Wall Street Journal - Letter to the Editor 3/23/2016
“Low Rates Sting Insurers” (WSJ March 21, 2016) examines how low interest rates are raising premiums for long-term care policy holders and reducing profits for the insurers. There is a solution to this problem, however. Regulatory bodies could approve the purchase of preferred equity by insurers instead of limiting investments to interest-bearing debt. Preferred equity inherently pays a 200 to 300 basis point premium over bond rates because the issuing company never has to pay the principal back. Wells Fargo’s A-rated preferred equity trades at a yield-to-maturity of 7%, about what is needed by insurers like Genworth to meet future obligations.
Insurance companies could approach companies like Bank of America and ask for issuance of 6-7% perpetual preferred equity, the way Warren Buffett does. Companies approached would likely take them up on the offer because preferred issuance increases tier-one capital, lowering their overall cost of borrowing. Meanwhile, the enhancement of tier-one capital at target companies reduces the risk of the investment for the insurance company buying the instruments.