The US life-insurance industry, as a group, has returned less than its cost of equity since 1985. That year, life insurers represented about 40 percent of the financial-services industry in market capitalization; today, that’s down to 25 percent. Life insurers have lost ground to banks, asset managers, and brokerage firms, and we believe the principal cause was the decision by many life insurers to move beyond products where they enjoyed a distinct competitive advantage—such as products where they manage poolable risk—to businesses where they do not. Ironically, this search for higher returns resulted in just the opposite: while riskier investment strategies boosted profits when markets cooperated, economic downturns more than erased those gains.
Yet not all life insurers have struggled. Despite the overall deterioration in the industry’s performance during the past decade, our research revealed a stunning spread in value creation among the 30 largest life insurers in the US market. Those in the top quintile increased in value by about 10 percent annually, while those in the bottom quintile declined in value by about 3 percent—creating a 400 percent difference in adjusted book-value growth over the past decade. So what do the winners do differently? Do they have a more attractive product mix? Execute better within product lines? Achieve higher investment returns?