|Title:||United States lines of business for mutual life insurance industry ranked by net premiums written and deposits in dollars for 2011|
Start of full article - but without data
Top Lines of Business
(2011 Net Premiums Written & Deposits)
Group A&H $X,XXX,XXX Ordinary Life $X,XXX,XXX Group Life $XXX,XXX Individual Annuity $XX,XXX Individual $X,XXX All Other Lines $XXX
Note: Table made from pie chart.
The business model employed by mutual life insurance companies may be old, but no one can argue it is outdated. In fact, the mutual model has proven to be remarkably resilient, even since the financial crisis struck in 2008.
"The environment over the last four years has allowed the natural advantages of mutuality to come to the forefront," said Michael Rollings, executive vice president and chief financial officer at MassMutual.
"In the decade or so before, the mutual vs. the public structure was not something that got a lot of focus, but when the economy and the investment markets went south and it seemed like everything was deteriorating, there really was a flight to quality. I think mutuals represent that quality, and not just for the past four years but for many years before that, too," he said.
The reasons mutuals have found favor in recent years have to do with business models that generate financial strength. Mutuals are generally better capitalized than their publicly traded competitors. Since they do not have stockholders, they can focus on providing value to policyholders.
And since they don't have to satisfy short-term demands of the public marketplace, they have the luxury of making decisions based on what is best for the long term.
"Generally, the publicly traded companies sell more of the equity-sensitive products like variable annuities," said Andrew Edelsberg, vice president in the life/health division of A.M. Best. "So when equity markets had a significant downturn, there was a flight to quality as the stock prices of the publicly traded companies plummeted and their reputations suffered."
Policyholders felt more secure with the mutuals, he said.
Today, nearly four years after the market crash of 2008, the largest mutual life insurers are still rated A++ (Superior), A.M. Best's highest financial strength rating. One reason is that the quality of their capital tends to be higher, said Thomas Rosendale, an A.M. Best assistant vice president. "The options available to mutuals for raising capital in the public markets are generally limited to issuing surplus notes, which tend to be long-dated, with principal and interest payments requiring authorization by regulators," he said. "They also tend to not do as much 'financial engineering' of their balance sheets as do publicly traded companies."
For example, many public companies securitize the perceived redundant reserves associated with certain products that have onerous reserve requirements, such as universal life with no-lapse guarantees, and level-premium term life, utilizing domestic captives in order to obtain capital relief. In contrast, most mutuals self-fund these reserves so that on a relative basis, they hold even more capital than their regulatory capital ratios suggest, Rosendale said.
And while public companies are more focused on stock prices, income statements, earnings, returns on equity and yields on their investment portfolios, mutuals can follow a strategy based on how each decision is going to benefit their policyholders over the long term, Edelsberg said.
So why haven't mutuals left public competitors in the dust? "The reality is that, compared to their publicly traded counterparts, they have been relatively inefficient over the years, particularly from an expense perspective, as there was very little accountability in the old mutual system and no outside pressure to deliver results," Rosendale said. "No one individual or entity can realistically accumulate enough votes to exert pressure on the company, as the only way to earn the right to vote is through product ownership."
Mutual companies with large participating life insurance books can also be at a disadvantage during rising interest-rate cycles. Rosendale said mutuals that are highly dependent on participating life products face some disintermediation risk in such an environment. The yields on their large investment portfolios would not rise as quickly as new money rates, so the interest component of the dividend scale would be slow to increase. Public companies, in contrast, can more easily reflect new money rates in their interest-sensitive product offerings.
"You saw that in the 1990s, when a lot of mutual companies struggled with their participating life businesses, and that's why a lot of them at that time developed interest-sensitive life product alternatives," he said. "But they also saw significant levels of product replacement activity initiated by agents representing some of their public competitors, because those participating whole life policies didn't look very competitive in that environment."
True to Form
In 2000 and 2001, many of the large mutual insurers went public, including Prudential, MetLife, Principal and John Hancock. Northwestern Mutual is one of several that stayed true to the structure.
"Being a mutual is very much a part of our core fabric and is very important to our business model," said Skip Poliner, president and chief risk officer and a Northwestern employee for XX years.
"People asked us over the years how we felt about remaining a mutual. We've insisted that we'll be the last mutual standing."
Other large mutuals are also committed. Chris Blunt, president of New York Life's Insurance Group, noted: "Over the years, this form has proven to be the right one for us, as the ability to husband capital and maintain a cushion of safety allowed us to weather financial crises and depressions, world wars, pandemics and other disasters, helping us to make good on our mission of being there when our policyholders need us." The company was founded in XXXX.
The Guardian Life Insurance Company of America has been in business for XXX years. "We believe strongly in the value of mutuality," said Deanna Mulligan, president and chief executive officer. "We are managed for the benefit of policyholders, and we take that obligation very seriously."
Last year, Northwestern Mutual's total surplus increased by more than $XXX million to a company record $XX.X billion. This year, the company expects to pay $X.XX billion in dividends, the second-highest in its history. Dividends, which reflect a mutual's favorable costs and investment experience, are considered a return of policyholder premium. Poliner said Northwestern's dividends paid were more than twice those of its nearest competitor. "The reason we pay so much is that we have more than XX% of our business in the form of participating whole life insurance, for which many policyowners use their dividends to purchase additional insurance coverage," he said.
Guardian paid dividends of $XXX million, its largest amount ever, and improved its capital position by X% to $X.X billion. Life insurance sales were up X%, led by whole life sales, up XX%. The company's risk-based capital ratio was XXX%, one of the highest in the life industry. Guardian also runs group insurance business, an individual disability business, an annuity business, and two new businesses: multilife disability and mutual funds.
New York Life reported paying more than $X.X billion in policyholder benefits and dividends last year. Its surplus and asset valuation reserve grew to $XX.X billion, and its investment sales--including individual annuities, mutual funds and third-party asset management funds--exceeded $XX billion.
MassMutual approved a $X.XX billion dividend, an increase of X.X% over the prior year. Total adjusted capital was $XX.X billion, up X% to an all-time high, Rollings said.
MassMutual also generates earnings from a retirement business and a portfolio of asset-management businesses. It owns Oppenheimer Funds, the seventh-largest retail mutual fund manager. It also owns Baring Asset Management, a London-based firm that manages institutional and retail funds for clients globally; and Bahson Capital Management, which runs the parent's general account and institutional funds for other entities, Rollings said.
A 'Closed Loop'
Behind the numbers are the operational advantages.
Blunt said the essence of the mutual model is that it is a "closed loop system" in which all of the value that is distributed goes to the policyholders in the form of dividends. "There is a simple elegance to the closed loop system of mutuality," he said. "At the end of the day, we are XXX% aligned with the interests of our policyholders."
He added that as a mutual, the company doesn't feel any Wall Street pressure to reach for yield or to add risky features or benefits on products in the hope of driving top-line revenue. "The mutual model is significantly better insulated in extreme scenarios, given the ability to manage for long-term strength and stability, which allows mutuals to limit the amount of additional investment risks or liability risks we are willing to take," he said.
Short-term pressures on public companies may also compel them to deploy capital rather than husband it, such as through stock buybacks. Wall Street values such short-term performance metrics as return on equity, Blunt said.
"While public companies obviously want to grow earnings, capital is the denominator in the ROE equation," he said. "It is simple math: Shrink the denominator to drive up ROE."
Poliner said the mutual advantage allows Northwestern to focus on such operating fundamentals as expense management, sound underwriting and customer satisfaction. On the investment side, the insurer can seek higher risk-adjusted returns in its investment portfolio. The company tends to hold more equities and high-yield bonds--XX% to XX% of the portfolio--than its peers, he said. The rest is in investment-grade bonds, public and private bonds and commercial mortgages.
Mutuals also tend to have strong career agency forces. Poliner said Northwestern exclusively relies on its career agents, which the company refers to as financial representatives, for product distribution. "They truly believe in the high quality of products we manufacture," he said. "And we are reliant on them to identify customers who will benefit from our products. They do field underwriting and then bring that business to us, so that's a big competitive advantage."
Finally, Northwestern pays dividends not just on life insurance, but also on disability and long-term care insurance and on term life.
"Any product line that generates a profit or has experience better than what we had priced for, we return those excess premiums back to policyholders in the form of dividends," Poliner said. And the company believes in equitable treatment of policyholders, new or old.
Whenever the company has a new product feature that it believes it ought to make available to those who bought previously, it oftentimes makes it available at no extra charge, he said.
If inflation flares, mutuals could face stiffer competition again from the public companies.
But Rollings said there is no prohibition on mutuals writing variable products and that mutuals are just as capable. "We think about that all the time and we think about designing products that would be as attractive in a rising-rate environment," he said.
* The Trend: Mutual life insurance companies continue to grow robustly despite the poor economy,
* Behind the Trend: Consumers are attracted by mutuals' financial strength and a business model that focuses on policyholders,