Policyholders File Class Action Lawsuits As Sinking Bond Yields Force Insurers To Hike Rates

Tyler Durden's picture

The latest victims of misinformed global central banking policies are retirees holding "universal life" policies...once again the "prudent" folks who saved for their retirement are exactly the ones being brutally punished for their efforts. 

As the Wall Street Journal points out, insurers are facing a rapidly rising number of class action lawsuits around the country after their attempts to raise premiums on universal life policies in response to lackluster returns on their bond portfolios.  As we've discussed on several occasions, low bond yields on sovereign debt are taking their toll on insurers whose asset returns have suffered.  The problem faced by insurers is related to old policies underwritten before the "great recession" and before central banks around the world decided to embark upon their "grand experiment."  While insurance policies written today can be adjusted for the current market environment, policies written prior to the "great recession" often carried "guaranteed" interest payments as high as 4% - 5%.  And, with central banking policies around the globe pushing sovereign bond rates to historic lows (see "With Over $13 Trillion In Negative-Yielding Debt, This Is The Pain A 1% Spike In Rates Would Inflict") it is no wonder that insurers are taking a hit.  Per the As the Wall Street Journal:

At issue are “universal life” policies. In short, the policies combine a death benefit with a tax-advantaged savings account that has a minimum interest rate. Such policies accounted for more than a quarter of all individual life-insurance sales in some years past. Millions of Americans own them.

 

Insurers’ problem is that many older policies guarantee annual interest rates of 4% to 5%.  In the mid-1980s, when universal life policies surged in popularity, the average investment portfolio yield for life insurers was nearly 10%, according to ratings firm A.M. Best Co.

 

Today, that yield is just under 5%, thanks to a general decline in rates over the decades, followed by the more recent sharp leg down.

 

In selling universal life, insurers typically aim to earn 1 to 2 percentage points more on the premiums they invest than they pay out in interest to policyholders, said Deloitte Consulting LLP principal Matthew Clark. Most insurers aren’t earning this spread today, and “with continued low rates some could face a situation where they are paying out more to policyholders than their investments earn,” he said.

As our readers know, pensions and insurance companies are stuck in a central bank-induced negative feedback loop that just keeps pushing rates lower and lower.  In an effort to "juice" returns, insurance companies have been forced to invest in longer-dated maturities but with rates collapsing across the curve many insurance companies have nothing left to do but raise rates.  As Scott Robinson, of Moody’s Investors Service, pointed out “Companies are under a lot of pressure to boost returns in this low-interest-rate environment, and [raising prices] is one lever they have." 

US Life Insurance Return

 

Among those seeking legal action, is Raymond Foos who recently received a notice from Transamerica informing him of price increases that he estimates will cost an additional $300,000 per year.

Among upset policyholders is Raymond Foos, an 87-year-old retired manufacturing chief executive who purchased an $11 million policy in 2003 to benefit his children. This spring, Transamerica informed him of an increase that he said will cost him nearly $300,000 a year, on top of the $2.25 million he paid as a lump sum to buy the policy and which he thought would cover costs through his and his wife’s death.

 

Mr. Foos, who said he is exploring legal action, regrets not asking enough questions about risks when he bought the policy.

 

He said Transamerica should “bite the bullet.” Drawing from his years of running a business, he said, “when you have a sale that you lose money on, you don’t go to the customer and say, ‘Give me some more money.’ You generally figure out how to live with your problem and go on….You tighten your belt.”

For the insurer's part, rate increases are explicitly defined within insurance policies.  While rarely well received by policyholders, Transamerica assured the Wall Street Journal that rate increase on policies, like those held by Foos, put new rates “at or below the maximum rates allowable.”

Sadly, central banking policies have already taken a huge toll on "savers."  Unfortunately, artificially low rates will have to revert back to some "normalized" level at some point in the future.  When that happens, it will only exacerbate the problem for pensions and insurers who will have to then deal with the huge losses resulting from sinking bond prices. 

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RafterManFMJ's picture

Raymond Foos, an 87-year-old retired manufacturing chief executive who purchased an $11 million policy in 2003...This spring, Transamerica informed him of an increase that he said will cost him nearly $300,000 a year, on top of the $2.25 million he paid as a lump sum to buy the policy...

Mr. Foos...regrets not asking enough questions about risks when he bought the policy.

Ah well, live and learn, right (former) Mr. CEO?

jcaz's picture

....OR, Mr Foos,  you just go out of business....  Cause that's business, right?  Because that's what insurance companies do when they're put into a no-win situation.

Sorry dude, but at 87,   you're not gonna get a "decent" rate no matter what is going on with interest rates-  you've already beat the game.  I can't believe the insurance company let you put up only $2.2M on an $11M bet on your life at 74- talk about lousy odds.

Just create a Trust and quit enriching the insurance companies and ambulance chasers- you don't have a prayer with any lawsuit. 

You got some nice protection out of a shitty investment for 13 years,  you won.

NoDebt's picture

He could always kill himself and have the policy pay off to his beneficiaries right now.  Most any life insurance policy has a 2-3 year "suicide" provision to prevent people who are already suicidal from buying a policy shortly before offing themselves.  He's way past that point so maybe suicide is a good financial decision for him.

What say you, Mr. Foos?  As your advisor I would recommend this course of action as the most logical financial decision you could make at this point.  Why are you looking at me like that, Mr, Foos?

 

 

 

 

0b1knob's picture

If you like your insurance policy rate you can keep your insurnace policy rate! Obozo

 

pipes's picture

You know what?

 

I say fuck Mr. Foos...rich dickhead lays out over 2 mil. for a policy to benefit his children? Because the TWO-POINT-TWO MILLION DOLLARS inheritance wouldn't have been enough you greedy fucker? And presumably, the 2.2 wasn't the sum total of his wealth, since he subsequently lived another 13 years off something, and he's now lined up to pay 300k/yr. premiums...

 

So yeah...FUCK YOU, FOOS...may you live -and pay premiums- until the DAY AFTER the collapse, when your insurer will be insolvent.

jcaz's picture

Well, more than likely,  he thought he was being clever with his estate planning, and trying to minimize the impact of estate tax.

Figure his estate was worth about $11M when he bought this policy- someone sold him on the idea that he was better off to put up $2.25M than his kids pay about $3M in estate taxes,  which is true if Foos died the next day-

But Foos beat the odds, lived at least another 13 years- whoops.  So while the $11M insurance policy pays no estate taxes,  the premiums ate up the estate more than the tax would have;

It's not the insurance company's fault- they just calculate odds.  Seems to me that they gave him pretty sweet terms, actually.

The fault is with whomever sold him this idea.  Shitty planning by a greedy agent or Mr Foos, no question-  but if I'm the agent,  my defense is that I was worried that Mr Foos was gonna drop dead any day (a reasonable concern for a 74 yr old man),  so this was his best bet;

Buyers remorse- it wasn't his best move.  But Foos has no one to blame but himself.  

Hell, I can't believe his premiums would be only $300K/yr-  iif it's MY insurance company, I'm making an 87 yr old man pay $3M+/yr on an $11M policy, because I'm not liking his odds so much anymore.....

Winston1984's picture

Ugh.. What's wrong with you?

 

This is a cash flow arrangement. I trade you 2.2M now for 11M in the future.

I sign the deal because I think that you will come through with that.  You sign the deal because you think that you can do better than 11M and keep the difference.   Voluntary agreement.

This is a risk transfer, agreed upon by two parties.  Could have gone against him, but its gone against the insurer due to our friends at the Fed.  

Do you have an arts degree?  It's geometric.

Its easy to say "fuck you, rich guy," but we all benefit in a society where these contracts are enforced.  We need this.

 

tarabel's picture

 

 

This guy claims he invested 2.25 million up front and didn't read the policy.

Must be Dilbert's pointy-haired boss guy.

mary mary's picture

And so it (hopefully?) begins.
There's an entire generation out there who are having their life savings stolen by the handful of criminals who run the "Federal" Reserve.

Handful of Dust's picture

I remember not buying a policy because everyone thought the guaranteed rate of at least 4% was ludicrously low.

It's a shame to see so many people really suffering due to zero yields on their hard earned money. Shameful, while at the same time bankers get the biggest bonuses in history from Obama.

So why don't insurers pressure the fed and/or Congress? Insurance companies have a huge amount of pull in Congress, only outdone by bankers and realtors.

I wonder if any of these old foggies will hang their insurance person?

pitz's picture

Savers are not 'suffering' from low yields.  Low yields have created huge gains in financial assets of almost all kinds, and have created a near deflationary environment.  Low yields result in the payment of very little taxes to the US Treasury as tax is based on nominal, not real yields. 

If people are whining about low yields today, they'll be even more upset when their financial asset values start cratering in the higher rate environment.  Based on what I've read from analysts over the past few years, not a single one of them really has a clue what a long-term rising long-term interest rate environment looks like.  Because none of them were even in the industry (or even meaningfully out of diapers) the last time we had one -- in the 1970s.

slightlyskeptical's picture

You are confusing saving with investing. Savers are in near cash equivelants.

 

jcaz's picture

There is no difference.  "Cash equivalents" are not without investment risk.   Just because cash equivalents haven't seen much volatility the past 50 years,  don't assume they won't in the future.

Money markets are shares priced at $1.  That means they have the potential to fluctuate down to zero.

You're gonna love what happens to the NAVs of "safe short term bond funds" when rates rise.  Better yet, wait until you find out that your bank account is subject to bail-ins because you're a creditor of your bank,  not a "customer".

You're naive if you think that "savers" are safe.  

The entire point of ZeroHedge is to wake people up to the real risks in the investment world.  Do a bit more reading.

Vlad the Inhaler's picture

Guess what, it's the wealthy who have those assets, the average American has jack shit and they're being robbed by low rates.  

pitz's picture

Ever notice that "their insurance person" more than likely has a nice house, cabin at the lake, new SUV, and all the trappings of upper middle class life?  That's been my observation of people I've dealt with in retail small-town insurance.  The entire insurance industry has lived and spent extravagantly over the past few decades, and now appears to be pulling the scam of claiming poverty because the interest rate environment is set to turn against them as long-term rates start to increase and asset values decrease. 

 

 

True Blue's picture

Well, here's the thing -the Insurance company should not have the policyholder's bottom line affected by interest rates, low or high. They took a bet, based on their actuary tables (lifespan odds) and nothing more. The entire industry makes beaucoup because they are 'the House' in the Casino sense; every bet they place has been calculated to maximize their returns and minimize their risks. That is their ROI -millions of suckers betting that they will die before they have paid more than their policy is worth -and most of whom do not.

Now, they are admitting that they have been gambling to make greater returns -and lost to someone else's casino -so 'sorry, your contract must be adjusted' to make up those losses (or in this case 'winnings' that aren't as great as had been hoped for?)

Is this 'insurance' or a mutual fund?

Sue them into the ground, then keep suing them until their posterity is bankrupt for a hundred generations to keep this ugly beast from ever raising its head again.

RafterManFMJ's picture

Guy at work sunk his retirement payout of around 250K into some annuity or some insurance scheme that he assured me would guarantee him 8% returns and THERE WAS NO WAY HE WOULD LOSE MONEY!

Tried to get me interested but I ignored him because Zerohedge...and anytime someone tells you you 'can't lose' it's a safe bet you're going to, in fact, lose.

tarabel's picture

 

 

"No brainers" are for, well people with no brains.

And soon to be no assets either.

Meyer Bauer's picture

Shit - I have a U-life policy with a US Index bias.

I guess I should cash out now - any advice out there? I'm not an idiot crying either.

 

Winston Churchill's picture

Read the small print very carefully before doing anything with it.

Those ULP are notorious for hidden fees and charges.

Handful of Dust's picture

I had a whole life policy but when I saw the fed printing like mad my accountant said by the time I die it would be worth 20% of the face value. He advised cashing that out and buying GLD...which I did and that almost tripled (but then pulled back as we see now) ... while the value of the dollar has only gone down.

One big problem is lots of these insurance companies will go bankrupt and then you are left with zilch.

I agree with the above; talk to your financial adviser or a good accountant. The next QE will most likely decimate the dollar even more.

slightlyskeptical's picture

Most annuity companies are insured by seperate entities in Bermuda. Wouldn't make sleep good at night if I had one.

 

Complete reset is about the only answer unless the financial elite are willing to take some pain. I  mean a whole bunch of pain.

LetThemEatRand's picture

As Mr. Churchill said, don't dare cash out without reading the fine print first.  Many policies like this have steep surrender charges and other penalties that would eat up a big part of your principal.  

Cheesebone's picture

Don't freak out just yet. Call the home office and speak with a representative regarding your policy. When someone picks up, ask them how much money your premium would need to be in order to project that the policy will endow at age 121. Whatever number they throw at you, add another 5% and make that your new premium. 

If it turns out that the cash value is already going the wrong way and the new cost to keep the policy would be beyond the realm of rationality or affordability, then you may want to consider a 1035 exchange into a different vehicle (different life insurance policy or even an annuity if it suits your needs) to avoid taxes as opposed to "cashing out" (assuming the policy shows a gain).

LetThemEatRand's picture

If anyone thnks the Fed and those who own/control it are not deliberately targeting prudent savers/retirees (the soon to be last remaining part of the middle class), they aren't paying attention.   The bankers are not satisfied with already having most of the world's weath.  They want all of it.  

RafterManFMJ's picture

Interesting piece from FOFOA, the savers and the debtors. Wish I knew how to make links less messy.

http://fofoa.blogspot.com/2010/07/debtors-and-savers.html?m=1

Thoresen's picture

Anyone remember Equitable Life in the UK?
Couldn't afford to pay 'Guaranteed' policies and tried to scale payments back. Policyholders took them to court insisting on their guaranteed payments.
Result? EL went bust and everybody lost.

bugs_'s picture

Just wait till BOND DEFAULTS start forcing insurers to hike rates.

insurance - a once useful financial instrument meant to inexpensively pool risk that was destroyed in the 21'st century by the central banks (refer to central banks in the historical financial organizations section).

pitz's picture

Insurers need to trim the bloated fat from their organizations, and arguably will be forced to, as rates go higher and financial asset values start to crash.  Especially at the long end of the curve.

Insurance was never intended to enrich insurance executives to the tune of millions of dollars per year in salary doing a job that almost anyone with a business degree and a few years of experience could do.  With such vigorous asset returns experienced by the insurance industry over the past 30 years, the only people to blame for messing that up are the people running the insurance companies.  The Fed is blameless here.  Low rates have created the best of times for the entire FIRE sector through asset inflation. 

booboo's picture

I invest with Man in the Mirror Financial, broker is butt ugly but he rarely lets me down but when he does he eats it.

RafterManFMJ's picture

Dumped my cash in with Bernard Madoff Investment Securities. I should probably check on my account Monday. It's been a while.

pashley1411's picture

currency devaluation, taxes, reducing bond yield, regulation, asset seizure.    All our weapons of wealth destruction.  

pitz's picture

Low bond yields have been excellent for insurance companies, who have collected far more than just the coupon rate from their long-term bond investments in the form of capital appreciation.  They should be suing management of the insurance companies for paying themselves extravagant compensation and bonuses not justified by the labour market.  They should be suing management for running innefficient operations with excessive dealer compensation.  They should be suing management for not embracing the modern IT paradigms to reduce costs. 

Low rates have created the best of times for the insurance/FIRE sector by inflating financial assets of all kinds.  If things are bad with low rates, imagine how much worse they'll be when rates actually start rising!  Glad to say I don't have a life insurance policy with any of these clowns!

Twee Surgeon's picture

"How much should I save for my Retirement ? is one of my favorite reoccurring "Newspaper" articles, I expect I will live long enough to see an article titled "How much Ammo should I save for my Retirement?."

Watermelon's picture

Just work until 80, then you only need 10 years income. doctors don't have to retire.

Watermelon's picture

Just hire other doctors to staff your practice????

Montana Cowboy's picture

This completely shatters the image and purpose of insurance. What if economic conditions went the other way and dramatically increased the profits of these insurers? Would they forward those unanticipated gains to their policyholders? No frigging way! And that is why those same insurers must bear the entire burden of their unanticipated losses - and they need to do that without being crybabies. Its called faulty forecasting and that is a risk freely accepted by insurance companies. If insurance companies can't be relied upon to spread out risks, there is no use for them at all.

Watermelon's picture

They're trying to buy my friend's dad's policy back, so check the fine print. My friends dad locked in an 8% rate before he passed, and they are required to honor that interest rate.

pitz's picture

The insurance company went and bought long-term bonds at a yield of 8% or better to write that policy.  In practice they collected significantly more than 8% on the bonds due to capital gains in the falling rate environment. 

Watermelon's picture

My friend won't let them buy the policy back.

Watermelon's picture

I'd have to ask which company it is.

Omega_Man's picture

yawn.... say this coming years ago.... wait for the pensions to go bust and all the seniors packing heat and shooting up the pension offices...

chosen's picture

Old people have a relatively short time to live, so I would not mess with them.  They have little to lose by shooting people who bother them.

hoagy goldmikel's picture
hoagy goldmikel (not verified) Sep 2, 2016 8:22 PM

clown shoes

lasvegaspersona's picture

I've seen a 30% jump in auto insurance rates (clean record) after decades with State Farm.

My agent was clueless as to what was happening.

Econogeek's picture

I bought the second-smallest long-term care policy I could find 14 years ago.  My annual premium went up this year by 73 percent.  That means 120 percent since I bought it.   

No way at these fake interest rates can these guys pay out even the small amount I'm 'guaranteed' by the time I need it.  Absolutely no way.  Pretty soon this policy will be pay-as-you-go, i.e. 100 percent premium.  Thank you Fed.

All variations on the Ponzi.

withglee's picture

While insurance policies written today can be adjusted for the current market environment, policies written prior to the "great recession" often carried "guaranteed" interest payments as high as 4% - 5%.  And, with central banking policies around the globe pushing sovereign bond rates to historic lows (see "With Over $13 Trillion In Negative-Yielding Debt, This Is The Pain A 1% Spike In Rates Would Inflict") it is no wonder that insurers are taking a hit.  Per the As the Wall Street Journal:

If they wrote these policies without COLA clauses in them, and then the hyper inflation (which will soon be here) hits and their returns are in the 300%+ range, they're not going to run to the courts to get a better deal for their annuitants ... do you think?

Contracts that fail don't predict the direction of failure ... oh wait, yes they do ... look at your mortgage contract ... it protects them, not you ... for things at which they aren't even at risk ... and it's a "state" written contract (e.g. FHA). Go figure whose side the state is on.

withglee's picture

Run the numbers on your homeowners policy. The mortgage agreement "requires" you to maintain "replacement value" insurance ... even if you only have the land left to pay for. And look at the premium. A back-of-an-envelope actuarial analysis shows the underwriters are predicting a 50% chance your house will be completely destroyed over a 30 year mortgage period.

I don't know about you, but not a single house in a two mile radius of anywhere I've lived over the last 50+ years has been destroyed ... let alone every other house on my block.

And guess what. If you balk at the loan company demanding you pay to cover a risk they don't even have and choose to self insure, the contract says you can't. And if you don't insure, the contract says they can insure for you ... at your cost. And guess what? They "own" the insurance company they turn to ... and charge a higher premium than the one you balked at.

Go figure.

Now knowing this, are you going to sign such a contract? Of course you are ... if you want to buy a house with anything but cash you are.