Sarbanes-Oxley ‘Stifles Competition’, Says MetLife CEO

In the opinion of one major industry player, the Sarbanes-Oxley Act of 2002 set in place “a mad rush to save the world from bad management,” a misguided and costly strategy that will fall victim to its unintended consequences, which include “putting everybody on edge,” engendering a fear to take risk, and, ultimately, stifling innovation.

However well-intended, the measure is “setting a bad tone,” according to MetLife CEO Robert H. Benmosche, who made his blunt remarks during a CEO panel session on “Structuring for Success in the Insurance Industry” at Standard & Poor’s annual insurance seminar in New York City last month.

“It’s been real fun,” Benmosche shot back to a question on the impact of the law, evoking laughter from the audience. “We’ve really enjoyed it.”

In the wake of Enron and numerous other high-profile business scandals, Sarbanes-Oxley introduced significant changes to financial practice and corporate governance regulation. It introduced stringent new rules with a stated objective “to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws.”

Benmosche was one of four industry CEOs to participate in the panel. The others were Jay S. Fishman, CEO of St. Paul Travelers; Edmund F. Kelly, CEO of Liberty Mutual; and Seymour Sternberg, CEO of New York Life.

“The pendulum,” argued Sternberg, “has swung too far” under Sarbanes-Oxley. “We’re so concerned with independence, we forget that the most important thing is effectiveness. When you change your auditors every two years, you optimize and maximize the independence aspect of it, but the effectiveness aspect is minimized, and effective auditors are just as important as independent auditors,” he maintained. “We have to recognize we have a multidimensional problem.”

Fishman said the act is a good example of the maxim, “Be careful of what you wish for.” His company recently filed a 106-page-long disclosure statement under the act. Still, he said the enhanced quality controls are beneficial. “We’re in the early stages of working it out,” he said. “Transparency is a good thing. We’re heading in the right direction.”

Liberty Mutual’s Kelly said politicians and journalists have a naïve take on the problem. As an example, he pointed to a recent article in the Sunday magazine of The New York Times in which an Enron whistleblower, a former department manager, is cited as an expert, a consultant in fact, on corporate governance. This, he said, reflects “a fundamental misunderstanding” of the issue.

Reinsurers’ resolve questioned
Another panel warned that U.S. reinsurers are in peril of repeating the mistakes of history by sacrificing profitability. With prices beginning to level off after a three-year upward surge, they said, managements must resist the temptation to pursue market share at the expense of bottom-line results.

“We have to get out of our cyclical behavior,” said Al J. Beer, executive vice president of American Re Corp. He referred to inadequate reserves for policies written in the late 1990s, when pricing was weak. The reinsurance industry has “a long way to go to convince ourselves and our employees that we can be profitable,” he said.

Laline Carvalho, an S&P reinsurance analyst, called the sector’s 6.5 percent rate of return (ROR) in 2003 “a fairly disappointing number, considering we’re at the top of the hard market.” Over the past 10 years, she said, the average ROR has been a meager 2.5 percent. Although she has seen a change in management philosophy in the past few years toward “a bottom-line focus rather than a top-line one,” she questioned whether that discipline will be maintained and “whether the industry can reverse its history of underperformance.”

“With discipline you can have a very good return in this market,” said Joseph Taranto, CEO of Everest Re. “That means being willing to walk away from poorly-priced business” and resisting pressures from shareholders to go after revenue.

“A lot of money has been made recently,” added Britt Newhouse, president of Guy Carpenter—North America. “The problem is that the people who made it don’t stop writing the business when they should.”

Execs foresee more consolidation
In other news from the seminar, two-thirds of insurance executives and analysts responding to an S&P survey said the recent mergers of St. Paul and Travelers and John Hancock and Manulife suggest heightened industry consolidation activity.

Some 71 percent of respondents surveyed said the debt and equity markets reward stock insurance companies for their ability to acquire other companies. “It is clear that the financial flexibility enjoyed by stock companies to purchase another company far outweighs the vulnerability to be acquired,” said Steven Dreyer, managing director of S&P’s insurance ratings.

Other issues of concern were excessive jury awards (20 percent), rapidly rising interest rates (18 percent), increasing regulatory risks (18 percent), and terrorism (11 percent).

Approximately 100 executives and analysts responded to the Standard & Poor’s survey. More than 500 attended the two-day seminar.