Are the largest life insurers in the US the best?

Is it Better to Work with the Largest Life Insurers?

Buying whole life insurance or universal life insurance as a cash accumulation tool or even because you want a permanent death benefit requires you to make a long term commitment to the life insurer.  Even buying term life insurance commits a rather lengthy attachment to a life insurer.  It's understandable that anyone would want to ensure as much as possible that the company he/she chooses will be around and able to uphold its end of the bargain.

So with this in mind, should you skip past the little guys and head straight to the larger life insurers out there?  Or does the size of the life insurer matter with respect to longevity and delivering on promises?

How to Measure the Size of a Life Insurer

When we talk about a life insurer being big or small, we traditionally mean the amount of assets it manages.  All life insurers collect money from policyholders and hold on to a larger percentage of that collected money.  The industry term for the place life insurers (or any insurer for that matter) store all of this cash is the general account.  To be clear, it's not held in cash entirely.  While some percentage of the assets are cash, bonds comprise the majority of the asset pool.

Life insurer general account asset value is public information we can see by looking up and insurer's statutory filing where we can see not only what the total value of the general account is, but also a detailed breakdown of the specific assets the life insurer owns.

Evaluating life insurers by the amount of assets managed in the general account is a long established practice.  Perhaps brought about more by larger life insurers who chose to focus on this as a vanity metric to claim superiority over the competition, there is some logic detailing why we might care if company A managed considerably more assets than Company B.  I'll walk through the most likely straight forward reasons, as well as address a few more subtle reasons that might shift your thinking on the virtues of a big and small assets pools.

Larger Life Insurers more Immune to Risk?

You don't need an advanced degree of finance to understand that traditionally, we view larger companies are less risky compared to small ones.  Applying that same logic to life insurers, we often believe that insurers with larger asset pools are more stable than those with smaller ones.  But identifying quantitative data that supports this theory is tricky.

Among the largest mutual life insurers in the United States, we certainly note that all the major rating agencies note the massive assets under management as a positive weight on the insurers' rating rationale.

But there are several larger U.S. life insurers (measured by assets) that do not hold the highest ratings by these same agencies.

What's more, there are several very small life insurers with ratings at or near the highest achievable in the United States.  So their tiny asset pools in relationship to the behemoth life insurers seem to have little to no affect on risk evaluation at least in the eyes of the analysts of work for firms such as Standard & Poor's, AM Best, and Moody's.

Do Larger Life Insurers Perform Better?

Risk aside for a moment, how does policy performance fare among larger and smaller life insurers?  Observationally, this is an area where smaller insurers have held a bit of an advantage over the past decade.

While there is no doubt that anyone managing a massive $100 billion-plus portfolio has almost immeasurable leverage and access to the most unique opportunities that investing world has to offer.  It would appear as though you gain admittance to almost the same show if you only manage a few billion dollars (it's still quite a lot of money).

Smaller insurers benefit from arguably more options as they can enter unique investments that will have a small absolute result, but a large relative impact on the assets managed.  I'll use an example to paint the picture.

When Small is Advantageous

Insurance Company A has a general account totaling $150 billion while Insurance Company B's general is $5 billion.

Both companies make a $10 million investment in a new internet startup called kitty-fy.  A year later, Kitty-fy goes public and both companies exit their initial investment for $300 million.

In both cases, the company, A and B made lots of money on the investment.  But, the impact that $290 million gain will have on Company B is substantially more than on Company A.

Suppose both companies were mutual life insurers heavily engaged in issuing whole life insurance.  Also, assume that Company A's average total dividend reward to policyholders over the last five years is $1.5 billion while company B's was $150 million.  The $290 million gain will help support Company A's pursuit to pay a dividend to policyholders, but it could entirely cover Company B's dividend with a lot of money left over.

Using this same example, suppose instead that Company A passed on Kitty-fy because a $10 million investment was too small and Company A assumed it wouldn't make enough of a meaningful difference.  This exact scenario plays out among managers of very large asset pools every day.

Measuring Life Insurers by Income

What if instead of worrying about assets, we measured insurers by the amount of income they generate?  This notion seems very straightforward, but if we start to peel back the onion layers, we quickly find out that income is not as straightforward as we might think when it comes to life insurers and the type of life insurance company might cause us to focus on different income measurements.

The first income metric we could consider is revenue.  This is (ignoring ancillary operations) the gross amount of premiums collected and investment income produced by the life insurer.  It's the largest figure on the income statement, but beyond looking impressive by its size, it doesn't give us any real actionable data.

Next on the list is operational cash (we don't worry much about gross profit when evaluating life insurers unless we are attempting to make a stock evaluation for a public life insurer).  This is the cash left over after the insurer covers all expenses EXCEPT policyholder dividends and taxes.  This is a super crucial income metric for mutual life insurers (i.e. anyone engaged heavily in whole life insurance).

Lastly, we could look at net income (aka profit), but this figure is of relatively little significance to policyholders.  Stockholders care about it, I assure you.  But this is only important when the company in question is a publicly owned stock life insurance company.  Higher net income implies a higher value of the company an opportunity to fund dividend payments to stockholders.

The other problem with measuring an insurer by income is keeping an eye on which accounting principle we are using when looking at these figures.

Life insurers traditionally report financial data under an accounting principle designed specifically for the insurance industry.  This principle, knowns as statutory accounting, focuses on capitalization and values the company primarily on what's its worth upon complete liquidation.

The accounting principle used when we read or listen to most other analysts is GAAP, which focuses heavily on income produced by the company in question.

The two accounting principles count various financial measures differently and we might draw a strange conclusion if we ignore the accounting principle used for the financial statement we review.  We'll especially have a problem if we fail to realize that one company's reporting is a statutory accounting statement when another's is GAAP.  All life insurers must prepare financial reports submitted to state regulators using Statutory Accounting Principles.  So anytime we look these up, we know which accounting principle the insurer used.  GAAP is required for stock company disclosures, but non-stock insurers can choose to prepare a GAAP report if they want (some do largely because it makes the income reporting look better).

Statutory and GAAP Accounting Principles

Are Life Insurers with Higher Incomes Less Risky?

Looking at life insurance company ratings relative to the income they generate gives us no discernible pattern for safety and income.  While certain high-income metrics are also a positively weighted factor mentioned in rating rationale, this too varies and considerably much more so than asset size.

Do Life Insurers with Higher Incomes Perform Better?

For the most part, the answer here is inconclusive with one small exception for a sub-category I didn't even mention above.  Life insurers who tend to produce a lot of investment income relative to their general account assets have tended to have policies that performed better for policyholders.

This is one area were logic has matched up with reality at least in part.  But, you should note that this is a metric that anchors income to asset pool and does not look at investment income in absolute terms.  It's the exact thing we have evaluated for years in our investment income analysis.

Life Insurance is Inherently Risk Averse

The life insurance industry is risk-averse by design, so even the smaller life insurers tend to uphold considerable focus on safety and stability.  Unlike other industries where smaller players are known for their wild temperament seeking boom or bust opportunities, most of the “riskier” life insurers are boring.

It's hard for people to detach from the traditional thinking that safety indicators mean large, well established, brand names you see at major sporting events.  Not all life insurers pursue that level of marketing exposure.  However, unlike other industries, even the smaller lesser known players have been around for 100+ years and manage portfolios that would place them well within the top 1% of mutual funds by size.

The good news is, life insurance is stable and boring which means there's little danger of a complete loss.  You might walk away with less than you hoped, but your chances of walking away with nothing is slim.

About the Author Brandon Roberts

Brandon launched the Insurance Pro Blog in July of 2011 as a project to de-mystify the life insurance industry. Brandon was born in Northern New England, and he currently calls VT home. He attended Syracuse University and graduated with a triple major in Economics, Public Administration, and Political Science.

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