I don’t have the time to read as much as I would like, in the foreign press, about insurance and investment. So I was grateful to have found a story spotter in Suzanne Stevens. She was a big cheese in Discovery marketing before getting the entrepreneurial bug and leaving to help launch BrightRock Insurance five years ago.
When I asked her if the insurer was considering expanding from its current product range, which offers different streams of cover for different needs, into universal life, she sent me an article from The New York Times which explained why it was not on the cards.
Universal life was the main wrapper for life products here in the 1980s and 1990s. It made sense in a high inflation environment, as part of the premium was paid into an investment account. In SA this was usually invested primarily in the JSE. In the US the investment account was more commonly used to invest in cash and bonds.
Universal life faded away in SA because it was not transparent and too complex. Many clients did not get good value for money but there weren’t too many tears. But in the US there are some catastrophic tales. The New York Times story was in a section called Business Day. (I will gratefully accept a royalty cheque for the brand name on behalf of my employer.) The article says the universal life policy in the US was designed with an investment account that accumulates cash when interest rates are high, but with rates at historic lows many accounts were being drained quickly. People who had been contributing the same premiums for 25 years were suddenly told that their premiums were rising sharply. In particular those who bought universal life policies with a 4% guaranteed annual return (which looked ridiculously small 30 years ago) are being hit with increases.
For US life insurance companies it has become a challenge to fund policies that were sold when actuaries could not imagine a world of interest rates below 8%, and to work out what can be sold which would be attractive to potential clients now that rates are little more than zero. However much we complain, we should be grateful that life insurers do not employ the same cowboy tactics they do in the US. Over there, many insurers have undertaken financial manoeuvres to pay dividends to their shareholders. For example, some — such as Transamerica Life — have shifted a company’s future obligations to policyholders into a special-purpose vehicle that does not appear on the balance sheet.
Life insurers in the US have more than 75% of their US$6.4trillion assets parked in bonds, and almost all have exposure to the 10-year treasury note which recently hit a record low of 1.36%. And they often find long-dated bonds, which had a coupon of around 8%, maturing, and then the money has to be invested in a similar bond with a 2% coupon.
One option is to move into riskier investments in search of higher returns. Metlife (which you will be glad to hear is not connected to Metropolitan Life in SA) had a 46% drop in quarterly profits on the back of poor performance from the company’s hedge fund and private equity investments.
Suddenly and arbitrarily, rising premiums are causing the most consternation. AXA Equitable Life increased premiums on 1,700 universal life, $1m-plus policies of clients over 70, saying its customers were dying sooner than expected. That’s hard to believe, given the dramatic increase in longevity over the past 20 years. AXA later admitted in a lawsuit that the premium increases would increase profits by $500m. What a disgraceful way to treat clients.