When you’re considering life insurance or an annuity, many of the products you’ll find will guarantee a certain level of growth. For instance, the accumulated cash value (which you can use during your life) and death benefit within a whole life insurance policy are guaranteed to grow, and may grow even faster if your policy earns dividends. Many income annuities also guarantee that they’ll make regular payments to you for as long as you live. Over time, they can pay out more than the amount you pay in. The stable growth these products provide can add significant value to your overall financial plan.
But how do insurance companies meet these guarantees? They invest a portion of the premium you pay through something known as a general account portfolio. At Northwestern Mutual, our General Account Portfolio (commonly called the General Account) is made up of assets worth about $235 billion as of June 2019.
We recently sat down with Chief Investment Officer Ron Joelson, who oversees our General Account, to learn more about Northwestern Mutual’s General Account.
What should policyowners know about the value they get from the General Account?
While not invested directly in the General Account itself, policyowners can get some of the financial upside you can get from taking risk, while taking on less risk themselves. That’s because as a company, Northwestern Mutual, with the highest financial strength ratings given to any life insurance company in the industry, guarantees the value of our products. We take risk for you through investments within the General Account.
How is the money in the General Account invested?
Most of the money is invested in fixed rate investments such as public fixed income, private placement debt, private equity, real estate loans and commercial mortgage loans.
Then, about 17½ percent is invested in what we consider risk assets: real estate equity, public equity like stocks, private equity and high-yield bonds. Northwestern Mutual actually has about 3 to 4 percent more in risk assets than our competitors have in their general accounts. We can do that and still maintain our high credit ratings because our company has a healthy surplus, good liquidity and liabilities without unusual guarantees that are difficult to honor.
How did you arrive at 17½ percent as the allocation for risk assets in the General Account?
First, 17½ percent represents our long-term policy but the actual amount can vary based on our tactical positioning and changing market conditions. Second, we’re very deliberate about how we set that number. With every investment decision, we balance two things: one, maximizing the total return for our policyowners and, two, maintaining the unsurpassed financial strength of the company. Those two things can be at odds. If you want to maximize return, you may take certain risks that are not appropriate. And if you focus solely on financial strength all the time, you probably won’t generate the kind of returns that drive value over the long term.
To find the right balance, we stress-test the General Account on a regular basis. We assume very severe equity market events — for example, a 50 percent decline in equities. And then we assume what would go along with that, how it would affect high-yield investments or real estate. We also assume that we would continue to invest in the market on the way down to take advantage of lower prices. So, 17½ percent works because at that level, we can withstand that stress, reinvest on the way down and still have enough capital, based on what we know of rating agency methodologies to maintain the highest credit quality in the insurance industry.
What does Northwestern Mutual own through our General Account?
In addition to stocks, bonds, private equity and private debt, I think our policyowners would be surprised by how present we are in their communities. We have office properties in every major U.S. city. We have retail properties like very high-quality destination malls. We own storage facilities, pipelines, we even own a couple of golf courses. These are real assets and they're very visible. Occasionally, I'll give a talk in a local city and someone will ask what Northwestern Mutual owns in that city. I'll mention an office property, multi-family property, mall or industrial park and people are just kind of shocked at how widespread the portfolio is. We own all these properties because they’re diversified assets that work very well against all the other assets in our portfolio.
Learn more from Northwestern Mutual Chief Investment Officer Ron Joelson. Here, Ron talks about a specific investment and how it illustrates Northwestern Mutual’s unique ability to generate value for our clients:
What’s our approach to investing with the General Account?
We manage for the long term; we have enough liquidity that we only sell assets when it makes the most sense from a total return perspective. That means we don’t have to sell our assets because we need cash to pay claims or to do something unusual. We have that cash in house. Ultimately, that really enhances our returns and drives the value our clients get with their policies. We never have to think about what we would sell to meet an obligation. We sell based on the best timing with the investment itself.
Ron Joelson talks about how we make investment decisions with the Northwestern Mutual General Account:
How does Northwestern Mutual’s structure as a mutual company impact how we manage the General Account?
It really supports our long-term investment approach. I used to be the chief investment officer of a public company, and we were very concerned about how investment decisions would affect quarterly earnings. If I had a large gain near the end of a quarter, I might visit the chief financial officer and ask whether he wanted me to make a sale and realize the gain in the second quarter or the third quarter. It was perfectly legitimate and it’s the kind of thing a public company might do to impact earnings. At Northwestern Mutual, the response is, “Where can you make the most money?” In other words, we don’t care about quarterly earnings. We want to generate the most value for the policyowner.
Northwestern Mutual continues to have the highest financial strength ratings awarded to any U.S. life insurer by all four of the major rating agencies: A.M. Best Company, A++ (highest), April 2019; Fitch Ratings, AAA (highest), August 2019; Moody's Investors Service, Aaa (highest), September 2019; S&P Global Ratings, AA+ (second highest), August 2019. Third‐party ratings are subject to change. Ratings are for The Northwestern Mutual Life Insurance Company and Northwestern Long Term Care Insurance Company. General Account investment performance is one of many factors used to determine Northwestern Mutual’s financial strength ratings.
The vast majority of the company’s managed assets back most of its life, disability income and Portfolio Income Annuity liabilities. The investment strategies described apply to the investment of those assets. A portion of managed assets backs the remaining liabilities (primarily fixed deferred annuities, income plans and long-term care insurance), which have different investment exposures. When purchasing the company’s life insurance and annuity products, clients are not investing in the company’s General Account portfolio but purchasing products backed by the financial strength of Northwestern Mutual.