One on One is a weekly feature offering excerpts of interviews ? conducted by The Evening Sun with newsworthy business 6 leaders. Joseph E. Blair Jr. is the president and chief executive B officer of Baltimore Life Inusrance Co.
' Q. As you well know there has been the savings and loan crisis that the federal government has had to deal with for the last few years. There is growing concern about banks, also. Insurance companies have also come up as a concern lately, particularly their large investments in junk bonds. How is your situation at Baltimore Life? How much of your portfolio consists of junk bonds and is there anything that you're doing to strengthen your investment situation?
A. Junk bonds, I think, have concerned a lot of people. There are a handful of companies that have purchased too many junk bonds and the junk bonds have resulted in too many concerns. In one case, they were 40 percent of the assets. If you look at the life insurance industry as a whole, however, junk bonds only represent between 3 and 5 percent of total assets of the entire industry. In the case of Baltimore Life, junk bonds represent less than 1/2 of 1 percent of the assets. We have had a conscious effort not to buy junk bonds. We own one, Federated Department Stores, and when we purchased that it was rated AA. So, we don't have a great deal of concern about junk bonds. I think that really flows from an underlying investment philosophy. We think there's a place for speculative investment and there's a place for conservative investment. If you buy an insurance policy, we think those dollars should be guaranteed dollars. And if you want to guarantee dollars, you don't invest those dollars in something that is speculative, even to get a little higher return. So, we've probably been more conservative than the life insurance industry generally. Other than really than a handful of companies, I don't see the junk bond issues being a problem for the life insurance industry.
Q.Do you think the concern about the insurance companies is misplaced or do you think that there is some weakness in the insurance industry?
A.Oh, I think it's a natural extrapolation if you look at what's happened to the S&Ls and the banks. Changing to another investment -- real estate -- banks have been burned by some of their real estate investment. Generally, banks provide the development money for the construction of a new office building. The insurance companies provide the mortgage money to take the banks out of that. Well, the risk in connection with developing is much greater than the mortgage risk, because the insurance company doesn't offer a mortgage unless it's rented, or 70 percent rented or substantially rented. So the nature of insurance real estate lending has been less risky than the nature of bank real estate lending. ... Now, there are some insurance companies that get involved in financing the development end of it and they're exposed to the same risk that banks are, but that's a smaller percentage of their total real estate investment. I guess the way I see it, the S&s are the ones that have been hit the hardest. Big difference between S&Ls and banks. And I think there's another big difference between banks and insurance companies.
Q.As you well know, the Baltimore economy has moved primarily from an industrial economy to the service sector economy, which includes companies such as banks and insurance companies. Are insurance companies more resistant to a recessionary environment that some economists see coming in the near future?
A.I think we're a little more resistant than most companies. Our valleys might not be quite as deep and our peaks won't be quite as high; it's more of an undulation rather than sharp spikes. It's interesting. When unemployment goes up, and conditions are uncertain, people tend to value products that offer them security more highly, so they keep their policies in force.
Q.What portion of your premium dollar comes from cash-value policies as opposed to term policies?
A.The vast majority is cash value. Now most of our new sales today ... well, we focus on individual life insurance and annuities. We're not in the group business. We're not in the health business. We're not in the automobile business. We offer traditional forms of whole life insurance, term insurance, universal life insurance, something called interest sensitive whole life, which is somewhere between traditional whole life and universal life. [Universal life policies offer flexible premiums and interest rates that fluctuate with the market.] Universal life is our bigger seller today. I don't think it's any better product than traditional whole life, but it's easier for the buyer to understand. It's more visible.