More Disturbing News For The Life Insurance Industry

 MetLife building in New York, October 8, 2008. REUTERS/Lucas Jackson)

MetLife building in New York, October 8, 2008. REUTERS/Lucas Jackson)

Last month, MetLife made the bombshell announcement that it will exit from the life insurance business. The company indicated it will shed its life insurance and annuity business by forming a separate company and then selling stock in the new company via an IPO; in essence selling its life insurance business to stockholders. (Most likely because MetLife knew no other company would buy it.)

For those of us in the insurance industry, this is one of those, “you’ve got to be kidding me” moments. Could you have ever imagined reading that MetLife, the very pillar of the life insurance industry, would announce that it is getting out of the business? This is akin to the New York Yankees announcing they are going to get out of the baseball business.  

MetLife CEO Steven Kandarian justified the decision by blaming federal regulators for imposing the “too big to fail” tag on MetLife. The MetLife grievance is that these federal regulations would require the company to increase – to unreasonably high levels – the reserve capital it holds to support its life insurance business. (Of note, there are those in the financial and regulatory community – including the Insurance Department in New York – who have suggested that MetLife has been “playing games” in reporting its life insurance reserves.)

Blaming federal regulations for MetLife’s decision to exit the life insurance business is at best a half-truth. The new federal regulations for reserves may have been what triggered the decision, but they are being used more as a smokescreen and an excuse for doing what the company has wanted to do for a long time. MetLife acknowledged that even if the company were to prevail in its lawsuit against the federal government over its designation as too big to fail, it would still exit the life insurance business.

There is an unspoken but simple truth underlying MetLife’s decision: Life insurance and annuities are no longer “core” to the future of MetLife. It may surprise some in the insurance industry, but the retail life and annuity business now represent only about 20 percent of MetLife’s operating earnings, and it has been declining. MetLife reported that in the third quarter of 2015, operating earnings from life insurance and annuities declined by 33 percent from the previous year and growth had slowed to just 2 percent, compared to 12 percent the previous year.

Reaction by the Financial Community

When MetLife announced its decision to exit the life and annuity business, the financial community did a happy-dance. MetLife stock jumped 10 percent, right off the bat. The Wall Street Journal suggested that MetLife’s action will put pressure on the industry’s biggest companies such as Prudential and AIG to follow suit and exit from the life and annuity business. The Journal mused that MetLife’s action could trigger “a broader shake-up of the insurance industry’s biggest companies.”

The MetLife Decision in Perspective

It is difficult to argue with the MetLife CEO’s decision to exit the life insurance industry. He should be given credit for recognizing the realities of the industry now and for taking action to meet them. For a number of reasons, there has been, in effect, a “polar reversal” in the fundamentals of the life insurance industry. An industry that operated for 150 years selling products based on guarantees producing long-term value and long-term profits, has become an industry driven by fear of guarantees, short-term profits and commodity pricing. A business model predicated on long-term value and steady returns simply cannot function effectively (if at all) in a frenetic short-term world.

There is a simple factor at work here: It is expensive, in terms of capital required, to guarantee meeting the liabilities for mortality (death benefits) or longevity (income in retirement) that either may not emerge for decades or (even worse) be unpredictable. It is the cost – capital held in reserve – to provide these long-term guarantees that MetLife has decided it is not worth paying.

Driving this dynamic is the reality that many of the larger companies in the industry such as MetLife, Prudential and AIG are now public companies judged on the basis of their performance in the next calendar quarter, not the next quarter century. In this short-term world, the financial community views capital that is held in reserve against future liabilities as “dead capital,” and that is judged to be a liability in and of itself. This modern reality is at the core of MetLife’s decision not to invest its precious capital in new life insurance business.

It is of note that MetLife is not divesting its large block of in force (called a “closed block”) life insurance and annuities. This business has already had capital invested in it and is throwing off consistent profits. What MetLife is saying is, “We don’t want to invest our capital in new, long-term life and annuity policies, because we are being pressured by the financial markets to deliver short-term returns on our invested capital; returns not available from life insurance and annuities.”  

There is a cruel irony in this situation: When the life insurance industry was singularly focused on guaranteed long-term products sold on the basis of value, it was awash in capital. The profits from this type of business created more capital than the industry could invest. In 1987, when I started LifeUSA as a new life insurance company, no less than seven very large companies fought over the right to provide the capital needed to write our new business. These companies literally paid us to take their capital, so they could participate in the long-term life insurance and annuity business LifeUSA was writing.

It was only after the companies began to shift away from guarantees and long-term value, toward a focus on commodity-type products designed to generate short-term profits that their capital base began to evaporate. By looking short-term for its return on capital, the life insurance industry moved from being a capital creator to a capital eater. As a result, the life insurance industry has now become dependent on sources of capital such as the stock market and private equity funds, that demand higher returns than life insurance is designed to produce, and these returns are expected to be delivered over the short-term. Faced with this pressure, MetLife felt its only option was to get out of the life insurance business.

MetLife could take this action because life insurance is no longer a core business of the company; in fact, this action will theoretically allow the company to increase short-term profits. The real question is: What is going to happen to those companies for which the sale of life insurance and annuities is their core business? What options will they have? What cost will they have to pay just to stay in business; if they can?

MetLife’s action is not an outlier, but only the first concrete example of the long-term damage that can be inflicted on the industry when companies abandon long-term thinking for short-term results and returns. Unfortunately, the real losers will be the insurance industry itself and consumers who need, seek and are willing to pay for guaranteed long-term protection and value.  

15 responses to “More Disturbing News For The Life Insurance Industry

  1. It’s a very curious decision.. Even though, they sold tons of insurance, not helping families in the long run.. the could have sold term insurance, 100% of the time (doing what’s right).
    What is their product going to be?

  2. I agree with the previous response of John C. If MetLife would have done whats right by familes by providing (TERM INSURANCE) and educated clients on proper investing, not only would the company be in better position but the clients of MetLife would be closer to financial independence.

  3. As a former met agent, who sold “term and invest the difference” and had managers complain about why I didn’t write more Whole Life, I firmly agree with the above posters. If met life (and most other big named companies) sold term and invest the difference strategiea, they’d be better off.

  4. Why is it that the big three mutual companies,MassMutual, New York Life and North Western Mutual sale tons and tons of whole life and Best, Fitch and Moody’s rank them as the strongest in the industry. Do your research.

  5. My husband has had a MetLIFE POLICY for years. What happens now?

  6. I can fix that for anyone. Email me gmontee@gmail.com

  7. Invest the difference? Why so that people can pay extra hidden fees and knowing how the market goes up and down, how likely is those policy holders money growing? Go back to basic and reallu understand the purpose of permanent policies. They have their own methods of practice. Buy term and invest the difference… Get term yes but with advance medicine people are likely to live to 80 and above. What will you tell the person how much their term policy is going to cost them at that age!

  8. Excuse my typos*

  9. To the above comment, Orlando. Buy Term and Invest the difference is right. Yes advanced medine has helped to prolong life. So why not enjoy that added life expectancy? Get educated, invest, and reap the benefits so that you don’t Need life insurance. I can help you understand how if you’re interested.

  10. Nicole, I can understand how you think that buy term and invest the rest is the “right” way to do things. That is an opinion. Buy term and invest the rest is just one of many strategies. With the options of guaranteed products these days permanent is a great option. You may not agree “and thats ok” but with the market and economy down, people are leaning a lot towards safety for the long term. Millionaires even have permanent life insurance because they see the value, is the avg. Joe too good for that?

  11. I agree with the above buy term & invest the difference. It’s aboustley Ludacris for someone to have permanent insurance for life. You will need cash on hand in your retirement days you can’t buy anything with a policy. Being self insured is a better option & if you think you will reap the benefits of a permanent policy the sad truth you will not. Knowing the 4 Rules to a whole life policy is key. Knowing the rules no one and I mean no one would buy such a product if they truly understood how it worked. Find a company that does what’s right 100 % of the time. #PriWorks

  12. “Buy term and invest the difference” is whats right for the client 100% of the time thats not an opinion its a Fact..
    If you have a WHOLE LIFE, VARIABLE, UNIVERSAL, you have the wrong type of term horrible!!!!
    Get educated you’ll thank yourself later…
    To the comments above about permanent insurance its still a term policy, remember there is LEVEL TERM DECREASING TERM and ANNUAL RENEWABLE TERM the worst of them all!!
    Contact me if you wish to learn how to breakdown any policy out there..951-288-7639

  13. Typo wrong number 951-288-7630

  14. Luis Marquez

    To say that “Buy term and reinvest the difference is the best strategy” is incorrect, as is to say that “Permanent policies are the best”. Those are blanket recommendations and just show a lack of understanding by the agent. It would be like saying that a “Minivan is the best vehicle you can buy”, its just plain ignorance. It really depends on the person’s needs. If a client has the cash to buy a permanent policy, then so be it. If they’re strapped for cash, term is better. I do have to say however, that TERMITES do tend to be more TRAINED to repeat the words of the trainer than EDUCATED to think for themselves. For instance, we all know that with term one can, buy more coverage, at the penalty of losing the policy if you outlive it (98% of term policies don’t pay out, and that’s a fact), then you must be healthy enough to re-qualify for a new policy at a premium which will be at least 4x greater than the original. But it will get you some coverage now, while you have a family to protect and are broke. The money you paid all those years is gone, yes everyone knows that. But what ppl don’t know is that they’ve lost another benefit… Life insurance generally pays tax free. No uncle Sam to touch this inheritance money. This is the reason why Permanent works better, most of the time. I have been a fully licensed financial professional, and lucky enough to work at a firm where I can and DO SELL both strategies. A firm where I’m educated, not trained. Permanent life insurance can work GREAT as long as it’s structured correctly. Believe it or not TERMITES, some permanent insurance products are blended nowadays with guess what… TERM Insurance. Giving a client maximum coverage while you need it most during your family years with a minimum cost, and most of the monies going into the cash value. And then eliminating the term once you go to retire to focus on using the cash value to supplement retirement without losing the tax free advantage of life insurance. This is something that agents who sell permanent policies NEED to get educated on as well. Also not running Target Premium would really help. I somewhat understand TERMITES bc they have come across bad permanent policies as have I. So once again, IF structured correctly, CASH VALUE can be GREAT. Specially the Indexed polices bc they’re not tied to the prime rate, nor a company declared rate. It’s just the stock market goes up, client makes money up to a limit, the stock market goes down, the client loses nothing. Roth IRAs are a thing that TERMITES use a lot NOT knowing that the IRS can actually give your family a deduction upon your passing, for the amount of money saved, and tax the rest. I.e. Mary saved $50,000 and upon her passing, the account had $200,000. The IRS will tax the FULL AMOUNT and give Mary’s beneficiaries a deduction of $50,000, which in turn exempts $15,000 at a 30% tax bracket. So if the taxes on the $200k were to be $60k, minus the $15k credit, the family would still have to pay $45k in taxes if taking the cash option (which most ppl exercise due to lack of follow-up from the advisor, and don’t know they have options to defer). Also, ROTH IRAs are susceptible to the ups and downs of the market and most clients haven’t seen their agents who sold them the investment for years, are close to retirement and STILL have an aggressive portfolio. This is BAD service as well. Finally, this website is preposterous bc giving ppl half information is like looking a child straight into their eyes and saying YOU’RE GONNA DIE (which is technically correct)!!! And that’s it, without saying the great things about life. This article makes it sound like ppl are going to just lose their policies just to scare the poorly educated General public. That’s plain IRRESPONSIBLE to say the lest, bc State Insurance Commissioners would NEVER allow that. Insurance companies selling their business is a normal practice that has happened in the past, is happening now, and WILL CONTINUE to happen. Insurance is profitable!!! This has to do with CASH RESERVES!!! MetLife has bought companies in the past, it’s just their turn to sell this time. On another note… Term insurance is a bigger risk to an insurance company because if every 1 dollar of COST OF INSURANCE (COI) converts into $1,000 of insurance coverage with term, well with permanent policies, they may still have the same $1 = $1,000 of coverage, BUT the CASH VALUE lowers this ratio since the cash value is Also counted in the entire company’s financials. So if for every $1 of COI there’s $10 of Cash Value, that means that $11 covers every $1,000 of coverage. That means that the risk is LOWER!!! You Don’t have to be an ACTUARY to do this math!!! The only thing that helps Term Insurance ONLY companies is that most ppl lose their policies due to lack of payment, which is more rare with permanent policies, since the cash surrender value (if available) pay for the COI possibly for many months or even years in the event of a lapse of payment. Most permanent policies usually build Cash Surrender Value after just 4 years, but if structured correctly after just 2 years. ***Rena Westfall***, your policy will be ok, just possibly serviced by another company, but the terms will remain the same since whichever company will buy this block of business MUST ADHERE to the terms of the contracts previously placed In-Force!!! ***Steve*** Stop trying to fish clients like you used to catch a girl on the rebound back in high school, it’s LOW CLASS and unbecoming of an insurance professional!!! Do what you wish with this KNOWLEDGE, people!!!

  15. Hello everyone,

    Please do not stressed yourself. Get the right financial education and the right advisor. You’ll be fine. Contact me at 347-941-1023 for further information about the insurance and becoming financial independence. I’m totally follow by “buy term and invest the difference.” Please do not wait longer to get your knowledge.

    Thanks!

    Mohsin

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