Pacific Mutual Life Taps Burgeoning Market in Supplemental Retirement Plans
A life insurance company nowadays does a lot more than sell life insurance policies. And Pacific Mutual Life Insurance Co. expects to be offering customers a variety of financial services in 1988.
The Newport Beach-based firm, for instance, is plugging into the rapidly growing market of supplemental retirement plans, said Harry G. Bubb, the firm’s chairman.
Supplemental plans usually call on employees to match company contributions, and the funds are managed by insurance companies that guarantee returns of 9% or so currently. Pacific Mutual has developed two plans, one for highly paid executives who cannot receive more than $90,000 from company pensions and one for the rank and file.
“There’s no question that this is the wave of the future,” Bubb said.
In 1987 alone, the insurance company added “well over $1 billion” to its pension-asset management portfolio, more than three times the $300 million it had added three years earlier, Bubb said. The company has a total of $15 billion in pensions and assets under management, he said.
Though growing, the management portfolio is still the company’s second-largest operation.
With $30 billion of life insurance in force, Pacific Mutual is the state’s largest life insurance company and the nation’s 24th largest.
The life insurance industry in general has had to look for new revenue sources because it was squeezed for profits last year, said David Seifer, an analyst at First Boston Corp. in New York. He said rate increases should help improve profits somewhat this year.
Bubb acknowledged that Pacific Mutual’s profit margins have become narrower on its insurance products. The company has been looking for new sources of income over the past few years by diversifying into such areas as money management, real estate developer loans and administrative services for self-insured companies.
Partly because of the profit squeeze, the company is starting to market and advertise more heavily those areas that can be more profitable--such as supplemental retirement plans.
“The margin trend is deteriorating because health claims and costs are up and the profit margins on the newer life insurance products are much more narrow,” Seifer said.
More important, he said, the impact of AIDS-related insurance issues is still unknown and potentially damaging. The number of death claims, outpatient treatment costs and eventual total costs cannot be assessed, he said.
“No one really knows who has the liability,” he said.
Pacific Mutual has been at the forefront of county businesses in educating the public about acquired immune deficiency syndrome. It has passed out AIDS-related education grants and sponsored an Orange County business leaders task force for AIDS education in the workplace.
“AIDS is the biggest health cataclysm of the century,” Walter B. Gerken said in an interview in August shortly before he retired as Pacific Mutual’s chairman. “The issue of who bears the great cost is becoming a major one, and I don’t have a solution for it. Ultimately, we will have to socialize the cost of it.”
Bubb, who succeeded Gerken, said the company must be ready to change at all times to meet society’s needs.
A new kind of life insurance product, called variable universal life insurance, for instance, will provide customers with a choice of where to invest their premiums. He said he hopes the new policy, to be introduced later this month, also will help revive the company’s sales of individual insurance policies, which have been growing at a slower pace.
“For older people, they could protect the money they have accumulated by going to the money market funds, which will protect them for the ups and downs of the market,” Bubb said. “If you’re young and very aggressive, you may direct that your premiums be invested in an international fund, which is riskier. And there are all sorts of levels of risk in between.”
Seifer, however, is not so sure the new policy is going to significantly help Pacific Mutual. The history of such policies offered by other companies, he said, shows that most policyholders are content with the conservative investment practices of the traditional insurance policy. So the need for the new policy remains questionable, he said.
The roller coaster ride that the economy took this year normally would not affect life and health insurance companies, Bubb said. So it should not be surprising that Pacific Mutual Life Insurance Co. hardly felt a twinge from the October stock market crash or the April interest rate increases.
“We tend to be, as an industry, less affected by business cycles,” Bubb said. Pacific Mutual has put about 96% of its investments in bonds, mortgages and preferred stock--investments that react less to the shifts in the economy, he said.
But that percentage may drop as a new subsidiary, Parametric Portfolio Associates, swings into gear this year. Pacific Mutual established the Seattle-based company six months ago to invest only in stocks. Already it is managing $280 million for three pension funds.
Because equity investing is a small part of pension funds, Parametric only deals with funds that have about $100 million or more in assets, said Mark England-Markun, its managing director. The investments are in stocks of companies worldwide.
For Bubb, the greatest concern this year is the uncertainty over tax laws.
Legislators recently talked once again of taxing the increasing value of life insurance. Policyholders, who never see any dividends because they are simply plowed back into the investments, would have to value their policies every year and pay taxes on the increased value, he said.
“It begins to wear you down when they keep talking about it and keep bringing it up,” Bubb said. “It all comes from the magnitude of the national deficit and the need to pay it off.”
Analyst Seifer said the company should not have much to worry about, though.
“Pacific Mutual is a quality name,” he said. “The company has done some innovative and creative things in investments over the years. They’re doing well.”
PACIFIC MUTUAL LIFE INSURANCE CO.
Pacific Mutual and its subsidiaries market a variety of financial services ranging from group life and health insurance plans to personal financial planning and pension asset management. As a mutual life insurance company, Pacific Mutual and is subsidiaries are owned by and operated for the benefit of its policyholders. Founded in 1868 in Sacramento, the company is now licensed in the District of Columbia and every state except New York.
Year ends Dec. 31
(in millions) 1986 1985 1984 1983 1982 Revenue $2,171 $1,792 $1,234 $975 $930 Net income $9.3 $15.4 $25.3 $30.8 $8.4
Assets $307.8 million
Number of employees 2,000
Number of contract agents 3,000
