How Mutual Life Companies Really Protect You (And Why It Matters)

At a company with multiple stakeholders, you have to say, well, where do we deploy that asset? Is it into the shareholder accounts or into the policyholder accounts? How, how do we best use this asset for us? Again, it's, it's, there's only one answer. How is this best deployed for the policyholder? What is the best value created for the policyholder? Here we do things like allocating expenses. How much expense do we allocate to this, to that, and again to shareholders versus policyholder impacts? There's only one answer. What's the best answer for the policyholder? So there's a lot of financial benefits that we think come through in more subtle implicit ways versus again which is a benefit of our structure and just being able to focus. So there's very explicit type things that maybe are a little bit more obvious, but there are a lot of hidden, implicit, subtle things that our clients, advisors would never have any way of knowing about. But when you're inside the machine and you see the way things are being run, the mindset, it can be quite different actually. And so those are a couple of examples of ways that the thinking is just different with a mutual organization.

Now I'm curious, how much of that were you aware of prior to becoming a part of a mutual organization yourself? You had a very long, extensive career with a company that, that I'm going to assume wasn't mutual and you've made that transition. So you know, there's a learning curve with everything. You move from one job, one career, you, you have to, you know, make your, make your claim in the new location. But what, what would you say? How much of that have you discovered since you become a part of the organization versus maybe what you perceived would be so prior to joining?

So you have to maintain separate books, separate set of accounts for your PAR policies from your nonpar policies. This is true for mutual organizations as it is for non mutual, say again, a shareholder owned organization. So at that account level they're identical in the requirements. Now the reason the PAR assets have to be separate from the non PAR assets is so that the profits of the PAR account can be provided back to the policyholders in the form of dividends. So it's really meant to ring fence the profits coming from those policies back to the PAR policyholders in the form of dividends. And so again that's similar. Now where you start to differ, and this is lesser known, is that when you rise above the par, what we traditionally call the PAR fund, the PAR account, which holds the assets for the policyholder, all Organizations have to hold a certain amount of capital or equity. This is again, we're an OSPE regulated entity. We have to hold capital to ensure we're able to meet our obligations to our policyholders under say, catastrophic type events. And so again, stock companies have equity and capital and mutual organizations have, let's call it surplus, to use consistent terminology here. So we have surplus, which again is provided by our PAR policyholders. The difference is the stock company is required to maintain the surplus from their PAR policyholders, again separate from the shareholder equity. So they actually have two surplus accounts or two equity accounts where the mutual organization only has one. All of our surplus is owned by our participating policyholders, where a stock organization will have their PAR surplus and their shareholder surplus.

We want you to understand the five strategies that you can use to reduce taxes now and in the future. In fact, we wrote about them in our book, keep taxes away from your wealth. You can get a copy of keep taxes away from your wealth by going to keep taxes away dot com. That's keep taxesaway dot com. Ease on over there. Get a copy today.

And so our board of directors is elected by our policyholders, a shareholders organization. Their board of directors is elected by the shareholders. They create incentives to maximize shareholder profit. Our board is elected to maximize policyholder outcomes. And this is where you start to differ in both the structure and the behavior. And you could say chicken and egg, which comes first. But at the end of the day, you end up with different incentives and different behaviors because there's only a single surplus account in the mutual organization which is owned by our PAR policyholders. And so we're trying to maximize value for the participating policyholders only by virtue of only having part policyholder owned accounts.

Oh, that's fascinating. And you know, to take that one step further, I'm, I'm curious about, you know, dilution a little bit. So with an open block in a stock company, there's a percentage. And, and the way that my understanding is as the size of the account grows and it gets to a measure of scale, there's a, there's a sliver. And that percentage of a sliver actually can, can squeeze a little bit lower. But anytime that participating profits are declared, which are not guaranteed but pretty ridiculously consistent in the country of Canada, which is pretty amazing, one of the really oldest financial products on the planet. And just because of the power of actuarial science and knowledge, you know, we can create a large degree of predictable consistency. What should people understand about the dilutions?

These policies comes with a Lot, a lot of options and features. And like any product or service, when there's a lots of options and features, if you're not using them, you're not getting full value from what you've purchased. And so someone who's engaging regularly with their policy and understands it is most likely to get maximal value from their policy. Now, in terms of the loans themselves, they're great assets. You mentioned they're an invested asset for us, and that's absolutely correct. It makes up part of the invested pool of the PAR account and it's a great asset. In fact, it's probably the best one we have because it comes with a very, very, you know, I'd say good rate of return on a risk adjusted basis. We view them as riskless assets because the policy itself is collateral for the loan and the same person borrowing is holding the collateral. And so if they're unable to pay the loan, there's no default. We just, you know, in the, in the agreement with the policy. And so it's completely without risk, but generates a good level of return. Now, when I say good level of return, what I mean is we generally tend to keep our policy loan interest rate very close to our dividend scale interest rate, which is the amount of interest being paid out to the policy. And what this does is from our perspective, it doesn't dilute the dividend scale interest rate. So someone taking a loan at a rate that's very similar to the interest we're paying on the account keeps us quite neutral but with less risk because again, that's a riskless asset versus the bonds or stocks or whatever else we happen to be invested in. And so, yeah, the, the policy loans for us are a fantastic asset class and it works very well for the clients as it does for us.

I love that. And I think it's important to understand because something you identified is that there's a way that you, you consider and think about management of not just the, obviously the asset base that the park count has, but also the relevance to say, a policy loan interest rate and what you're doing on another side. So it's almost like the scales of balance to some degree, it sounds like, is a little bit of the thinking process that's going on at the top level there.