Monday, October 21, 2013

Unpacking MetLife and Cigna’s Business Relationship with the NRA


[The following piece is a guest post by Daniel P. O’Neill, CFA. The views expressed here are his own, not those of the Coalition to Stop Gun Violence.]
The National Rifle Association (NRA), a non-profit and 501(c)(4) organization, is located in Fairfax, VA and incorporated in the state of New York.  The NRA received royalty payments in excess of $10 million from its endorsed insurance program in 2011[i].  The vast majority of these royalties appear to come from four NRA business partners: MetLife, Cigna, AGIA and Lockton Companies.  MetLife and Cigna are insurance underwriters that write standardized insurance contracts for NRA members.  AGIA and Lockton Companies act as Third Party Administrators (TPA) to handle NRA endorsed insurance products and as brokers.  Both AGIA and Lockton appear to be very proud and open about each company’s business relationship with the NRA.  Executives of each insurance broker have made public appearances with NRA executives at past annual meetings.  MetLife and Cigna, through lack of disclosures and opaque responses, appear to go out of their way to prevent disclosure of the business relationships with the NRA.  MetLife and Cigna should be open and transparent to investors and clients that each respective company pays the NRA an estimated multi-million dollar sum in annual royalty payments.  Socially responsible investors and customers of MetLife and Cigna should be aware of a business relationship that provides material financial support to the NRA.  Socially responsible investors and clients can benefit from transparency and disclosure to make an informed decision, based on individual or institutional principles, whether MetLife and Cigna’s financial payments to the NRA violate their principles.
Many insurance companies partner with non-insurance businesses or associations (i.e., affinity groups, such as an alumni association, employer or credit union) to solicit insurance to the group’s constituents.  It can be very expensive to acquire new insurance business through a mass mailing and marketing campaign.  The response rate in a mass mailing and marketing campaign is generally low, and by definition, not targeted.  The cost of postage, printing and mailing materials can be quite expensive if an insurance company only receives one response per one-hundred mailings.  Only a fraction of those responses will result in a new policy that the insurance company will bind.  An affinity group is an organization that has members that share some common attribute, such as the same alma mater, employer or financial institution.  State insurance regulators prohibit non-insurance businesses or associations from soliciting or negotiating insurance contracts.  Most states, however, do not prohibit non-insurance businesses or associations from lending a group’s mailing list and brand/logo to a licensed insurance company or agent.  The majority of states allow commission-sharing arrangements, where the insurance company will tie commission payments to a percentage of written insurance premiums.  Other states, such as FL, OH and VA, prohibit commission sharing arrangements between insurance companies and non-insurance businesses or associations[ii].  These states, generally, allow for referral fees if the referral fees are fixed and not contingent on a specific outcome (i.e., completed application, bind, etc.).  A small number of other states, such as MA, TX and GA, either have unclear laws or prohibit both commission sharing and referral fees in affinity marketing contracts[iii].  Insurance companies, depending on the state, may structure “sponsorship agreements” with affinity partners to advertise a fixed dollar amount in an affinity association’s magazine or on its website.  Insurers sometimes create sponsorship agreements to compensate an affinity association for insurance business written in a state, which prohibits both commissions and fixed referral fees.
The NRA, in its 2011 financial statements, received $9.3 million in insurance administration fee revenue (4.1% of 2011 revenue)[iv].  The NRA increased its insurance administration fee revenue by 54% in two years (FY2009 – $6.1 million, 2.4% of 2009 revenue)[v].  The NRA Ring of Freedom magazine’s issue, highlighting the organization’s 2012 annual meeting in St. Louis, gave additional commentary regarding the NRA endorsed insurance program:  “The program’s total 2011 royalty to NRA was $10 million-plus”[vi].  The difference between the “$10 million plus” in royalty revenue described in the NRA magazine article and the $9.3 million in insurance administration fees, according to the organization’s 2011 financial statements, likely have to do with differing account classifications and state insurance regulations.   These data suggest “sponsorship agreements” with insurance companies may be posted in the “Advertising” or” Other” revenue accounts.  The notes to the NRA’s income statement do not contain account classification to this level of detail, so this is just an educated guess.  The NRA did not respond to any emails sent from the author for this article.
Royalty payments received by a 501(c)(4) organization are exempt from federal taxes (i.e., not considered unrelated business income).  The NRA received a total of $12.7 million in royalty payment revenue for its 2011 tax year[vii].  The vast majority of these royalties would be related to the NRA endorsed insurance program.  The definition of a royalty payment, for federal tax purposes, is subject to legal interpretation and beyond the scope of this article.  The form 990 instructions from the IRS provide the following guidance for entering royalty revenue on the annual Form 990 tax form:
“royalties received by the organization from licensing the ongoing use of its property to others.  Typically, royalties are received for the use of intellectual property, such as patents and trademarks.  Royalties also include payments to the owner of property for the right to exploit natural resources on the property, such as oil, natural gas, or minerals[viii]”.
MetlLife, Inc. is a public company traded on the New York Stock Exchange (NYSE Symbol: MET) and headquartered in New York, New York.  MetLife, a global insurance company, offers a wide array of insurance products, financial products and employee benefits.  MetLife is a member of the Fortune 100 list of American corporations and a component of Standard & Poor’s 500 stock market index.
MetLife’s business relationship with the NRA involves the marketing and sale of personal automobile and homeowner’s insurance to members of the NRA[ix].  NRA members can buy discounted auto insurance through MetLife in all 50 states and discounted homeowner’s insurance in 47 states (excludes: MA, FL, and GA)[x].  In the Commonwealth of MA, for example, NRA members are eligible for a 5% discount on MetLife private passenger automobile insurance.  Metropolitan Property and Casualty Insurance Co., a Rhode Island insurance subsidiary of MetLife, Inc., underwrites the NRA endorsed automobile policies.  MetLife’s NRA discount plan for Massachusetts automobile drivers originated on February 1, 2011.  The NRA had 3,274,391 total members in its group, according to Metropolitan Property and Casualty Insurance Company’s 2012 group marketing plan filing with the MA Division of Insurance[xi].
The author spoke to MetLife’s investor relations department regarding the size and scope of MetLife’s business relationship with the NRA[1].  The investor relations department refused to acknowledge whether a relationship even existed.  When the author mentioned that the NRA and its Third Party Administrator advertises the relationship on websites and other distribution methods, the investor relations department gave the same response “no comment”.  The author cited that the group relationship for Massachusetts private passenger automobile insurance was public record and there was no reason to refuse to acknowledge the relationship.  The investor relations department again responded “no comment”.  This back and forth continued for the remainder of the call with the same response to each question.  Charles Douglas, of the MetLife investor relations department, clarified later in an email that MetLife does have an affinity relationship with the NRA.  His previous “no comment” response had been intended for the specific details of the relationship[2].
The author, without any assistance from MetLife, has made an educated guess as to the value of the MetLife relationship to the NRA.  The forecast includes the following broad assumptions: The average premium for an automobile insurance policy in the United States, as of December 2012, was $1,510[xii].  The average premium for a homeowner’s insurance policy in the United States, for the 2010 calendar year, was $909[xiii].  The penetration rate of sales to group members for automobile policies is 1.5% and 1.2% for homeowners (80% of Auto[3]), and the NRA member population from Metropolitan Property and Casualty Insurance Company’s insurance filing: 3,274,391.  The remuneration as a percentage of premiums paid in affinity insurance contracts averages 3.3% for property & casualty programs[xiv].  The forecast assumption uses the same average.  The forecasted annual royalty payments from MetLife to the NRA for an auto & home affinity relationship would be approximately $3.6 million, using the assumptions discussed.
MetLife refuses to acknowledge its business relationship with the NRA.  The insurance company gives off the appearance, through its actions, that it wishes not to be associated with the NRA in any way.  MetLife profits off an exclusive underwriting arrangement with NRA members for personal auto & home insurance, makes significant royalty payments to the NRA and fails to disclose these business arrangements to its investors and clients.
Cigna is a public company traded on the New York Stock Exchange (NYSE Symbol: CI) and headquartered in Bloomfield, Connecticut.  Cigna, a global health service company, offers products and services through the corporation’s operating subsidiaries.  Cigna’s largest subsidiaries are Connecticut General Life Insurance Company, Cigna Health and Life Insurance Company, Life Insurance Company of North America and Cigna Life Insurance Company of New York.  These subsidiaries offer insurance and healthcare products and services.  The major insurance products offered include group disability insurance, health insurance, life insurance, accident insurance and international insurance.  Cigna is a member of the Fortune 500 list of American corporations and a component of Standard & Poor’s 500 stock market index.
Cigna is the exclusive underwriter for certain accident and health insurance contracts sold to members of the NRA.  NRA members can purchase cancer care insurance, hospital indemnity insurance and accidental death & dismemberment insurance from Cigna’s affiliate AGIA.  Life Insurance Company of North America (a Cigna subsidiary) and Cigna Life Insurance Company of New York underwrite these insurance policies[xv] [xvi].  AGIA is a Third Party Administrator and handles the business relationship between the NRA and Cigna.  The NRA received a royalty check from Cigna for approximately $2.7 million (issue date: 3/19/2012; for FY2011 annual payment), representing in excess of 1% of the NRA’s 2011 annual revenue[4][xvii].
The author posed several questions regarding Cigna’s business relationship with the NRA to the head of the company’s investor relations department[5].  Edwin J. Detrick, the head of Cigna investor relations, responded:
“There is really nothing to disclose — as a matter of policy, we do not comment on or acknowledge vendor/ customer relationships except in those circumstances where the other party has made the arrangement public”.
The author asked to clarify, stating:
“Let me make sure I understand your response, are you saying that:
a) there is nothing to disclose because Cigna does not make any payments to the NRA directly or through a third party administrator or
b) there is nothing to disclose because Cigna’s payments to, and relationship, with the NRA is material information and subject to fair disclosure rules”.
Edwin J. Detrick responded:
“My response was more narrow than you wanted, addressing only the customer / vendor relationship side of the equation.  As you phrased below:
Re: item a) — your assumption would be accurate
Re: item b) – separate issue – we are required to disclose material vendor / customer contracts – the absence of disclosure should tell you that any such relationship we might have with the NRA does not meet those materiality thresholds — given our size not many contracts do.  When not material, we invoke our own internal policy not to comment on or disclose such relationships”.
The author then sent an email to Mr. Detrick with a link to the NRA magazine article that included a picture of a check, written by Cigna and made out to the National Rifle Association, for approximately $2.7 million.  The article also referenced the royalty payments for the endorsed insurance program[xviii].  Mr. Detrick did not respond to that email.  Mr. Detrick did speak to the author a few weeks later to review the facts about Cigna mentioned in this article and was courteous and helpful[6].  It is the author’s opinion that Cigna prefers to “have its cake and eat it to” regarding the NRA relationship.  Cigna profits from its relationship with the NRA, provides multimillion-dollar royalty payments to the NRA each year, and discloses nothing to its investors or customers regarding the company’s profitable relationship and financial payments to the NRA.
AGIA is the Third Party Administrator for the NRA endorsed life, health and accident insurance program.  AGIA, a licensed insurance broker headquartered in Carpinteria, CA, sells individual term life insurance to NRA members through its insurance website (Life Insurance Central®) and call center.[xix]  Life Insurance Central® offers term life insurance from multiple insurance underwriters that compete for new business on price.  There is no exclusive underwriting arrangement that offers an NRA discount to a single life insurance company.  Any commissions paid by a life insurance company to AGIA would be similar to commissions paid to any other comparable life insurance agent.  There is no royalty premium for exclusive use of the NRA discount by any life insurance underwriter.  AGIA likely pays a royalty to the NRA for the affinity relationship, however, unlike MetLife and Cigna, the company is very open and transparent about its business relationship with the NRA.
Lockton Affinity, a division of Lockton Companies, is the Third Party Administrator for the NRA endorsed property & liability insurance program.  Lockton, a licensed insurance broker headquartered in Kansas City, MO, purchases specialty property & liability insurance for NRA members in the Lloyd’s of London insurance market.  Lockton does not handle an exclusive underwriting arrangement between the NRA and a single specialty insurance underwriter.  Lockton advertises to NRA members the exclusive MetLife NRA discount arrangement for personal auto & home insurance on its website.  Lockton, like AGIA, is very open and transparent about its business relationship with the NRA.
A growing population of investors, both active and passive, invests in companies based on environmental, social and governance issues.  Passive investors can invest in an equity fund that tracks a number of stocks, which meet socially responsible criteria, chosen by an index provider, such as MSCI® and FTSE®.  The index provider uses a proprietary method of measures that may include investment, social, environmental and governance factors to rate stocks.  These ratings can use positive and negative screenings, depending on each social index provider’s criteria, to determine the proportion or exclusion of each stock in its index.  Active institutional and individual investors may use their own subjective criteria to determine how they invest.  Many socially responsible funds may exclude the ownership of companies that produce or manufacture tobacco and firearms.  If a publicly traded insurance company invests part of its surplus in the tobacco industry, then it is unlikely that a socially responsible investment fund would exclude (i.e., negative screening) the insurance company from its investment universe based on this one factor.  The socially responsible fund, however, may use the tobacco investment as a factor in determining the insurance company’s weight in its fund (i.e., positive screening).  In positive screening, based on corporate best practices affecting environmental, social and governance issues, socially responsible investors rank companies and invest a higher proportion of investment funds in companies that demonstrate best environmental, social and governance practices.  Other socially responsible investors may take a more active role as investors in a company.  Investors may directly engage a company’s management or cause change through proxy voting[xx].  Socially responsible investors and company executives will benefit from open channels of communication.  Company management can align environmental, social and governance goals with those investors they wish to attract.  Socially responsible investors can either invest in companies that benefit their view of society and corporate governance or influence companies to change certain policies that will benefit their view of society and corporate governance.
Affinity insurance relationships are common among non-profit organizations and insurance companies.  Alumni associations receive royalty payments from insurance companies and may then use that money for purposes to support the association’s causes, such as athletic and academic scholarships.  There is nothing controversial about this type of relationship.  If, however, insurance companies provide significant royalty payments[7] to an organization which actively engages in controversial political actions that a client or investor in the insurance company may find socially unconscionable, then the insurance company should disclose the extent of its business relationship and financial support to those clients and investors upon request.  MetLife and Cigna should disclose enough information regarding their business relationship with the NRA so that socially responsible investors and clients can determine for themselves whether the relationship conflicts with their investment principles.

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