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Home / Insurance / Are whole life insurance companies safer than universal life insurance companies? • The insurance problog

Are whole life insurance companies safer than universal life insurance companies? • The insurance problog



A couple of weeks ago, we addressed a proposal that lifelong insurance companies are more conservative investors who seek specific guarantees when making their investment decisions. We tested this theory with a comparison and looked at the investment profiles of Northwestern Mutual (the largest issuer of all life insurance in the United States) and Pacific Life (the largest issuer of indexed universal life insurance in the United States). [19659002] There was no significant difference between the investment profiles of the two insurance companies. Northwestern did not have a more conservative or higher guaranteed investment profile applicant. In fact, PacLife had less total exposure to non-investment grade bonds, a longer average bond length and a larger share of bonds covering its investment portfolio.

But that was just a comparison between two life insurance companies. What if we expanded the analysis to several more life-focused and universal life-focused insurance companies? What happens to the results then?

Comparison of whole life and insurance companies with universal life focused

We created two pools of insurance companies. An entire life insurance focused pool and an indexed universal life insurance pool. Each pool consists of 1

2 life insurance companies. Each pool represents approximately the same amount of assets under management for fixed insurance products (just under $ 800 billion for each pool). The life insurance companies included are:

Whole Life Pool

  • Northwestern Mutual
  • Guardian Life
  • MassMutual
  • New York Life
  • Ohio National
  • Mutual Trust Life
  • Lafayette Life [19659008] American United Life (One America)
  • Savings Bank Life Insurance of Massachusetts
  • Penn Mutual
  • Security Mutual
  • Thrivent

Indexed Universal Life Pool

  • Alliance
  • Securian (Minnesota Life )
  • John Hancock
  • Pacific Life
  • Lincoln National
  • American General
  • Midland National
  • North American Company for Life and Health
  • Equitable (Axa)
  • Transamerica
  • Life of the Southwest
  • Penn Insurance and Annuity

While there is some overlap in companies, we did our best to separate companies with a majority product focus. Penn Mutual appears in both pools, but the company issues its entire life and indexed universal life products through two different companies, so we categorized these companies.

We used the same criteria in our analysis that we used when we originally compared Northwestern and Pacific life. We have also added another statistic to compare the pools. The six focus areas are:

  • Portfolio distribution
  • Bond exposure of non-investment class
  • Overall bond quality
  • Overall bond quality
  • Average investment return
  • Ratio of income accounting reports submitted by each life insurance company and reviewed independently as part of the reporting process established for life insurance companies by the National Association of Insurance Commissioners.

    Portfolio breakdown

    The portfolio breakdown divides each life insurance company's assets into seven categories:

    • Bonds
    • Shares
    • Mortgages
    • Real estate
    • Policy loans
    • Cash
    • Schema Bonds, stocks and real estate are probably pretty self-explanatory. Mortgages can contain various consortia of debt instruments that include some form of collateral for real estate. Mortgage investments for life insurance companies are usually commercial mortgages, but they are not exclusively commercial mortgages.

      Policy loans represent the total value of outstanding loans taken out by policyholders. Life insurance companies collect interest on these loans that represent income from the asset. Cash represents cash deposits and bonds that fall due within a year or less. Schedule BA is what we normally like as alternative investments such as hedge funds and private investments (to name a few examples).

       Whole Life Company Portfolio Breakdown

       Universal Life Company Portfolio Breakdown

      There are some very small variations, but the overall trend is identical. Bonds are the largest (no surprise), mortgages are the second largest, Schedule BA is the third largest. Over the past ten years, mortgages and BA schemes have increased in terms of the percentage they account for many life insurance general accounts. Continuously low interest rates are the main driving force behind this trend. Insurance companies moved to these assets to try to get back some of the lower returns they now face with new bonds.

      It is interesting that companies with universal life have a much smaller total exposure to political loans. We suspect that this may be due in part to the likely greater annuity exposure that these companies have compared to whole life companies. Annuities rarely have provisions for insurance loans, so this may explain part of the lower total exposure to policy loans. This does not mean that entire life insurance companies do not have exposure to annuities. Many of them have subsidiaries of life insurance companies that issue and manage their annuity blocks. These subsidiaries were not included as part of the financial information for the entire life pool.

      It is also a bit interesting that the entire life pool has twice as many shares compared to the universal life pool. Holdings in shares have decreased significantly over the past ten years among life insurance companies.

      Non-investment ratio bond exposure

      All bonds held by a life insurance company receive a credit quality rating. The National Association of Insurance Commissioners (NAIC) sets the criteria for bond quality assessments. Bonds are included in six categories 1 which are of the highest quality and 6 as the lowest quality. Categories 1 and 2 are investment class and all other categories fall into non-investment classification.

      It is important to understand that the NAIC's definition of non – investment class bonds is not the same as the junk moment designation used by the investment industry. NAIC bonds 3 and 4 for non-investment class are really higher risk, but they would not get the junk rating of ordinary bonds.

      None of the pools had any significant exposure to bond categories 5 and 6.

       Non-Investment grade Bond Exposure

      Lifetime Corporations has a significantly higher exposure to bonds that are not of investment class. As we have already covered, these are not junk bonds in traditional bond investors. There is an increased risk for standard bonds that NAIC classified according to its special criteria.

      Bond Quality

      Bond Quality uses the category ratings set by the NAIC and the percentage that each insurer has in each category to calculate a weighted average. [19659002]   Bond quality

      Despite the higher exposure to non-investment quality among companies with a full lifespan, the total weighted average bond quality is almost the same. This suggests that whole life companies have a higher degree of highly qualified bonds, while universal life companies seem to have more second highest ranked bonds.

      Bond period

      Looking at the total bond held by all insurance companies, we calculated the average duration of bonds held in each pool.

       Average bond length

      Universal life insurance companies have a slightly longer average bond length. This probably does not give them any real advantage over lifelong businesses as the average is only about 1.5 years longer.

      Investment return on assets

      Investment return on assets is the effective return that each insurer achieved on its assets for fixed life insurance products.

       Investment Yield

      Despite the small differences in bond quality and duration and small variations in the portfolio distribution, the return on the total asset is almost identical. Both assets were approximately equal in size, which means that the total investment income is approximately the same amount of dollars between the two pools.

      Investment income to contractual obligations Ratio

      Investment income compared to contractual obligations looks at how well the insurance companies generate investment income with their assets in addition to the obligations created by the insurance contracts they issue. Life insurance companies have long generated profits from the income they receive from assets created by collecting premiums for insurance contracts.

      This of course only works if the insurer can generate investment income in addition to the contractual obligations they create with the insurances. they issue.

       Interest margin

      The percentages above represent income that exceeds contractual obligations. Since both pools generated approximately the same amount of dollars, we can conclude that the entire pool of life has higher total obligations. This should not be surprising.

      All of life is well known for its high guaranteed benefits, so we can expect to see higher obligations represented in this analysis. This naturally raises a certain question as to how much of these guarantees have for the profitability of life-insurance companies focused on because they generally do not give better investment results than universal life insurance companies.

      Results Similar to Original Analysis

      This analysis is much more comprehensive in terms of capturing much more of the market for whole life insurance and indexed universal life insurance than our original analysis. As I said, the results are no different from the results seen in the original analysis. The hypothesis that lifelong insurance companies are more conservative, invest in higher guarantees or do something safer in terms of investment than universally life-focused insurance companies has no empirical support. In fact, indexed universal life insurance companies in a much smaller way seem somewhat ( very little ) safer than entire life insurance companies – however, these are hairs and I would not say that there is any meaningful difference. [19659002] The only major drawback from this data is that higher guaranteed contracts accumulate more operating capital created by investment income. This is not a new information limit. It is quite well established that higher guarantee contracts limit insurance options as they have to capitalize to meet these guarantees.

      This is one of the main reasons why many insurers left full life insurance years ago. The chance that this higher obligation towards policyholders places insured insured persons throughout their lives with a serious disadvantage remains to be seen and also has no empirical support.


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