Inhale deeply….hold it….hold it….ahhhhh, yes…..the smell of March Madness is in the air. Squeaking rubber soles against the mirrored glossy hardwood, arena buzzers ringing loudly, and frenzied collegiate bands ordained in bright-colored rugby shirts….the NCAA national collegiate basketball tournament is front and center and consuming the attention of americans everywhere. Trying to effectively blog against this tidal wave of sports fanaticism seems a daunting task. So I figured, if you can’t beat em’…join em’. Below we’ll cheekily consider the financial strength of several life insurers and see which one advances to be crowned the DOL 95-1 champion.
Before we unveil the bracket, some quick background regarding the US Department of Labor’s Interpretive Bulletin 95-1 aka the “Safest Available Annuity Provider Standard”. This piece of regulatory fiduciary guidance, which was issued following the collapse of some well-known life insurers (i.e. Executive Life, Mutual Benefit, etc.) offers a solid framework for evaluating and selecting an insurer. While DOL 95-1 is largely focused on ERISA fiduciaries sponsoring defined benefit pension plans (who are interested in procuring annuity settlement contracts), the framework remains useful for evaluating guarantors more broadly including in the context of a defined contribution plan investments, and/or a retail insurance company product. For those interested in a more technical dissertation I’d refer you to an article I penned for iiJournal’s Guide to Longevity Risk Management. In short, DOL 95-1 outlines six core criteria items which fiduciaries should be considerate of when evaluating insurers:
- Quality & diversification of annuity provider’s investment portfolio
- Size of insurer relative to size of proposed contract
- Level of insurer’s capital & surplus
- Lines if business of the annuity provider and other indications of an insurer’s exposure to liability
- Structure of the annuity contract and guarantees supporting the annuities, including use of separate accounts
- Availability of additional protection through state guaranty associations and the extent of their guarantees
A quick note of disclosure (close your eyes and imagine Jim Nantz’s melodic voice). All of the insurers discussed below are high-quality, financially strong institutions, any of which might be deemed to meet the guidelines codified under DOL 95-1. This exercise is intended to provide a general and fun introduction to the topic of analyzing a life insurer’s financial strength. It is not intended to imply one company is better or worse than another, nor is it intended to replace a more rigorous analysis and/or the engagement of an independent expert to assist with insurer/product evaluations. I’ve included links below to each insurers website so that readers can conduct their own due diligence and draw their own conclusions regarding each organization’s financial strength. Let’s go ahead and take a look at the tournament matchups.
Mutual Insurer Bracket
The mutual insurer bracket consists of four leading mutual life companies. The hallmark of a mutual insurer is that it is owned and operated for the benefit of policyholders as opposed to a stock company which is owned by shareholders. This distinction creates a wide disparity in terms of how mutual companies view risk, capital, and profit decisions compared to their stock company brethren. The tendency to hold more capital and flexibility to accept lower profits creates a natural alignment of the interests of mutual insurers with the policyholders who purchase their guarantees.
New York Life is the top dog in this half of the tourney bracket, facing off against the smaller firm from the west coast Pacific Life. New York Life easily defeats Pacific on the quality of their overall ratings, size, and consistent general account and risk based capital growth. In the matchup of #2 Mass Mutual vs. #3 Mutual of Omaha, Mass Mutual gets the victory in a closer than expected match, using their larger size and capital position to earn the win over the smaller midwest firm. Hats off to Pacific Life & Mutual of Omaha who left it all out on the floor. Pacific Life’s robust Risk Based Capital level did not go unnoticed, and Mutual of Omaha’s stellar bond quality were clearly key factors in their gaining an invitation to this “best of the best” event.
#1 NY Life squares off against #2 Mass Mutual in a battle of balance sheets. NY Life wins a squeaker in overtime based upon having marginally more size and higher portfolio bond quality.NY Life earns a trip to the finals and will square off against the winner from the stock insurer half of the bracket. Despite failing to advance, Mass Mutual is a perennial powerhouse in this tournament and we look forward to seeing them in action for many years to come.
Stock Insurer Bracket
Over in the other half of the draw, the stock insurer bracket contains four leading, brand name stock life insurers, two of which are true heavyweights in terms of their size and global reach. These publicly traded stock firms tend to have a shorter term focus on meeting earnings expectations and deploying capital in ways that foster share price growth.
Met Life is the top seed facing off against #4 American General (important to note that the regulated life insurance liabilities were not where AIG’s past problems stemmed from). Met Life chalks up the victory despite a second half comeback by the recently recapitalized American General. In the end, Am Gen just could not overcome their significantly lower ratings and dramatically smaller size. The #2 seed Principal vs. number #3 Prudential matchup witnessed an intense, see-saw match. Principal jumped out to an early lead based upon its business line diversity and lower exposure to volatile & expensive to hedge variable annuity liabilities. Prudential fought its way back into the match and eventually prevailed to win on a last second buzzer beater. In the end, Pru’s size and improved bond quality was just too much for the smaller Principal to match.
#1 Met Life squares off against #3 Prudential in a battle of the 800 pound gorillas. This matchup is high scoring and fast paced, with lots of lead changes throughout. Prudential took a slight lead in the second half on the strength of innovation driving top-line results in product lines like variable annuities, synthetic stable value wraps, and jumbo pension closeouts. However, at the end of the day financial strength from a policyholder perspective is all about bottom line results, and Met Life sealed the victory on the strength of it recent strategic business re-organization and interest rate hedging program, decisions which while not headline grabbing are aligned with keeping the company on track to perform consistently. Met Life is headed to the “ship” to square off against its cross-town rival.
“Snoopy” vs. “The Company You Keep”…Beagle vs. Witty Phrase…Park Ave. vs. Madison Ave. This classic matchup started out as a competitive back and forth affair. However, in the second half, NY Life pulled away as Met Life became fatigued under the weight of variable annuity exposure and less well capitalized, significantly larger balance sheet. While Met Life covered the “Vegas odds” they were unable to overcome New York Life’s conservatively run, well-managed, mutual company business franchise.
So there you have it, I’m pleased to crown NY Life as the DOL 95-1 Tourney Challenge Champion. Let’s hope they offer a competitive price to complement their pristine balance sheet. In closing, I’d like to extend a note of recognition to all the high-quality, best of breed insurers who were called upon to support this fictional, fun, and hopefully interesting literary exercise.
I hope you enjoyed this written indulgence. What do you think?
The video below is an absolute classic IMO. FYI, I’m a Syracuse University alum so I thought I’d throw this in to give a few added chuckles for readers/viewers. Advanced apologies for Mr. Boeheim’s salty tone.