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."
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.