One of the great challenges facing those of us who manage life insurance has been the long-term trend in interest rates. This is particularly true with Whole Life insurance. As the chart below shows, the drift in dividends has sloped downward for the last 28 years. And, today’s environment is especially challenging as we wallow in historically low interest rates for fixed investments. The cash value backing Whole Life insurance is typically invested in bonds (approx. 70%) and mortgages (approx. 10–15%), with the balance split between stocks, real estate, and other investments. In a recent blog (Life Insurers Adapting Investments to the Sustained Low Interest Rate Environment), I wrote about the fact that some carriers were exploring “other investments” that included “toll roads and stadiums as well as renewable energy initiatives, such as wind parks and solar farms” to reach for higher returns. But even for those carriers, these investments are only around the edges and the bulk of their investments are still in traditional fixed instruments. I concluded that blog entry with the following encouraging comment: “A few weeks ago, we received a notice from a carrier telling us that the dividend rate on a Whole Life policy held in one of our client’s portfolios was going up this year.”
Looking at the current dividend rates of the “Big 4” of Whole Life carriers—the four highly rated, gold plated carriers Northwestern Mutual, Mass Mutual, Guardian Life, and New York Life—we may be seeing a turnaround, or at least a leveling off, of dividend rates. Three of those four carriers have either maintained or increased their dividend rate.
Mass Mutual increased its dividend rate from 6.85% in 2011 to 7% in 2012, then it held steady in 2013. In 2014, they raised the dividend rate to 7.1%, which they just announced on November 3rd will hold for 2015, marking a positive trend.
New York Life is also moving up, at least lately. Its 2010 and 2011 dividend rate of 6.1% dropped to 5.8% in 2012, but it rebounded to 5.9% in 2013 and 6% in 2014, showing another positive trend.
Northwestern Mutual had a dividend rate of 7.5% as recently as 2008, but that dropped steadily. In 2009, a 100 basis point drop occurred. In 2010, the dividend rate dropped to 6.15%, followed by a drop to 6% in 2011 and another drop to 5.85% in 2012. After dropping further to 5.6% in 2013, the rate held steady for 2014. On October 29th, the carrier announced that the dividend rate would hold steady again at 5.6% for 2015.
The only carrier in this group to announce a dividend that is still slipping lower is Guardian Life. In 2011, the Guardian dividend dropped to 6.85% from the 2010 dividend rate of 7%. In 2012, the rate actually jumped a bit to 6.95%, but it has dropped each year since, to 6.5% in 2013 and 6.25% in 2014.
All in all, it looks as if the dividend slide may be leveling off and slowly trending upward. But like a battleship in choppy waters, the turnaround will be slow. So if you are managing Whole Life policies you still need to keep a close eye on them. Annual reviews to match expectations with reality are a must.
Hopefully, happier (higher dividend) days are ahead.
Mike, I’m not sure I understand how the carriers’ dividend rates and interest crediting rates are able to level off or even start to increase at this time. Aren’t the bulk of their general account investments in long-term bonds? And aren’t the carriers continuing to replace maturing higher-interest bonds with new lower-interest bonds in their portfolios? And won’t that situation continue for at least a few more years even as prevailing interest rates start increasing? If the answer is ‘yes’ to all of this, it seems to me that dividend/interest rates should continue to FALL over the next 5 years or so. What am I missing?