Still in the win column

The collapse of the financial services industry has inflicted carnage on the life insurance industry.

To date, American International Group Inc. (AIG) has received up to $150 billion in emergency loans from the U.S. government to stave off financial insolvency. AIG has posted four quarterly losses, including a $25 billion loss in the third quarter, and is using the federal bailout plan to survive.

Other large insurance carriers have suffered lesser, but still significant losses:

During the third quarter, MetLife Inc. reportedly lost about $215 million in investment income, largely because of volatility in the financial markets, a company statement said.

Prudential Financial Inc. reported a $108 million third-quarter loss among its financial services businesses, which includes its insurance and investments divisions.

Principal Financial Group Inc.’s third quarter revenue fell 61 percent in November, when the company said its investments lost about $156 million. Principal recently announced that it is forecasting its 2009 operating earnings to be below Wall Street estimates, as the weak financial markets hurt assets under management. The company expects a 3-percent drop in assets under management and a $90 million to $110 million operating loss from its corporate and other segments.

By contrast, no government bailout or investor angst are needed for Milwaukee’s Northwestern Mutual Life Insurance Co., the largest direct provider of life insurance in the country.

Northwestern Mutual is not only surviving the recession, but it is thriving. The company anticipates paying about $4.6 billion to its life, disability, term life and long-term care insurance policy holders next year.

At the end of the third quarter, Northwestern Mutual company had about $158 billion in total assets under management, with about $1 trillion in total life insurance protection in force.

Through the third quarter, Northwestern Mutual had about $16 billion in revenues.

While many of its competitors are struggling, Northwestern Mutual is in a strong financial position, said Mark Doll, the company’s senior vice president and chief investment officer. The company believes it can ride through the financial crisis relatively unscathed.

“We started 2008 with a near record capital base for the company of over $15 billion,” Doll said. “We compare our capital reserve relative to our liabilities, and that was one of the highest percentages we’ve ever had in our history. It really positioned us well for what we’re going through.”

The company’s $4.6 billion dividend for 2009 would be a decrease from its $5 billion dividend from 2008, Doll said, but is reflective of the current economic conditions.

“We went from a 7.5-percent dividend in 2008 to a 6.5 percent in 2009. That’s a larger-than-normal decline for us,” he said. “At the end of the day, we’ve made a lot of promises to people that we’re going to pay off their policies when they pass, and none of us knows what the future looks like, so at times we’re going to be a little more conservative. But it gets to the philosophy of this company that we never want to be questioned about our financial stability. We don’t want to be trying to defend our capital base in these troubled times. We want to be above question as best as we can.”

Mutual model

Northwestern Mutual is poised to ride out the economic turmoil in fine shape partly because of its operational and investment strategies, Doll said.

More than 80 percent of its liabilities are in cash-value life insurance policies to individuals or families, Doll said, which give the company a steady cash stream.

The company’s closest competitor has less than 50 percent of its asset base in cash-value life insurance policies.

“What’s been happening is that financial institutions have been forced to basically downsize their asset portfolios to de-leverage their balance sheets, which meant that they were having to sell financial assets – stocks, bonds, etc., at significant losses,” Doll said. “Everybody pretty much finds themselves in the same boat.

“We, on the other hand, have cash flow from our policies and policy holder premiums, as well as cash flow off our investment portfolio that totals almost $1 billion a month. Can you imagine in an environment like this where it is the ultimate in a buyer’s market as others are forced sellers and these assets are coming out, and it’s as if everything is on sale right now? And we’re just very well-positioned to take advantage of that.”

Northwestern Mutual’s corporate structure as a mutual insurance company, where its policyholders are essentially shareholders in the company, gives the company an advantage during an economic downturn, Doll said, because it is not subject to the short-term whims and needs of a publicly traded firm.

“We get away from that inherent conflict that stock companies have between meeting the objectives of their policy holders and their shareholders, because in that dynamic, I’m pretty certain I know who wins,” he said. “We can afford to be more forward-looking, and as you take a look how we incent our investment people, we incent them for longer-term returns and not one-year returns.”

Marathon investor

Since 1980, Northwestern Mutual has balanced its investment portfolio on an 80/20 philosophy – investing roughly 80 percent of its assets in fixed income securities such as investment-grade bonds and roughly 20 percent in a diversified portfolio of equities.

“We did a lot of modeling of good and bad periods, going back to the 1930s,” Doll said. “It really has served us well.”

Northwestern Mutual’s status as a mutual company allows it to focus on long-term investments that will produce the best financial outcome for its policyholders, Doll said, as opposed to publicly traded companies that must meet quarterly and annual shareholder expectations.

Of Northwestern Mutual’s fixed income assets, roughly 27 percent are tied up within corporate bonds, while another 20 percent are invested in private bonds and preferred stock.

The largest portion of the company’s fixed income assets are invested in commercial and residential real estate investments. About 17 percent of its fixed income assets, roughly $17 billion, are invested in residential mortgages, Doll said. Of that $17 billion, $15 billion are agency-backed mortgages, Doll said, and Northwestern Mutual remains comfortable in its investment security.

“These are Fannie (Mae) and Freddie (Mac) backed residential mortgages which in my opinion are about as good as the government right now,” he said. “We have a very modest exposure to residential mortgages and almost nothing in subprime.”

Commercial mortgages take up about 30 percent of the company’s fixed income portfolio, Doll said. The company’s commercial real estate holdings are primarily in apartments and industrial properties, Doll said, with a few office investments.

The largest chunk of Northwestern Mutual’s equity portfolio, roughly 37 percent, is invested in private equities, including leveraged buyouts, venture capital and oil and gas ventures.  The category makes up about 4.8 percent of the company’s total assets.

The company is not making any new commitments for private equity investments now because of the volatility in the financial markets, Doll said.

Another 26 percent of Northwestern Mutual’s equity portfolio is invested in public common stock.

Some short-term pain

Like nearly every financial services company that has investment income, Northwestern Mutual has incurred some losses in the recent collapses on Wall Street, the bond market and other areas.

“We have done a nice job on the investment side, but I mean, everybody’s taking some losses here,” Doll said. “If you have the capital to ride this out, that’s very comforting. We didn’t do a lot in structured product, which is where most of the problems are, and we avoided subprime. We have some exposure in commercial mortgage-backed securities and a few other things.”

Determining the company’s investment losses is difficult, Doll said, because it is near impossible to price some asset classes. For example, default and delinquencies among commercial mortgages are relatively low, but many in the investment community are heavily discounting commercial mortgages. Some other asset classes have been subject to heavy sell-offs by other large financial institutions, thus lowering the price of what might otherwise be a healthy investment area.

“When you get a market where there’s a lot of selling and a very limited number of buyers, you can get very distorted prices, just because of the technicals and the imbalance between buyers and sellers,” Doll said. “And so, when we look at prices that seem depressed, is it because of this imbalance between supply and demand, or is it really a reflection of what people think the future fundamentals are going to be? We’re all kind of anticipating how bad it might be, but pricing securities, particularly on some of these structured products, these days is much more art than science.”

Relative to most of its competitors, however, Northwestern Mutual is better-positioned to weather the downturn.

No subprime pain

Northwestern Mutual had virtually no exposure to subprime residential lending, Doll said, which has helped the company maintain its financial position.

“We’ve got some really good people in our mortgage structured product area and they felt it just didn’t make any sense,” Doll said. “Why make mortgages to people that, prior to this, weren’t allowed to get mortgages because there was a concern about their ability to pay it back? We just felt it was not a good risk.”

Ultimately, the decision to not invest in subprime mortgage lending harkens to the company’s core investment and operational strategy.

“We’ve been in business almost 152 years, and we’re not about short-term returns and the short-term splash,” Doll said. “We’re about the long-term grind it out. And when we look at things like subprime (lending), it just didn’t make sense to us, so we avoided it completely.

“Sometimes, just not making mistakes is what keeps you out of trouble. When I think about in all the years I’ve been with this company, whether it’s been in our investment area or our philosophy generally, we do the right things, for the most part,” Doll said. “On the investment side, we’ve just avoided the big mistakes. We’ve kept broad diversification of our portfolio, so any problems we might have are very manageable. And we didn’t fall for the latest gimmick or push the envelope to add a couple extra basis points to yield because inevitably, that comes back to haunt you.” 

Northwestern Mutual Life Insurance Co.

720 E. Wisconsin Ave., Milwaukee

Industry: Life insurance and related products

Employees: About 5,000 in metro Milwaukee, including its newer campus in Franklin.

Assets: $158 billion (as of third quarter)

Revenues: $16 billion (year-to-date, as of third quarter)

Web site:

Mark Doll

Senior vice president and chief investment officer

Duties: Management of Northwestern Mutual’s general account investment portfolio.

Work history: Joined Northwestern Mutual in 1972, working in common stock investments, investment specialist in public bonds, investment officer, and a variety of senior positions, including president of Mason Street Advisors LLC, the public markets arm of Northwestern Mutual.

Education: B.A. in finance and MBA from University of Wisconsin-Milwaukee. He also holds the Chartered Financial Analyst (CFA) designation.

Family: Wife, Terry; and two grown daughters.

Hobbies: Jogging, hunting, fishing & woodworking.


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