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A number of years ago, we stopped regularly updating various analyses we performed on the insurance industry. This, of course, brought on questions. What motivated our decision to end this practice? Was there some objective we sought to accomplish by ignoring it? Perhaps the data was no longer supporting our narrative about a strong industry capable of protecting your retirement assets.
The real answer…we got bored with it.
Whole Life Insurance is Kind of Boring
Insurance companies are boring companies. They don’t often oscillate all that much. The analysis, while interesting the first time, became much the same year over year over year. At some point, we forgot to update it. And following that oversight, we chose to focus on more exciting things.
But given all the time that passed between our last analysis, surely things have changed enough for us to report on something noteworthy. In the interest of this pursuit, I went back to the database of insurance accounting reports and pulled together a five-year general account yield analysis for year-end 2023–the most recent year for which we have a full year’s worth of data.
Why five years? Because it always seemed like the “sweet spot” that captured enough time to make a reasonable inference about the trend, while not over-counting talents or circumstances that likely no longer exist/have any influence on the general account.
And why focus on the yield of the general account and how it changes over time? Because investment profits usually play a significant role in the payment of dividends to whole life insurance policyholders. Building off this, people who advocate for using whole life insurance in this capacity, and the people who buy into this strategy as an option within their retirement portfolio, are leaning on the insurance company’s abilities as an asset manager. The capabilities of the insurance company to produce yields on the assets managed is highly noteworthy because we are entrusting them with the task of taking our money and turning it into more money. The yield achieved on assets plays a big role in this task.
2023 General Account Five-Year Yield Trend
Here’s a table that summarizes results across 10 mutual (or mostly mutual) life insurers who have a reputation for focusing on the whole life insurance industry–or at least did until very recently:
The numerically astute among us will notice that seven of the 10 companies are effectively in a statistical tie for first place. Ranging from 0.03% to -0.025% they are all closer to zero than they are one-half of one-tenth of a percentage in year-over-year change.
Even the bottom three performers remain pretty close to zero–though their results are somewhat more noteworthy in terms of an identifiable trend for the five-year period. Ranging from nearly one-eighth of a percentage to slightly under one-fifth of a percentage decline year-over-year. When we start to see movement in the tenth of a percentage point range, we generally take notice.
Not Much has Changed with Whole Life Insurance
The trend in this analysis is similar to what we were seeing several years ago when we last visited this subject. Mutual life insurers continue their steady-as-you-go approach to life and any identifiable change we measure in microscopic quantities. This, I’ll argue, is a really good thing for the philosophical appeal of whole life insurance.
Whole life provides an excellent buffer against volatility. Its dull attributes make for a gradual–don’t forget guaranteed–ascension in value while promising that declines are impossible. Pulling this off successfully with a meaningful rate of return demands a standard operating procedure that can only be described as unexciting. And that’s the magic–subtle I certainly confess.
Whole life insurance provides unparalleled downside protection while also producing favorable returns. It’s never going to beat the more volatile options like stocks, but it’s also never going to leave you holding the bag during a recession. Its risk-adjusted rate of return is a standout among the marketplace of assets you could choose for building your net worth and preparing for retirement. The fact that these insurance companies accomplished very little change over the past five years when it comes to yield on assets bolsters the point about whole life insurance’s inherent safety.
But why not more increases given the rising interest rate environment?
Slow to Rise; Slow to Fall
Let’s first keep in mind that this five-year time span encompasses 2019 through 2023. Interest rate increases didn’t start to gain steam until the latter half of 2022. The majority of this timeframe includes a much lower interest rate environment than today’s current rates.
But on top of that, life insurers tend to move slowly during interest rate transitions. This isn’t by their choice.
Life insurers buy bonds and collect the yield produced by those bonds. They don’t trade them. The bond purchase seeks income to cover a liability. In the case of a life insurance contract, the guarantees the insurer is making to the insured. The spread between the income received and covering the liability is profit that plays a large role in dividend payments to policyholders (it’s why we track yield in the first place). But once bonds are purchased, the yield they produce will persist for some time.
So these life insurers own a lot of bonds paying yields far below current market rates. We know this is the case because all of them have book values higher than the market-assessed value of their bond holdings. As insurers collect more premiums and cycle out of maturing bonds, they will begin to buy new bonds at current market rates. This will, if given enough time with higher interest rates, result in a gradual increase in yield achieved on the entire bond portfolio–but this is a slow process.
The inverse of this is also true. When interest rates first fell sharply following the 2008 recession, life insurers maintained dividend payments higher than comparable market interest rates. This easily took place for life insurers because they held a lot of bonds that paid rates much higher than then-current market rates. As they collected new premiums and cycled out of matured positions and into new bonds, the yield they achieved with new bonds was less. This led to an eventual–but very slow–decline in dividends over a 10+ year timeframe. We can’t say that the rise will follow the exact same path now that rates are higher. But we know there will be similarities to the trend.