A panel of CEOs offered their take on a business landscape that by all accounts at the annual LIMRA meeting here is one of the toughest in recent memory.
During the first day of the 2009 meeting the panel addressed issues posed by Robert Kerzner, LIMRA’s president and CEO that included distribution, rating agencies and the best structure for a life insurer. The three panelists included Robert Chappell, chairman, president and CEO of Penn Mutual Life Ins. Co., Philadelphia; Donald Guloien, president and CEO of Manulife Financial, Toronto; and Theodore Mathas, chairman, president and CEO with New York Life Ins. Co. in New York.
The panelists began by discussing the current economic climate and the lessons that have been learned over the past year. Manulife’s Guloien said he believes we are halfway through the cycle but continues to be concerned about the level of unemployment and the impact that will have on the ability to sell life insurance. The need for better risk management techniques is a lesson that has been learned from this experience, he added. “There has been too much emphasis on quant techniques and not enough emphasis on seat of your pants judgment,” Guloien added.
Penn Mutual’s Chappell discussed facing the “unknown and unknowable” and said that companies have to protect themselves against the unknown by maintaining sufficient capital so that they can keep their promises. He said that companies have eliminated 30-40% of their employee base to improve corporate profits and it is going to take the economy a while to rebound.
New York Life’s Mathas said that there are a few lessons to be learned from the current economic client but “we’ll have to wait and see if they stick. Models have supplanted judgment,” he noted. Sophisticated companies and rating agencies have relied on modeling to help them assess risk, Mathas added. “A model should help you understand risk and not get you comfortable with a level of risk,” he continued. “If a GPS says take a right turn off of a cliff, you are still supposed to look out a window,” Mathas added.
In response to a question from Kerzner on how much capital a company should hold, Mathas responded that “We make guarantees. We should hold more capital than what is would be economically efficient to hold because we make guarantees. That is what we are supposed to do.” Over 20 years, it might be too much to hold in 19 of those years but in the 20th year, a company should be glad it did, he added.
The panelists were then asked by Kerzner whether recent rating agency downgrades are an overreaction or whether they are justified. Chappell said that rating agencies assessed where life insurers are today and projected that out into the future. But in the recent market, there was an inflection point that turned the economic environment topsy-turvy for insurers, he continued. He added that the agencies “piled on” and will probably continue in 2010 when assessing holding of commercial mortgage-backed securities. This could put insurers in a “much deeper hole,” Chappell added.
Guloien said that life insurers have been blaming rating agencies for not catching weaknesses when rating securities but many of these companies have internal departments that should have caught these weaknesses.
And, he added, there is a new reality to which companies need to adjust. Both regulators which are dealing with gaps in oversight and those which consider themselves lucky to have avoided problems they would need to deal with directly will be looking more carefully at life insurers going forward, he predicted.
New York Life’s Mathas said that rating agencies deserve blame but so do others.
When asked about distribution, he added that it is one of the biggest issues that his company focuses on. Mathas maintained that a career agency system was still the best way to distribute life insurance and New York Life does nothing to infringe on that system. For instance, Mathas said that the company does have a direct marketing effort through the AARP, Washington, but that the size of the policies sold are so small that a career agent could not make a living selling them. Consequently, the effort is not competing with agents, he added.
On the issue of mutual versus stock company, Chappell said that the mutual structure is better suited to keep a promise that can span decades. He cited a recent claim on a policy issued in 1927 on a man who was a month shy of turning 112. Stock companies are thinking more on a short-term basis, he added.
Mathas agreed that for a long-term guarantee, the mutual model is “superior.” Part of the way that a stock company increases the value of its stock is to buy it back and increase ROE, he explained. But mutual companies are able to retain the extra capital, he continued. However, Mathas did say that there are well run stock companies.
Guloien noted companies like Mutual Benefit Life and Confederation Life which failed and said that the strength of a company really depends on how well run the company is and not on whether it is a mutual or stock company.