Insurers See Future in Your Retirement
Metropolitan Life, the insurance giant with $76 billion in assets, and Kaufman & Broad, the California home builder that is rapidly expanding its insurance business, are battling each other in an Arkansas court for the right to take over the insurance remnants of Baldwin-United Corp., which collapsed three years ago. Those remains include access to $3.2 billion in annuity contracts and 165,000 potential new customers, so both sides are looking forward to the judge’s decision in the next week or so.
But the Baldwin battle is only one of several significant moves recently in the enormous, $600-billion (assets) life insurance industry. Last year, Metropolitan bought up the remains of Charter Insurance, another failed annuity seller of the early 1980s. And Kaufman & Broad took on half a billion dollars worth of the annuity contracts of Capitol Life of Denver. Meanwhile, in related moves, Prudential Insurance--at $80 billion in assets the industry’s largest company--bought Jennison Associates, a money management and investment firm, and Equitable Life purchased Alliance Capital, also in money management.
New Role for Industry
What does it all portend? That the life insurance industry has figured out a role for itself in the brave new world of financial services. It wants to be your retirement insurer.
“Many companies that have traditionally been in the life insurance business are seeing now that the only way they can get asset growth is through the pensions and the savings plans,” says Theodossios Athanassiades, senior vice president for pensions at Met Life.
He’s referring to the big change that financial deregulation brought to insurance. Sales of traditional policies, in which a company collected ample premiums, saved up cash in the policy and paid only upon death, gave way to less-profitable term insurance--lower premiums, no cash buildup. The industry looked to many experts like a beached whale--big, of course, but going no place.
But now the industry is feeling lively, competing with banks and investment houses for pension management work and approaching the public with a savings product called a single premium deferred annuity. That’s a certificate of deposit that acts like an individual retirement account. You put a sock of money into it and it earns interest tax-deferred until you’re 59 1/2 years old, at which point you can draw the whole amount or ask that it be paid in annual installments--an annuity. There are variations as to interest rate guarantees, and there is even a variation, called single premium whole life, which contains conventional insurance death protection.
Wave of the Future
But the big deal is the tax-deferral feature. Without taxes taking the joy out of your interest income, money earning 7% doubles in little more than a decade. At under $20 billion outstanding, the annuity business pales beside the enormity of insurance in force in this country--almost $5 trillion in face value of policies. But insurance men see it as the wave of the future--a silver-threads-among-the-gold wave.
“As you see the aging of the population, you’re going to see more savings,” Met Life’s Athanassiades says. “Our biggest and best market is what I call graying America,” Chairman Eli Broad of Kaufman & Broad says.
Yuppie was yesterday, graying America is tomorrow. The insurers look at the population statistics, which show that the 45-and-over age group grows dramatically in the 1990s, and see opportunity. The way they figure it, as baby boomers get longer in the tooth, they will want to sock money away for their retirement.
Maybe they will, but the competition to handle that money will be fierce. The danger is that insurance companies and other financial institutions will get to competing on rates--promising a high rate to get the money, then having difficulty delivering on the promise.
That essentially is what happened to Baldwin-United and Charter Insurance, where the aftermath of failure has involved shareholder lawsuits, courts, state insurance commissioners and compensation committees from both the insurance and securities brokerage industries. Those 165,000 Baldwin annuity holders--average investment $20,000--are probably glad to be getting out whole. But it’s a good bet that they’re sorry they ever handed their money to the old Baldwin piano company.
The wise consumer will keep in mind that an annuity is not a bond or a share of stock. Basically, it’s a long-term promise to pay, which is only as good as the company making the promise. And there is no federal deposit insurance as there is with bank CDs. So check out the company and ask how it proposes to earn the interest that it has pledged to pay. If a rate seems too good to be true, it is.
