#125 | Voya & The End of an Era
Yesterday, Voya announced in its Q3 earnings release that it will no longer issue new life insurance policies effective 12/31/2018. This decision writes the last chapter in a long story of historical dominance in the individual life insurance space. Voya’s story, in a lot of ways, is the industry’s story. They got fat and happy on UL premium financing, Guaranteed UL, Term and STOLI in the 2000s, went through a painful withdrawal after exiting GUL in 2012 and then reinvented themselves as an Indexed UL seller – and a moderately successful one at that. After falling out of the top 20 UL writers in 2013, Voya ended 2016 ranked at 13th, just behind Allianz and ahead of AXA and AIG. Equally as important, they rebuilt with front-loaded, accumulation-oriented, capital-efficient Indexed UL products. By every metric typically used to evaluate life insurance businesses, Voya had a viable operation. So why did they decide to pull the plug?
The question isn’t really about Voya. It’s much bigger than that. Voya is just the latest name in a list of life insurers who have either sold, spun off or shut down their retail life insurance operations. It’s becoming increasingly apparent that life insurance may not be a viable product line for publicly traded life insurers. The economics are, to put it mildly, not particularly attractive. Think about the investor value proposition. The typical life insurance policy (including Term) takes between 8 and 15 years to break even. The projected return on capital of 8-12% over the life of a block of policies is extremely sensitive and leveraged to assumptions about persistency, asset yields, interest rates, policyholder behavior, funding patterns, mortality, underwriting quality and sales skew. If you were offered an opportunity to put your own hard-earned savings into an investment like that, would you do it? Didn’t think so. Why would a corporate management team allocate capital any differently?
Long ago, something like 40% of Iceland was covered in forests. When the Vikings showed up, they naturally chopped down the trees to build things and keep warm. Their operating assumption was that the trees would grow back quickly. But that isn’t the case in Iceland, where the cold climate combines with rocky, volcanic soil to make an extremely inhospitable environment for forests. It takes a long time to grow a tree in Iceland. The island was quickly deforested and remains that way – even now, just 2% of the land is forested.
I bring up this little story because it’s not so different than what happened with the demutualization craze in the 1990s. It takes a long time to grow a mature life insurance policy that kicks off a low-risk stream of strong distributable earnings. A lot of people got really rich selling the mature policies that had been studiously grown at mutual companies to the capital markets through demutualization, apparently without considering the effort, patience and persistence required to grow profitable new policies. Now, we’re starting to see how hard it is to grow a life insurance policy in the rocky, volcanic soil of quarterly earnings releases and the cold climate of fierce competition for capital. Little wonder that the Vikings didn’t stay long in Iceland after the forests were gone.
My bet is that more publicly traded life insurers will close up their life insurance divisions in favor of writing lower margin, lower capital, higher volume business in other lines. Getting out of life insurance would be an afterthought for many of these firms in the same way that it was for Voya – even at Prudential, where their juggernaut of a life insurance division consistently generates some of the smallest segment operating earnings at the company. If MetLife, Voya, Aviva, SunLife, Allstate, Jackson, Hartford, Genworth, Travelers, Cigna and Aetna can get out of life insurance, just to name a few, what’s to stop anyone else? Some of those firms were paragons of the life insurance industry and then, poof, they’re out.
Is this a bad thing for the industry? No, it’s not. In an effort to consistently show strong returns on capital, stock insurers have tended to sell risky products that are highly leveraged to the assumptions the actuaries use for pricing. These products work well or they don’t and then the business thrives or gets shut down. Stock companies, for lack of a better term, are more volatile than their mutual counterparts. Insurance contracts are sold for the long run but in just the 20 short years post-demutualization, we’ve seen plenty of stock life insurers fold up, shut down, sell out, spin off, whatever. How many mutual companies have done the same? It’s a very short list that’s ringing up at zero in my mind, although I’m sure I’m missing a couple. The next ten years will probably witness the slow reversal of the last twenty. The companies left standing strongest in the life insurance space, with a few notable exceptions, will likely be mutual companies. Maybe, just maybe, that’s the way it should have been all along.
11/1/18 Update
Voya’s earnings call transcript shed a little bit more light on their decision to close Individual Life new business. You can find it here. The leadership team at Voya brought up several points that I think are worth noting. First, they made this decision entirely based on their view of how to most efficiently deploy capital. Second, as a result, they are willing to sell the block if it makes sense. Third, they were quick to highlight the cost savings of closing Individual Life, but did not mention the fact that they were also not putting new business on the books that would have been accretive to earnings in the long run. Taken together, Voya’s message on Individual Life is clear – writing new policies is costly and capital-inefficient and the best way to get value out of a life insurance block is to stop adding to it.
The message to other publicly traded life insurers is also clear – if you’re still writing new individual life insurance business, then you have the opportunity to unlock value and you’re not taking it. Voya threw down the gauntlet. After their stock is up nearly 10% from the low on 10/30, it’ll be quite interesting to see how other companies respond.
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