A rich financial realm run almost without oversight
At mutual insurance firms, big money for insiders but no say for ‘owners’ — policyholders
SPRINGFIELD — Massachusetts Mutual Life Insurance Co. frequently brags that it doesn’t react to the whims of Wall Street, it answers to the millions of policyholders who own the giant insurer. But when a handful of those owners showed up for MassMutual’s annual meeting this spring, they were treated more like security risks.
After driving past the iron fence surrounding the company’s headquarters in Springfield, they had to get their photo taken at the security desk, submit to a search as a guard passed a metal-detecting wand over them, and wait for an escort. Once they got to the meeting, the annual business of the Fortune 100 company, with more than $250 billion in assets, was concluded in 15 minutes.
That same day, Liberty Mutual Insurance convened its annual meeting at its headquarters in Boston. The nation’s second largest property and casualty insurer, it has $124 billion in assets, and 50,000 employees.
And its executives closed out the meeting in six minutes. No presentations were made, no questions asked, and no outside board members attended.
The speed with which the policyholders were shooed out the door is symbolic of the shadows in which MassMutual, Liberty Mutual, and others among the nation’s largest insurance companies, such as State Farm and Nationwide, operate. They are “mutually owned,” which means owned by their policyholders; there are no stockholders as at publicly traded companies. It is a kind of corporate structure that dates to the early years of the American economy, when farmers and ordinary workers found it hard to find insurers and banded together to form their own.
It has grown into something else entirely: an opaque, poorly understood, and often immensely profitable world in which some executives and insiders operate with minimal scrutiny and, no coincidence, often reap maximum personal rewards.
Policyholders, despite their status as owners, have no meaningful oversight of how mutual companies spend their money — whether to lower rates, pay dividends, or fund executive salaries and perks — and few avenues to challenge such decisions.
It’s not as if there weren’t questions worth asking in the 21 minutes the two mutual giants together opened their doors to their “owners.”
Liberty’s policyholders might have wondered why the company, despite its $1.8 billion in annual income, generally doesn’t pay dividends to them. And whether its chief executive, David H. Long, merits his nearly $14 million annual pay package.
MassMutual’s policyholders might have asked about the eight-figure compensation package doled out to chief executive Roger Crandall, the two airplanes and two helicopters the company maintains, or the $34.5 million the company spent last year ferrying executives to New York, Europe, and the Caribbean.
“Here we have a major corporation in the United States that operates in the dark,” said Jason Adkins, a Boston lawyer and longtime insurance industry critic who represents policyholders pushing MassMutual to become more transparent. “People’s voices aren’t heard. It’s about the appropriate treatment of owners.”
At the MassMutual meeting, filled primarily with company employees, Adkins was the sole outsider to stand up and speak.
But more is at stake in this world of scant scrutiny than the interests of policyholders and the self-interest of executives. Mutuals like Liberty and MassMutual have grown to become far more than insurers; they are sprawling financial-services companies managing billions of dollars and with operations entwined in all aspects of the US economy, from real estate to retirement accounts to copper mines. MassMutual alone holds more in assets than Google Inc. and IBM Corp. combined, according to the Fortune 500 list released Friday.
Their decisions, actions, and investments can have huge consequences on both Wall Street and Main Street. Recall the financial crisis that started in 2008: Risky products sold by American International Group, a publicly traded insurance company subject to more oversight and disclosure than mutuals, nearly brought down the global financial system and required a government bailout to prevent its collapse. Two other insurance companies took $4.4 billion in taxpayer-funded bailout money in 2009.
Since then, the Dodd-Frank financial overhaul law granted the Federal Reserve powers to regulate large institutions — including insurers and their holding companies — that it designates as systemically important, meaning their failures could destabilize the entire financial system. But insurers, both mutual and publicly traded companies, have fought greater oversight, lobbying Congress to limit the involvement of the Federal Reserve and international regulators in the industry.
The sheer size of these companies, though, warrants greater oversight, Michael McRaith, director of the Federal Insurance Office at the US Treasury Department, said during a meeting of a mutual insurance trade group last fall.
“Financial stability conversations have to include the insurance industry,” he said. “I mean, it’s $7.3 trillion in assets in the US. It’s part of our national economy.”
Mutually owned insurance companies say there is no need to change. Quite simply, they argue, if policyholders are unhappy with a company’s management, they can cancel their coverage and buy from a wide array of competitors.
“Policyholders indicate their satisfaction in how the company is run with their decision to purchase insurance,” said John Cusolito, a spokesman for Liberty Mutual, which between 2008 and 2014 grew from the fourth- to the second-largest auto, home, and business insurer in the country, behind only State Farm. “Our growing number of policyholders and high retention rates indicate a strong level of customer satisfaction.”
Mutual insurance companies started as a form of public ownership. Members were supposed to share the risks and the benefits. Profits were supposed to be returned to the policyholders/owners in the form of dividends or lower premiums.
But as mutuals have grown from local to national and even international corporations, their operations have grown more impenetrable to outside review.
Mutuals lack many of the checks and balances of publicly traded companies, where the management can be pressured to make changes by large shareholders, whether institutions or individuals, who can form alliances with other big shareholders, sometimes by buying up millions more shares.
Activist investors like Carl Icahn regularly fight and win battles for seats on a public company’s board of directors, and force changes in corporate leadership, operations, and policies.
But with large operations like MassMutual and Liberty Mutual — the state’s only Fortune 100 companies — there are no major stakeholders who can make a difference because it’s virtually impossible for one person to buy millions of policies.
In corporate America, too, outsiders generally have limited power to influence how companies are run. Executives and directors of publicly traded companies can write the rules to ensure, for example, that shareholder votes are advisory and easily ignored. Their annual meetings are often just as brief as those of mutual companies. Public companies, however, must disclose more information, giving shareholders advantages over policyholders.
In the rare case where policyholders try to challenge the management of a mutual, the odds are stacked against them. They typically can’t get lists of other policyholders they might enlist to join their campaign; with public companies, the largest shareholders are publicly reported.
In 2001, when a group called the MassMutual Owners Association tried to get the insurer to convert to a publicly traded company, MassMutual fought back. The company changed its bylaws to prevent policyholders from bringing proposals for a vote without approval from the board of directors. It even took the dissident policyholders to court for trademark infringement for using the company’s name on their website.
The lack of accountability, critics say, could allow executives to mismanage the company or divert extra profits to themselves. That concern isn’t theoretical.
MassMutual fired Robert J. O’Connell as its chief executive in 2005 after alleging that he had improperly used the company’s fleet of aircraft for family and friends, abused his stock trading accounts to earn millions to pad his pay, bought a condominium in Marco Island, Fla., from the company at a price below market value, and interfered with an internal investigation involving two relatives who worked for MassMutual and were suspected of improperly sharing securities information. O’Connell also had affairs with two employees.
The issues came to light only when O’Connell’s wife, who learned about at least one of the affairs, tried to confront MassMutual board members during one of their meetings. That forced the company to investigate, created a wave of bad publicity, and shook up its leadership.
A state court eventually ruled that MassMutual owed O’Connell $50 million in severance pay, although he did relinquish $23 million accumulated in his trading accounts. The two sides reached a private settlement in 2009.
O’Connell’s attorneys argued at the time that MassMutual relied on biased and stale evidence to fire him, and that he hadn’t violated any laws. MassMutual said it has committed to strong corporate governance to avoid such situations in the future.
“MassMutual operates for the benefit of our members and policy owners, and our governance structure, policies, practices and controls are designed — and regularly reviewed — to ensure the company is focused on serving their best interests and long-term needs,” said Jim Lacey, a company spokesman.
Liberty Mutual ran into its own bad publicity in 2012, when the Globe reported that former chief executive Edmund F. “Ted” Kelly earned roughly $200 million in his last four years overseeing the company, making him one of the nation’s highest paid executives. Liberty later acknowledged that his successor, Long, spent $4.5 million to renovate the executive office suite.
All of this came as a surprise to policyholders, who were never told the details of Kelly’s compensation, perks, and spending. Liberty Mutual defended Kelly’s pay, saying that he earned it by expanding the business over two decades as head of the company. As for the office renovations, Long said that some of the high costs were due to heating and cooling system updates, and having to pay workers for weekend and night work to remove asbestos.
The controversy over Kelly’s compensation prompted the Legislature to require mutual insurers in Massachusetts to report the pay of their top executives on their websites or in letters to policyholders. The disclosures, however, don’t have as much detail as the reports that publicly traded companies must file with the US Securities and Exchange Commission.
In addition, the law doesn’t apply to insurers based in other states, even those with thousands of customers in Massachusetts. Many, including Amica Mutual Insurance Co. of Rhode Island and Nationwide Mutual Insurance Co. of Ohio, refuse to tell policyholders how much their executives make.
“There is a lot more scrutiny that takes place for a publicly traded company,” said Brandon Roberts, a Vermont insurance broker who writes the Insurance Pro blog.
David D’Alessandro led John Hancock Financial first as a mutual, and then as a public company following its conversion in 2000. He said executives can become wealthy running either type of insurer, but at public companies they must do more to justify their pay.
For instance, D’Alessandro was criticized for pocketing roughly $100 million in stock, severance, pension, and other payments in just four years, after he oversaw the Boston insurer’s conversion to a public company, and then its sale to a Canadian financial services company, Manulife, in 2004.
D’Alessandro noted that the company was sold for $38 per share, more than double its initial stock price of $17.
Liberty Mutual’s Kelly received twice what D’Alessandro did during a similar period without the same clear financial benefits to owners.
“It’s two different paths for executives to make a lot of money,” D’Alessandro said. “It’s just that the mutual path has a lot less scrutiny, accountability, and transparency.”
Mutual insurers are regulated primarily by a patchwork of state insurance commissioners, many with small staffs. MassMutual’s legal team alone is about half the size of the entire Massachusetts Division of Insurance, which has about 125 employees.
So who is watching out for policyholders? No one, really.
With publicly held companies, the Securities and Exchange Commission is charged with protecting shareholder and investor rights. Big institutional shareholders, such as unions, pension funds, and foundations, have divisions set up to target companies with poor governance.
But there are no similar watchdogs to police mutual companies.
Laura Campos, director of shareholder activities for the Nathan Cummings Foundation in New York, said the foundation has used its $444 million endowment to influence a number of public companies, including pushing Rupert Murdoch’s News Corp. to disclose its political contributions, by lobbying executives or proposing shareholder resolutions.
But Campos said it is so difficult to organize the dispersed owners of mutuals that the foundation hasn’t even tried.
Supporters of mutual ownership say the companies have sufficient oversight from their boards of directors. Lacey, the MassMutual spokesman, said the Springfield insurer’s directors are independent and well qualified, and include retired and current executives from the British chocolate maker Cadbury, Boston biotech Vertex Pharmaceuticals, and Westborough-based retailer BJ’s Wholesale Club, as well as a past Montana governor, and a former president of the Federal Reserve Bank of Boston.
Last year, the board approved a $10 million compensation package for Crandall, the chief executive, but the figure excluded the more then $14 million in accrued incentives that he cashed out. “Our compensation structure is designed to allow us to attract and retain talented associates in a competitive job market,” Lacey said.
Crandall’s perks include personal use of the company’s aircraft. MassMutual owns two jets and two helicopters. It operates two helipads near its offices in Springfield and Connecticut, and employs a crew of pilots, flight attendants, and aviation managers.
MassMutual spent $34.5 million last year on travel expenses, according to its financial reports. That’s more than the $21.8 million reported by rival Northwestern Mutual Life Insurance Co. and the $30.3 million by New York Life Insurance Co. New York Life specifically bars executives from using company aircraft for personal travel.
MassMutual officials defend its aircraft operation, saying it is more cost effective than having executives travel commercially to the company’s business hubs around the world, and it’s difficult to compare spending among companies, since they vary in terms of office locations and lines of business.
As proof the company is well managed, Lacey noted that some policyholders recently received a 7 percent dividend, a return that is several times higher than many other fixed investments, such as certificates of deposit.
Rating agencies that evaluate corporate finances give MassMutual among their highest marks, noting the insurer’s record sales, continued growth, and profitable subsidiaries, including Babson Capital Management, a global investment manager; OppenheimerFunds Inc., a fund and investment manager; and Cornerstone Real Estate Advisers, an investor in Boston’s Fan Pier developments.
The passivity of most policyholders is crucial to those ratings. If investments sour, MassMutual can reduce dividends without facing too much resistance, unlike the blow-back from shareholders that public companies would likely experience.
“Policyholders are a less demanding constituency than stockholders,” said Neil Strauss, a senior credit officer at the rating agency Moody’s Investors Service.
That’s because they don’t feel like owners, said Glenn Daily, a New York insurance consultant who owns a MassMutual life insurance policy.
Daily said he gets invitations to attend annual meetings, but receives little other information from MassMutual. He doesn’t know much about the company’s overseas operations or its investment subsidiaries, and whether they are benefiting him as a policyholder.
“In order to make me feel like an owner, they would have to treat me like an owner,” Daily said. “That is their culture: If they don’t have to disclose it, they don’t.”