Insurers’ Wall Street Risks Hurt Investors, McKinsey Says
U.S. life insurers underperformed most industries after taking risks that should have been left to Wall Street banks, McKinsey & Co. said in a report today.
Insurers were hurt by offering guaranteed returns on products linked to stocks and bonds to compete with banks, tying company profits to investment markets, McKinsey said. The firms are better suited to manage risks apart from capital markets, such as the chance that customers will die early, leading to life insurance payouts.
“As a whole, the industry has been much better at poolable risks, as opposed to Wall Street types of risk,” Guillaume de Gantes, an author of the McKinsey report, said by phone.
Insurers were among the worst-performing of 24 industries in the Standard & Poor’s 500 Index over the past decade, beating only banks and financial firms. The group that includes MetLife Inc. (MET) and Prudential Financial Inc. (PRU) gained 8.1 percent in the 10 years through yesterday, while the S&P 500 (SPX) almost doubled.
The insurers that did best focused on managing the risks in their product portfolios, said Vivek Agrawal, an author of the report, which doesn’t name companies.
American International Group Inc. (AIG) shares lost more than 90 percent over the past decade as the seller of property-casualty coverage and life insurance required a U.S. rescue beginning in 2008 after soured bets on real estate. New York-based AIG repaid the bailout last year. Chattanooga, Tennessee-based Unum Group (UNM) did the best among large insurers since March 2003, climbing more than 300 percent.
Skill at managing liabilities was “the real differentiator for a life insurer,” Agrawal said. “While it was true that a life insurer could lose their shirt if they weren’t good at risk management, it was very hard for a life insurer to consistently outperform based on investment management.”
Insurers can grow by improving their ability to evaluate risks in products, and by pricing the offerings appropriately, according to the McKinsey report, which was based on evaluations of both publicly traded and customer-owned firms. Insurers can also expand by providing savings products to retirees, selling more coverage outside the U.S. and offering additional products to existing customers, McKinsey said.
Prudential Vice Chairman Mark Grier said Wall Street should appreciate the fees the insurer makes on the retirement products known as variable annuities.
“We’re getting more than 2 percentage points of fees from the assets that are part of our annuity business,” Grier said last week at a Citigroup Inc. financial-services conference in Boston. “In your businesses, you probably would dance in the street over 40 or 50 or 60 basis points.” A basis point is 0.01 percentage point.
Hartford Financial Services Group Inc. (HIG) and Toronto-based Sun Life Financial Inc. (SLF) are among insurers that scaled back from the retirement products known as variable annuities to limit risk tied to interest rates and stock market volatility.
“We’ve significantly de-risked,” Sun Life Chief Executive Officer Dean Connor said March 8 in an interview at Bloomberg headquarters in New York. “We want people to buy our stock not as a call option on the S&P 500, but because they believe in” the company’s plan to focus on asset management, group coverage in the U.S., insurance in Canada and expansion in Asia.
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