What Northwestern Mutual's latest investment adds to the cash value life insurance discussion

By Brandon Roberts

The Insurance Pro Blog

It's important for you and your client to understand that money in a fixed insurance contract is money well managed.

Northwestern Mutual is a large mutual life insurer well known for it's financial stability and smug career agency sales force. Another thing the "Quiet Company" is somewhat well known for within the industry is its not-so-quiet approach to brandishing its latest investment moves.

Recently, we learned that Northwestern now includes a $142.5 million loan to Douglas Emmett, Inc. for the Warner Center Towers. On its face, this may not seem like such a big deal. It's certainly not a huge investment for a company like Northwestern. In fact, $142.5 only represents about one-tenth of one percent of Northwestern Mutual's total general account. But one thing to be gleaned from this news is the diversity of investment exposure your money has when it sits in an insurance company's general account.

These sorts of investments are pretty typical for most insurance companies. In fact, one of the most astute comments I've ever heard from a fellow agent was, "These companies tend to run mini-private equity firms inside a portion of their general account."

Bonds, bonds, bonds

A lot of people assume that putting money into a fixed cash value life insurance contract is like investing in bonds, and to a large degree, they are correct. In fact, a lot of the mutual career agents position their whole life contracts as a bond alternative. They know it, and the investment world knows it.

I remember a conversation I had with a sales rep from one of the well-known big name mutual funds years ago when he came to my office while I was still career with one of the big mutuals. He mentioned they had great bond funds, but he wouldn't waste my time because he knew what people like me talked to my clients about when it came to bonds.

However, we're a tad remiss if we completely ignore the fact that insurance companies do invest in other assets. And this move can have a substantial impact on their overall investment yield. The 30-year average yield on general accounts is still near 9 percent. And insurance companies are hot spots for accomplished CFAs who have a track record to stand on and desire a job where they can oversee lots and lots of investable assets.

What else?

Besides bonds, insurance companies like to dabble in equities, but not in the way the average investor tends to think. Insurance companies love private equity, and they often own several small private companies. They take to heart the Warren Buffet approach to investing, and they've done well with it.
Insurance companies are also often at the top of the list for private placement offerings and have a penchant for mortgages. Not so much subprime collateralized debt obligations (the sort of thing that sunk certain investment banks and hedge funds in 2008); insurance companies are looking for multimillion dollar income-producing real estate mortgages (like premier office space lending opportunities).

Why this matters

Cash value life insurance has long had a wealth creation element to it. I've contended for a while that it's a worthy, low-risk asset class that complements portfolios very well. I also like to point out that the diversity of exposure when it comes to life insurance companies is second to none. The overall investment pool is huge (ranging from several billion to well over $100 billion).

And within that huge pool is almost a micro-economy of several business functions ranging from bonds to more alternative and exotic investments, and touching on the profitability of the business of issuing insurance contracts itself. It's one of the reasons I like to talk about return on equity and credit margins within specific companies.

It's important for you and your client to understand that money in a fixed insurance contract is money well managed. And it's money exposed to an extremely wide array of investment choices one could only dream of when investing alone. And this fact is true for a wide range of companies, not just Northwestern Mutual.