New life in the life insurance industry

The president of the John Hancock Mutual Life Insurance Company likes to collect scales. Shelves on two walls of E. James Morton's office, on the 59th floor of the glass-skinned John Hancock tower here are loaded with a variety of old weighing devices, some with long arms, some with big copper pans. They look as if they should be out weighing onions in the market or nails in the hardware store.

Scales are also part of John Hancock's advertising for its broadening range of financial planning products and services. The company's advertising people, Mr. Morton says, did not know about his collection until after they adopted the scale as a symbol.

The scale also serves nicely as a symbol of the new balance Hancock and the rest of the life insurance industry are achieving. After more than a century of depending on the traditional whole-life policy and a few variants for handsome profits, life insurers have watched whole life fade as an income source, but they have managed to offset the loss with new products and movements into new businesses.

The result, industry observers say, has been several years of turmoil, but turmoil that is changing both the products and the image of the life insurance business.

``The most important thing that has happened to the business in the last 20 years,'' says Robert Grossman, director of West Coast research at Rooney, Pace Inc., a brokerage, ``is the switch in emphasis from life insurance as protection to insurance as an investment device.'' That shift, Mr. Grossman says, is part of the reason insurance companies have begun -- perhaps grudgingly -- to offer competitive, better-yielding products.

``The insurance industry in general has a well-earned reputation for being slow moving and stuffy,'' says Ron Wilson, an analyst at Shearson Lehman Brothers Inc., a division of the American Express Company. ``That is definitely changing.''

``Several things are coming along to help the life insurance industry,'' adds Alice L. Cornish, an analyst with Conning & Co., a Hartford, Conn., brokerage specializing in insurance stocks. ``One of these things is demographics.'' People in their 20s and 30s who postponed getting married and having children have stopped postponing and are buying more life insurance. Ms. Cornish recently moved to Conning from Shearson. While there, she and Mr. Wilson prepared a report on the insurance industry in which they wrote that ``1984 stacks up as a thrilling year for insurance stocks,'' and ``1985 should be a fairly good year for the lifers.''

Another reason for this optimistic outlook has been the startling sales of new, investment-oriented life insurance products, particularly universal life and variable life. Both are designed to answer the oft-heard complaint that traditional whole-life policies provide a poor rate of return for the investment portion of the customer's premium. The idea seems to have worked, as universal and variable-life policies now account for 30 to 50 percent of life insurance sales, depending on the company. Variable life, for example, accounts for just under half of John Hancock's life insurance sales.

Also, with lower interest rates, fewer people are taking out policy loans to reinvest the money elsewhere. In 1982, policy loans accounted for $53 billion, or 9 percent of the industry's assets, according to the American Council of Life Insurance. Last year, the dollar figure for these loans had increased to $54.6 billion, but their share was down to 7.6 percent of assets.

While this should mean a return to more stability -- a condition insurance companies most enjoy -- it has not. The so-called ``financial services revolution'' got in the way.

Instead of raking in the cash and reinvesting it to produce high yields and to guarantee death benefits, insurance executives have to think about competition with banks, brokerages, and mutual funds.

``Eight years from now, Citicorp is going to be doing just about anything they want to be doing,'' Wilson predicts. ``I think insurance companies had better be planning on how they're going to compete with a lot of people they never had to compete with before.''

``We have a lot of competitors we didn't know we had,'' Morton says. ``People like American Express and Merrill Lynch and Citicorp and Sears. Companies that we used to look on as banks, retailing firms, stockbrokers, and so forth. They're now in our business, selling insurance, and they're competing very directly, frequently on a price basis and with very different selling methods.''

Those different selling methods have pushed companies like John Hancock to alter their own selling techniques. Until a few years ago, Morton explains, all John Hancock life insurance was sold through John Hancock agents. They sold no other products and the company sold through no other channel.

No longer. ``We have to focus our attention on capturing clients,'' Morton asserts. ``We have to at least experiment with other forms of distribution.'' That means doing a lot of things some of the older, hidebound agents don't appreciate. Like approaching customers through mailing lists, running coupon ads in magazines, even selling the whole insurance policy through the mail, without benefit of an agent at all.

When agents aren't complaining about by-mail insurance selling, they are lobbying Congress to keep the competition at bay, something Morton wishes they wouldn't do.

``People say, `You're going to keep the banks out of the insurance business aren't you?' And we say we have to be in the banking business. We would be very much surprised if people let us in the banking business without letting banks in the insurance business.''

Getting into new lines of business is one of the primary reasons for the frequent use of a word that has been tripping ungracefully out of the mouths of many people in and out of the insurance industry: ``demutualization.'' If the word is unwieldy, so is the process that leads to a mutual -- or policyholder-owned -- insurance company converting itself into a company owned by stockholders. Several of the largest insurance companies are already stockholder-owned, including Aetna, Travelers, and Connecticut General. But Prudential, Metropolitan, Equitable, New York Life, and John Hancock still follow the mutual path.

While it appears they will stay on that path for at least the near future, factors beyond their control are forcing a hard look at demutualization.

One way a life insurance company -- or any other company -- can become a broad-based financial services firm is to form an ``upstream'' holding company that serves as the parent company with subsidiaries engaging in a variety of businesses. Citibank, for example, is a subsidiary of Citicorp, although the bank came first.

A mutual insurance company, however, is owned by its policyholders, so it has to demutualize if it wants to form a holding company. But several questions must be answered first. How does a company compensate policyholders who each ``own'' a piece of it? How about policyholders who do not have participating policies? How does the firm show earnings performance to investors when it hasn't been keeping its books like a normal profitmaking company?

Being a mutual company does not mean John Hancock and others of its type cannot enter non-insurance businesses. It just means they have to borrow or pay cash to buy existing companies or start new ventures. In 1968, for instance, John Hancock started selling mutual funds; in 1982, it bought Tucker, Anthony & R. L. Day Inc., a stock brokerage; in 1983 it began offering tax shelters and financial planning; and last year it began selling commercial property and casualty coverage.

Then why go through the bother of demutualization?

While he often sounds like he's prefer not to do it, Morton says that if John Hancock is to compete in the deregulating financial service business, it will have to become a stock company, so it can form the holding company that owns the separate subsidiaries, not as divisions within the more closely regulated mutual company.

For many insurance companies, the question is not one of demutualization, but survival. The costs of developing, marketing, and servicing more-competitive insurance policies, as well as a broader range of financial service products, will just be too much for some companies. There are about 2,000 life insurance companies in the United States today, Ms. Cornish of Conning & Co. figures. Last year that number got whittled down, partly as the result of more than 80 mergers and acquisitions. That number will ``certainly'' grow this year and will continue indefinitely, she says, as consolidation becomes a fact of life in life insurance.

``The pull toward efficiency is going to necessitate some sort of consolidation,'' particularly among small and medium-size companies. Mr. Wilson at Shearson adds. ``I don't know if it will be a major upheaval over two years or a gradual change over 10 or 15 years, but it will come.'' Life insurance policy loans keep growing -- but not as fast. Source: American Council of Life Insurance

Total Percentage of assets Year-to-year growth

(in billions) 1974 $22.8 8.7% 7.0% 1975 $24.5 8.5% 5.1% 1976 $25.8 8.0% 5.1% 1977 $27.6 7.8% 6.6% 1978 $30.1 7.8% 8.4% 1979 $34.8 8.1% 13.6% 1980 $41.4 8.6% 16.0% 1981 $48.7 9.3% 9.3% 1982 $53.0 9.0% 8.2% 1983 $54.1 8.3% 2.1% 1984* $54.6 7.6% 0.9% *Estimate

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