Transcript: Northwestern Mutual Holds Course With New Leadership

A new era of leadership has arrived at Milwaukee-based Northwestern Mutual Life Insurance Co.

Edward J. Zore has retired as chief executive officer, succeeded by John E. Schlifske. Both executives participated in an exclusive audio podcast with BestWire senior associate editor Fran Lysiak. Here is the transcript:

LYSIAK: I'm Fran Lysiak with BestWeek. Joining me today are Edward Zore, the retiring chairman and chief executive officer of Northwestern Mutual Life Insurance Co., and John Schlifske, president who became CEO on July 1 and is set to take over as chairman on Aug. 1 after Zore retires. Welcome to you both.

ZORE: Good to be here.

SCHLIFSKE: Good to be here, Fran.

LYSIAK: I'm pleased to be able to speak with each of you today. Ed, let's start with you. You have more than 40 years with Northwestern Mutual and likely many insights into the U.S. life insurance industry. Trained as an economist, you joined Northwestern Mutual's investment department in 1969 and held various investment positions over the next 28 years. Ed, what are some of the biggest or more significant changes that have occurred or that you've seen in the industry over the past several years?

ZORE: Well, I could speak for several hours on that but I'll try to keep it really short. When I first started at the company I believe most of the big companies were mutual companies. Now as you know most of the companies in the industry are stock companies. There's been tremendous consolidation. The number of competitors we had back in '69 and then in the '70s and '80s has been reduced significantly through mergers, acquisitions, in some cases just winding down of businesses.

Back in the old days, the insurance industry was primarily focused on protection products like life insurance; annuities weren't that big a product for most companies. If you take a look at the business mix today it's split. Most of the companies are focused on annuity and savings-linked products as opposed to pure protection products, at least as a measure of premium income.

The last big change has been the change in the type of producers that the industry uses; 40 years ago I believe most of the companies had their own aligned field forces. Today a few companies have exclusive field forces. Most companies are using brokerage channels to sell their products.

So those are the big changes that have occurred in the industry. Along with that the whole business has become much more complex and the products are much more complicated than they were many years ago.

LYSIAK: Can you just elaborate on that last point, Ed? How are they complicated or which products?

ZORE: Sure. For our products, our representatives could carry a little rate book in their vest product that would be the size of a wallet. Today they would have to have a laptop. That's because the protection products have all kinds of permutations. The savings products, the annuities have all kinds of different features. There are different options. There are different things that people can acquire for their specific financial security needs. So the technology that's been applied to the business has allowed the products to become more complicated and more tailored to specific individual needs. It's happening in financial services all over.

LYSIAK: Right now financial services reform is occurring. It's winding through Congress. Who knows where that's going to go? What's your take and what might you see as the industry's concerns if any with what's going with financial service reform?

ZORE: Well, the industry has largely avoided some major regulatory initiatives directed at life insurance companies. That has been good. We will have an Office of National Insurance, which is not going to be a regulator. It's going to be an oversight body within a regulatory framework. Frankly, we think it's good to have somebody in Washington that is familiar with and looking out for the insurance industry.

In the nine years that I've been CEO -- and I've been really involved with the ACLI -- we have been lobbying Washington for the option of a federal charter. Because in many cases companies find dealing with 50 different state regulators complicates things. We've never anybody in Washington to do anything about the industry. So that's a good thing.

We were worried about having some kind of financial penalties imposed on us as part of the regulatory reform and payback for the bailouts. But I believe the latest iteration that I've seen, we've avoided that. We don't, at least from Northwestern Mutual's perspective, see any major issues in the regulatory reform as it exists right now that will have an impact on the way we operate.

LYSIAK: What do you see as your main accomplishment as CEO of Northwestern Mutual?

ZORE: Well, I inherited a very good company. I tried to keep it a very good company. So I think I accomplished that. We kept our focus, although we became much more efficient. We tried to become world class in everything that we did. By world class I'm just talking about if we're servicing clients we want to make sure we do it in a fashion that's up to the highest standards of any industry. We expanded our product lines. We didn't do anything silly. We didn't have liabilities that blew up on us. We didn't have options in our products that caused us concern. We remain financially strong, which has been our hallmark and has been really important over those last several years. Lastly, we focused on strengthening our exclusive distribution system, which for us is a key element of the Northwestern Mutual business model and value proposition. Our field force is growing now. It's very healthy and we've spent a lot of time and effort over the last 10 years in trying to make it better. So I feel very good about the position that we're in right now.

LYSIAK: What do you see as the state of the industry post 2008 financial crisis?

ZORE: Well, I think the industry demonstrated that it is more disciplined than other financial services companies in different sectors. Other than AIG, which the insurance part of AIG was good, the hedge fund part is what blew up, but other than AIG, most of our companies came through this financial market meltdown in relatively good shape. We all took nicks in our investment portfolios. We had to worry about what was going on around us but the industry demonstrated it didn't go out on a limb on a lot of the different things that some of the banks and broker/dealers did. As a consequence the industry is still intact.

As I take a look at the position of the industry today and what this country needs, I think the industry is perfectly positioned. We have what the country needs to help get us out of this financial malaise we're in. We provide financial security to individuals and businesses. We provide products that help people take care of their needs and we do it in a high-quality fashion. As I look at the prospects of the industry right now, I think they're great. I think we came through this period in stronger shape than perhaps we realized at the time we went into it.

LYSIAK: For Northwestern Mutual's 2009 results, your company reported a 57% drop in net operating income in 2009. Can you tell me a little bit about that and what the impact was, why your results were down? It dropped to $475 million from $1.1 billion in 2008.

ZORE: Yes, it's not the number that we focus on because we pay dividends. We pay out as much as we can in dividends. So the net operating income is the residual we have after gross operating income minus expenses minus dividends. We end up with a net operating income number, which frankly we can make whatever we want. I could have had a $5 billion number if I'd paid no dividends. We try to pay out as much in dividend per policy owner each year as we feel we can afford, leaving the company in great financial shape. So again we pay it out in dividends, we put some money in surplus and the residual is what we have left over that goes to the bottom line that basically is our contribution to surplus. So that's a managed number.

LYSIAK: I want to hear about your "leaving a legacy," an initiative there. You launched this earlier this month as part of your charitable efforts there. Tell me a little bit about that.

ZORE: Our company is very involved in the community. We encourage our employees and our associates to become involved in this community and in the field offices of whatever communities they are located in. We think it's very important, not only for business but very important for society. Healthy communities make it a better environment for us. I've been involved in both before I was CEO and as CEO in many different nonprofit causes in this town. Our company is the major sponsor of nonprofit activities in this town. We felt that in my departure as a gift to the employees, instead of giving out a paperweight or a pen or some little trinket, that we would give our folks the opportunity to make a contribution, a further contribution to our community. This is our Leaving Our Legacy program, which basically lets people take four hours of paid time off and contribute that time to any nonprofit that qualifies. It's really been well received. We hope to accumulate 1 million minutes of time devoted to nonprofits. We're getting close to that right now.

LYSIAK: And where did you kick off the campaign earlier this month in June? Tell me how that worked.

ZORE: Well we had a number of people that went to a day camp; well actually it's not a day camp. It's a camp that's on a lake run by the Boys and Girls Clubs. We had I believe 125 Northwestern Mutual employees along with folks from the Boys and Girls Club and folks from an organization called Kaboom. We constructed and installed a new playground plus made some improvements to the camp. It was amazing to watch this all happen in a period of about I think six or seven hours. From laying, mixing concrete, laying concrete, putting up slides and all kinds of playthings to building picnic tables, it was just amazing. Everything worked well. Nobody got hurt and everybody had a good time.

LYSIAK: It sounds interesting. That sounds like a worthwhile effort. Best of luck to you and I appreciate you speaking with me today.

ZORE: Thank you. I guess this would be my last time speaking to Best.

LYSIAK: John, you held several positions. You joined Northwestern Mutual in 1987 as an investment specialist. You most recently served as president and CEO of the subsidiary at Northwestern Mutual called Russell Investments from 2008 to 2009. Then you were named president there at Northwestern Mutual last year. Can you tell me a little bit about your experience and how that will serve Northwestern Mutual going forward?

SCHLIFSKE: Sure. The bulk of my career has been spent at Northwestern Mutual. The first maybe two thirds was on the investment side here. Obviously we're a large money management firm in our right, managing $150 billion plus or minus of investments. I did spend a tremendous amount of my career though dealing with our field force and a lot of the products that our field force sells, until I went to Russell a couple of years ago to serve as their CEO on an interim basis. Russell, as you know, is a subsidiary of Northwestern Mutual. It's a global money management firm; operates distinctly from Northwestern Mutual in all respects. My tenure there was primarily to serve as a place holder until we could find a CEO to permanently run the place. I got a lot of neat experiences out of that. The primary benefit of that experience for me was just the chance to operate as a CEO of a large company and really hone my business skills in that kind of environment.

LYSIAK: I do want to bring up, because this is significant and I had reported on it, about the commercial real estate holdings of life insurers. Can you tell me about this and what's the state of Northwestern Mutual's commercial real estate investment holdings?

SCHLIFSKE: Sure. Just from a post-financial crisis perspective we couldn't be better positioned as a company. We have the highest possible strength ratings from all major companies. We're growing organically, both in terms of revenue and in terms of our sales force, our career agency system. So from a post-financial crisis perspective we're incredibly well positioned to continue our mission of delivering financial security to our policy owners.

From a real estate perspective, we've been very involved in the real estate market for decades at this company. We're a big investor both in commercial real estate directly as well as in mortgage loans. Our track record in those asset classes has been way above average. Back in the '90s, our default rate on mortgages was a fraction of the industry's default rate. So we view real estate as a core part of our balance sheet, investment holdings and continue to invest in that asset class going forward.

LYSIAK: A.M. Best had noted in March, though, that the company does have above average aggregate exposure to commercial real estate, below investment grade bonds and equities, both public and private. Can you clarify?

SCHLIFSKE: We as a company given our business model, have an investment portfolio that in many ways is different than our peer companies. It allows us because of our long-term orientation, the fact that we're a mutual company, the fact that we're predominately a life insurance company, it allows us to invest in asset classes in terms of a size perspective that many of our peer companies don't. We view that as strength. We have a diversified portfolio. We invest across the world and across all asset classes. At the end of the day we believe this gives us a chance to deliver higher returns to our policy owners without actually increasing the portfolio risk because many of these asset classes don't vary in terms of their results directly. So it gives us a little bit of a smoothing of our overall performance and also better than average returns in the long run.

LYSIAK: What's your management style and what was Ed's? Are you similar? Different? What can employees expect with this management change?

SCHLIFSKE: I'd say we're more similar than we're different. I've worked for Ed for, directly and indirectly, my whole career practically. I've learned a lot from his management style. I think there are a lot of great things about Ed's style that I intend to keep going. I'd say the one thing that Ed was incredibly good at was creating an environment of transparency and open communications with our field force, with our policyowners, with our employee base and with external constituencies like the rating agencies, with A.M. Best. Because we were so open the high level of trust between each one of those constituencies and our management team and I think that's been a really powerful factor, especially when things get in sort of a disarray like they did in '08 and '09. I intend to continue that. We have a collaborative management style here. This is not an environment where there's one leader making all the decisions and everyone else is following that. It's more of a team approach to leadership with our senior team being very involved in all the major decisions that affect the business. I intend to keep that going.

The other thing that Ed taught me that I really intend to focus on is that executives here, there's a lot of discussion on what they're going to do and there's clear alignment with the CEO on what you're going to do. But there's a lot of latitude on how you do. Ed's allowed each one of those of us on his management team to have a fairly free hand in accomplishing the goals and using our particular leadership styles to do that. I intend to continue that as well. What that does is it creates an incredibly high functioning team at the top that then flows down to the rest of the organization. I think that's one of the reasons we're so well managed as a company. I would say all of those things I would continue to emulate when I become CEO.

LYSIAK: Do you plan on making any changes to the company, let's say with perhaps the structure of the company?

SCHLIFSKE: The answer is no. I can tell you what we're not going to change. We're not going to change our culture around doing the right thing. We're not going to change our focus on financial strength. We're not going to change the fact that we're a mutual or that we use a career agency system. We're certainly not going to change our focus on financial security with our policy owners. So when you look at it, where you see change at Northwestern Mutual and Ed used this term with me a while ago and I've plagiarized it 100 times, this is just like another chapter in the same book. We're going to evolve as a company. We're investing in new things, new products, new field force techniques, creating more consumer centric issues around service and reporting. We're spending a lot of money but it's all evolutionary. There just will not be any major changes in the things I mentioned, nor am I considering any major structural changes to the organization at all.

LYSIAK: John, thanks for speaking with me today and I hope to interview you many more years in the future.

SCHLIFSKE: You're welcome, Fran. I look forward to that.

LYSIAK: And Ed, again congratulations and enjoy your retirement.

ZORE: Thank you. I hope I do. I think I will.

LYSIAK: I'm Fran Lysiak with BestDay Audio.

To listen to the entire interview with Zore and Schlifske, go to http://www3.ambest.com/ambv/displaycontent/MediaArchive.aspx?RC=175192

(By Fran Matso Lysiak, senior associate editor, BestWeek: [email protected])