There is no question of a recovery in 2009: Mathas
How long do you see the crisis continuing?
Ted Mathas: Unfortunately, the recession is slowly making its way to the mainstream, real economy in the United States. There is no question of a recovery in 2009. An optimistic forecast will be on recovery of some sort in 2010. So, it is a fairly pessimistic outlook based on many things that have still to completely unfold. Even though you can’t predict these things, there is probably a downside in the real estate sector; there are still issues in the credit markets, and consumer confidence in the US is severely impacted by job losses. And that has spread to the rest of the world. In India, in particular, you have an advantage as you have sustainable engines of demand. India is better positioned.
New York Life switched its portfolio to US treasuries a full six months before the subprime crisis emerged. What prompted the switch?
TM: Well before the crisis blew out in the US, we put in place a quality tilt programme. We found that the market, prior to the subprime crisis unfolding, was not properly compensating for credit risk. We do our credit underwriting. Second, we have a diversified portfolio. Third, we avoided certain sectors that we thought were less creditworthy. So we actually avoided the financial sector in terms of a smaller concentration in that area. However, the main action that we took, which was a pretty significant move, was this: If you looked at spreads between the US government treasury and the corporate bonds, they were going down. We have a bond portfolio of $140 billion. In 2006, we actually lost a total of $23 million on bond portfolio due to defaults. That may not be too bad, but actually it was a bad sign.
Here is the issue. Nobody could default. Everybody had access to capital... the market perception was that if nobody is defaulting then there must not be any risk there. But it was actually the opposite. So we decided to convert some of the $15-20 billion cash flow into treasury as opposed to corporate bonds, in the event that if there was some kind of blow-up, we would be better positioned because we would have more cash on hand to invest when spreads widened into much more attractive investments, and less at risk with respect to those bonds.
What is the quality tilt saying now?
TM: We are still diverting a large amount of money into US treasuries, but it is now not so much about the credit issues... the reason that we are leaning towards treasuries is due to liquidity issues.
How was NYL able to take cover while the others missed such signals?
TM: The reason that we could actually do it was because we gave up earnings to do that. A lot of companies wouldn’t do that. We did not have to defend the decision. Part of that is tied to the fact that we are a mutual company.
Has there been no pressure to demutualise?
TM: In the late ’90s, a lot of US insurers began to demutualise. For us, we decided to remain focussed on life insurance. Second, if you do not need the capital, and we did not need the capital, all that we would do is to introduce a potential conflict.
TM: I think you have to look at the context of the market environment. I think it makes a case in the US given the market dynamics there. In India, there is the advantage of not being a publiclytraded entity in terms of making the right long-term decisions... on the other hand, given the growth opportunities in this market, it may make sense. So, it is not an obvious decision.
So, when does MNYL list in India?
Analjit Singh: There are many things that need to happen before we consider such a change... we don’t have a decision either way. We will wait for the opportune time.
What are MNYL’s funding plans?
AS: Both shareholders are committed to making their respective share of capital available to MNYL as we have been doing till now. The paid-up capital of the company is Rs 1,900 crore today. Our peak funding plan calls for up to about Rs 3,800 crore—another Rs 2,000 crore over the next few years or so. What is the individual status here in the joint venture as there are signs of FDI cap in insurance increasing? AS: Unfortunately, we have a very unexciting response to the question. First, we are both eagerly waiting for the FDI cap to increase. We would like to see it happen in the near future. Second, we have a clear agreement filed with the IRDA that NYL has the option to go up to 50 per cent as and when the norms permit that. We have even announced our transaction criterion. Max India will sell its 23 per cent shareholding in MNYL to NYL and we have agreed how we would value those shares.
How does the competitive scenario in India look like?
TM: One way is to look at the strength of the parent company. Also, we are focussed on life insurance. And the stability of the earnings profile in life insurance business is much better. Many other life insurance companies are into many other businesses.
In the past year, when everyone has been under pressure, we have had a 13 per cent increase in our insurance sales, i.e., $2.4 billion in insurance sales; we had 8 per cent growth in our revenues, and we actually had growth on our operating earnings, though there was a decline in the growth rate. But the average US life insurer in 2008 had a 50 per cent decline in its earnings base as a result of the market conditions. So, this is a story which is consistent across NYL and MNYL. Sure, the economy is tough but in many ways it is an opportunity to show that we have a better and more sustainable business model.
What are the challenges in the Indian market?
AS: Right now, the first challenge is the restoration of confidence in India at large. And that has to do with credit policy, cost of money, cash flows—the same answer as it would be for any business in India. If environment gets fixed, we get a boost. In life insurance, we lost some growth, particularly in October, November, and December. January has been a reasonable month. In February, we are looking to grow around 20 per cent over February 2008. That is not, perhaps, true for all life companies. Our planning in the early days of this year leads us to believe that we will gain market share in the coming 10 months of the year.
Any plans of launching an asset management business in India?
TM and AS: Not immediately.
New York Life’s motto: Confidently humble
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