(Bloomberg) — Are shareholders bad for business?
More and more, the answer in the U.S. life insurance industry is turning out to be a resounding "yes."
Since 2008, publicly traded insurers have seen their share of the $4 trillion market shrink vis-à-vis mutual companies, according to data compiled by Bloomberg Intelligence. The trend has been particularly stark in North America, where mutual insurers — those owned by policyholders — earned a record percentage of life-insurance premiums, industry data show.
In an age when shareholders come first and short-term profits are paramount, publicly traded companies like MetLife Inc. and Prudential Financial Inc. are finding it harder to compete. As rock-bottom interest rates squeeze industry margins, pressure to keep delivering returns year after year has left many with lower credit ratings and higher capital costs. That means they have to earn more from the policies they sell than mutual companies like Northwestern Mutual Life Insurance Co. and Massachusetts Mutual Life Insurance Co., which can effectively offer rebates in the form of policyholder dividends without having to worry about shareholders.
It's the kind of situation that led MetLife to say in January that it plans to stop selling life insurance directly to Americans after more than 140 years. The insurer concluded it isn't generating enough cash to justify the cost to shareholders.
A public company feels the pressure to "extract as much dividends as they can and when they can, return them to shareholders," said Robert Haines, an analyst at CreditSights Inc. "With a mutual, you don't have any of that stuff."
Short-termism
MetLife declined to comment. Prudential spokesman Scot Hoffman said in an e-mail that its "life businesses have continued to grow, providing competitive products and attractive returns." Combined with the insurer's overall business mix, Prudential is able to "return significant amounts of capital to our shareholders, while maintaining a strong financial position."
The current state of affairs is drawing renewed attention to the age-old debate over the rise of "short-termism" — and whether too much of corporate America is sacrificing long-term success and viability to meet the demands of shareholder activists and the never-ending quarterly earnings cycle.
Though financially sound, the persistent shareholder calls to boost returns have been a handicap to growth, according to Haines. From 2008 to 2014, publicly traded insurers increased their life assets an average of just 1.9 percent a year, the latest available data compiled by Bloomberg show.
At MetLife, the largest seller of life insurance in the U.S. by premiums, assets actually shrank about 0.8 percent annually.
Free from the distractions of investors agitating for breakups, bigger payouts or share buybacks, policyholder-owned firms have been able to grow more than three times as fast, increasing by an average 6.6 percent a year.
Record share
In North America, that has enabled mutuals to lift their share of the life insurance market to a record high of 31.5 percent, based on premiums, data from the International Cooperative and Mutual Insurance Federation show.
One reason is price. Mutual insurers typically can't match publicly traded companies for brand recognition (think MetLife and Snoopy or Aflac Inc.'s wacky duck). But they're able to offer competitively priced policies because their counterparts need to increase shareholder returns as well, said John Schlifske, Northwestern Mutual's chief executive officer.
"Stock companies have to split their returns between the people who own their products and their shareholders," Schlifske said in an interview.
And shareholder pressure can end up putting an insurer's creditworthiness at risk. After American International Group Inc. announced a plan in January to return $25 billion to shareholders over two years, following criticism from activist investor Carl Icahn to break up the firm, S&P Global Ratings cut its outlook on the insurer's credit rating to negative from stable.
"AIG's management is spending a lot of time trying to fend off its activist investors," Haines said. "A mutual company, they're not doing any of that."
AIG declined to comment.
Financial strength
Financial strength is a key selling point when clients compare policies that need to be in force for decades, said Joe Biondolillo, a Staten Island-based financial adviser.
