New York Life CEO Sy Sternberg decided to go abroad rather than go public. That's just one of his contrarian moves that turned out to be right on the money.
By Jacqueline S. Gold
November 2002
Institutional Investor Magazine
Seymour (Sy) Sternberg likes to go his own way. A computer whiz, he jettisoned a promising career as a missile-systems engineer for actuarial tables. A onetime consultant, the CEO of New York Life Insurance Co. now won't let any corporate advisory firms sell him anything. "They're always pitching," he grouses.
Sternberg is just as contrary in running his business. In the 1990s, when much of the industry was jumping on the financial supermarket bandwagon, diversifying into banking and securities brokerage, he stuck to peddling life insurance. When rivals took an ax to distribution to slash costs, Sternberg lavished millions on his force of 10,200 full-time salespeople in the U.S. And as one insurer after another decided to go public to raise capital and get currency to make acquisitions, Sternberg held fast to his mutual structure. Now New York Life is targeting emerging markets for expansion at a time when many of its competitors are licking their wounds at home.
"If I was running a public company, my shareholders wouldn't really care what's going to happen 30 years from today. Their priority is next quarter, next year," says Sternberg. "We don't squeeze out expenses. We leverage competencies, and it works."
Flouting conventional wisdom has served New York Life well. Since Sternberg became chairman and CEO in 1997, profits have risen by 60 percent, from $650 million to $1.09 billion, while annual life insurance and annuity sales have climbed from $2.9 billion to $5.5 billion. The company's share of the U.S. life market has expanded from 5.5 percent to 7 percent, while dividends to policyholders have leapt from $5.8 billion to $7.3 billion. Rather than go public, New York Life raised $1.3 billion by selling two units that didn't fit its life-focused strategy: the health care business, to Aetna in 1998, and the long-term disability operation, to UnumProvident Corp. in 1999.
Meanwhile, newly public rivals like John Hancock Financial Services, MetLife, Prudential Insurance Co. and UnumProvident have watched their shares slide and their earnings -- with the exception of Hancock's -- sputter. With $111 billion, New York Life ranks eighth in assets among U.S. insurers; that's more than double the $47 billion of 1989, when Sternberg joined the company, although its rank has fallen from fifth, as rivals grew faster through acquisitions. In annual revenues, at $26 billion, New York Life ranks tenth, but in the life category it trails only MetLife and Prudential.
Mutual ownership certainly hasn't cramped Sternberg's style or ambition. Life insurance may be a mature business stateside, but Sternberg sees big potential in countries like China, India and Mexico, whose emerging middle classes make them reminiscent, he says, of the U.S. in the 1950s -- the heyday of life insurance sales. "The middle class is the raw material of our business," says Gary Benanav, CEO of New York Life International. "Our market is not the upper crust."
To be sure, these won't be easy markets to crack. There's a high cost of entry and growing competition, and U.S. rivals like American International Group and Citigroup are already ensconced in some key markets. But New York Life is beginning to see returns. After spending nearly $1 billion over four years on acquisitions, recruitment and joint-venture start-ups, New York Life International expects to record its first small profit this year. The unit currently generates 26 percent of the company's life insurance sales, which totaled $1.6 billion in 2001, on its way to a projected 50 percent by 2009.
"Sternberg has been a very effective CEO," says Thomas Upton, an insurance analyst at Standard & Poor's. "He's made a lot of changes to the organization. He's sold off noncore operations. He's introduced tremendous efficiencies in the distribution network."
Sternberg's timing has been pretty sweet. His redoubled focus on the company's traditional business lines -- "We're a life insurance company, and we're proud of it," he proclaims -- plays well in a sluggish economy marred by a bear market for stocks: Life policy sales at New York Life shot up 41 percent in 2001 and 31 percent in the first half of 2002. "We're on an 18-month run that's unbelievable," says president Frederick Sievert.
But the company will face a big test when markets recover and customers who had found a safe haven in prosaic life policies look again for market-driven returns in variable life and annuity products, as well as in stocks and mutual funds, which have not been strong New York Life suits.
MetLife chairman Robert Benmosche warns that the mutual model will have a hard time surviving an upturn: "As more people become aware of demutualizations, they will put pressure on the company to issue shares."
But Sternberg is holding firm: "We made these decisions in a booming stock market, and they started to pay off before the market tanked. I'm sure we'll do fine when the market comes back."
STERNBERG WAS AN UNLIKELY CHOICE TO HEAD one of the oldest companies in a tradition-bound, risk-averse industry. The 59-year-old grew up in the working-class Bensonhurst neighborhood of Brooklyn, New York, and attended public schools all the way through college, earning an engineering degree from City College of New York.
Sternberg's father, a Romanian emigrant, was a Western Union telegraph operator, while his stay-at-home mother pushed him to excel in school. She drummed into Sternberg the fact that his father gave up the chance to attend Cooper Union for the Advancement of Science and Art, an elite engineering school in Manhattan, because he had to work to support his own mother.
"God forbid I came in with a report card that wasn't quite right," Sternberg recalls. He spent three hours a day commuting back and forth to City College, and in 1965, five days after earning his engineering degree, Sternberg moved to Peabody, Massachusetts, to work for defense contractor Raytheon Co. There he had access to some of the most advanced computers of the time, financed by the Vietnam-era boom in federal spending. "They saw me as the kind of guy who learned quickly, so they gave me the opportunity to work on independent development projects," Sternberg says. In one project he helped pioneer computer-assisted design technology.
That assignment landed him in Raytheon's fledgling management information systems department. In 1971 Sternberg, by then married with two daughters, became head of management information systems, at 28. "It was very exciting," he says. "We did some of the earliest work in online systems anywhere in the United States -- purchasing, inventory control, billing and inspection systems."
But Sternberg concluded that his career prospects there were limited, so when Norman Zachary, a computer consultant retained by Raytheon, called in 1973 to ask him if he'd be interested in joining his firm, Data Architects, Sternberg jumped. His first assignment, for MassMutual Financial Group, was to oversee the building of an online network connecting 140 offices with company headquarters in Springfield, Massachusetts. "At Raytheon if you become successful in MIS, nobody knows who you are. The company wasn't in the information systems business, it was in the missile business," Sternberg says. "If I was going to do information systems, I'd rather do it in an insurance company, where it's mainstream."
Zachary, now a director of Express Scripts, a prescription benefits management company spun off by New York Life in 1992, remembers the young Sternberg as "very fast and very good." On any new technology, he says, "it took Sy one weekend to get up to speed." Adds David Blackwell, who then headed MassMutual's information technology department: "Sy has some rough edges. He's a New Yorker. But he was so smart. People saw his basic honesty and his intelligence, and they respected him for it."
While on the MassMutual project, Sternberg impressed then-president William Clark. MassMutual's CEO from 1980 to 1988, Clark remembers "a very smart young man -- not the most polished individual in the world, but he was so damned intelligent. In a short time he knew more about our health business than I did."
In 1975 MassMutual hired Sternberg as director of information systems, reporting to Blackwell, who assigned him to fix a troubled group insurance claims-processing operation. "Sy developed a very good system," says the now-retired Blackwell. "He soon knew more about it than those who came out of the actuarial or sales side of the company."
However, the group operation was still losing $15 million a year. In 1981, at Blackwell's suggestion, Clark put Sternberg in charge. His task: Either turn the unit around or dress it up for sale.
Sternberg, who until then knew nothing about underwriting or sales, instituted a new pricing structure that had the effect of turning money-losing customers away and boosting the profitability of those who remained; within a year the unit had turned a profit. In 1982, with group sales at $77 million, Sternberg was promoted to executive vice president. By 1986 sales had reached $157 million. (MassMutual sold the business in 1996 to Wellpoint Health Networks of Thousand Oaks, California, for $380 million.)
Despite his success, Sternberg found his way to the top blocked, because Clark had designated as his successor Thomas Wheeler, who'd come up the traditional way, through the agency system, and who ran the life and annuity business. Sternberg was named to a specially created office of the chairman, but when Wheeler moved into the top spot in 1988, he pushed his rival aside. Clark convinced the board to write Sternberg a $1 million severance check.
Sternberg weighed several job offers, eventually choosing to go to the bigger New York Life as senior vice president of group health. "They said that I had to prove myself, that if they made me an executive vice president, it would offend people," he says. "It was such a traditional company. They gave me a good enough financial package, so I looked the other way."
As at MassMutual, Sternberg soon turned a struggling business unit into a moneymaker. He did this by combining the health maintenance organization business with group indemnity, expanding and upgrading the agent force, introducing new products and investing in customized software to support the sales effort. Group health went from a $30 million loss in 1989 to a $24 million profit in 1992, earning Sternberg his executive vice president title. Next he was given oversight of the company's business in Canada. But Sternberg concluded that New York Life was too small to succeed in that mature market. On his recommendation, the business was sold to Canada Life Assurance Co., for $186 million, in April 1994.
In February 1995 then-CEO Hohn named Sternberg vice chairman in charge of the life and annuity business; the onetime engineer was now officially anointed, on the last stepping-stone to the top job. "You can't be the CEO unless you know life insurance, including agents," says Sternberg. He became president and chief operating officer later that year. And with the responsibility came some baggage.
In 1994 New York Life had paid $65 million to settle its portion of a class-action suit alleging that agents at various companies guaranteed customers dividends that never materialized. New York Life's liability was relatively low (Prudential shelled out $410 million), but its agents were unhappy. Hohn had dictated that all sales materials be reviewed by a separate compliance department, a policy that struck the agents as heavy-handed. "Sales fell like a rock," Sternberg says. "I had to get in there and kind of smooth some feathers and send the right message to our agents."
Sternberg patched things up with what he calls "love and loyalty": training courses and videos, improved software and frequent visits from upper management. Sales of insurance and annuities jumped from $2 billion in 1995 to $2.4 billion in 1996 and have risen steadily ever since. Crucial to this turnaround was Sternberg's belief in the importance of the sales force. The company considers full-time agents to be its primary sales generators and spends $400 million a year supporting them. "The agency system is our key market differentiator," says Sievert, Sternberg's No. 2 and heir apparent, who began running the agency system in 1994.
Other insurers don't share that attitude. Many have walked away from their agents in recent years; some firms have even started to charge agents for participating in their networks.
"You have to understand that the relationship between an agent and his company is not an employer-employee relationship but a franchiser-franchisee relationship," says Sternberg. "Any franchiser knows that the way to get and keep your franchisee is to do things for them they can't get anywhere else."
THE BIG QUESTION THAT CONFRONTED Sternberg when he became CEO in April 1997 was whether to take New York Life public. Convergence was all the rage in financial services; Congress was close to repealing the Glass-Steagall Act, which had effectively kept banks, insurers and securities brokerages from operating under the same corporate structure.
On one side of the great debate were industry leaders like MetLife's Benmosche, who, having concluded that Glass-Steagall would soon fall, felt he had to take action: "There was always a question of survivability. We needed to decide what corporate structure would allow us to compete," he says.
MetLife went public in April 2000 at $14.25. Out of the box, it was a hit: Its share price peaked at $34.85 in April 2002 before falling recently to about $25. MetLife has moved deliberately to broaden its business base. In February 2001 it bought Grand Bank of Kingston, New Jersey, now MetLife Bank, for an undisclosed price. It also merged two brokerage subsidiaries and is busy cross-selling checking accounts, securities and insurance.
Benmosche doesn't regret the decision to demutualize, but he admits: "The economies of scale are not so compelling. Returns won't be better if you're bigger, and the benefits [of acquisitions] all go to the seller."
Mutual partisans came down very differently. Robert O'Connell, chairman and CEO of MassMutual, argues that the insurance IPOs were largely motivated by greed. "Consolidation in the banking and insurance industries has been way overanticipated," he says. "Far too many people instinctively demutualized to get wealthy."
Sternberg concurs with the leadership of his old company. Most of New York Life's business is in participating whole life policies, which pay dividends to buyers and usually sell poorly when stocks are rising. New York Life conceivably could have used share capital to develop more products and mitigate business risk, but Sternberg felt comfortable with the status quo, primarily because he was sitting on a $7.6 billion cushion of capital (which has since grown to $8.5 billion). "We looked at all of our potential acquisitions and concluded that we just didn't need the capital," he says.
How right he was: In the three years since New York Life decided to stay mutual, the stock market has tanked, and consumers have scrambled for safe havens like the life products sold by mutuals. In 2001 whole life accounted for 26 percent of U.S. individual life premiums, up from 24 percent in 2000, according to insurance research firm Limra International. New York Life's sales of participating whole life jumped 15 percent in 2001. The demutualization-diversification wave -- culminating in Prudential's $3 billion IPO last December -- only helped the mutual's cause. "Here we are, the market is moving away from variable life insurance and toward traditional whole life, and my competition is voluntarily walking away," Sternberg says. "We died and went to heaven."
Sternberg didn't just sit still. Prosperity allowed him to take New York Life into global markets. His international lieutenant, Benanav, a 56-year-old native of Israel, had revived Aetna's international and property-casualty divisions before Sternberg persuaded him to come to New York in 1997. Benanav says he made it clear that he wasn't interested in an international "dabble strategy -- 'let's put $100 million here and there and see what happens.'" Sternberg obliged, giving him a free hand in hiring and in deploying up to $2 billion to bootstrap New York Life International, which now has 13,000 agents and 200 offices in 11 countries. That's up from 2,000 agents and 100 offices in six countries at year-end 1996. Sternberg expects the unit to earn $15 million after taxes this year, $30 million in 2003 and $100 million-plus in 2004.
New York Life is not out to conquer the world -- just the most promising emerging markets in Asia and Latin America. "They have to meet certain criteria: populations of at least 20 million, political stability, healthy economic growth, and the growth must translate into a growing middle class," says Benanav. The target list includes not only China, India, Korea, Mexico and Taiwan but also trouble spots like Argentina and Indonesia. "We think the storm will eventually blow over, and we want to be there when it does," Benanav says of Argentina, where New York Life has a joint venture with HSBC Holdings dating back to 1994.
Most of Benanav's investment has gone into the December 1999 purchase of the third-largest Mexican insurance company, Seguros Monterrey Aetna, for $570 million. It was a company Benanav knew well, since he placed Aetna's original investment in it -- a joint venture with Grupo Financiero Bancomer -- in 1992. Aetna decided to sell to concentrate on its health care businesses, and now Seguros is under Benanav's gaze again, with $677 million in assets, $300 million in annual life premiums and 4,000 agents.
Benanav tailors his strategy to the country. New York Life entered the Philippines de novo because, says Benanav, "we didn't see any companies there that had the kind of market share we wanted, and we didn't want to have to revamp someone else's culture." In China and India, however, to comply with restrictions on foreign ownership, New York Life set up joint ventures with conglomerates Haier Group and Max India, respectively.
But how does New York Life match up against well-capitalized multinationals like AIG, MetLife and Canada's Manulife Financial Corp.? Benanav contends that New York Life has advantages as it eyes the vast potential of markets like China, where, Sternberg likes to say, a 1 percent market share would double the company's size. AIG has roots in China dating back to 1919, but Benanav expects to gain market share there and elsewhere by developing a quality, full-time sales force.
"We may have a smaller agency force than AIG, but it will have higher sales per month, partly because of the amount we invest in agents and their training," says Benanav. "In a place like China, we'll probably spend $50 million to $100 million over seven or eight years before we expect to see a return. New York Life has the premier agency force in the U.S. We are exporting that knowledge to other markets."
Others are skeptical. Says David D'Alessandro, chairman, president and CEO of John Hancock: "Growth in Souteast Asia and Latin America will be difficult. The economies of scale of the major players will be hard to match."
STERNBERG'S ICONOCLASM GOES ONLY SO FAR: His choice for heir apparent -- Sievert, named president in September -- couldn't be more traditional. A former high school math teacher who became an actuary in his home state of Michigan in the early 1970s, Sievert, now 54, joined New York Life in 1992 from Southfield, Michiganbased Maccabees Mutual Life Insurance Co. There, as chief financial officer, he oversaw the firm's demutualization and sale to Royal Insurance Group of Liverpool, England, in 1989. At New York Life he initially served as life and annuity group CFO, later rising to vice chairman and head of that core unit.
But even as Sievert and Sternberg proclaim fealty to the life business and depend on its stability, they stress that New York Life is not too limited in either products or distribution. The company offers whole life, which pays a dividend; fixed universal life, which has an underlying guarantee; and variable life, which fluctuates with the equity markets. There are "second to die" products, which pay death benefits -- often to defray estate taxes -- after both insured parties die, as well as long-term-care products, a proprietary mutual fund family called MainStay and an array of annuities marketed in part through banks and brokerages. Annuity sales rose 22 percent in the first six months of 2002, to $2.4 billion, Sievert says.
The big challenge will be to maintain the momentum even when the stock market bounces back. "Consumers today do not believe that one company can provide competitive products. They want choice," says John Hancock's D'Alessandro. "If they are going to buy an annuity, they want to see a variety of brands. The dedicated sales force is an anachronism."
Sievert insists that the agency network is what sets New York Life apart. "More than any other company, we are focused on that system," he says. He credits New York Life's approach for making the company No. 1 in U.S. life insurance sales last year, ahead of MetLife for the first time.
New York Life has one glaring problem: New York Life Investment Management, which could see profits fall by 25 percent this year, according to the subsidiary's chairman and CEO, Gary Wendlandt. The bear market has hurt revenues at the unit, which has $150 billion under management, and its small mutual fund and retirement plan businesses are struggling to compete effectively against larger fund families. The unit's earnings, at $110 million last year, were up 10 percent from 2000 but were 35 percent below the 1999 level.
"Thankfully, we have a good deal in fixed income," says Wendlandt, 52, a former MassMutual chief investment officer who joined New York Life in 1999. "We manage a lot of bonds, mortgages, private equity and real estate," which have offset sagging equity returns.
Bonds aren't an unalloyed asset. New York Life has $170 million in WorldCom exposure and sits on the bond committee in the telecom company's bankruptcy. Moody's Investors Service says New York Life has the fifth-largest exposure among U.S. life insurers to the scandal-ridden group that includes Enron Corp., Tyco International and WorldCom. Sternberg brushes aside the amount, $974 million, which equals 1.1 percent of New York Life's investable assets and is well covered by capital reserves.
"The real challenges we faced four or five years ago," the CEO says, recalling the agents' unrest and the demutualization dilemma. "We're in execution mode now."
For the most part, New York Life has executed well. Whether it can sustain its recent successes when the financial markets recover and life policies lose their comforting allure is another question. Sternberg isn't worried, because, he says, market gyrations don't affect his long-term convictions: "When I saw insurance company stocks go up from the time MetLife went public, I didn't think we made a mistake [by staying mutual]. Nor do I think we are right just because the stock market is down now. What really matters is whether or not we're around in 30 years to pay the policy claims."
