What Other Mutual Whole Life Company Faces De-Mutualization?

With the recent news that Ohio National Life will demutualize and become a stock-owned subsidiary of a Canadian insurance holdings company, we unsurprisingly received questions about the probability of other mutual life insurers taking the same action.  This is an understandable question, as current and future policyholders try to gauge the risks they face in buying a whole life policy from a mutual insurer.

The really short answer is that we view the likelihood of another demutualization announcement among the remaining U.S. mutual insurers low.  But to understand our logic, it makes sense to dive into some details about what we know regarding Ohio National and other mutual life insurers.

Mutual Insurer Historical Financial Data

We maintain a database of financial performance for several major life insurers engaged (either now or at one time) in writing cash value life insurance.  Our database goes back to 2013.  This allows us to analyze how companies' balance sheets and income statements change year over year.  Using this database, I wanted to look at how Ohio National performed relative to other major mutual insurers with well-respected whole life products for sale.

Looking at changes in assets to liabilities, we see a very universal trend of the two moving mostly in sync with one another:

Company Asset Growth Liability Growth
Guardian 5% 5%
MassMutual 7% 7%
New York Life 5% 5%
Northwestern Mutual 5% 5%
Ohio National 2% 2%
Penn Mutual 9% 9%

As we noted when we discussed the demutualization announcement from Ohio National, we do not have cause for solvency concern.  The company continues to grow its asset pool and appears to be capable of balancing it against growing liabilities from the contracts it issued.  While Ohio National did grow at a slower pace than the other companies, we can only speculate on why this occurred.  Regardless, it doesn't cause much concern from a business soundness point of view.

Looking at business cash flow, on the other hand, paints a very different picture:

Company Revenue Cash from Operations
Guardian 0% 7%
MassMutual 4% 8%
New York Life 4% 4%
Northwestern Mutual 3% 2%
Ohio National -11% -17%
Penn Mutual 10% 26%

ONL faced extreme pressures on its overall ability to produce income and experienced a significant decline in both top-line revenue and operational profitability.  This, I would speculate, is there the major concerns lie and hold a deeper explanation behind its decision to put itself up for sale and go through demutualization.

Notice also that during this time period (2013 through 2019) almost every company improved operational cash flow at a rate better than revenue.  This would suggest that everyone worked to operate more efficiently (Northwestern being a slight exception, but keep in mind that the company already had a stellar reputation for lean operations).

Looking at management of investment income to contractual obligations we also see a weakness at Ohio National that is subtle, but potentially critically important:

Company Net Investment Income Net Obligations Ratio Change
Guardian 5% 6% -1%
MassMutual 7% 7% 0%
New York Life 5% 4% 1%
Northwestern Mutual 3% 4% -1%
Ohio National 3% 6% -2%
Penn Mutual 8% 7% 3%

This data shows us the year-over-year change from 2013 through 2019 of the income produced by the assets held by each insurer held against the year-over-year change of the obligations created by the policies put in force by each insurer.  All insurers produce more investment income than they owe their obligees.

All insurers faced a trend of declining investment income relative to the growth in obligations they took on.  This is due to the sustained low-interest-rate environment of the U.S. economy reaching back to around 2008.  Some insurers managed this reality better than others.  The “Ratio Change” column is a mechanism for comparing how investment income to obligations changed relative to each insurer.  While the percentage numbers may appear small, this is an area where minor movements in one direction can have a dramatic impact on the insurer's operations.  Notice that several insurers experienced a rise in obligations similar to Ohio National, but all of those insurers managed to grow assets at a much faster rate to better partially compensate for it.

Lastly, I want to look at life insurance policies issued by each insurer.  To me, this metric hints at a few important considerations.  First, it tells us is the insurer is growing business or not.  In this unique situation, it also gives us some insight into the impact certain business decisions have on a company's ability to continue to distribute its products.  The variable annuity commissions fiasco ONL found itself caught up in a few years ago (more on that in the next section) potentially has far-reaching ramifications:

Company Annual Policies Issued
Guardian -3%
MassMutual 10%
New York Life 0%
Northwestern Mutual 0%
Ohio National -7%
Penn Mutual 4%

Here we see the majority of companies experience flat or moderate growth over the same seven-year period with two exceptions.  Guardian experienced a decline (something we noted in the Whole Life Study from last year) and Ohio National experienced an even more serious decline.  Looking more granularly at the data from Ohio National, we see a moderate downward trend that accelerates around the time they announced they would cease trail commissions on variable annuity business.  This likely indicates that the decision created a lack of confidence in agents to continue to sell their life insurance products for fear of a similar outcome.

Ohio National's Decision to Cease Commissions on Annuities

The decision Ohio National made to stop paying commissions on variable annuities was quite dramatic.  While they are not the only insurance company to take action that impacted the payment of compensation to which a company originally agreed, they were the first to make such a decision with a broad an impact regarding payable commissions.

It is our theory that this decision did not come lightly and that Ohio National knew it would face serious backlash for it.  It's also our theory that this was the best least ugly option they had before them.

The impairment their annuity exposure placed on the company's profitability and subsequently damaged reputation led to a significant decline in profitability for the company.

The Woes of ONL do not Appear Among other Mutual Insurers

While no one is immune to an array of financial headwinds that life insurers face, we don't evaluate any current mutuals as having similar obstacles to overcome like Ohio National currently faces.

Not only did the company suffer from an apparent bad call on its annuity business, but it also appears to have struggled to create yield on its assets sufficient to simply keep pace with its peer companies.  This unfortunately bad hand puts the company in its current position.

In other words, Ohio National's motivation to demutualize (which may realistically be a move of necessity) comes from a unique set of circumstanced facing the company and not a broader trend plaguing all mutual life insurers.

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