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FEB. 11, 2007
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Taxing Times
The phase-out of central sales tax is yet another move towards ushering in the national goods and services tax (GST). The compensation to the states, in lieu of CST phase-out, will include revenue proceeds from 33 services currently being taxed by the Centre as well as 44 new services of an intra-state nature that will be traded by the states. However, VAT is the way forward, though much needs to be done to iron out the anomalies in the current VAT regime.

India, Ahoy!
Indian investments overseas are growing and how. For instance, total Indian investment in Latin America and the Caribbean has topped $3 billion (Rs 13,500 crore) so far. The latest investment is by ONGC Videsh, which acquired an oilfield in Colombia for $425 million (Rs 1,912.5 crore). Earlier, ONGC bought an offshore oilfield in Brazil for $410 million (Rs 1,845 crore).
More Net Specials
Business Today,  January 28, 2007
"Mortality Is More Predictable Than Interest Rate Risk"
Sy Sternberg/ Chairman & CEO/ New York Life Insurance Co.
"The US market is growing at only 1 per cent as opposed to the Indian market, which is growing by over 100 per cent"
"We have not been able to move as quickly in China as India. China is four years away from break-even, India may be just two"
In the 162 years that it has been around, New York Life Insurance Company has insured a wide variety of people, including Presidents of the United States (Teddy Roosevelt and Richard Nixon, among them), famous sports stars (baseball legend Babe Ruth) and legendary journalists (Henry Luce). Over the last 10 years, it has been Sy Sternberg's responsibility to keep New York Life as the #1 insurer in the US. A native of Brooklyn, New York, Sternberg is the Chairman & CEO and also the man instrumental in kick-starting New York Life's joint venture in India with Analjit Singh's Max Group. In India recently, Sternberg, 64, met BT's Anand Adhikari to talk about the challenges of growing in mature markets like the us and the opportunities in emerging markets such as India. Excerpts:

NYL is well known for charity and philanthropy. How difficult is to earn every dollar in the competitive life insurance business?

Insurance is a tough business in the sense that you have to invest capital today and there are chances that you may not get the return in the next 10 years. So, a lot of people do not want to enter the insurance business because of long gestation periods. We, having been in the business for over one-and-a-half century, understand this business much better than many others.

Let me put it another way: how do you manage the ever growing expectations of policy holders, especially when insurers are seeing escalating costs, higher life expectancy and also competition?

We tell our customers the most important thing, and which is that New York Life is around to keep its word and promise. Our company has been around for 162 years and through every war, every depression and stock market crash, New York Life has always paid its claims. We have to deliver what we promise and any one of our subsidiaries outside us will make the same level of commitment to customers.

The US today is the most sophisticated and yet the most saturated market for insurance in the world with almost no growth. How do you differentiate yourself and manage to keep the leadership position?

The US market is challenging because it is a mature market. This market is growing at only 1 per cent as opposed to the Indian market, which is growing by over 100 per cent. That's the challenge. The challenge for us is, how does one company differentiate itself from another when the market isn't growing. The way we do it is by reflecting on the company's ability to keep its long-term promise. We are a (Moody's) triple A-rated company. We have $13 billion of surplus fund to take care of any future eventuality. There can be pandemic flu, or September 11, or other human tragedies, but we have the financial strength to pay any kind of claims.

What about product offerings? How is a New York Life insurance product different from that of a competitor?

In the life insurance business, products do not provide differentiation because any product could be developed or copied easily. That is not the differentiation area. The differentiation actually is in terms of training and education. We train our agents better than any other insurance company in the world. That applies not only in the US, but right here in India. There is more training given to agents than you find in any other insurance company.

In India, we have seen a trend towards stock market-driven unit linked insurance policies (ULIPs), which are not understood very well by the masses here. In fact, people buy unit linked more as an investment than insurance? What has been your experience in the US?

ULIPs became very popular in the late 90s on the back of buoyancy in the stock market, but when the stock market fell in 2002, everybody abandoned them. In fact, people are again coming back to unit linked. This unit- linked phenomenon is largely a function of stock market behaviour. I must tell you that the maturity of the market doesn't really determine the issue with respect to product offerings. It is really the equity market. If there is a belief that the stock market is going up, people buy unit linked products to become rich and vice versa.

What has been New York Life's experience in the ULIP space?

New York Life specialises in traditional insurance products. We sell about 20 per cent of the unit-linked products, while other companies in the US have about 50-60 per cent share of unit linked. In fact, there are some companies which only sell unit-linked products.

How close are your competitors-Metropolitan Life Insurance and Prudential Life Insurance-to you?

Globally, new premium sold is an indicator of the performance of life insurance companies. New York Life has been judged as #1 in four of the last five years under this parameter. In 2005, Met Life merged with Travellers Life and they became bigger than us. But in just one year's time, we got back to #1 position. Today, New York Life sells more new premium than any other insurance company in the US.

Any surprises in 2006 so far as the financial performance of New York Life is concerned?

We are having the best year as long as I can remember. Life insurance sales are going to be up 22 per cent. Our earnings are expected to go up 17 per cent and revenues, which is a very hard number, are expected to grow 11 per cent. Our surplus will be $13 billion by 2006. Our investment sales will be $29 billion, up 20 per cent. All our measures are the strongest since I became chairman in 1997.

What according to you is behind this impressive growth?

I would say the reputation of our company and that has grown bigger and bigger. People in New York say 'that's a great company to work for' and that's what brings in big bucks.

If we look at the broad business segment, which is the fastest growing segment and one that holds promise for New York Life's future?

Undoubtedly, the international segment is the fastest growing amongst all our businesses. In the current year, international segment will grow at about 30 per cent in sales. In fact, one of the biggest contributors here is the Indian operation. Indian operation is growing at over 100 per cent in terms of sales year after year. Back home, even in a flat domestic market, we expect to grow by about 11 per cent. We are actually beating the market by 9 per cent if you look at the overall market growth of 1-2 per cent in the US.

Your competitors-Met Life and Prudential-are publicly traded company. Any thought of going public?

We are one of the few remaining mutual companies in the US. Met Life and Prudential both converted into public companies. Right now there is no thought at all to convert into a public company. There is not even one member of the board who thinks we have to change this instance. It's totally unanimous. We believe that life insurance business is a long-term business. We make promises that are 30-40 years out. When you run a public company, you worry about the earnings for the quarter or the next year and sometimes have to make short-term decisions to look good for the stock market. We don't want to do that, we want to make decisions that are enduring in the long term.

Secondly, publicly-owned companies generally want to minimise the capital. As against this, our view is the same as the policy holder's and which is to maximise capital. Today, the two highest rated companies in the US are New York Life and North West Mutual. Both are triple A-rated companies. It is because the public companies don't hold that amount of capital.

Will you be able to maintain this in emerging markets like China and India?

First of all, as long as the primary ownership of the parent is mutual, we can have a public company at the local level. As a matter of fact, in Thailand our company does have public shares. We have a joint venture in Thailand with Siam Commercial Life Assurance. Going forward, we are not taking any position relative to the specific international operations.

A majority of New York Life's funds is locked up in fixed income securities. Any thought of shifting assets to equities, since they tend to earn higher returns?

We have overall equity exposure that runs around 8 per cent out of the total assets of $130 billion. If you look at the specific businesses, our life insurance business has about 12 per cent, and pension and annuity business keeps equity for a very short period. Sometimes, it's even zero. In fact, our proportion of equity or fixed income securities is driven solely by our liabilities. We are not in the business of timing the stock market. We recognise that a part of our assets has to be invested for the long term. Wherever we have unit-linked products, the money definitely goes to equity, depending upon the nature of the insurance scheme.

There have been alarming interest rate fluctuations recently in markets like the US, where the Fed rates gradually moved up from a decade-low of 1 per cent to 5.25 per cent. Does it affect your fixed income securities portfolio?

It does affect our portfolio. One has to recognise that some of the risk that one takes in insurance is interest rate risk. As a matter of fact, interest rate risk is a bigger risk for us in the insurance business than the mortality risk. Mortality is more predictable than interest rate risk.

You started China operations two years after you launched in India. What has been the progress in China?

We have not been able to move as quickly in China as India. We are currently in six cities in the mainland. The Chinese operations are also far smaller than in India because you need separate approval for every province and only then you can go to the cities to sell insurance. Right now, I would say China is at least four years away from break-even and India may be just two years away.

Which is the bigger market-China or India?

In the short run, clearly it's India. In the long run, people speculate that China will be as big as India. I don't think any one would say that in the long run Chinese operations will be bigger than India, but clearly China is a much longer term bet than India. We also have big operations in Latin America and Mexico. We are the second-largest life insurance operation in Mexico.

But your Indian operations don't seem to be making waves compared with aggressive players like ICICI Prudential, Bajaj Allianz...

As of today, we are #5 in premium and #3 in terms of new policies sold. We have got great management in India. Our performance has met, and even exceeded, our business plans, year upon year. We have sold over 1.20 million policies. In fact, we are today amongst the top three highest capitalised private life insurance companies in India.

How do you plan to scale up the business in India?

We are focussing on the full range of products. We will continue to fund our business with regular injection of capital as and when required. We would be expanding to new geographies. We have expanded the number of offices across India to over 100 offices and plan to continue with this expansion. These initiatives will help us in reaching out to more consumers and further improve our service levels.

And in terms of products?

We will continue to focus on protection and long-term wealth creation, as we believe that the penetration of life insurance in India can rise manifold.

Will you increase your stake in the Indian joint venture if the government were to enhance the FDI limit from the existing 26 per cent?

We definitely want to increase the stake in Indian subsidiary. We are really looking forward to an increase in FDI cap from 26 per cent to 49 per cent. We have an agreement with the Indian partner, Max, that if there is relaxation in future, then Max would sell their stake to us.

Are you satisfied with the Indian private sector life insurance industry's performance in the first 5 years?

Indian people have shown a great interest in the true value of life insurance. We see tremendous potential for expansion in the Indian life insurance market. The penetration of life insurance is currently one-third to one-fourth of what it should be. With liberalisation of the sector and entry of private players, customers are becoming more aware of the role and scope of insurance. This will translate into a wider variety of products and tailor-made solutions for Indian consumers. Overall, we expect a larger, more competitive and vibrant life insurance market.

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