Solution Manual for Principles of Corporate Finance 14th Edition by Richard B...
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1. REPRINTED
WITH
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Business Day SATURDAY, OCTOBER 4, 2008
SATURDAY INTERVIEW
A Life Insurer Projects Calm
During the Storm
regulators. The industry has been lobby-
By AMY ZIPKIN
ing for a federal regulator. Right now,
we’re regulated by 50 states. I think what
W
ITH the credit and housing mar- will happen with the A.I.G. takeover by
kets in turmoil, insurance was, the government is that it will force them
until recently, an overlooked to focus on the industry, realize we’re
piece of the financial picture. That part of the financial fabric and need a
changed when the government shored up voice in Washington. We will be part of a
the American International Group, the na- new regulatory regime.
tion’s largest insurance company, with an
$85 billion emergency loan two weeks ago. Q. A.I.G. is going to put some of its prop-
Edward J. Zore runs Northwestern Mu- erties up for sale. Are you going to buy
tual, the largest direct provider of indi- something?
vidual life insurance in the country with
3.3 million policy owners and more than A. We’re always interested in looking for
$1 trillion of insurance in force. Mr. Zore bargains, but I do not believe A.I.G. has a
recently discussed the changes that business unit that would fit with North-
might be afoot in the industry, his compa- western Mutual. We’re not going to be in
ny’s traditional approach to business and the mix.
why he resists becoming a publicly
owned company. Q. As the credit markets weakened and
interest rates fell, to what extent have
Q. With the announcement of the federal you seen renewed interest in whole life EDWARD J. ZORE
bailout of A.I.G., how is the insurance in- policies as forced savings?
dustry holding up?
A. Whole life insurance sales are up
A. The insurance industry is holding up about 5 percent for the first eight sociation estimates that $12 billion to $15
very, very well. Our company had less months of the year. Our current divi- billion in death benefits changed hands in
than one-half of 1 percent of assets ex- dend rate on unborrowed cash values is 2007. Companies like Goldman Sachs and
posed to subprime markets at year-end. 7.5 percent, which looks pretty good in JPMorgan are reported to have invested
As the hedge funds were liquidating their today’s environment. in these products. Why all the attention
subprime mortgages and the banks were now? And what’s your take on where this
trying to raise capital, the industry was in Q. Have A.I.G.’s troubles reordered is headed?
a positive cash flow position and was your priorities? Do you have a more im-
there to provide support to the market mediate concern for your company and A. Life settlement transactions involve
back in March. the industry than you did a couple of selling existing life policies to unrelated
weeks ago? parties for more than their cash value or,
Q. Has there has been any fallout for your if they have no cash value, for some value
company or any of your competitors? A. No. The A.I.G. issue is part of a bigger — usually policies with face amounts
systemic problem that the financial in- over $250,000 owned by people who are at
A. There has been no fallout for our com- dustry and the economy face. It has to do least 65 years old or have life expectan-
pany. I think we look better in the mar- with the deleveraging that has started to cies that range from 2 to 12 or 15 years.
ketplace when people are looking at op- occur and will be occurring for some It’s a market that is growing.
tions in the life insurance industry either time. As a financial institution, we are It’s bad business if somebody owns a
as a place of employment or to place their more cautious because the risks are high- policy on your life who has an interest in
money to buy a product. er out there. your death and gets a financial reward if
I don’t think we will have any negative you die. Because of demographics, the
reverberations due directly to A.I.G. Q. As the population ages, some seniors settlement market is a market that’s
A.I.G. has brought the industry to the at- are selling life insurance policies to raise here. I think it should be regulated so that
tention of the federal government and the cash. The Life Insurance Settlement As- life insurance isn’t used by speculators.