M Financial President and CEO Fred Jonske says the company's reinsurance unit provides "incredible intellectual knowledge." (Photo: M Financial)
It’s not every producer group that boasts its own reinsurance arm. Indeed, just one (to our knowledge) lays claim to a presence in this space: M Financial Group. The distributor of life insurance and other financial products and services says the unit avails its advisors of competitive advantages — tailored solutions at unbeatable prices for the high net worth — that they would hard-pressed to find anywhere else.
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To learn more about the company’s unique positioning, LifeHealthPro's Senior Editor Warren S. Hersch interviewed several of the company’s top executives, including its president and CEO Fred Jonske; Daniel Byrne, senior vice president, chief product and technology officer; plus Jacob Boston, vice president of communications and government relations. The following are excerpts.
Hersch: Can you provide a quick background on M Financial? How did the company get started?
Jonske: M Financial was established in 1978 as a distribution network of entrepreneurial member advisory firms. Through these members, we offer products customized for our market niches: affluent individuals and corporate clients.
Shortly after the company’s launch, we established our reinsurance company. This is unique in industry: I'm not aware of any other independent distributor that invests capital in partnering insurance companies. Through the unit, we reinsure business of a half-dozen carrier-partners, including Pacific Life, TIAA-CREF, Nationwide, John Hancock, Prudential Financial and Unum.
Hersch: Why did you start up a reinsurance business? What are the advantages?
Jonske: The reinsurance company gives us incredible intellectual knowledge in terms of the unique pricing, policy experience and market segments we serve. That knowledge enables us to offer specialized products manufactured by our partner carriers. Among these are customized life, disability income insurance and long-term care insurance. We also offer annuities, corporate benefits, wealth management and international insurance solutions.
Byrne: It's hard to overstate how important the reinsurance division is to our business proposition and success. The method of reinsurance is modified co-insurance or capital-sharing with our partner carriers. Each year, M Financial Re covers between $25 and $50 billion in policy face amounts. Our reinsurance agreements with the carriers underwrite mortality, persistency and investment-related risk connected with their products.
The reinsurance gives us in exchange unlimited access to proprietary carrier data specific to M Financial and our clients. The information relates mostly to policy mortality and persistency rates.
Other data we get is less critical to product pricing, such as average face amounts, placement ratios, or the probability that a policy gets placed. Such data is important to expensing because you have to underwrite every case.
The data enables us to negotiate favorable pricing with our partner carriers on behalf of clients. And that’s reflected in our results: For a given feature set and death benefit, our clients might pay 5 to 10 percent less than they do elsewhere. We also enjoy superior mortality and persistency rates and a better expense structure than the industry at large.
Another value-add for clients is our management of in-force policies. It's critical that we protect the interests of clients after the sale. Thus, if mortality and persistency rates on existing blocks of business improve, we’ll pass the savings along to clients.
(Photo: Daniel Byrne, senior vice president, chief product and technology officer at M Financial)
Hersch: Reinsurance aside, how is M Financial distinguished in the marketplace?
Jonske: Another focus of the company is client advocacy. As part of this mission, we’ve partnered with the American Bar Association to help to write various guides. One is The Advisor's Guide to Life Insurance, which provides insights on the purchase, fundamentals, applications and maintenance of life insurance products. The book is an educational resource for ABA members and other professional advisors. ABA also publishes our Advisor’s Guide to Long-term Care Insurance.
Also noteworthy about M’s business model is our governing structure: We're owned solely by the member firms. They are the company’s stockholders; we have no outside investors.
We have a 13-person board, nine of whom are owners of member firms. There are also two dozen committees, each chaired by a board member. Principals of the 140-plus member firms, among others, are also on committees. At any point in time, about 40 percent of the member firms are also engaged in governance. The member firms oversee about 800 producers nationwide.
Hersch: I imagine you’re looking to expand your pool of member companies. What do you look for in firms aspiring to join M Financial?
Jonske: We look for firms that have a certain competency in in our target markets and products. We’re also targeting practices of a certain size — those with $2 million-plus in annual revenue. For every firm we invite to join M Financial, we probably reject another 18.
After we do our due diligence on prospects — a one- to two-year vetting process — a committee of the board decides on firms we recommend be approved for membership. These new firms then pass through a two- to five-year provisional period, during which they have to fulfill certain production requirements and responsibilities associated with membership, including an up-front capital contribution to the company. Only after these commitments are made do we make them full members.
Hersch: Apart from favorable pricing on custom products, what benefits do member firms receive back? Is there, for example, ongoing training and support for advisors?
Byrne: We offer a combination of Internet-based training, in-person/classroom training, peer-to-peer training at company meetings, as well education materials. The training runs the gamut — from insurance products, sales and marketing to case design, underwriting, advance planning techniques and best practices.
In 2014, the company also established the M Center of Excellence at The American College of Financial Services. Set up in partnership with the USC Davis School of Gerontology, the university offers advisors structured courses in underwriting. We’re now expanding on the curriculum in collaboration with carrier partners.
Hersch: Are there also opportunities for joint-work among the member firms?
Jonske: Yes, we do encourage the members to share expertise and collaborate — these are among the founding values of the company. And there is indeed a significant amount of sharing that happens.
Often, this take place among firms based in different states. Less frequently, expertise is tapped outside the M Financial community; there are no restrictions on this, as the firms are independent. Also, we avail members of additional services, such as HR functions, through professional staffers based in our Portland [Oregon] office.
Hersch: How are revenue and profits divvied up among the member firms and parent company?
Jonske: When a sale is made, the firm that wrote the policy receives the commission. If the sale involved joint work among different firms, they decide among themselves how the commission is split. An override stream on sales goes to the Portland office.
The members firms participate in profit-sharing arrangement: Like any other holding company, M Financial distributes profits to the members as a stockholder dividends. After taxes are paid, remaining earnings are allocated back to the firms. The distributions are based on each member’s contribution to profits and on the quality of business generated.
Since the company’s founding, we’ve paid out more than $900 million to the members, both as incentive compensation and stock dividends. So there has been much value distributed back to the firms. If we realize a near-term objective — achieving a compounded annual growth rate of 8 percent — the members can look forward to a lot more revenue-sharing.
Hersch: Let’s turn to an issue much on the minds of agents and advisors today: the Department of Labor’s proposed fiduciary rules. What is M Financial’s position on the draft regulations?
Boston: We're very concerned about the DOL’s proposal. The draft regulations will, we believe, have unintended consequences, including fewer choices and higher costs for consumers.
The proposal is not a good solution for the country. In collaboration with the Association for Advanced Life Underwriting and the Financial Services Institute, we’ve submitted joint comment letters — both to the DOL and to members of Congress — articulating our mutual position on the proposal.
Hersch: Life settlements also are an issue for the industry, particularly product manufacturers that see the transactions as negatively impacting their earnings. Do M’s member firms do life settlements? Are restrictions on these transactions imposed by partnering carriers?
Byrne: The member firms can engage in life settlements as, again, they operate independently. That said, we've had relationships with life settlement providers in the past, but we haven't found it to be a significant portion of our business.
The transactions lend themselves to a market segment we’re less active in: individuals who hold a policy outside of trust, estate plan or business plan. The contracts in these cases are more liquid and, therefore, more easily sold on the secondary market.
Also, because most policies that are life settled underperform in the marketplace, holding onto them is not attractive. Returning to our earlier points about in-force management and client advocacy, if we keep our products attractive in the marketplace, then policyholders are less likely to sell them later on.
Hersch: Another trend we’re tracking is retirement income planning, a practice area that’s growing for advisors’ as more boomers leave the workforce. Are you also observing a shift from wealth accumulation to income distribution planning at M Financial?
Byrne: This is definitely an emerging trend. Ten years ago, there was a much greater emphasis on wealth accumulation than income distribution; the focus is now reversed among boomers. Their priorities are changing: A key concern for many is protection against longevity risk and volatility in the equities markets — both areas where protection products have a key role to play.
Jonske: Technologies that improve health outcomes are rapidly advancing. And this has implications for clients’ wealth expectancy and life expectancy. So we've embarked on a joint effort with The American College to delve into this area: how to plan for retirement given lengthening lifespans.
Warren S. Hersch is Senior Editor, Advanced Markets & Sales, for National Underwriter Life & Health magazine, which he joined in 2004. He covers practice management and life insurance-funded advanced planning techniques and trends in such areas as executive benefits, wealth transfer/estate planni... More