New York Life Chief: Industry Should Use Judgment Over Financial Models

A lesson the life industry likely has learned following the financial crisis is that it's better to use personal judgment than rely too much on sophisticated financial models, says the chief of the largest mutual life insurer in the United States.

Clearly, a big lesson was learned from an "over-reliance" on tools, said Ted Mathas, chairman, president and chief executive officer of New York Life Insurance Co. Instead of using them to help mitigate risks, the industry used them to justify taking on more levels of risk. These models "are designed to assist -- not supplant your judgment," he said.

Mathas likened the situation to having a GPS installed in one's car, which makes driving easier because you don't have to know exactly where you're going. "But I'm still supposed to look out the window when I drive," he said. "If the GPS says 'turn and go off the cliff,' I'm supposed to say, 'no, that must be a programming error.'"

Through overconfidence, the industry lost that fundamental judgment. The next couple of years will tell if the market learned its lesson, said Mathas, who met with BestWire at Limra International's 2009 annual meeting in New York.

The industry's in better shape and fared better than other financial services companies, he said. Nevertheless, life insurers encountered problems on the asset side of the balance sheet, especially companies with more investments linked to subprime mortgages, Mathas said. Many have "cleaned them up or they've raised capital to help with that."

In a recent special report, "Life/Annuity Mid-Year Update: Despite Improved Markets, Fundamental Concerns Remain," A.M. Best Co. discussed the drivers behind maintaining its negative rating outlook on the U.S. life/health industry. Among the trends A.M. Best notes are that investments remain a concern -- especially those tied to commercial mortgages (BestWire, Sept. 28, 2009).

The industry recognizes that some of the problems with their investments in commercial real estate "have yet to occur, but are likely to occur," Mathas said. Many companies will have losses linked to commercial real estate investments, he said. Most believe that will put pressure on commercial real estate portfolios starting next year and into 2011, Mathas said.

Mathas contends there's an understanding that "not all life insurance companies are created the same," and that it's no accident that the companies that maintain the highest ratings tend to be mutuals.

Mathas discussed the somewhat sticky topic of mutual life insurers versus publicly traded ones during a CEO panel.

The business model of a mutual is superior to that of a public one because the interest is focused on policyholders not shareholders, Mathas told BestWire. "Mutuals, public -- both can run good businesses," he said.

But when it comes to life insurance, the difference is that the policyholder is the creditor of the mutual company and the company's concern is being able to live up to the obligations it made to that creditor, he said. "Creditors and shareholders don't have aligned interests," he said.

Most of the mutuals amassed capital "during the good years" and held onto it. During the financial crisis, life insurers needed capital. Public companies had to minimize their capital in order to grow their return on equity.

If a company uses its capital to buy back its own stock, it's increasing its ROE and creating demand for its stock. "That's a wonderful thing for shareholders" but "you just made the company financially weaker," Mathas said.

According to the A.M. Best special report, market share has shifted substantially to mutual insurers.

Mathas became president on July 1, 2007, and CEO on July 1, 2008. He became chairman in June (BestWire, June 1, 2009).

New York Life Group is the sixth-largest U.S. life/health writer based on 2008 admitted assets of $188.8 billion, according to A.M. Best Co.

New York Life Insurance Co. currently has a Best Financial Strength Rating of A++ (Superior)