You know there are times when we feel like we’re just going off based on a gut feel, not that we are, but let’s be real. Life insurance companies and life insurance agents making big commissions aren’t necessarily the best avenue for an unbiased opinion on a product. Occasionally though a piece of information will float to the top that sheds light on reality. We received a release from Prudential today that on the surface just kind of looks like business is down a bit, but when we compared that with our own business being up about 40% over 2013, it looked like we must be doing something they aren’t.
Chairman and CEO John Strangfeld noted that “For the quarter, the company reported after-tax adjusted operating income (AOI) of $1.03 billion, down from $1.37 billion for the third quarter of 2013. Excluding the impact of market-driven and discrete items, our year-to-date adjusted operating income per share is 12% higher than a year ago” I would hate to be the life insurance CEO who had to explain the upside of being down 1/3 of a billion dollars, but God knows those discrete items can fluctuate, but let’s hang on the other part for a minute. If they exclude “the impact of market driven…items”? So, that’s the company as a whole and Prudential sells stuff that we’ve never heard of so let’s just see his comments on life insurance. “Individual Life Insurance (ILI)’s reported AOI for the third quarter of 2014 was $97 million, compared to $148 million in the year-ago quarter. The decline included an unfavorable variance for updates to actuarial assumptions based on an annual review, which was partly offset by lower integration costs in the current period. Excluding these items, AOI was $23 million higher than the year-ago quarter, driven by more favorable claims experience.” That’s kind of like saying your bank account is overdrawn, but excluding all the frivolous stuff I bought, I would still have a positive balance. So life insurance revenue is down by a third because of “an unfavorable variance for updates to actuarial assumptions”. Sounds like high risk life insurance to us.
Must be some actuarial openings being advertised with Pru but we didn’t see that in the release. Now we recognize that there are probably several products that feel market driven impact and would suffer from bad actuarial assumptions, but Pru and the rest of the industry are all claiming that their best selling life insurance product over the last year has been indexed universal life. So, if your best product is a market driven product and that market has performed magnificently over the past year, why would a market driven product (items) be driving profit down? Maybe because too much is going to the customers, leaving too little for the company? Now Risk Life is not known for making or recommending assumptions, but is it possible that the fact that bad actuarial assumptions, being one of the moving parts in indexed universal life, could be driving down life insurance profits?
Let’s throw in one of those little discussed life insurance facts, that if a product is really good for a company then it is generally not so great for the customer. If the reverse is true and what’s really good for the customer with an IUL is a really up market, isn’t really good for the company, well, what’s a company to do? I polled a team of experts on this question and we both agree that making a major adjustment in actuarial assumptions can swing that pendulum back in favor of the company. Even if another good year in the market occurs that actuarial adjustment can change the profit picture for both the company and the client, big time.
The world according to Risk Life insurance. It was kind of nice that instead of depending on all of our research, Pru just handed one to us on a platter. Muchas Gracias. If you have any questions or don’t like playing ball with a company that can take their bat and ball and go home anytime they want, call or email us. We can help.
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