#173 | TIAA Exits Individual Life

Another one bites the dust – but this time, it’s not a publicly-held conglomerate spinning off or shutting down a brokerage-oriented individual life insurance unit. Instead, it’s TIAA, a non-profit company selling fee-based life insurance products through RIAs and commission-based life insurance products through M Financial. From the outside world, it looked like TIAA was actually making quite a bit of headway. Their fee-based Intelligent Life series was the product of choice for the growing number of insurance specialists (DPL, RetireOne, etc) serving the RIA space. And, of course, TIAA was continuing to build out what seemed to be a successful distribution partnership with M Financial. If all of that is true, then why would TIAA suddenly drop the business line? The story I’ve heard so far is that the decision was made way up the chain at TIAA, which isn’t particularly surprising considering that TIAA is a colossus. In the absence of any substantive information, I’m going to craft a story that is pure speculation but does play out in the data. Who knows, maybe it will shed some light on why this happened.

In general, the characterization of premium payment patterns for permanent products falls into one of three camps – recurring, single and excess. Comparing the ratio of single and excess premiums to recurring premiums gives a sense of how tilted the premium mix is to a particular sale. The quirky thing about TIAA is that their ratio of single premiums to recurring premiums is the highest in the industry except for the few companies that are focused almost entirely on single premium products. This is quite odd considering that none of the permanent products sold by TIAA were designed for single premiums. As any actuary will tell you, an abnormal tilt towards a particular premium pattern means a pricing problem somewhere.

It’s not hard to spot the problem at TIAA. The vast majority of TIAA’s single premium comes from its Universal Life product line, which was predominately sold by M Financial firms. Why were M firms using TIAA for single premiums? Two reasons. First, TIAA was an arbitrage opportunity. Their crediting rate at launch was high relative to other UL products and the policy charges were lean. TIAA has subsequently dropped the crediting rate as their portfolio was diluted, which is probably part of the reason why single premiums in UL for 2018 are down 30% from 2017. The second reason is a rumor, but probably not untrue – TIAA was being targeted for intergenerational split dollar sales. For those of you who are not familiar with the strategy, it’s a hyper-aggressive tax play where huge single premiums are deposited into life insurance policies, discounted for estate tax purposes and then (usually) liquidated shortly thereafter. To make it work, you need a policy with a high crediting rate and low initial policy charges. TIAA’s M proprietary UL would have fit the bill nicely.

You can kind of imagine the storyline at TIAA playing out. Large single and excess premium deposits were clearly diluting a relatively small UL portfolio, which raised red flags at the finance and actuarial parts of the company. As they dig deeper, they see the success of the RIA operation but its scale is still too small to sustain on its own, especially given that it’s not remotely a core business to the broader TIAA enterprise. All of the potential fixes – dropping the crediting rates again, putting explicit single premium restrictions, etc – will crush the new business flows. So why not just pull the plug on the whole thing? It’s not hard to see how TIAA landed where they did.

But the bigger implications for the broader industry are even more troubling, even if my story is completely inaccurate. TIAA is a non-profit. TIAA carved out exclusive distribution. TIAA sold products with less initial capital strain. TIAA didn’t sell products with long-term guarantees. By any normal metric, TIAA should have stayed in the Life business, but they didn’t. They dumped it. And for my part, I’m particularly disappointed because I’ve made no secret about the fact that I’m a huge fan of TIAA’s RIA offerings. TIAA was the only company making a credible and committed push into the RIA space with fee-based products and were generally regarded as the incumbent in the race. My hope is that other companies will fill the void – and quickly.