and are therefore completely weird. But what they are is very bright, and we need them.
Most importantly, it’s darn tough to come at actuaries with emotional arguments because they’re dead to them. It’s like trying to get your poodle to eat lettuce.
The only thing actuaries are interested in is the numbers, which is why it’s worth following this sector as it prices risk.
For example, when Al Gore and his climate fanatics promised the world we’d all either have drowned or be living on a boat with Kevin Costner by 2012, I watched insurance premiums on beachfront real estate.
Weird, heh? The masses, spurred on by millionaires (who used the ruse to join the ranks of billionaires) were spoon-fed fearporn by the billionaire-owned propaganda channels, resulting in folks scurrying about, anxious for a solution to this impending doom.
The good ol’ problem (climate change), action (carbon taxes), solution (catastrophe averted) worked like a charm.
And as mentioned, the quants never repriced any risk on beachfront real estate.
Fast forward today and…
“And what we saw just in third quarter, we’re seeing it continue into fourth quarter, is that death rates are up 40% over what they were pre-pandemic,” he said.
“Just to give you an idea of how bad that is, a three-sigma or a one-in-200-year catastrophe would be 10% increase over pre-pandemic,” he said. “So 40% is just unheard of.”
Primerica also said it paid $2.1 billion in term life death claims in 2021. That’s up from $594 million in spending on death claims and other forms of term life benefits in 2020, and up from $475 million in 2019, before the COVID-19 pandemic began.
Thus far health insurers have — due to the uncertainty with Covid — typically excluded complications caused by Covid in their policies (the old opt out strategy), and for those who have not, they initially simply waived care and then charged it separately.
Insurers never, ever like taking unknown risks.
I spoke with one particular actuary who works for a medium-sized health insurer pricing risk. They’re always tracking the data in order to price and reprice where necessary, their policies.
With life insurance it’s simple: No real repricing took place during this “pandemic”.
Deaths just never materialised for 2020 as they all expected. 2021 was the same… up until the last quarter when things changed. And this is where what was mentioned above comes to light. Folks are now dying, and not in the age groups anticipated or expected and definitely not in the age groups that Covid affects most – the old and infirm. The brainboxes are looking at some worrying numbers and repricing risk accordingly.
This brings up the second thing worth considering.
Insurers collect premiums and invest them into yield bearing instruments. Corporate debt and real estate are principal in their portfolios. What happens when payout ratios exceed premiums earned?
Insurers will become forced sellers in order to meet payments.
Also look at corporate debt, which is at all time highs. And why wouldn’t it be? The Fed has kept interest rates artificially low, incentivising this accumulation of debt.
As you can see, life insurance makes up a whopping 20% of the US corporate bond market.
Now if… and I say “if” because we don’t know for sure… but if insurers are facing a “3 sigma, once in a 200-year catastrophe”, then they’re going to have to raid the piggy bank to stay afloat. Premiums collected were all based on the stats that said young and middle aged people don’t just randomly die. Now they are. So the corporate bond market may just be about to have a steady stream of bids turn into offers.
If 20% of any market goes from buyer to seller, you’ve got a problem.
As they sell assets to cover short-term immediate liabilities, they’ll be selling those (largely) bond positions right as inflation is kicking in… and who wants to own bonds in an inflation?
What else? They can jack premiums. Which they will undoubtedly do, but payouts are typically amortized such that you pay out over time… not in a short hard hit. This is why they have those pesky “act of God” clauses in those contracts.
What about exclusions? Sure, if they can isolate a particular illness, but what if it becomes clear the vaccines are causing weakened immune systems which result in deaths from multiple differing ailments (as has been warned many times by folks such as Dr. Sucharit Bhakdi, Pierre Kory, and hundreds of others)?
It’s too early to know how this plays out. The quants can’t at this point accurately analyse risk profiles across multiple different ailments and age groups, since this is all new. So for now, our interest here is in identifying the insurance sector both as a potential opportunity and a catalyst for possible second order consequences.
The flip side
Not to sound like a schizophrenic, but inflation is typically good for insurers. Insurers collect money today and only pay out over time (based on today’s currency value). They offer a natural hedge to inflation. We should be bullish. Certainly things have been looking good for them.
Here’s the SPDR Insurance ETF over the last three years.
It has protected investors from inflation and outperformed the S&P 500. A job well done!
One reason that we’ve been hesitant to get involved is the fact mentioned above. They hold a lot of fixed income and real estate and THAT, at the tail end of a debt supercycle, represents a risk we’d just rather not take.
Now that there is the potential they have massive payouts unaccounted for simply increases the risks in the sector. This is something I think worth watching because I can’t see the bean counters being influenced by assurances of “safe and effective” or that deaths are “unrelated”. Given the amount of censorship and suppression these days, don’t expect to see any statements being made about “the thing that cannot be named”.
But we’ll see it in life insurance being repriced.
If cancer deaths and numerous auto-immune diseases continue to spiral, insurers will still have to pay out on those life insurance policies while repricing new ones. My suspicion is that many folks will simply be priced out of this market and hence not insure. For many in the developed world this may seem crazy to them, but realise that in the developing world very few take out life insurance. That’s what seems likely to happen in the developed world. A shrinking industry since health and life insurance is really a disposable income expense.
So… what does this mean for us?
Good question. Let’s recap. From a risk reward basis (which is how we look at everything) while insurers are good to own in an inflationary environment, this little “problem” may lead to unintended consequences and insurers having to meet payouts they’d not accounted for.
This would entail them selling portfolio assets right when those asset classes are overvalued, and seeing a declining market to sell their products to.
So then what?
Probably just another factor in the rotation of capital – from over valued assets, like bonds, into undervalued asset classes that are forgotten, cheap, and critical to civilization. For the last few years we have been positioning for this via our Insider program. If you want access to the newsletter (with stock tips) only you can grab that here.
To highlight this point visually:
Here is the iShares Russell 1000 Value ETF (IWD) in purple, up 23.13% last year.
Then we have the iShares 7-10 Year Treasury Bond ETF (IEF) in orange, returning -3.45%, and the ARK Innovation Fund, which is the poster child of the “growth” stocks with a -38.48% return.
Keep your eye on the insurance sector
It’s an evidence based sector in a world where the truth is harder and harder to find.
If these companies begin repricing deaths following this initial spike, then we may be in for some overall fireworks socially as well as in the market, because with all the intense propaganda around “the thing that shall not be named”, any impact to the trust in this narrative could absolutely create significant ramifications for entire asset classes globally.