For five years, we have tracked the investment yield trend of whole life insurance companies and we continue to analyze this data every year because investment income is a primary driver of dividends paid to participating insurance policy holders.
Investment income is not the only contributor to any insurance company’s dividend payout. The other two factors considered each year by the board of directors is
- Claims experience
- Operational expense
Claims experience plays a much larger role in affecting the overall dividend than operational expense–there simply isn’t large fluctuations in day-to-day operating expenses for companies that have existed for over a century.
We use investment performance data reported in statutory accounting reports published by all insurers domiciled in the United States to compute the five year trend of investment yield on admitted assets. This computation tells us the average change in yield on invested assets over the most recent five year period.
For example, if the result of an insurer for this analysis is -.10% per year that means the insurer has experienced a loss in investment yield of .10% (ten basis points) per year for the last five years.
The results of this analysis are as follows:
Negatives Across the Board
This is the first year since we started this analysis that all insurers show a negative trend. In years past, only a few insurers achieved average growth in investment yield year-over-year with most insurers having experienced a decline on average. This result is not surprising given the current trend in interest rates across the broader U.S. economy.
Size Doesn’t Seem to Matter Much
The asset pool size of the insurer seems to have little effect on insurers 5 year trend for investment yield. The top five insurers on this list represent a broad range of asset sizes and all but one, New York Life, have experienced single digit decline year-over-year.
However, smaller asset pool sized companies to make up the entirety of the bottom 5 insurers on the list. Dividing the list in half, most of the larger insurers are found in the top 11.
This Trend is Likely to Remain
Interest rates remain low and don’t show major signs of improvement in the short term. As a result, we do not expect this trend to reverse in any major way for the next several years. Insurers will likely continue the trend of moving to somewhat riskier assets where available. This strategy will be more impactful for smaller insurers and then large ones due to sheer scale of overall assets and the impact smaller alternatives investments have on the total pool.
To continue on with the discussion of potentially rising interest rates…
We actually get into what it might mean for life insurance companies and for your life insurance policy–whether it happens to be participating whole life or universal life.
Major discussions in this episode:
- How quickly can you expect your dividend (WL) and/or interest rate (UL) to increase if Greenspan's prediction of a whipsaw comes true?
- Will the life insurers who were “forced” to raise expenses in their UL contracts over the last couple of years, lower these price increases as interest rates rise? (given that most of them gave the excuse of having to deal with a “prolonged period of low interest rates” to raise their prices on existing policies)
Former Federal Reserve Chairman, Alan Greenspan, believes the next bubble to burst will not be in the equity markets…it will be a normalizing of yields in the bond market as inflation ticks up.
During a Bloomberg interview, Greenspan said…
“By any measure, real long-term interest rates are much too low and therefore unsustainable”
And he went on to say…
“When they move higher they are likely to move reasonably fast. We are experiencing a bubble, not in stock prices but in bond prices. This is not discounted in the marketplace”
Greenspan also warned that we are headed toward a “stagflation” that we haven't seen since the 1970's.
But what does any of this have to do with life insurance?
As we all know, life insurance companies are large buyers of bonds and have been long-suffering over the last several years as their bond portfolios mature and they're forced to buy bonds with much lower yields.
Come back next week to hear our take on what it all means for life insurance companies.
Did you know that it's possible to outlive your permanent life insurance?
That entire sentence is discombobulating. When does permanent not really mean permanent?
Recently, a pending court case was brought to our attention on Joseph Belth's blog (former publisher of the Insurance Forum) that raises some interesting debate. You should really take a few minutes to read the entire blog post if this sort of thing interests you, it's worth a quick read.
The long and short is that a gentleman and his wife (Mr. and Mrs. Lebbin) formed an irrevocable life insurance trust (ILIT). They made their two children the trustees, gifted money to the trust each year and the proceeds were used to purchase two separate survivorship and/or second-to-die universal life policies from Transamerica. Mrs. Lebbin is deceased which leaves Mr. Lebbin as the insured.
All seems normal. However, Mr. Lebbin is approaching his 100th birthday and the policies were designed to endow (mature) at age 100. Thus he will receive the net cash value (of unknown value to us).
Mr. Lebbin would like for Transamerica to extend his maturity beyond 100. Transamerica has decided not to do that.
And so begins the lawsuit.
Listen to the episode to hear what we have to say about it.
In episode 75, our discussion revolves around a suggestion that comes from this article over at Fox Business. In particular, the article points out that many larger and well-known employers are aggressively raising their matching contributions for their employees in the company 401k plan.
The article goes on to suggest that companies believe this is an effective means of retaining talent and helping workers accumulate enough money to retire–making way for younger employees.
We think that all sounds great. More money from the company you work for toward your retirement is generally a good thing.
But…do people really stay with a company because of the matching contribution in the 401k? Not likely.
We've both been in the business of talking personal finances with people for a number of years and never heard anyone mention their sweet 401k as a reason they stayed at a job. The best retention tool seems to be actually paying people more.
Recent settlements have been reached between policyholders and a couple of mutual life insurance companies. Turns out an obscure bit of insurance regulation from 100 years ago might get you an extra $22 that you weren't expecting.
We've been asked a few times about these lawsuits over dividend underpayment, so we'd share our perspective on the issue in episode 74.
Recent comments from Fed Chairman, Janet Yellen, indicate that she thinks we'll never see another financial crisis like we saw in 2008. She's probably right but is that really a profound observation?
Well, the day of reckoning has come and gone. The new Department of Labor's new Fiduciary Rule is largely in effect across the financial services industry.
Discussion over the rule and its implications have been debated over the last couple of years with a fair degree of intensity. Still it seems that the smoke screen has worked.
The new rule expands the definition of a fiduciary as it relates to giving investment advice regarding retirement accounts.
We're not trying to explain the rule in today's episode…as far as I can tell from attending several informational webinars/meetings regarding the implications of the rule there's no agreement or real understanding of what it means for advisers.
Big surprise, right?
We aren't all that concerned with procedural issues (disclosures, paperwork etc.) as much as we're concerned about how this new rule warps the definition of “best interest” and what it really means to act in the capacity of a fiduciary.
Our issue isn't really about a rule change, that's just what's visible. What's more troubling is that policymakers are attempting to fix a perceived problem that they don't really understand. A new rule will not fix the problem.
According to information published by the Insurance Research Council, almost 13% of all automobile accidents in the U.S. are caused by people who have no insurance. Yet, it's illegal to drive without insurance in almost every state.
I got some breaking news for you…some people do bad things and writing new rules won't change it.
The new rule implies that what's in your client's best interest has an absolute right or wrong. And before you think it…yes, fraud is always wrong.
But…what's in my clients best interest is highly subjective and that has not changed–rule or no rule.
Are increasing COI charges really a problem with universal life insurance? Or could it be that competence in understanding policy design (from the outset) and management is actually more important?
Today we're discussing an ongoing lawsuit between a family and Nationwide regarding a couple of variable universal life policies that are owned by an ILIT (irrevocable life insurance trust).
Episode 70 marks only our second FAQ episode since we started the Insurance Pro Blog Podcast. But it proves that we do indeed love the questions that we get from our audience, so keep'em coming our way. We'll do our best to get to them in our upcoming Q&A episodes.
We were planning to answer three questions today. Alas, our attempts at brevity fell short and so we only answered two questions.
Here's what we tackled in episode 70:
1. Is the waiver of premium rider worth the cost and what does it really do for you if you become disabled?
2. How do you distinguish a “good advisor” from all the rest? The financial services industry views an advisor/agent/producer as top notch if they generate more revenue than everyone else. But…is that the metric you (the client) should be using?
And seriously, keep the questions coming our way, we may address your questions in a future broadcast or mash them up with other questions if we believe it provides a better context for understanding.