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A Life Insurer Projects Calm During the Storm

By Amy Zipkin

With the credit and housing markets in turmoil, insurance was, until recently, an overlooked piece of the financial picture. That changed when the government shored up the American International Group, the nation's largest insurance company, with an $85 billion emergency loan two weeks ago.

Edward J. Zore runs Northwestern Mutual, the largest direct provider of individual life insurance in the country with 3.3 million policy owners and more than $1 trillion of insurance in force. Mr. Zore recently discussed the changes that might be afoot in the industry, his company's traditional approach to business and why he resists becoming a publicly owned company.

The insurance industry is holding up very, very well. Our company had less than one-half of 1 percent of assets exposed to subprime markets at year-end. As the hedge funds were liquidating their subprime mortgages and the banks were trying to raise capital, the industry was in a positive cash flow position and was there to provide support to the market back in March.

There has been no fallout for our company. I think we look better in the marketplace when people are looking at options in the life insurance industry either as a place of employment or to place their money to buy a product. I don't think we will have any negative reverberations due directly to A.I.G. A.I.G. has brought the industry to the attention of the federal government and the regulators. The industry has been lobbying for a federal regulator. Right now, we're regulated by 50 states. I think what will happen with the A.I.G. takeover by the government is that it will force them to focus on the industry, realize we're part of the financial fabric and need a voice in Washington. We will be part of a new regulatory regime.

We're always interested in looking for bargains, but I do not believe A.I.G. has a business unit that would fit with Northwestern Mutual. We're not going to be in the mix.

Whole life insurance sales are up about 5 percent for the first eight months of the year. Our current dividend rate on unborrowed cash values is 7.5 percent, which looks pretty good in today's environment.

No. The A.I.G. issue is part of a bigger systemic problem that the financial industry and the economy face. It has to do with the deleveraging that has started to occur and will be occurring for some time. As a financial institution, we are more cautious because the risks are higher out there.

Life settlement transactions involve selling existing life policies to unrelated parties for more than their cash value or, if they have no cash value, for some value - usually policies with face amounts over $250,000 owned by people who are at least 65 years old or have life expectancies that range from 2 to 12 or 15 years. It's a market that is growing. It's bad business if somebody owns a policy on your life who has an interest in your death and gets a financial reward if you die. Because of demographics, the settlement market is a market that's here. I think it should be regulated so that life insurance isn't used by speculators.

We find these people through references from our field representatives and we find them on our own. They might be chief executives of organizations, lawyers, consultants or business owners. We bring them in for a week and give them free rein to learn more about the company, make some assessments of what we do and give us some ideas. When they are here they are committing probably 15 hours a day to do the job. We pay them $17,500 plus expenses for seven days. We get great consulting at a reasonably good price and we end up getting professionals in different parts of the country that appreciate the company even more.

We're a triple-A-rated company. I don't have to worry about meeting the ideals of a Wall Street analyst or some hedge fund manager who has a 60-day time horizon. I don't have to worry about short-sellers. Our investment portfolio is very well balanced, very well diversified. It's a portfolio I could not have as a stock company. The earnings effect of what we have would be less predictable than what would be required by stockholders. So we couldn't do what we do. We have no intention to become a stock company.

Copyright © 2008 by The New York Times Company.