A couple of weeks ago, we reported that Northwestern Mutual had declared its 2017 dividend and had not only lowered it but also increased some costs (see: Northwestern Mutual Dividend and Crediting Rates Drop, Expenses Rise). Northwestern Mutual was the first of the so-called “Big 4” mutual carriers to report. These A++ (AM Best)–rated companies are considered to be the gold standard among life insurance carriers. The others in the group (New York Life, Massachusetts Mutual, and Guardian Life) have now all reported in, and all but New York Life experienced a drop in their dividend interest rate (DIR).
These Big 4 mutual carriers are among the most solid, stable businesses in the country. Unlike the vast majority of carriers, which sell their products through a brokerage system, the Big 4 sell their products directly to the public through an agency system of career agents tied to the companies. The career model tends to increase persistency and repeat business among clients and loyalty among agents. However, even these firms have felt the sting of low interest rates and are struggling with their investment returns. As we noted in our prior post, Northwestern Mutual’s chief investment officer told the Milwaukee Business Journal that the low interest rate environment resulted in the company’s generating $6 billion less in income than it would have in a normal interest rate environment.
The DIRs below-right represent the investment components of the dividends paid. Other factors besides the investment portion include actual expenses and mortality experiences. If mortality and expenses are more favorable than expected, it positively affects the dividend paid.
While the DIR may have dropped at most of the carriers, the actual total dollar amount paid out to policyholders actually increased at two of the carriers. Policyholders own mutual carries like the Big 4 carriers, and the dividends received represent a portion of the divisible surplus left after all expenses and claims have been paid. As can be seen in the chart to the right, New York Life and Guardian Life will pay out more to policyholders in 2017 than in 2016.
Since the presidential election, we have seen a bit of an upturn in interest rates, and many prognosticators are anticipating a trend to higher rates in the Trump administration. An article in the Wall Street Journal last week cited the head of U.S. short-rates strategy at a major US bank, who believes that “government bond yields are likely to rise further.” That same article pointed out that “Investors have been scrambling for the past two weeks to position themselves for a Trump presidency that they believe will mean higher growth, higher inflation and a Federal Reserve that will be under pressure to raise interest rates in a way that hasn’t been seen for more than a decade.” (1.) While higher rates are not a simple fix, as they will affect many parts of the economy negatively, for many carriers that rely on fixed vehicles as their primary investment, higher rates, on balance, would be welcome.
- Traders Convinced Higher Rates Are Near, Wall Street Journal, by Min Zeng, November 23, 2016
Good article per usual —
Just a note as to the perceived exclusivity of the above referenced “career agency” distribution systems. All but Northwestern are available in some fashion to independent producers. There are also some fundamental differences between these 4 carriers alone that could be considered an advantage/disadvantage depending on the situation and additional carrier options brought into play.
In addition, successful Northwestern “special agents” typically have significant production with carriers outside of NML as they are smart/objective enough to ignore the NML “blinders” and actually understand the difference between Net Surrender and Net Payment Indexes, negative effects of direct recognition loans on dividends, underwriting specialties of other carriers, and yet still qualify to walk around with a chest-full of NML production ribbons at the annual meeting in Milwaukee. The “NML no matter what” agent is often one who has to profess that very fallacy because their average production barely validates the NML agent contract and thus puts them at risk with regard to discounted health insurance, office overhead, deferred compensation, etc.
I assume the “gold standard” connotation pertains to a 98 to 100 COMDEX rating rather than just A.M. Best as I have witnessed “A+” (highest level at the time) carriers totally fail the following year. Regardless, restrictive underwriting, limited product flexibility, and higher fixed premiums can certainly boost financials but also can also resemble a bank that is hesitant to make loans as opposed to investing deposits in the market while promoting CDs at 1/10 the return to customers. Piggy bank or superior leverage for the client?
The above requires the mentality and specific needs of individual clients be considered in every case and is not an easy task and all to often ignored with regard to possible advantages of several other stable carriers with a low, to mid-ninety and up COMDEX ratings.
In summary, if only four carriers were vastly superior across the board there only be four carriers in business today in an industry over 150 years old.
All good points, Bill. I have been out of the brokerage world for well over a decade. Back then I always felt was that there was no one “best policy,” a mantra I still repeat at ITM TwentyFirst. The same goes for carriers. There are advantages and disadvantages to each carrier and facts and circumstances should dictate policy purchases and yes…none of the Big 4 are necessarily the best carrier, nor are their products the best in a particular case. It takes well educated Advisors to help to decide what is best for a particular situation…an important job. Michael Brohawn
Agreed and I did not mean to stray from your core subject, but too many think âbigger is betterâ and if that was true they would bring Miss America in on a two-wheeler.
I might have sent the attached in the past and am trying to obtain a current version.