New York Life's Investment Philosophy: Putting Your Safety First

By Gary Wendlandt, New York Life's Vice Chairman of the Board and Chief Investment Officer

The latter part of 2008 was characterized by commentators as a “financial tsunami” – an apt description.

As I write this report in February of 2009, there are indications that, with the unprecedented level of government intervention, some level of stability may be returning to the financial markets, but there is no evidence to suggest a rapid economic recovery.

Although subprime mortgage lending was the trigger for the crisis, it was only one aspect of a much larger credit boom and bust that has had far-reaching effects on the global economy. At the height of this boom, we saw widespread declines in lending standards and, at the same time, a growing number of firms willing to invest in increasingly risky and complex credit instruments, with expectations of oversized returns.

An environment of easy credit also encouraged financial institutions to borrow heavily in order to participate in all manners of investments. This aggressive leveraging strategy created outsized immediate returns for these firms but also created staggering losses when the housing bubble burst.

New York Life has remained strong throughout the crisis, ending 2008 with over $12.8 billion in statutory capital and retaining the highest ratings for long-term financial strength from all four of the major rating agencies.

Last year, I reported to you about our initial response to the overheated credit market. We believed the risks inherent in popular investment vehicles far outstripped the rewards. Rather than get caught in the prevailing climate of over-optimism, we invested cautiously. As an added precaution, we also temporarily allocated a larger portion of the Company’s investments into safe U.S. Treasury bonds.

In our 2007 Report, I also detailed a number of the most important principles that guide investment decisions at New York Life. These guidelines are worth revisiting here, as they will help you better understand how we have been able to protect the interests of our policyholders amid the events of 2008.

We Maintain Diversification
We do not take outsized stakes in any single investment opportunity, no matter how attractive it may appear. Because of this, we had a very low level of exposure to individual firms, particularly in the troubled financial sector. New York Life typically maintains one of the most diversified investment portfolios among all of the major life insurers. As of year-end 2008, our ten largest credit exposures amounted to less than two percent of our total portfolio.

We Conduct Our Own Research
We do our own fundamental, bottom-up research, rather than rely on the analysis of others. Based on our research, we independently concluded that many debt securities — including the complex repackaging of subprime mortgages — held far more risk than their ratings suggested.

We Insist on Getting Paid for Taking Risk
Our research showed that the real estate loans underlying collateralized debt obligations (CDOs) were subject to weak lending standards and questionable underwriting practices. These investments were inherently risky because they were originated with the intent to immediately repackage and sell them. We thought it foolish to take on someone else’s risk if they demonstrated an unwillingness to hold it themselves.

Similar reasoning stood behind our decision to avoid credit default swaps — the financial instruments that insure creditors against the risk of default. The inherent risks were mispriced because investors believed that historical low levels of default rates would continue – a misjudgment that proved extremely costly for many firms.

We Take a Long-Term View
We invest for the long term because we make long-term commitments to our policyholders. As a mutual company, New York Life Insurance Company’s investment decisions are not subject to shareholder pressures for quarterly profit gains. We will — and do — forsake the potential of short-term gains in order to preserve long-term safety. This is exactly what took place two years ago, when we reallocated some of our investable cash flow from credit market investments to the security and liquidity of U.S. government bonds.

We Maintain Ample Liquidity.
For New York Life, liquidity is “king,” as we must always be prepared to meet our obligations to policyholders. Our strong balance sheet is your assurance of protection in this environment. Unlike other financial firms, we have not been forced to sell assets in order to raise cash in a down market and do not require infusions of government capital. Indeed, the strength and liquidity of our portfolio will enable us to take advantage of the attractive investment opportunities that will arise in the years ahead.

We Don’t Blindly Follow the Crowd.
New York Life has been through numerous economic cycles in its 164-year history, and we have learned to avoid both the frenzy of overheated markets and the panic that occurs when markets tumble. For example, we did not join the rush to invest in hedge funds, as we are not comfortable with their lack of transparency. We simply will not participate in investments we cannot thoroughly analyze.

Sadly, the most damaging losses suffered by financial companies and individual investors could have been avoided through the application of these, and other, common-sense investment Principles. Read how New York Life’s Investment Philosophy can apply to your own family’s financial future.

As we look ahead, it is still not possible to forecast the duration or depth of the current economic cycle. It appears that the recession will continue well into 2009 and it is reasonable to expect that corporate bankruptcies and defaults will continue to rise.

New York Life is certainly not immune to what occurs in the financial markets, but historically, our portfolio has experienced lower defaults — and better recoveries in cases of defaults — than market averages. With our strong balance sheet, disciplined investment approach and rigorous risk controls, we are well positioned to continue to deliver superior investment results.

Our primary goal is ensuring we can meet all of our obligations to policyholders, now and decades from now. No matter how the markets perform in 2009 – and in the years beyond – New York Life will be here, secure as always, standing behind every promise we make.

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