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.