Around 2007, Pacific Life Insurance Co. offered an annuity that nowadays makes investors drool: a guaranteed 10% annual return for 10 years and then a 5% annual return for the rest of a customer’s life.
“It certainly was a rich benefit,” recalled James “Jim” Morris, chief executive of Pacific Life, adding that the firm no longer offers that particular annuity. “At the end of the day, it will still be profitable but not as profitable given the current rates versus what we expected a decade ago.”
A lot has changed in the past decade since Morris was named CEO, just in time to steer the company through the 2008 financial crisis.
Nowadays, commissions on annuities are trending downward while hybrid annuities are fast-growing products.
Its reinsurance business, begun within the past decade, provided almost a quarter of its profit last year. Pacific Life is expanding into term life insurance through the purchase last year of a platform from Genworth Financial. It’s aiming to increase investment offerings, which is why last year it purchased Cadence Capital Management, a wealth manager with $4 billion in assets under management.
The company reported that 2016 net income soared 25% to $824 million, while sales climbed at a lower 7% rate to $9 billion. Morris said in these days of low-interest, he has to carefully manage costs, and earlier this year, the company laid off 140 employees.
Still, it remains Orange County’s largest private company when ranked by revenue, according to Business Journal data.
It’s financially healthy, according to A.M. Best Co., which for five consecutive years has given Pacific Life its highest possible rating of A+.
Next year the company will celebrate its 150th anniversary.
Morris, the 14th CEO in its history, is celebrating his 35-year anniversary this month at the company.
During an hourlong, rare interview in his Fashion Island office overlooking Newport Beach harbor, the 57-year-old Morris discussed annuities, genetic testing, interest rates, aircraft leasing and even the notorious June shooting of a Republican congressman he was scheduled to meet. Here’s part one of our discussion.
Q: This is your 10th anniversary as CEO. How has the industry changed?
A: The biggest change was the outcome of the financial crisis. My first full year was ’08. That was a pretty dramatic year for all of financial services. There’s a lot more diversification and risk management. Growth remains important, but it’s secondary to diversification and risk management.
Another significant change was privately owned companies have gained share relative to public peers. Those of us who are private can manage for the long term and have seen growth.
In terms of consumers, the industry has fared well through the crisis. It’s not a rapid- growth industry, but it has solid fundamentals.
Q: During the 2008 financial crisis, did you have to do anything different to survive?
A: Going into that, we had one of the highest capital positions in the industry and one of the highest ever in the company’s history. Everyone’s balance sheet was going through turmoil. There were lots of board meetings and touching base with advisers to reassure them. We definitely became more diversified and put in more risk management. The crisis made us all more imaginative about what could go wrong.
Q: AIG wasn’t able to manage the crisis and was bailed out by the government. What was the difference between you and AIG?
A: We’re privately owned and looking for the long term. Public companies sometimes reach for growth when it’s not there. Second, AIG’s trouble came about through a lightly regulated, noninsurance part of its business, credit default swaps. The whole regulatory regime for CDs is now changed.
Q: You call yourself small compared to competitors, but your company has $800 billion life insurance in force.
A: All of those customers would have to die for us to write a check for $800 billion. The industry uses assets under management to measure itself. We’re at $140 billionish, which puts us in the top 15.
Q: Are you satisfied with the growth of assets under management?
A: We’ve grown nicely. The metric we’re proud of is that in the last 25 years, our assets have grown from $10 billion to $143 billion. We’ve grown our AUM by 14 times. That certainly exceeds the industry average by a good margin. At the same time, our employee count has gone from 2,500 to 3,500. At a time we’ve grown the assets by 14 times, we’ve been able to do it in an efficient manner.
Q: What drove your 7% revenue growth last year?
A: The primary driver was the excellent investment result, which was particularly good in a low interest environment. Higher equity markets led to higher account balances for our customers, and that leads to higher revenue levels for us. We have great persistency. Our customers stay with us. When your clients stay with you, their assets stay with you, and that drives revenue.
Our typical persistency is 95% of customers staying with us every year. In the industry, that average is 93%. Sales were also good. I wouldn’t call them great.
Q: Out of your four units last year, your retirement unit provided the biggest profit by far, followed by reinsurance, aviation and life insurance. Is retirement the most profitable unit year after year?
A: Retirement solutions business has consistently been the largest part of our business for the last 20-something years.
It’s true for the industry. In general, retirement is about half of the industry, life is about a quarter, and the remaining quarter is various things. For us, it’s reinsurance and aviation.
Q: Any plans to grow through acquisitions or pull back in certain areas?
A: A few years ago, we did a portfolio review and decided which businesses we were going to stay in and go after and which businesses we were going to pull back from. Those four businesses are where we want to stay, and they are growing.
We bought a capability to get into the term insurance business through an acquisition. The first year is putting the structure into place. We’re starting to see the sales come in, and we’re at plan or better. New business ventures takes time to get to scale.
It’s a competitive business. It’s a high-tech, process business, whereas our life insurance business administered out of California is high touch, highly affluent. We write about 25,000 policies a year in the affluent business. Term is more about the emerging affluent. We expect to write 100,000 policies a year in that business once we get it up to scale. It’s much more transaction oriented, smaller policies, smaller premiums than the affluent business.
Q: Do you see term outgrowing whole life?
A: We use the terms term and permanent. Our flavors of permanent are generally not whole life. It would take a long time to see term succeed permanent. I don’t see that in the foreseeable future. I see term as a meaningful part of our sales. It’s 20% of industry sales, and it has been next to nothing for us.
All of our businesses are nicely growing their revenue and bottom lines faster than their peers.
Q: Silicon Valley has taken over many industries. Do you see it taking over insurance, or is your industry able to adapt?
A: There really hasn’t been a disruptor that has come in and taken market share. It takes a lot of capital to get into these businesses, and Silicon Valley generally doesn’t want to deploy a lot of capital. The robo-advising has been a place potentially of some competition. We see it as an opportunity more than a threat. We use it as a tool to complement some of the personal advice that our industry is known for.
Q: There have been great advances in genetic testing for certain diseases. How do you see this affecting underwriting for your clients?
A: Genetics hasn’t materialized into an issue yet. There’s very little overlap today. We have an initiative to understand how genetics can help the industry. Today, you cannot ask an individual to take a genetic test.
We’re talking to regulators. If someone has access to genetic information that we don’t have access to, we worry they might take out policies that they know about and we don’t. That unevenness is of concern.
The opportunity side is that the underwriting process needs to be a more streamlined process. Blood testing is the standard; it doesn’t always feel like a 21st century process. Genetic tests today are still pretty expensive.
Next week: Why an insurance company is one of the world’s biggest owners of commercial airplanes; Pac Life’s future in OC; and the fate of the humpback whale.
