Home > Medical/Health Commentary > Insurers own fast food stock. Should we care?

Insurers own fast food stock. Should we care?

No, we really shouldn’t, recently published misinformed scholarship notwithstanding.

The WSJ Health Blog brings to our attention a gem of a “study” performed by researchers at the Harvard Medical School-affiliated Cambridge Health Alliance.

The article opens with the supposition that “[l]ife and health insurance firms profess to support health and wellness,” then reminds us of the various evils of fast food and of the various efforts at the municipal level to rein in fast food firms.  We learn that certain large insurers hold shares in certain fast food firms.  The article closes with the claim that insurers should “be held to a higher standard of corporate responsibility,” and thus their only ethical options regarding fast food shareholdings are to 1) divest, or 2) become activist investors and push for “practices consistent with widely accepted public health principles,” possibly even “turn[ing] over their proxy votes to an independent nonprofit organization.”

Is this such a widespread problem?  Is this a problem at all?  How did they get to this conclusion?


Researchers, “sensing [a] potential disconnect” between insurers “responsibility to share- or policyholders to maximize returns” on the one hand, and “their health-promoting mission” on the other, decided to look at the value of major insurers’ investments in:  Jack-in-the-Box; McDonald’s; Burger King; Yum! Brands (mainly Taco Bell, Pizza Hut, and KFC); and Wendy’s/Arby’s.  Of these five firms, McDonald’s is a component of both the DJIA and the S&P 500 indices; Yum! Brands is a component of the S&P 500. The study examined the holdings of eleven major insurers who, on aggregate, write life, health, and long-term disability policies in Canada, the US, and the UK.[1]

The results are, in my view, pretty vanilla.  The researchers looked at the state of the world on June 11, 2009.  Between them, these eleven insurers had positions worth $1.88 billion in the five fast food firms, of which $1.18 billion was McDonald’s holdings and $0.404 billion was in Yum!  Brands shares.  The current (April 15, 2010) market capitalization of these five companies combined is approximately $101.24 billion; McDonald’s alone has a market cap of $74.41 billion.  The article states that, at the time, these eleven insurers together owned shares worth 2.2% of the combined value of the five fast food companies.

(There are some mildly interesting factoids to be gathered by looking at individual insurers: some have large fast food stakes, some have minuscule stakes; some have holdings across all five fast food firms, some only hold shares in one; the three two insurers who write health insurance in the US hold stakes that are minimal relative to the others’; no information is given as to the size of any firm’s total investment portfolio)

The authors suggest three reasons why insurers whose alleged “mission” is to promote health would invest even a dime in these Evil fast food firms.  Firstly, the return on investment in these companies might exceed the “potential financial liability associated with their policyholders consuming fast food.”  Alternately, insurers might simply be “unaware of the social impact of their investments.”  And lastly, the authors suggest that the claims and underwriting sides of large insurers just might not be aware of what their colleagues on the investment side are up to.  Holding the shares is just not an option.  After all, “”[t]hey’re profiting directly off the people who eat fast food, and if that leads to obesity or cardiovascular disease, they’ll charge you more for premiums if you have some of those conditions,” says Boyd. “They’re making money in either case.””

Even assuming the objections raised by the insurers about the data’s accuracy are incorrect, let’s see if the researchers’ normative conclusions are justified.

Any insurer’s first priority will be to its shareholders; a legally enforceable fiduciary duty exists between a firm’s management and its owners.  Its next priority (or first priority in the case of a non-profit insurer) should be to its policyholders.  Specifically, an insurer should uphold its end of any policies that it has written, and should take steps to remain solvent so long as it has policies outstanding.

Nowhere is there an obligation — legal, moral, or otherwise — for life or health insurers to promote health and wellness either among their policyholders or in the community at large.  It’s possible that some insurers, particularly health insurers, might find it cost-effective to do so, but it is not within the scope of their obligation to policyholders.  A study author claims that insurance ownership of fast food stock amounts to ‘double-dipping.’  Insurers exist to insure against risk (sounds so simple, doesn’t it?).  Faced with a riskier prospective policyholder applying for an underwritten product, they will increase the premium to reflect the expected increase in claims paid out to that policy’s beneficiary.  To the extent that underwriting differentials are actuarially fair, it doesn’t matter to an insurance company how many Big Macs their policyholders choose to eat, so long as their policies are priced appropriately.  If anything, owning fast food shares could be seen as a (vastly inefficient) hedge against unexpectedly increased policyholder obesity from fast food consumption.  It’s most certainly not a way to directly profit off of their own customers.

Why would any insurer hold shares of anything in the first place?  I can think of two main reasons.  The first is unique to life insurance.  With universal life insurance or segregated funds, life insurers hold shares on behalf of policyholders.  Policyholders may choose to invest the cash value in a number of ways, including in fast food securities.  The WSJ blog post quotes a Prudential executive as pointing out that much of their shareholdings could be attributed to these policies and funds.  I can think of no policy or ethical reason to prohibit these investors/policyholders from investing in fast food shares, nor do the authors venture one.

The second is common to most insurers:  they need someplace to invest their float (the money collected from premiums that do not yet need to be paid in claims).  Profits from the float can be good for consumers:  insurers can use float profit to offset underwriting losses, and even to maintain looser-than-otherwise underwriting standards or lower-than-otherwise premiums.  A vanilla investment strategy might include buying shares of major companies that form part of the Dow Jones Industrial Average or S&P 500 Index… such as McDonald’s or Yum! Brands.  I see nothing sinister about it.

Even if insurers were to divest their and their client’s holdings of fast food companies, what effect would it have?  Someone else would own the shares and derive profits from them.  Instead of profits from those shares being used to reduce the need for premium increases or tighter underwriting standards, they would accrue to someone else.  Assuming these shares were held in the first place as part of a profit-maximizing investment strategy on the part of the insurers, this divestment would not serve their policyholders.  It’s also hard to see how it serves the larger community in any meaningful way.  Buying or holding shares in the secondary market sends no money to the company whose shares are being bought.

In short, this study is much ado about squat.

Life and health insurers have obligations first to their shareholders, then to their policyholders, neither of whom would benefit at all if insurers were to divest from fast food firms.  The larger community would receive no benefit from divestment either.  Aside from the symbolic value (which would be close to nothing, given the tiny amounts of these companies actually owned by insurers), divestment would do absolutely nothing for the cause of public health.

The larger community, I should add, I include in this analysis only because the authors do.  The role of private insurance in managing risk is one that is poorly understood generally, barely acknowledged in the recent health insurance reform conversation, and one that I hope to return to at the Notwithstanding Blog.  Generally, however, it does not include improving the health or well-being of the underlying community for its own sake.[2]

Physicians’ organizations spent most of their (limited) political capital during the recent reform conversation arguing for more money for themselves (a goal that I largely agree with), and arguing that ‘more be done for the patients,’ without, in most cases, displaying a serious understanding of the issues involved in the latter.  If physicians are to be taken more seriously on these topics in the future, it would behoove them to avoid the pitfalls of understanding that plague this study.

Update (15 minutes later):

I decided to look for information about these investments relative to the insurers’ portfolios.  I looked at Manulife and MetLife 2009 Q4 investment fact sheets; it’s unclear how much, if any, of these portfolios are client-directed.  Interestingly, MetLife doesn’t seem to offer health insurance, as the study authors claim.

Manulife had an investment portfolio worth C$187.5 billion, including C$9.38 billion in stocks, including $0.1461 billion in shares of McDonald’s and Yum! Brands.

MetLife had an investment portfolio worth $309.3 billion, including $8.66 billion in corporate equity, including $0.0020 billion in holdings of Wendy’s/Arby’s.

I see no reason to believe that the inferences drawn here are inapplicable to the other nine insurance companies in the study.

What this quick number-running tells us is that not only are these insurers’ holdings of fast food shares insignificant in terms of the fast food companies’ market capitalizations, but also in terms of their own portfolios (these two insurers have portfolios an order of magnitude larger than McDonald’s market cap).

Given that there really isn’t anything to be gained from divestiture, this only reinforces the conclusion that this study’s authors are trying to make a capital crime of a traffic violation.


Study citation:  “Life and Health Insurance Industry Investments in Fast Food.” Mohan et al. Am J Public Health.2010; 0: AJPH.2009.178020v1

Disclosure:  two of the eleven insurance companies studied are Manulife Insurance and SunLife Insurance, which in turn are two of the top 10 holdings of an ETF of whose shares I own a small number.  I hope this satisfies the FTC.

[1] – The authors’ argument is strongest for companies who write health insurance in the United States.  Of the 11 insurance companies evaluated, only three two did so.  Most of the insurers in question are life insurers, which leads me to think this whole hullaballoo is based on a giant red herring.  Private health insurance doesn’t generally cover the “bread and butter” health expenses of Canadians or Britons, and life insurance is a whole other matter entirely, so the authors’ arguments, weak as they are, are barely applicable to their own dataset. Back to text

[2] – One could argue that someone in the insurance sector should be looking out for the community at large .  That may be the case, but it’s not a job to be stuck on private, for-profit insurance, whose existence is a given here. Back to text

  1. April 16, 2010 at 17:38

    It’s also worth pointing out two things:
    1) Owning the S&P is a very inexpensive way of handling capital, and weeding out all the companies who are ‘bad’ would make it more expensive for anyone to do so.
    2) Many of these groups outsource their float management, and thus don’t actually exercise significant management control over their float. They could start doing so, but that would draw management attention away from important things like cutting costs or managing risk.

  1. July 2, 2010 at 21:27
  2. June 15, 2010 at 16:53
  3. May 9, 2010 at 20:32
  4. May 5, 2010 at 09:29

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