E97: How the Backbone of IBC Has Performed During COVID-19

Nate: We’ve received many questions from our clients since the pandemic began on just how the insurance companies are doing during this crisis. So in this episode, we’re excited to interview Dan Foley who’s the Senior Vice President of Marketing at Security Mutual Life to discuss exactly what insurance companies have been experiencing during this unusual time. She’s Holly and she helps people find financial freedom.

Holly: He’s Nate, he makes sense out of money. This is Dollars and Nonsense, if you follow the herd, you will be slaughtered.

Nate: Hi, welcome back today. We’re very excited. We’ve been getting questions from our clients throughout this entire pandemic. So for those of you who are listening to this later, this is in 2020, middle of 2020, June of 2020. And we’re just kind of seeing some of the ramifications, maybe hopefully the tail end, but I guess time will tell on the coronavirus and how that’s been affecting life. And it certainly does affect even the insurance industry.

But we’ve been getting a lot of questions. Well, what’s going on with my policy? What’s going on with the insurance companies? Is everything okay? And instead of us trying to answer that by ourselves, we wanted to bring in an expert.

And so here as a guest today, we have Dan Foley, he’s the Senior Vice President of Marketing at Security Mutual Life and has been a part of Security Mutual Life Insurance company in New York for 38 years. And so he really knows his stuff. He’s been through quite a few issues and maybe not quite just like COVID-19, but certainly quite a bit. And we are so happy to have him. So Dan, welcome to the show.

Dan: Thank you, David. It’s a pleasure to be here. You said I’ve been through a few things and I think back on my career and I certainly have, I started in our actuarial department. I’m an actuary by background, by training, but I spent about the last 30 years in a marketing role. And in that 30 years, we’ve seen some really, really interesting things. And some that have been really life-changing from those standpoint of how we go about our lives day to day, lots of financial ups and downs for our country during that period of time.

I have to say that it’s been a pretty exciting run for me. And it’s been great for our policy owners I’ll say that in terms of the products that we provide. As policyholders out there thinking about what’s going on here, I’ve seen a lot of volatility in the stock market. I’m seeing lots of uncertainty in what I’m doing.

I have to say that I’ve been an employee of Security Mutual for 38 years as you mentioned. My wife is a physical therapist in private practice and she’s a small business owner. So we’ve had a good sense of the ups and downs, especially in the pandemic, which has been, especially difficult for lots of small businesses. I can say with a lot of confidence, and even some level of pride that our whole life policies have been holding up well in helping out a lot of people during this time.

Nate: We’ve had a lot of questions, but I also wanted to say that we’ve also had a lot of compliments like, “Man, thank you for shining the light on this. I’m not having to worry about what my money’s doing. I don’t have to worry that it’s going down or up and that it’s readily accessible to me any time.” We’ve seen both sides for sure. And companies just like Security Mutual Life, we have many clients with. I’ve experienced that consistency, that for whatever we just don’t find in very many other industries, if any at all in the financial world.

Dan: That’s for sure. Well, I mean, when you think about it, the life insurance products that we build are built for the long term and we build in guarantees. I mean, you think about a lot of products out there, you’ll get a guarantee that lasts for some limited period of time. We’re building life insurance policies that have guarantees till age 121. We’re talking about investing for the long period of time. We’re talking about long periods of time with the exposure and protection that’s going to be provided.

So we have to be very careful when we invest. We’ll invest in high-quality corporate bonds, all investment-grade AAA type bonds, AAA to maybe BBB, class one and class two investment-grade bonds. And sometimes we’ll be encouraged to take a little bit more risk on an investment so that we can offer a better return. But we can’t chase returns because we have to provide those guarantees that need to be there for a long period of time.

So we’re very, very cautious about the way that we invest. In fact, at the end of last year, Security Mutual, every year, we take a hard look at our… Well, we don’t do it just every year. We do a report every year. We look at the investments that we’re offering or that we’ve purchased and that are available to be purchased. We buy the best that we can.

And at the end of last year, we had 100% of our bond portfolio which is approximately $2 billion was in high grade all performing corporate bonds. They were paying the returns that they needed to pay so that we could make our guarantees. So as much as we might like to take some money and invest it in and take a chance on something that’s not in our DNA.

In fact, we just can’t do it. We need to be there when people have difficulties. We need to be able to provide not only the death benefits, but we also need to be able to provide the cash value and the cash value can be very important. I mean, just during this past three months, there’ve been a lot of people who needed cash and could not turn to the stock market to get it because it was too up and down. But if they had a whole life insurance policy, they could go to the whole life insurance policy, take a policy loan and get cash very, very quickly.

Nate: Now, you were mentioning the longterm viewpoint that Security Mutual Life has to take. I’m curious, do you think that the stock held life insurance company? So for those of you who are listening, there’s two different types of life insurance companies. There’s these mutual companies that we prefer, but there’s also stock held companies that sell life insurance that are not owned by policyholders. They’re owned by stockholders. And is there a difference in your opinion, Dan, of the longterm focus from mutual companies as compared to let’s say like a stock held company, AIG or MetLife or something of that nature?

Dan: Well as a mutual company, we are owned by our policy owners. That’s who we have to respond to. A stock company is owned by their stockholders and their stockholders may or may not be policy owners. They’re probably, some probably are, and some probably aren’t, but we have to be responsive to our policy owners. And that’s who we are.

I can tell you that from where I sit, I think that the mutual company is really a powerful ownership feature because we are owned by our policy owners and we are responsive to them and to their needs. We did several things during this time period. Actually, we had taken actions to afford policy owners benefits beyond what the policy called for in terms of extending lapse protection. So that if somebody’s policy was about to lapse because of the pandemic, we extended that for 90 days to be able to give people a little extra time to pay.

As we were in the process of doing this, several of the insurance commissioners came out and said they were going to do it. The New York Department of Financial Services was one of them that took that idea and said, “Hey, we want to protect the consumers in the state of New York. And we want to extend the time for lapses and the time to execute certain transactions within a policy.”

So for example, if you had a term policy and you were nearing your final conversion date, which means the conversion is when you take a term policy and you say, “Okay, I want to buy a whole life policy,” and you can do so without having to submit any additional evidence of insurability. And you do that be for any number of reasons, but primarily to extend your coverage and to maybe buy a policy that’s going to build you a cash reserve over time.

Security Mutual was taking steps to do this, and the Department of Financial Services of New York came out and said, hey, we’re going to do this. We want everybody to do this across the world, all companies, but we were already in the process of doing it. Those kinds of rules extended other States as well. I mean, it speaks to how we thought we should respond to our policy owners, into the owners of Security Mutual.

Because we thought that, hey, there’s people in need, who have cash crunch type situations now who had a lucrative business. But all of a sudden, they had to close the doors because they were fearful of the spread of COVID-19 and the implications of that. I think that the mutual ownership is really, really powerful for the consumer.

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Holly: Dan, I know we were talking a little bit about the pandemic and you mentioned fears of, do we buy life insurance. Do we not buy life insurance? And there’s even been, “Hey, insurance companies aren’t selling life insurance right now during this pandemic.” Can you speak to some of the reasons why, if you own it now, or if you’re considering buying it, why it is actually one of the best places to put your money right now during a pandemic or in general, not just what it offers you, but the benefits of both sides of it.

Dan: One of the key things with life insurance and with whole life insurance in particular is the fact that there are guaranteed values, guaranteed cash values. So you have the death protection right away and you build guaranteed cash values over time. Those guaranteed cash values can be made available to you so that it can be like a reserve that you can go to, that you can borrow the money out of the to use to do whatever. Whether it’s to help support payroll for a business owner, or if it’s to help with a personal expenses, that kind of thing.

And often people will use whole life insurance to use the cash value, to build it up, to help pay for what I’ll call big-ticket items in life. Because it’s a great place for cash to grow because of the fact that there are guarantees. And by the way, when we have experience in our investments and in our mortality, our claims experience and expenses, when that’s more favorable than the guarantees. And we give that back to our owners, to our policy owners in the form of the dividends.

So you can build cash, you can get dividends credited to the policy and non-dividends, of course, are not guaranteed. That you can get them credited and that goes to build that reserve that you’ve got. The thing that I think is very interesting about Holly is that it’s the cash is that it is readily available. The term policy loan is used, but really the cash value is the collateral that secures that loan. So you can get access to the money very, very quickly. There’s not a loan approval process or anything like that. It’s a safe place to have the money because of the way that it is backed up by the safe and sound investments that we put those premium dollars into.

Nate: Dan, how long has Security Mutual Life been in existence and been paying dividends for? Because it’s not just now, but some people are curious, well, how the insurance companies do it? Well, the insurance companies, they must know something that we don’t know because they’ve been doing it through the worst and best of times for a long time.

Dan: We sure have. We’re in Binghamton, New York, which is in upstate New York and we’ve been here since 1886. So that’s a good long time. I mean, the company is almost 100 years old when I started here. And that was a long time ago. We’ve been paying dividends, we’ve paid dividends for 127 consecutive years. And we’ve been able to do that again because of our foundational financial goals and objectives here to protect the policy owners, to make sure that we have the cash that’s needed to pay the claims, to build the cash value in contracts.

So, yeah, I mean really, Nate, it’s all about taking a long view, knowing that we need to build the cash value so that people can have the living benefits now, but also so that we can pay the death benefits. I think maybe on the investing side, it might be a little bit different depending on what you’re doing with those funds that you have to invest.

It’s really a very different thing to say, “Okay, I’m going to put this money into an investment. And I hope that it’s going to grow like crazy. I hope it’s going to be that I’m going to be the next Warren Buffett or someone who’s going to do tremendous work with their capital.” The likelihood is that you’re probably not going to be that person. But anyway, if you do take the chance and you lose the money and you’re okay with that, you lose the money. It may go great, it may go great. And you have to kind of know that going in, in the investment world.

For us, we can’t afford to lose the money. We have to be able to pay the claims. We have to be able to make the cash value available to our policy owners. So we have to invest conservatively and go slow and steady for the long haul kind of thing. The important thing for the policy owner know is that the policies are built for the long haul. They’re not built for a flash in the pan kind of growth or opportunity or a chance wherever you want to call it, to hit it big. They’re built to be there when we need to be there.

Nate: One of the things I find interesting too is so many people are used to dealing with accounts, whether that’s in an IRA or a 401(k) or a brokerage account where their account itself goes up and down based on how well the investments are doing in the account that they own. But it does work a little bit differently with their life insurance policies because it’s not like some people were concerned when early on and before the federal reserve started making some policy changes in buying bonds, they were worried about liquidity crisis. The price of bonds were going down and so forth and people were wondering, well, does that correlate to my policy like it would the value of my brokerage account?

The answer is no, but I’ve even heard from insurance companies and Dan, you can speak on this, that short term fluctuations in the prices of bond or the value of bonds that really are not a huge deal when you’re just so focused on holding bonds to maturity and holding them for the long term. And maybe we would all like for interest rates to be more normalized. But aside from that, since you’re not really in the business of trading bonds and buying and selling them consistently that it really doesn’t impact too much the value of the bonds since we’re holding them for so long, to begin with. Is that right?

Dan: That’s an excellent point, Nate, because yeah, I mean, we don’t have to mark the market, but we are going to hold the bonds for very likely to maturity. That gives us a little bit different perspective and that helps our policy owners. That gives us the stability that’s really needed to provide the protection and the growth that is going to be required over the long haul.

Do you remember when you buy a policy, a whole life policy, you’re going to pay a level premium, most typically you’re going to pay a level premium that’s going to give you protection for lifetime. And lifetime meaning right out to, let’s say, age 121. So we’re talking about building something with a long view. I mean, maybe you might shorten up the funding to, I don’t know, maybe just 10 years or maybe paid age 65 or something like that. But you’re building that policy so that ultimately the cash value grows to be equal to face amounts.

You have to do that with a longterm perspective. You’re going to buy bonds that are going to give you that long-term value. And yet we’re going to hold those bonds to maturity. One of the challenges that companies have right now, and I think that this came up recently, there was an article, I can’t remember where it was published right at the moment.

But there’s concern that companies have portfolios of bonds. And that as the bonds mature, and maybe if it was a bond that was purchased eight, 10 or 12 years ago, it would have been at a far higher interest rate than what you could earn today if they took those maturing bond and bought a new bond. So, you’re going to get less investment income.

I mean, that’s just a fact of life. As we buy bonds, we buy them of varying maturities to give us greater protection and greater diversity so that we don’t have a big chunk of them all maturing at the same time and having a big turnover in terms of what the investment income is going to be. We use an investment advisor, BlackRock with some are investing and the whole asset-liability matching becomes extremely important to us. And we take that very, very seriously.

Nate: Absolutely. Now we talked a little bit even before the show, Dan. But how do insurance companies prepare for things like a pandemic? Kind of come out of left field whereas a life insurance company, you’re insuring people’s lives that have death benefits, how do you prepare for those types of things or do you at all?

Dan: We do. In the Security Mutual, I mentioned, we’re at Binghamton, New York. But we’re licensed in all 50 States, the District of Columbia, and the US Virgin Islands. So we have a national reach with our company. Being in New York though, and most of the people on the line will realize this, but generally, insurance companies are governed by the state where they operate. So we’re in New York and New York, there are special rules in New York, they’re different from the rules in Pennsylvania and different from the rules in Florida and all that.

And many companies, if you look at this, I don’t know, somewhere like 1500 insurance companies out there, the life insurance carriers. Now, many of them will not do business in the State of New York because the State of New York is very, very difficult in terms of being super consumer-friendly, super demanding of what companies do in terms of the guarantees they provide. And in terms of the rules, so if they follow. In New York, we’re very, very consumer-focused.

That’s a challenge for a lot of companies. So while there may be 1500 insurance companies out there operating across the country and I’m estimating a little bit. I think it’s between 1500 and 1600, maybe 75 to 100 of them do business in New York. They just don’t want to do business in New York because they’re so difficult.

I consider that to be an advantage at the moment because one of the things that New York asks for every year is they ask us to provide them with a report as to what would Security Mutual, what would happen to Security Mutual if claims went to 300% of what they normally are? They do call it a pandemic testing. They really are looking at the sensitivity of the company’s operations, it’s financial underpinnings, and how the company would be able to respond? Because guess what, stuff happens?

The pandemic, which I want to say in February, I was at a meeting. One of our directors is a medical doctor. He’s a research epidemiologist. And we were talking about what was happening in Wuhan at that point. Now, this was early in February and our world was pretty much undisrupted. I mean, you’d get five minutes of it on the news at night talking about Wuhan. I’m still scratching my head trying to figure out where is Wuhan?

Nate: Right.

Dan: Anyway, we’re not too far from Cornell. There’s a thousand students in Cornell who are from Wuhan, which was shocking to me. Guess what? They didn’t go home for spring break this year. And having a conversation with his doctor, he was concerned. He said, “I think this could have an impact,” and I’m politely nodding. And I’m thinking, “I wonder if this guy really knows what he’s talking about.” Guess what? He does and he did. And our world changed within a matter of I want to say maybe four weeks after that, we started talking about closing the company and stuff. I thought, “Wow.” And you work for 38 years, and I don’t think anybody had ever said, “Look, at some point in the future, we’re going to send you home for four months to work.”

Nate: Right. And you guys are almost all working from home. Is that right, Dan?

Dan: That’s right. Over 80% of our workforce is at home now. But anyway, back to the testing, I didn’t mean to get off on all that. But the New York Department of Financial Services makes companies domiciled in New York, working in and operating in New York, give to them every year implications of pandemic study. So as we look at our claims and frankly, our claims are up.

I think if you look at the industry, the claims are up just a little bit. We have a significant amount of business in New York and in New York City in particular. And I got to tell you that in the month of March, our claims went up pretty dramatically. I mean, to the point where it was almost like somebody had thrown, I say, it was in March.

Beginning on March 20th, we started to see a significant uptick in claims. And that continued throughout the month of April. And it moderated in May, and it’s continuing to moderate in June, which is good. As I said, we have a significant concentration of business in New York. By the way, and I don’t mean to get crazy here, but when we talk about claim moderation, it feel a little bit removed from the audience. Because when claims moderate, and we’re still talking about people behind these numbers. So-

Nate: Sure.

Dan: … when our claims went up by a significant number and we were happy to see them come down and we know there are people and families and businesses behind all this. And it’s something that we can’t dwell on because we have to steer the ship and keep things going. But I mean, believe me, there’s a real sensitivity to the fact that we’re losing people. I have friends in New York and I don’t know if you’re aware of this, but my friends in New York still every day, they’re going out at seven o’clock and just applauding for the first responders and healthcare workers and stuff. And so in New York, that’s a big deal.

Nate: You guys were in the front line drilling close to it.

Dan: No question about it. So it’s good that we do the pandemic testing, that we’re able to look at this and say, “Hey, something had happened and guess what, 2020 something happened.” And now our claims are not going to be up anywhere near 300%. I can assure you that, but they’re going to be up significantly. I can tell you that as well, but that’s what we’re here for.

When it comes right down to it, we need to be here for our policy owners, for our owners to deliver the benefits that they expect, whether they’re death benefits or living benefits, we need to be here for it. And by the way, we’ve done both. As I said, we’ve got business owners, families who needed cash, who came to Security Mutual to take money from their life insurance policies to be able to help them through this thing.

Believe me, nobody will ever feel sorry for an insurance company or think they did the right thing. But I think that we can stand tall and think that as an industry and certainly as a company that we did everything that we were supposed to do to honor our commitments and to help people through a very, very difficult time.

Nate: Absolutely. As a personal policy owner with you, I’ve experienced that many times. But Holly, we’re just about out of time, any last words on your end, Holly, as we wrap this up?

Holly: I would just like to thank SML, New York and you Dan just for being on here, as well as just realizing that life insurance isn’t just a death benefit. It also provides cash and living benefits as well. I do want to say SML, New York, maybe working 80% from home their staff, but yet they are still selling policies and doing that. So they haven’t shut the door even during the pandemic in regards to being there for their policyholders. And so I just want to say thank you.

Dan: Thank you for saying that. If I could just add something about that. I think that in some ways, people who are on the fence about buying life insurance took a new look at things because of the pandemic, knowing that eight years in illustration, that life really can change in a short period of time. I mean and in a way that you would never have expected.

And so some of those people who were procrastinating on some of their insurance decisions, I think a lot of them have said, “Yeah, now’s the time. I’m not waiting any longer. I’m going to do this.” And we have continued to be in business and sales are strong right now. It’s a little bit different in terms of maybe some of the traditional appointments, more appointments are being done through Zoom, through FaceTime, through all kinds of different digital media. But people are aware that now they can’t put this stuff off, you just can’t put it off. So-

Nate: That’s absolutely true.

Dan: … thanks for mentioning that.

Nate: Dan, anything you’d like to share as we close up?

Dan: One the thing that is interesting about the business these days, and if you bought life insurance, I don’t know, even five years ago, even if you didn’t buy a big amount of insurance, you were probably going to need to be very, very closely examined with blood tests and maybe your analysis and things like that.

Right now, a lot of that information is obtained in maybe you can’t get the exact same information that you can get from a blood test. But there are data sources that are available that insurance carriers can draw on that eliminate the need to do those kinds of things. You don’t necessarily need to get a blood test. I always tell the story, in New York when my wife and I got married 38 years ago, sorry, 37 years ago, don’t tell her I messed up on that.

Nate: Okay.

Dan: We used to have to get a blood test. Now she finds out about this about two weeks before we’re going to get married, she jumps back on that fence and saying, “Hey, I don’t know if this is worth it,” [crosstalk 00:28:16].

Nate: Yeah, exactly.

Dan: But anyway, talked her into it. And 37 years later, we’re still together. So that’s good. But the point is that carriers are able to get enough information using different data sources through lots of different things. You don’t necessarily need to go out and meet face to face and be able to get that insurance. You can do a lot of things over the phone and through different, as I said, data sources, pharmacy information and that kind of thing that will allow us to get enough information to not just make the yay or nay decision, but to say, yeah, you’re one of our top risks. You’re a preferred, you’re best class kind of risk or maybe you’re standard risk.

But the point is you’re able to do some of this without having the more invasive procedures. So I think that that’s a very, very powerful thing and that’s something to think about if you are thinking about buying insurance now. It’s a better experience for the person buying insurance, the applicant. I want to make it as easy as possible for people to get the protection that they need. So I think that that’s an important, I won’t call it a development. I think that covers just about everything that I wanted to say. I don’t know if there was anything else that you wanted to ask me. But-

Nate: No, I think it’s been great.

Dan: … I can say this. Me too.

Nate: I think it’s been great. So thank you so much, Dan, and thank you all for tuning in again, until next week. This has been Dollars and Nonsense, if you follow herd, you will get slaughtered.

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