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Annuities have a lot of value in today’s consumer world because of the guaranteed income they provide: CEO

John Schlifske, Northwestern Mutual CEO joins the On the Move panel to discuss the impact of COVID on the life insurance industry.

Video Transcript

ADAM SHAPIRO: We are bringing in John Schlifski. He is Northwestern Mutual's CEO. This private-held life insurance company-- and congratulations. You're rated among the highest by AM Best. A lot of us know the other kinds of rating services, but when it comes to insurance companies, AM Best is one to go to. 4.6 million clients, you've got a huge amount of money under management.

I want to zero in on something that life insurance companies do because it sometimes get a bad rap, but annuities. Because when we write stories about annuities and retirement, off the charts people are very interested in this. So what can you tell us about what you see coming down the pike, given that interest rates right now are so low, with the potential to secure your retirement foundation with an annuity?

JOHN SCHLIFSKE: Well, if you think about it from a client's perspective, you go back to my father's generation, and a huge portion of people when they were retired had some sort of pension fund payout, which is basically guaranteed income, right? And now, of course, there's-- it's-- unless you're a public-sector worker, it's almost impossible to find a pension plan that provides guaranteed income in retirement. And so annuities really step into that void.

And I think the key word in all this is "guaranteed." So it's this notion of being able to lock up part of your savings and have guaranteed income for life, and that's where I think annuities have a lot of value in today's consumer world. Because, you know, you work your whole life. You've built out-- built up a nest egg. You're set to retire, and if you go into that without any guaranteed income at all except maybe it's Social Security, which is basically a very subsistence kind of living, you know, you put a lot of your retirement at risk.

And so I think annuities that provide this guaranteed income are a great product, especially in retirement. And I think you're going to see more and more people do it because they have no other means to lock up their savings into some sort form of lifetime income.

JULIE HYMAN: Um, John, I want to ask you as well about one of your, I guess, competitors. There was a report today that AIG is going to be splitting off its life-insurance business. Now as far as I understand it, you guys have remained a pure-play financial advisory and life insurance. Is the fact that AIG is sort of not going to be that supermarket, if you will, anymore of different types of insurance, is that a validation of staying to more of a pure-play strategy?

JOHN SCHLIFSKE: Well, I think there's two things going on with what AIG is doing. At some level, life insur-- first of all, we're a mutual company, and I think when you're playing in the life-insurance sector, being a mutual is a huge advantage over being a publicly traded company because as a mutual we can invest for the long term. We can take more risk in our portfolio. We can generate higher returns for our policy owners than you can if you're a publicly traded company.

And so the first thing that you're seeing with ultra-low interest rates is enormous pressure on companies that are public life-insurance companies, publicly traded, to create the kind of returns on that asset base that are sufficient to reward their shareholders. Remember, as a shareholder in a life company, you have a different set of priorities than when you're a mutual company where the policyholders actually own the company.

The second thing I think what you're seeing is that AIG-- and you can ask their CEO-- but ultimately the returns on the life-insurance sector now are going to be lower than they have been in the past because rates are so low. And I think when you look at the return on capital in the P&C world versus the life world, they're seeing that as two different pictures and probably figuring it's better to separate those.

As a mutual that doesn't bother us. Our policy owners get all the value we create. We're not splitting it between policy owners and shareholders. And so we're very happy where we are right now given the economic environment.

ADAM SHAPIRO: In fact, it was $6 billion. That was the payout-- the dividend payout, right--


ADAM SHAPIRO: --that went back to the policy holder.

JOHN SCHLIFSKE: Last year. That's right.

ADAM SHAPIRO: When-- well we had a guest in the last hour who's helping millennials make these life choices that all of us have to make at some point after we're 21. So if I'm approaching the decision of life insurance or an annuity, what advice would you give to people who are weighing between a publicly traded company that might offer these products or a mutual insurance company? And I'm asking this question having facing--

JOHN SCHLIFSKE: That's a tough one.

ADAM SHAPIRO: --that issue--


ADAM SHAPIRO: --two years ago. And I don't want to betray how I made the decision, but I'm curious what you would say, because a lot of people are facing that right now.

JOHN SCHLIFSKE: Right. I think it's much more difficult for a publicly traded company to split the returns down a portfolio between shareholders and policyholders when rates go low and return on assets classes go low. And so increasingly I think mutuals have a key advantage in the marketplace, which is that we're not splitting the returns on that asset base, and we can give it all to the port-- to the policy owners, which ultimately increases return. So I think net-net in this environment, mutuals are a better way to protect yourself, especially if you're buying permanent life insurance or annuities or those kind of things.

When it gets to products that don't have a lot of economic value, like let's say term insurance, then I think you get to a point where mutuals and stock companies probably compete more on a level playing field because you're really just buying death protection, and there is no real advantage I think ultimately toward being a public or private company. It's more of a commodity product, and you're competing on price. So I hope that answers your question.

ADAM SHAPIRO: It does answer the question. It's always reassuring when you hear the CEO of a company like yours reinforce the decision that was made. As the third knight in the old Indiana Jones movie said, I chose wisely. I went with a mutual life company.

JOHN SCHLIFSKE: There you go. You did, yeah.

ADAM SHAPIRO: So thank you very much. John Schlifske, Northwestern Mutual CEO.


ADAM SHAPIRO: All the best to you and the team there--


ADAM SHAPIRO: --at Northwestern Mutual.