A Chat with Penn Mutual CEO Bob Chappell During Hard Times, Mutual Ownership Can Make Life Easier

Copyright 2008 SourceMedia, Inc.All Rights Reserved Retirement Income Reporter

December 2008

NEWS; Pg. 18 Vol. 15 No. 12

718 words

A Chat with Penn Mutual CEO Bob Chappell During hard times, mutual ownership can make life easier.

Paul Menchaca

Despite the economic turmoil that continues to weigh down the global markets, Penn Mutual Life Insurance Company continues to assert its financial strength, but remains guarded against catastrophic downside risks.

The company, which has $7.4 billion assets under management, had its 'AA-' counterparty credit and financial strength affirmed by Standard & Poor's in October.

The rating agency cited Penn Mutual's "strong competitive position, very strong profitability, extremely strong capitalization and liquidity, high-quality investment portfolio and adequate risk management."

New York Life also asserted its financial strength recently, which raises the question of whether mutual insurance companies are structurally built to weather the market storm better than their publicly owned competitors.

"As a mutual company we've maintained higher capital levels than will be required," said Bob Chappell, chairman and CEO of Penn Mutual. "When things do go awry we've got more capital to sustain us. As a mutual company we feel we can afford to keep that extra capital on the balance sheet in good times. That makes it better for us in the bad times."

Penn Mutual works closely with its producers to gauge the marketplace and know which products have the most appeal. It continues to see that variable annuity living benefits appeal to many clients.

By taking a longer-term perspective, the company doesn't feel compelled in the good times to reduce its capital levels because it knows that in the future they will be needed, Chappell added.

"Our normal and most emphatic measure of success is not the return on capital," said Chappell. "When return on capital or return of equities is your measure of success, it can make you want to reduce your capital levels."

Nearly 86%Â of Penn Mutual's investment portfolio is in cash and investment-grade bonds. The average rating of the bonds in the portfolio is 'AA-,' with over 50% of the bonds in the portfolio listed as 'AAA' rated.

Penn Mutual also has a surplus of about 18.5% of its assets, compared with an industry average of about 11.9%. The company manages conservatively and believes that its ability to increase its capacity to sell and market is important at this time.

"In this economic environment you have to be careful where you're spending your money," said Chappell. "Like other companies, we have to judge where spending will be most productive over the horizon that we're planning on."

By taking a long-term perspective, Penn Mutual makes sure that its hedges activity is for economic and not just accounting purposes. Chappell notes that accounting and economics don't always match up.

"Particularly in the last five or eight years, a lot of the new accounting practices let you do things that are good for accounting but not good for the economic sustainability of the company," he said. "You obviously have to follow the accounting rules, but you also have to focus on the long-term economic impact of these decisions."

In light of the credit crisis, controlling risk has become paramount in the financial services industry. Penn Mutual started a separate risk management department several years ago to take a holistic view of its risks.

"We try to inculcate in all of the people who make decisions at Penn Mutual what the risk factors are with the decisions they're making, and what the ramifications of those factors are," Chappell said.

The company looks at the normal risks, the things that can happen in a normal bell curve, but also pays attention to those major problems that will arise every hundred years. Over the past several years Penn Mutual has been paying significant attention to the risks that could cause a catastrophic downside.

"Risk management doesn't mean you'll eliminate risk, it just means that you understand the risks and do your best to eliminate the ones that could significantly harm your ability to fulfill your mission," he added.

In an extended down market, Penn Mutual hopes to strike a balance between responding to immediate circumstances and preparing for the future.

"If the assets under management are down by 25%, obviously the fees based on those assets will be down proportionately," Chappell said. "You can't ignore the present and always operate in the future, but neither should you just operate in the present."

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December 1, 2008