Life insurance carriers have traditionally been a conservative lot when it comes to investing, with the vast majority of their investable assets in highly-rated bonds and a lower proportion in gold standard mortgages.
The last few years have not been kind to anyone investing primarily in fixed investments, and that apparently includes life insurers. According to an article in Investment News, a poll taken early last month at the Standard and Poor's (S&P) annual insurance conference showed that “Fifty-four percent of participants believed that low interest rates are the greatest risk facing life insurance companies. Policyholder options and guarantees came in second with 21 percent of the vote.” I might point out that the issues around “guarantees” being spoken about might also be, at least, partially, interest rate related. For example, some older Universal Life policies have guaranteed crediting rates of 4 percent, a high hurdle for a carrier to jump these days. Those carriers who touted Universal Life policies with secondary death benefit guarantees were probably not expecting a long-term low interest rate environment when taking on those guaranteed liabilities.
Now, the industry is beginning to react. An article published by Reuters a month or so ago noted that the low interest rate environment is “putting pressure on investment returns for U.S. life insurers and driving them into riskier and less liquid investments, such as private equity and infrastructure debt.”
As the article noted, “Over the last five years … insurer assets in hedge funds, private equity, and real estate raised by about 10 percent.” Not a huge amount, for sure, since their previous investments in these asset classes were relatively small, but this is a change to be noted nonetheless. The article goes on to point out that Allianz Group “has invested in such projects as toll roads and stadiums as well as in renewable energy initiatives, such as wind parks and solar farms,” and they plan to “shift 10 percent … of the … firm’s assets into less-traditional investments in the next three to five years.”
A recent Goldman Sachs Asset Management (GSAM) survey found that over the next 12 months, 35 percent of chief investment officers of 233 global insurance companies intend to increase overall portfolio risk, while only 8 percent said they will decrease risk.
It appears that the investment changes will be most pronounced among the later arrivals to the insurance marketplace. In the Investment News article, it was noted by one industry insider that “material changes” among carriers such as New York Life, MassMutual Life Insurance Co., and Prudential Financial, Inc. did not occur; however, “for the institutions purchased by private equity companies, you did see a big change in asset allocation, and they got riskier.” Yet, as I write this, an article comes across the wire from the Business section of The Boston Globe which reports that Mass Mutual is “launching a venture capital firm to invest in financial technology startups.” The “catch” is that the fund is but a tiny fraction of Mass Mutual’s $126 billion dollars in assets. The carrier is investing $100 million, focusing on investments in “financial technology startups that will help the company improve its primary insurance and investment business.” It is, in fact, investing in IT for itself, an interesting investment.
Even though low interest rates have put a strain on carriers, an executive at S&P's Ratings Services was upbeat about their future, noting in the article, “The base scenario we're looking at—gradually rising rates—is good news for insurers as long as the pace is slow.”
I can personally pass on one promising tidbit. 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 for this year. This is the first time that has happened in years.