The financial crisis is over, but uncertainty remains for any company whose profitability faces challenges in this era of persistent low interest rates—even if the company is the biggest privately held enterprise in Orange County, with $7.7 billion in annual revenue and more than 2,000 employees here and another 1,000 or so around the world.
The answer for Newport Beach-based Pacific Life Insurance Co. is diversification—an ongoing push into new products and markets beyond the traditionally conservative and fixed income-driven nature of insurance companies.
The strategy has the company operating in five main areas of business: life insurance, retirement advisory services, reinsurance, asset management and aircraft leasing firm Aviation Capital Group.
And the moderate recovery—with interest rates at near zero for more than six years—means the strategy has become “increasingly important,” according to Chairman and Chief Executive James Morris.
“I think for any company, you want to play where you have strengths—so you can’t have unlimited diversification,” he said. “We’re certainly a company that likes to be significant in the business lines we are in. But in the financial services world, it’s … been the case since the 2008 crisis [that] having a more diversified balance sheet and a more diversified book of businesses is increasingly important. If you’re too concentrated, when financial turmoil hits, it can create more struggles. So the idea behind diversification for us is we want to still be significant—we’re not going to be all things to all people—but we would like to be a more diversified organization.’”
The life insurance division ranked fourth nationwide in sales last year, helping the company grow its operating revenue to nearly $8 billion and net income to $597 million. It had $137 billion in assets as of year-end, a record high.
Further diversifying from here on means broadening “the kinds of risks that we write [and] even geographies,” Morris said. “And markets also. We’ve been a company that’s heavily focused on the affluent. And we are trying to diversify by being more competitive in what we call the emerging affluent.”
Morris described the emerging affluent as the younger segment, the “Millennials, the 30 somethings and 40 somethings” who may not “have an estate that they’ve built yet, but they have income that they want to protect for their families.
“It’s not a bright, bright line,” he said. “But our typical client today has been someone who’s probably in their 50s and 60s, and they’ve built an estate. And those are still our focus clients. But in addition, we now want to be a more attractive company to … the 30-and-over individuals having a salary that enables them to buy financial products.”
Recent moves made by Pac Life to that end include launching an investing research platform called Swell Investing LLC, which aims to incorporate a “do good” component to investing. The subsidiary, which officially kicked off in April, pools stocks of 30 companies that are top charitable givers to various causes, including ending poverty and fighting cancer. It then creates a portfolio of their shares that an investor can trade through an account with broker-dealer Motif Investing Inc. Swell also donates 20% of the commission revenue it gets from Motif.
Pac Life President Khanh Tran has said the new platform is “about diversification, broadening our base” to cater to “the younger” investors.
Other moves include:
A name change last year of Pac Life’s mutual funds business from Pacific Life Funds to Pacific Funds.
“Part of the thinking behind the name change was there’s a preconception and a misconception that insurance companies are not broad competitive asset managers,” Morris said. “So changing the name … was really to brand the opportunity as an investment business, which is what it really is. Insurance companies are known for good investment skills in the bond world … but less so in the broader world, with equities and with alternative investments. It’s part of our growth initiative. We continue to do fixed income, but we want to get broader.”
Morris said insurance companies by nature are conservative because “we’re providing guarantees.”
He called the low interest rate environment a challenging one “on a number of fronts.”
“On the one hand, it’s really challenging for consumers,” he said. “They look at the equity markets, and it feels pricy to them. They see what they can get in fixed income, and the yields [are at] long-term historical lows. What do you do with your money? … And then financially, we have a number of products where we have or are required to guarantee certain minimum interest rates to the consumer. So when you have that kind of requirement, the lower-yield environment just creates earnings challenges.”
Pac Life’s push to grow its reinsurance business was visible when late last year it acquired $200 billion in life policies from St. Louis-based Reinsurance Group of America Inc., a publicly traded company Pac Life has worked with for a long time, according to Morris.
The deal brought about $450 million in premiums, Morris said, adding that the company writes “a little over $10 billion” in premiums in a typical year.
“Close to half a billion is not a small opportunity for us,” he said. “That transaction at the end of 2014 … helped our reinsurance business overall [to grow] 20% last year. The industry is one that’s not growing at that kind of levels.
“Insurers, sometimes they want to have someone help them with their risks as well, just like insurers take the risks off the back of individuals,” Morris said. “That’s where reinsurers come in to help by partnering with direct insurance companies and sharing those risks.”
Pac Life, through a small reinsurance company it acquired in 2007, has global operations, including in Europe and Asia.
“We have a desire to grow that business even more,” Morris said of the earlier acquisition that continues to be based in the U.K. The kinds [of risks] that it writes are somewhat different from the ones that we’re writing here through our divisions that are focused on the U.S. And it also diversifies us geographically.”
Morris, who is the 14th chief executive of the 150-year-old company, essentially is a “lifer” at Pac Life. He started in 1982 as an assistant actuary after graduating from the University of California-Los Angeles with a bachelor’s degree in mathematics. He was promoted to senior vice president in 1996 and to executive vice president in 2002. He was named chief insurance officer in 2005, chief operating officer in 2006 and chief executive in 2007. Morris is a regular on the OC 50, the Business Journal’s annual compilation of profiles highlighting the 50 most influential people here.
He often referred to the bigger picture of the overall economy and societal changes while discussing changes at Pac Life.
“With the economic changes, regulatory changes, demographic changes, technology—there’s a lot of opportunity for companies to try to capitalize on change broadly,” he said, calling the present “a VUCA world,” meaning volatile, uncertain, complex and ambiguous.
“And with change, that’s synonymous with diversification, because you’re moving into things you haven’t done before,” he said. “To some extent, it’s imperative, given all the major thematic changes, that companies can take a fresh look at what they’re doing. Will it still make sense one, three, 10 years from now?”
A VUCA world, Morris said, requires companies to have employees who are capable of working in technology and who understand investments, risk management and demographics.
“And Orange County is a great place for that,” he said. “While expensive, it’s an attractive place for people to want to come and live. We’re able to find talented people. Their talents are aligned with what our needs are. … We like being significant in the geography in which we are headquartered. So the Orange County presence is a value to us.”
