On June 30, Sy Sternberg, chairman and CEO of New York Life Insurance Company, will retire after an 11-year tenure that started on April 1, 1997. Sternberg joined the 163-year old company in 1989. On July 1 he will be succeeded by Ted Mathas, currently president and COO.
In an interview with Sternberg at New York Life headquarters, he discussed his future plans, his time with the company and the current state of the insurance market.
NU: What are you planning to do once you retire?
Sternberg: On July 1, I will become chairman of the board of directors in a non-executive capacity for a transition period similar to the way other companies have planned changes in leadership.
I am also a member of a number of public boards and have been asked to head a university’s board of trustees beginning July 1, which will be officially announced by the university in late May.
What has been your biggest accomplishment?
In terms of New York Life, it is the repositioning of the company and its positioning as an outstanding, high integrity company. Reputation is important because in the insurance industry, there is a risk that your product could be commoditized. We differentiated ourselves in a positive way by focusing on the company’s financial strengths. Its surplus is now more than $14 billion as compared with $6.5 billion when I started as CEO 11 years ago. And, we have retrieved our ‘AAA’ ratings.
We have a gem in terms of the distribution system. It is truly a market differentiator. The distribution system projects an image.
We continue to be a domestic company with international operations, not an international company with domestic operations. You won’t see us trying to become another AIG.
How important is it to have international operations?
To be a player in the industry today, you have to be a player in the international market. It is similar to what happened 80 years ago when regional carriers had to make decisions about whether to be in the national market.
The company’s different businesses can be looked at as a portfolio with the international operations representing the equity part of the portfolio of businesses.
What has been the biggest change that you’ve seen in the industry?
The biggest change in the industry is that most of our peer carriers demutualized. That changed the fundamental outlook of many of them in a way that was far different from our outlook.
This change has had an impact on the debate on reserving. We have no problem keeping excess reserves on the balance sheet. We don’t securitize. Our primary objective is to keep our promises to policyholders and have money on hand for a rainy day.
The reason some companies want reserves reduced is because equity is in the denominator in determining the ROE calculation [net profit/average shareholder equity.] It motivates companies to try and minimize the amount of equity [to increase ROE.] Because the idea is to minimize capital, they have to figure out how to squeeze down the reserves.
The reserving issue has 2 separate parts. One is the use of securitization for reserves and the second is maintaining an appropriate level of reserves.
Securitization is drying up; the capital is not in the business; if you know the current option is not there, that creates a sense of urgency [to advance the principles-based reserving system.]
The urgency is that they can’t get their reserves reduced and can’t securitize.
But are reserves excessive?
There is excess reserving in the term area, but I don’t know the exact amount because it depends upon individual company pricing. But I don’t believe there is excess reserving in the universal life area. So, in the term area, we probably need work on principles-based reserving because there may be redundancies.
The more important issue is that companies are promoting reducing reserves. That is a fundamental change.”
Is STOLI under control now that laws are being put in place in the states?
We are starting to see constraints, but I would not go so far as to say that it is under control.
Our agents are banned from STOLI transactions. It undermines our position on tax preference we are getting [on life insurance products.]
There are several companies that either participate or plan to participate in the life settlements market. Will that market become just another part of the life insurance business?
If a company has no effective distribution system and can’t differentiate itself, it has to play around the edges. And that’s what we believe it is, playing around the edges.
New York Life is offering a new option called Access Plus which seeks to provide cash in excess of the cash value while preserving a death benefit and retaining policy ownership.
Is an optional federal charter needed?
“Let me answer by giving you a little history. The year before I became American Council of Life Insurers chairman [of the board of directors in 2001] there were serious deficiencies in the state system including product filing, agent licensing and market conduct reviews. The ACLI wrote a scathing report.
There was one school [among board members] that just wanted pure federal regulation. I very strongly proposed a dual track, in part because I am a pragmatist. I realized that it would be 5-10 years before the proposal could be a reality and it made no sense to alienate regulators. So, why make enemies?
And, if there was a dual track, it would encourage improvements in the existing state system.
My logic prevailed. But there are still members who only want a federal charter.
What happens if an administration comes in that is hostile to the insurance industry? Could federal oversight backfire on life insurers?
Our view is that we will see what develops. We don’t know what will be in the bill. Is there a call for commission disclosure or a CRA [Community Reinvestment Act] requirement? A theoretical alternative always looks better than reality.
And, states have made progress. For instance, if New York State threw in its support [for the Interstate Insurance Product Regulation Commission] other states would follow and the product issue could be taken care of.
Some progress has been made on market conduct exams. The problems in the report have been somewhat mitigated.
But international companies see this as vitally important.
The counterpoint to the counterpoint, is that with 50 states at least it is not all or nothing. We continue to look at this. Until we see a proposal, we are in the wait-and-see column. We don’t see it happening for 24-36 months.
Has the growth of life insurance sales peaked in the U.S.?
U.S. sales peaked about 10 years ago and have been experiencing flat to low digit growth since.
The major reason is that there are fewer agents selling insurance. This is because there is not an investment by public companies unless there is a short-term return and a return on an investment in an agent is a 5+year return.
Mutual companies have retained their field force but most other companies have curtailed that investment.
The average age of the independent agent increases one year for each of the past 7 years. Seven years ago it was 51. Now it is 58.
Brokers don’t want to invest in new agents. They are used to robbing the career agency systems. And now that source is not as available.
Perhaps rating agencies need to look at the distribution systems of companies and comment on whether ratings could be impacted.
New York Life recruits 3,200 agents annually and has a force with an average age of 44 and about 20-25% 4-year retention.
Is the life insurance industry ignoring the middle market in pursuit of the high end market?
Agents are looking for high commission tickets.
We reach the middle market, in part, by recognizing the ethnic and cultural markets including the Chinese, Korean and Hispanic markets. The ethnic market represents 25% of our sales force.
Suitability is an issue that continues to be in the news with issues ranging from concern about fixed index annuities to senior designations. Could you address this issue?
Suitability is very important to us. We had no interest in indexed annuities. We felt that it is too complicated a product to explain.
With regard to senior designations, there are a lot of designations that we do not use. We have an experienced sales force that we have trained. The industry today is less disciplined than it was in the past because sales forces are not sponsored by carriers.
Planning for income in retirement is becoming a major focus for life insurers. What products achieve that goal?
We are selling immediate annuities. We don’t sell variable annuities with guaranteed benefits. A guarantee on a variable annuity is a guarantee on the stock market. That is not the industry’s expertise.
You have to hire a rocket scientist to hedge them and no hedges are perfect.
One of your product offerings is LTC insurance. Could you discuss the prospects for that product and why as an industry it hasn’t taken off as might be expected given U.S. demographics?
In the past 4-5 years, there has been growth in the market. A lot of carriers lowballed pricing, so other [LTCI] products did not gain traction. Those companies based their products on pure lapse supported pricing. States are now regulating more effectively.
There were senior citizens who were paying premium for 10 years and saw premiums double. We couldn’t imagine doing something like that.
Now it has settled down and pricing is generally reasonable but it is still expensive coverage particularly if there is an inflation rider.
We [the industry] will never really see a dramatic increase in sales unless there is a tax exemption for policyholders for a portion of the premiums paid for the product, but that is not likely to happen while there is a budget deficit.
Could you tell us about Ted Mathas?
A succession plan is always important for a company. As CEO, I did take this very seriously. As long as 5 years ago, I started considering potential candidates.
Ted has the people skills, leadership skills and good judgment, which made me include him in a short list of candidates.
And, we were very comfortable that not only was he the right guy but we also have the right team.
For example, Gary Wendlandt, [vice chairman of the board and chief investment officer] foresaw irrational behavior in the subprime market 15 months ago and diverted 10% of our fixed income investments into U.S. Treasurys.
I’m a firm believer that you don’t manage by consensus but you do manage by collective judgment. Sometimes collective judgment does not bring you to where you need to be; it might bring you to one or two options. I always made the decisions but collective judgment does move you in the right direction.
Is there anything else that you would like to discuss?
There are 4 pillars New York Life lives by. First, we are a life insurance company. Life insurance is our number one product. We have never changed our name.
Second, we are a career agency company. Third, mutuality is important to us; and fourth, we will not compromise the financial strength of the company.