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From Tom Dyson, publisher, Palm Beach Research Group: Most insurance companies crashed during the 2008-2009 financial crisis. For example, insurance titan MetLife’s stock dropped 80%.
But a little-known type of insurance company had less than 1% of its investments listed as “nonperforming” over this same time.
What accounts for the discrepancy?
There are two types of life insurance companies: “stock” and “mutual.”
Stock life insurance companies trade on the stock market. They issue stock, and they trade like any other public company. MetLife, Prudential, and The Hartford are all examples of stock life insurance companies.
Mutual life insurance companies do not trade on the stock market. They don’t have shares. You can’t buy into them through the stock market. They’re like credit unions, except the policyholder is an owner in the insurance company.
Mutual life insurance companies are much safer than their “stock-issuing” cousins.
For one thing, stock life insurance companies have millions of shareholders. Many of these shareholders are powerful money managers. They want higher returns on their investments. This encourages the management of stock life insurance companies to take risks.
But mutual insurance companies have no shareholders. That means Wall Street analysts and money managers can’t pressure management to make short-term decisions. The companies are free to pursue long-term strategies. As a result, these corporations are known to be among the most conservatively managed companies in the world.
Mutual life insurance companies serve only one master… the policyholder. There are no outside shareholders to split profits with. No Wall Street. No quarterly earnings estimates. No conference calls. No insider trading. No takeovers. No message board gossip. No stock options.
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Think of mutual life insurance companies as cooperatives… or not-for-profit clubs. A bunch of people have come together and pooled their money to provide life insurance for themselves.
Safety, stability, and good service are the only goals of the mutual insurance company. It still generates profits. But these get distributed back to all of the members each year as dividends.
You’re more likely to see stock insurance companies borrowing money, advertising, and using other aggressive growth strategies. They’ll invest in riskier assets to appease hedge funds or large shareholders with higher returns.
They’re also more likely to fudge their quarterly earnings releases to make their results seem better.
Bottom line: Mutual insurance companies are some of the safest places on the planet to put your money. And some of the highest paying, too: They pay up to 5% in interest plus dividends. And, thanks to IRS rules, this interest compounds tax-free. (That’s the equivalent of about 8% interest in most investors’ taxable bank savings accounts.) You’re not going to find a safer investment with a stronger return.
Reeves’ Note: If you’re concerned about the stock market (like Tom is), you owe it to yourself to watch Tom’s presentation. It includes three “action steps” to take to avoid another crash in your assets’ value. Click here to watch it.
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