August Insurers Agents & Brokers Reinsurers. Advantage

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1 BEST S REVIEW August 2014 Monthly Insurance News Magazine The Mutual Insurers Agents & Brokers Reinsurers Life Advantage Despite diminished numbers, mutual life mainstays endure. by Angelo John Lewis An uninformed observer watching the wave of life insurance demutualizations that crested around the turn of the century might have wondered if the mutual form of ownership was soon headed to the dustbin of history. One by one, some of the largest life insurers in the United States Prudential, MetLife and John Hancock among them changed their structure from mutual to stock companies or mutual holding companies. By the turn of the century, the number of pure mutuals had dwindled to less than 50, from more than 300 less than 100 years before. And the majority of the survivors were small or midsize mutuals with combined capital and surplus of $250 million or less. Despite their diminished numbers, the major companies that remain in the sector are steadfast to their commitment to what they call mutuality. For them, their stock brethren might as well be occupying a parallel universe. We continue to find huge advantages for us to be a mutual company and stay a mutual company, said David Simbro, senior vice president of life and annuity products for Northwestern Mutual, the second-largest life mutual based on combined capital and surplus, according to BestLink, A.M. Best Co. s online financial system. We are certainly committed to this business model, as it allows our interests to be completely aligned with our policyholders and do what s in their best interest for the long term. That s why we value our mutuality. Simbro s sentiment on the participatory structure of mutual companies, in which policyholders share the company s profits, was echoed by his industry colleague Mutuals Among the Top Life Companies Market share of total life. (Mutuals are market with an *) Market Share (DPW) () Company Metropolitan Life and Affiliated Cos *Northwestern Mutual Group Prudential of America Group *New York Life Group Lincoln Financial Group *MassMutual Financial Group John Hancock Life Insurance Group Aegon USA Group State Farm Life Group AIG Life & Retirement Group *Guardian Life Group Source: State/Line (Life Lines) Key Points The Trend: Large mutual insurers are among the most successful whole life writers. Beyond the Trend: One key to their success involves using career captive agents with expertise at selling longterm products. What s Ahead: Mutuals may expand their offerings to include other longterm products, such as long-term care. and competitor Mike Fanning, MassMutual s U.S. Insurance Group executive vice president. For us, it s always been about helping families manage risk and taking advantage of opportunities, Fanning observed. And we think the mutual structure helps us do so by putting them first. The strength of the mutual approach, characterized by a focus on long-term products, greater reliance on career distribution and lack of reliance on capital markets, was evident in the wake of the financial crisis. Some stock companies, with revenues fueled in part by investment products juiced by stock market returns, suffered during this period. Some of the stock companies were challenged during the financial crisis, said Stephen O Hearn, European insurance leader of PricewaterhouseCoopers, who previously led the firm s New York insurance practice. They weathered the storm and learned some lessons, but it was

2 the variable annuity guarantees that challenged the industry. That was largely a stock company issue: The mutuals had less exposure. Just in terms of perception, mutuals certainly fared better, added A.M. Best Vice President Stephen Irwin. There was this flight to quality concept where there was the perception that stock companies were encountering more financial difficulties than companies with a mutual structure who benefited from their longer term perspectives. Sales of safe products, like whole life, have generally done very well post-financial crisis. New York Life, Northwestern Mutual, Mass Mutual and Guardian are among the top 10 sellers of whole life insurance, according to Limra, while none are among the leaders in sales of variable annuity products. People were concerned during that time about the equity markets and even the fixed-income markets and so gravitated to low volatility insurance products, said A.M. Best Assistant Vice President Thomas Rosendale. Many were looking to get a decent fixed-income return and weren t interested in taking a lot of equity market risk, and whole life products seemed to fit the bill. The level of guarantees you could get were substantially more than what you could get with some Future Focus Looking ahead, life mutuals think long-term products. Looking at the market share of the major mutual life insurers, a case could be made that there s very little reason to change a winning formula when it comes to product design and fashioning new products. In other words, fine-tune life offerings and expand around the edges. Although it s not always the case, [mutuals] would not be the first to the market with a new type of product, said A.M. Best Vice President Stephen Irwin. They would generally focus more on traditional life insurance and not commodity type products. When Michael Fanning, MassMutual s U.S. Insurance Group executive vice president, talks about future direction for his company, he talks about cracking the underserved market that has long vexed life insurers. This includes increasing sales to multicultural and younger consumers. By 2040, we re going to be a majority-minority country, Fanning said. Without a doubt, we need to better engage with multicultural consumers. I think historically we ve done a decent job, but there s a much bigger opportunity as we grow. Minority groups account for almost 92 of the U.S. population growth during the last decade. We think that s a major trend and we need to be prepared for the demographic shift. The second challenge Fanning sees is engaging the millennial generation. Really positive returns in the life insurance space typically come from companies that have career agency systems. Mike Fanning, MassMutual of the other products and they became more attractive, Rosendale noted. Plus, mutual companies did not receive a lot of press regarding concerns about capitalization because they were generally holding higher levels of capital to begin with on a risk-adjusted basis. Thinking Longer Term Fast forward to today. A look at the product-mix emphasis and financials provides a good contrast between mutual and stock We think that still means face-to face distribution but that has to be enhanced by things like social, mobile, and the use of big data: those types of things and tools that they re used to working with. I don t think the competition for us are other life insurance companies. It s a share-of-wallet question: How do we create a buying experience as compelling as they receive from Apple or Amazon, for life insurance? If we don t figure out ways to engage these consumers, that s going to be a really difficult long-term challenge for the industry. Stephen O Hearn, of PricewaterhouseCoopers insurance practice, believes that future product design from life mutuals will reflect their focus on serving long-term needs. You might see a commitment to similar long-term products from them, like long-term care, for example. The mutuals seem to have more staying power in that product than the stock companies, although that s a product where it is less clear what future benefits are going to look like. Whatever their future product design focus, O Hearn thinks that life mutuality will endure. As long as they are selling a product that the policyholders want and they continue to provide as much value to their policyholders as they are, they will be around for a long time. 2

3 Life life insurers. Although all of the larger companies in both categories sell a variety of products, large mutuals focus more on longer term products, while public companies focus more on commodity-type products such as term life and, to a lesser extent, universal life with secondary guarantees. Last year, for example, more than one-third of the $124 billion in premiums written by mutuals were for ordinary life insurance and 30 for annuities. Stock companies earned less than 11 of their $558 billion in premiums from ordinary life and nearly 24 from annuities, according to BestLink. How the two types of companies manage their assets reveals parallel distinctions. As one might expect for participatory companies, mutuals profitability return-on-revenue ratios, 3.2, were lower than those of stock companies, 7.9, according to BestLink. That s because mutuals return a portion of their revenues to policyholders in the form of dividends. Their investment practices also differ, mirroring their contrasting liability profiles and market sensitivities. Mutuals generally have longer tail liabilities and are less pressured by Wall Street. Our mutual structure allows us to employ a longer term investment approach, rather than focusing on meeting the shortsighted expectations of quarterly earnings reports. This strategy has served us well in all economic environments, Northwestern Mutual s Simbro said. We are responsible for managing the company in the best interest of our policyholders and we don t have a responsibility to stockholders as publicly traded stock companies do, he added. Our longterm strategies give us flexibility in selecting investments and asset classes that help minimize shortterm risk and volatility. The whole life insurance investment portfolio can have a longer Our long-term strategies give us flexibility in selecting investments and asset classes that help minimize shortterm risk and volatility. David Simbro, Northwestern Mutual perspective and that leads to longer dated bonds, more real estate, more equities, PwC s O Hearn added. They can do more with their portfolios because they have a longer investment horizon than someone who, for example, is providing a shorter term retirement guarantee. According to BestLink, mutuals last year invested less of their assets in bonds than publics (69 vs. 76) and more of the bonds they invested were noninvestment grade (6.9 vs. 5.6). They also had higher allocations in stocks (2.9 vs. 2.2), mortgage loans (11.9 vs. 9.6) and Schedule BA alternative assets (5.2 vs. 3.9). Bench Strength Another clear distinguishing feature between stock and mutual insurers is the degree to which mutuals rely on career captive agents. The recent recruitment drives of companies that include Northwestern Mutual and New York Life go against the grain of what s going on in the insurance industry in general, where the agency affiliation model is being challenged. According to Limra, today s affiliated insurance sales force is now less than 150,000, down 40 from the 1980s. Whole life insurance, O Hearn said, is a product that needs to be sold and the thing that characterizes the big mutuals is their career distribution networks. What makes them distinctive is having sales forces that sit across the kitchen table and sell sophisticated longterm products. It s a different sales process than retirement annuities or term insurance, which are more readily bought. It s not lost on us that there are not a lot of Americans who wake up every morning and think, I ve got to buy whole life insurance today, added MassMutual s Fanning. They know they have financial responsibilities to their families and their business partners and the first thing they really buy is an agent, or a relationship with somebody that they trust. And I think some companies have really gotten away from thinking about that as part of the value proposition and trying to compete on price. I think when you look at the data and see where companies have had really positive returns in the individual life insurance space, it typically comes from companies that have career agency systems. One of the frequent critiques of the mutual structure is the lack of transparency among its managers and concurrent lack of accountability and effectiveness. These critiques, which have been echoed elsewhere, were summed up in a 2006 paper, Demutualization in the Life Insurance Industry: A Study of Effectiveness, by University of Massachusetts professors Lal Chugh and Joseph W. Meador. The management of a mutual may be disposed to seek personal benefits or to indulge in expense preference behavior due to a lack of policyholder monitoring, the authors wrote. The large numbers of policyholders, who are widely dispersed, and the limited availability of information about mutuals, make the cost of monitoring the behavior and performance of management very high. Indeed, policyholders are 3

4 Life not inclined to monitor management closely. I think back in the 90s some of the mutuals [that demutualized] were in need of increased focus, O Hearn said. Making them public brought them increased focus. But the ones that remained mutuals and prospered would not have been able to maintain their prosperity had they not been well-focused companies to begin with. By the Numbers: 4 Mutual Companies Guardian Life Insurance Company of America Total $42,065,979 $5,011,885 $6,705,587 Fanning believes the participatory structure of mutuals encourages efficiency and accountability. All of us are incredibly focused on running efficiently, because if we don t, those expenses get passed back to the policy owner. I would say for us and the other mutuals as well, it s a big part of our value proposition and our product pricing to be efficient and effective. Group A&H $2,384,919 Ordinary Life $3,471,178 A level of accountability that Northwestern Mutual uses is a policyholder examining committee that annually visits the company, interviews officers, examines the company s books and reports their findings to other policyholders, Simbro said. Their view on how they feel about the quality of the operation adds another nice outside perspective. We feel we get additional value continued on page 6 Group Life $425,152 Individual A&H $399,100 Individual Annuity $24,228 All Other Lines $0 New York Life Insurance Co. Total $252,522,965 $17,853,770 $23,486,482 Individual Annuity $8,994,085 Ordinary Life $7,475,447 Group Annuity $4,457,107 Group Life $2,047,913 Group A&H $274,014 All Other Lines $237,916 Massachusetts Mutual Life Insurance Co. Total $182,776,471 $12,524,447 $20,418,821 Individual Annuity $3,312,423 Ordinary Group Life $1,058,795 Life Individual A&H $524,477 $4,399,010 Group Annuity $11,124,117 The Northwestern Mutual Life Insurance Co. Total $215,165,006 $17,198,785 Group Annuity $145,551 All Other Lines $0 Individual Annuity $2,384,595 Individual A&H $1,010,075 $15,995,244 Ordinary Life $12,391,100 Group A&H $52,912 Source: Company Overviews 4

5 Top 200 U.S. Combined Life & Health Insurers ed by admitted assets. ($ Thousands) Company/Group 1 1 Metropolitan Life & Affiliated Cos Group ,768, Prudential of America Group ,977, John Hancock Life Insurance Group ,181, AIG Life & Retirement Group ,529, TIAA Group* ,109, New York Life Group ,522, Northwestern Mutual Group ,171, Lincoln Finl Group ,168, Aegon USA Group ,490, MassMutual Finl Group ,081, Voya Finl Group ,235, Hartford Life Group ,499, Jackson Natl Group ,971, Axa Finl Group ,555, Principal Financial Group ,852, Nationwide Mutual Life Group ,458, Pacific Life Group ,388, Ameriprise Finl Group ,420, Aflac Inc Group ,668, Allianz Life Ins Group ,297, Thrivent Finl for Lutherans Group ,467, Genworth Finl Group ,092, State Farm Life Group ,776, Athene Life Ins Group ,222, Kaiser Fndn Group of Health Plans ,057, Guardian Life & Health Group ,937, Great-West Life Group ,427, Allstate Finl Cos ,974, Protective Life Group ,438, Sammons Finl Group ,462, Sun Life Assur Group ,073, Western & Southern Finl Group ,994, Unum Ins Group ,864, Securian Finl Group ,297, Amer Equity Investment Group ,783, UnitedHealth Group ,052, Aetna Health & Life Group ,399, Cigna Group ,370, GE Capital Corporation ,943, Global Atlantic Ins Group ,104, OH Natl Life Group ,802, WellPoint Health Networks Group ,169, Symetra Life Group ,943, Oneamerica Group ,778, CNO Group ,130, Guggenheim Life Group ,509, Fidelity Investments Group ,680, GAFRI Group ,221, Mutual of Omaha Group ,600, RGA Group ,456, USAA Life Group ,692, Security Benefit Group ,319, Natl Life Group ,756, Knights of Columbus ,534, Amer Natl Group ,693, Phoenix Life Group ,562, Standard Ins Group ,384, Health Care Service Corp Group ,953, Penn Mutual Group ,941, Sun Life Finl Group ,929, Company/Group Fidelity & Guaranty Life Group ,864, Berkshire Hathaway Group ,390, Ameritas Mutual Hldg Life Group ,283, Mutual of America Life Ins Co ,666, Torchmark Cos ,851, CMFG Life Group ,664, Modern Woodmen of America ,398, Liberty Life Assur Co of Boston ,115, Zurich Amer Life Group ,969, Swiss Re Life Group ,796, Southern Farm Bureau Life Ins Co ,679, Humana Group ,203, COUNTRY Financial Life Group ,662, Woodmen of the World Life ,067, Highmark Inc. Group ,813, Natl Western Life Ins Co ,771, Assurant Inc Group ,351, BC/BS of MI Group ,503, Farm Bureau Life Group ,723, Horace Mann Life Group ,299, Farmers New World Life Ins Co ,140, Munich Amer Reassurance Co ,981, BCBS of FL Group ,879, Blue Shield of CA Group ,553, Reliance Standard Life Group ,156, Americo Life Group ,156, Wilton Re US Group ,134, Amer Family Life Ins Co ,074, Sentry Life Ins Group ,056, Heritage Life Ins Co ,872, Amer Fidelity Group ,790, Philadelphia Finl Life Group ,746, Hannover Life Reassur America ,527, Independence Blue Cross Group ,527, Horizon Healthcare Svcs Cos ,479, Lifetime Healthcare Group ,466, Kemper Life & Health Group ,071, BCBS of MA Group ,951, Kansas City Life Group ,937, CareFirst Inc Group ,926, BCBS of NC ,786, Cincinnati Life Ins Co ,737, Cambia Health Group ,593, Auto-Owners Life Ins Co ,509, Health Net L&H Group ,465, BCBS of SC Group ,184, Physicians Mutual Group ,176, HIP Group ,171, CVS Caremark Group ,139, NGL Ins Group ,105, BCBS of Minnesota Gr ,064, Jefferson Natl Life Ins Co ,053, Beneficial Life Ins Co ,011, Senior Health Ins Co of PA ,985, Independent Order of Foresters USB ,940, Continental Assur Co ,937, BCBS of AL Group ,886, Ullico Life Group ,813, Scor Life US Group ,723, Security Mutual Life Ins Co of NY ,676,

6 Life Company/Group Legal & Gen America Group ,625, Gerber Life Ins Co ,548, Savings Bank Life Ins Co of MA ,534, BCBS of TN Group ,484, Centene Group ,478, Assurity Life Ins Co ,449, Homesteaders Life Co ,378, Farm Bureau Life Ins Co of MI ,293, Wellmark Group ,292, AAA Life Group ,168, WellCare Mgmt Group Inc ,168, IN Farm Bureau Group ,148, Premera Group ,136, Lincoln Benefit Life Co ,070, Erie Family Life Ins Co ,021, Combined A&H Group ,935, TN Farmers Life Group ,930, Centre Life Ins Co ,927, MTL Ins Co ,894, Scottish Re (US) Inc ,808, HealthPartners Inc Group ,791, Primerica Group ,789, LifeCare Assur Co ,779, Trustmark Ins Group ,742, LA Health Svcs & Life Group ,736, Medical Mutual of OH LH Group ,715, Group Health Cooperative of Puget Sound ,660, United Life Ins Co ,648, First Investors Life Ins Co ,641, Delta Dental of CA Group ,609, Molina Healthcare Group ,586, Blue Cross Blue Shield of AZ Inc ,578, Columbian Finl Group ,558, Arkansas Blue Cross/Blue Shield Group ,553, BC & BS of KS Grp ,551, Vision Service Plan Group ,544, Manhattan Ins Group ,522, Capital Blue Cross Companies ,492, SBLI USA Group ,484, Federated Life Ins Co ,435, Pan-Amer Life Ins Group ,434, Gleaner Life Ins Society ,417, GBU Finl Life ,411, Alfa Life Ins Corp ,357, Triple-S Mgmt Group ,340, continued from page 4 from it, and it adds an additional layer of accountability. This is always something we ve had built into our process. Which One s Preferable? Because of their contrasting operational philosophies, comparing the efficiency of stock and mutual insurers is an area that has long fascinated organizational theorists. David L. Eckles, an associate professor of the University of Georgia s Risk Management and Insurance Program, was one of three professors who attempted to make such a comparison. The trio summed up their findings in a paper, Ownership Form and Efficiency: The Co- Existence of Stock and Mutual Life Insurers. The researchers analyzed the financial statements of 267 mutual and stock life insurers and how their economic inputs (such as agent labor) translated into economic outputs (such as insurance products). They concluded that it s sort of an apple and oranges comparison if you re talking about efficiency, Eckles said. Stocks do some things better and mutuals do other things better. Both of these structures do their own thing. The researchers found that the Company/Group IL Mutual Life Ins Co ,329, Prosperity Life Group ,324, Catholic Finl Life ,320, Pekin Life Ins Co ,301, Liberty Bankers Group ,298, Boston Mutual Group ,284, UPMC Health Ins Group ,254, Medica Hldg Companies ,247, Local Initiative Health Authority of LA ,233, Pavonia Life Ins Group ,229, Centurion Life Ins Co ,209, Tufts Associated Health Plans Group ,200, Sagicor Life Ins Co ,176, Oxford Group ,156, Amica Life Ins Co ,133, CareSource Group ,130, Express Scripts Ins Group ,109, Baltimore Life Ins Co ,085, Shelter Life Ins Co ,078, Harvard Pilgrim Health Care Group ,054, Universal Amer Group ,037, EMC Natl Life Co ,030, Catholic Life Ins ,019, BCBS of KC Group ,015, HealthNow NY Inc ,009, Catholic Order of Foresters , Funeral Directors Group , Axa Corporate Solutions Life Reins , Citizens Inc Group , GPM Life Group , Citi Assur Svcs Group , HI Medical Service Assn , Amer Republic Group , Vantis Life Group , UCare Group , Top 200 Insurers $6,353,085, Total U.S. Life, Health and HMO $6,422,012, * TIAA s assets are significantly understated. Most of its separate account assets are in its affiliate, CREF. Note: Data for some companies in this report has been received from the NAIC. Source: Combined Life and Health, US; Data as of: June 6, 2014 mutual organization form allows them to be more competitive and efficient in life insurance, Eckles said, while the stock structure provides insurers with advantages in group lines, annuities and accident and health insurance for cost efficiency, but only in accident and health insurance for revenue efficiency. Mutuality, O Hearn said, has served this handful of players well. But those who demutualized have benefited from the stock structure as well in terms of an entirely different agenda. And, frankly, the capital markets have imposed a discipline that some of them needed. BR Financial information for Massachusetts Mutual Life Insurance Company (MassMutual) is as of 12/31/13. Total (Net ) and for MassMutual. and are consolidated statutory results of MassMutual that includes its U.S.-domiciled wholly owned life insurance subsidiaries: C.M. Life Insurance Company and MML Bay State Life Insurance Company. Visit for more information. Reprint provided courtesy of MassMutual, Springfield, MA COR1261 Copyright 2014 by A.M. Best Company, Inc. All Rights Reserved. Reprinted with Permission, Best s Review, August CRN