Pacific Mutual, MONY Will Merge Group Health Units
Two major life insurers--Pacific Mutual Life Insurance Co. of Newport Beach and Mutual Life Insurance Co. of New York--said Thursday that they will merge part of their ailing group health and life operations into a new company based in Fountain Valley.
The planned joint venture, first of its kind in the insurance industry, is aimed at stemming the flow of red ink from the two companies’ group insurance businesses.
Pacific Mutual expects to report a 1987 loss of $2 million to $5 million on its group insurance operations, while MONY expects a loss of $5 million to $7 million on its group business, officials at both companies said.
Both insurers said they are confident the joint venture will significantly reduce costs and enable their group health and life divisions to post profits for 1988.
Group revenues accounted for about 25% of Pacific Mutual’s $2.2 billion total revenues and about 5% of MONY’s $4.6 billion in total revenues in 1986, the last year for which full financial results are available.
Pacific Mutual is the nation’s 24th largest life insurance company, with $5.5 billion in assets. MONY is the nation’s 14th largest insurer, with $11.2 billion in assets.
While the joint venture agreement is tentative, executives at both companies said it is so comprehensive that little work needs to be done before they sign a contract sometime in the next two months.
Neither company would reveal the percentage interest that each holds in the joint venture.
Pacific Mutual does not expect to lay off any employees as a result of the joint venture. The company said it expects its cost savings to result from increased technological efficiency.
MONY said it plans to eliminate 220 positions beginning in May or June. About 40 of those employees are being transferred to new jobs within the company, a spokesman said.
Industry analysts hailed the agreement as the kind of alternative strategy that could allow other insurance carriers to stay in the group business, an industry sector expected to post more than $1 billion in losses in 1987--its worst performance ever.
“I think it’s a tremendous experiment,” said David Seifer, an analyst with First Boston, a securities firm in New York. “If it can work, there’s no reason only two have to do it. Maybe 10 or 20 other insurance companies can join together with a centralized computer.”
Pacific Mutual and MONY executives said there is room for other group insurance carriers to become partners in the joint venture, to be called Employee Benefits America Administration Co.
Pacific Mutual officials said they already are talking with another large insurer about signing up.
EBAA, to be operated by Pacific Mutual at an existing facility in Fountain Valley, is to handle group health and life administration and claims processing for both companies. The two firms will continue to compete in other areas, offering separate insurance products and maintaining separate sales and marketing departments.
“Our joint arrangement with Pacific Mutual is a creative solution to a problem impacting many companies today--generating favorable financial performance in an extremely dynamic and competitive marketplace,” said James A. Attwood, chairman and president of MONY.
Harry G. Bubb, Pacific Mutual’s chairman and chief executive, said the “innovative” venture is “the beginning of a new commitment to providing more competitive services in the group insurance industry.”
Industrywide losses in group insurance are attributable primarily to health insurance operations, where medical costs continue to soar, said Herbert E. Goodfriend, an analyst at Prudential-Bache Securities in New York.
“Inflation costs were 10% a year ago, hit 15% in mid-year and are now running at 17% to 20%,” Goodfriend said. “Government programs have cut down the number of days patients spend in hospitals, but doctors have built up outpatient services and other treatments.”
Numerous companies have been fleeing the group health insurance business or piggybacking their health plans on other kinds of insurance policies offered by competing companies, allowing them to reduce expenses, he said.
The Pacific Mutual-MONY venture offers an alternative to leaving the business or raising premiums, he said.
Neither industry analysts nor company executives could cite examples of other insurance companies that have merged part of their operations into a new company to cut back on administrative costs while remaining competitive in other areas.
“This could be the wave of the future,” said Julius Alberico, head of MONY’s group insurance department. “If people want to stay in the business, maintain their separate identity and lower costs, this is the way to go.”
The idea came up nearly a year ago when Bubb and Attwood, who have long known each other, discussed the possibility at a trade convention. G.W. Kimmerle, who heads Pacific Mutual’s group operations, said he then pursued the proposal with his longtime friend at MONY, Gordon E. Perry, who heads group and pension operations.
Under the agreement, EBAA would receive fees from both Pacific Mutual and MONY for collecting an estimated $800 million a year in premiums--$550 million for Pacific Mutual and $250 million for MONY. The joint venture also would handle inquiries and process claims, Kimmerle and Alberico said.
MONY’s four claims-processing offices in San Francisco, Chicago, Dallas and Purchase, N.Y., would be consolidated in its Dallas office, which would become an EBAA branch operation. MONY’s group administrative operations would be transferred to Fountain Valley.
Pacific Mutual expects to double the size of the EBAA branch in Dallas to 100 employees and to hire 50 employees for the headquarters operation in Fountain Valley. Kimmerle said EBAA offers are being made to some MONY employees who are expected to lose their jobs.
For Pacific Mutual, the savings should show up in the form of enhanced productivity because of the increased volume of work to be processed by its computers, which can process claims more efficiently than MONY’s system, Kimmerle said. Pacific Mutual is acquiring even more advanced computer hardware and software, he said.
The new arrangement should not present any antitrust problems, Kimmerle said, because the combined operations would represent only 2% of nationwide group insurance revenues.
HOW PACIFIC MUTUAL, MONY COMPARE
Pacific Mutual Life and Mutual Life Insurance Co. of New York will merge part of their ailing group health and life operations into a new company based in Fountain Valley. The venture will be the first of its kind in the insurance industry.
Pacific Mutual of Mutual New York Industry Rank 24th 14th 1986 Revenues $2.2 billion $4.6 billion 1986 Group Premiums $550 million $250 million Assets $5.5 billion $11.2 billion Life Insurance in Force $30 billion $57 billion
Source: Company reports
PACIFIC MUTUAL AT A GLANCE
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 its subsidiaries are owned by and operated for the benefit of the 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
Number of employees 2,000
Number of contract agents 3,000
