Private Equity Poppycock
Metlife’s exit from the Banking industry and Genworth’s departure from the mortgage industry may spell the end of the Financial Services industry’s infatuation with the concept universally accepted in the 1980s called the Financial Services Supermarket. At one time, when Sears acquired insurance company, Allstate, broker, Dean Witter, and Real estate agent, Caldwell Banker, it looked like the cross-industry colossus would dominate with Corporate conglomertates dominating the American Financial Services landscape. Instead, the trend became a drag on earnings and an integration nightmare. About the only relic left from the era, is the bank in the supermarket and automaker finance companies. One could write a novel about the size of “War and Peace” about the attempt to cross-sell washers and dryers to investors and homeowners insurance to tool time Tims.
I remember joining investment banking powerhouse, Donaldson, Lufkin and Jenrette, which was owned by AXA which also owned clearing firm , Pershing. Our objective was to convince rank and file life insurance agents to send their middle income clientele over to our side to buy a private equity fund or leveraged buyout fund. Conversely, the DLJ brokers job was to refer their blue shooed clients over to buy an annuity at AXA. After a leading FIA carrier wrote off hundreds of millions of dollars with it’s ill fated purchase of Dresdner Bank, Germany’s third largest bank in the mid- 2000s, you would think it would be the last company to criticize private equity’s entrance into some poorly managed indexed annuity companies that offer potential growth in a $22 trillion dollar retirement market . Thia company featured a sales piece comparing private equity’s entrance to the growing indexed annuity industry as comparable to piano company Baldwin United’s ill- fated entry into the fixed annuity business in the early 80s. The comparison is ludicrous as private equity companies job is to simply turn a profit for shareholders and bolster a company that has lagged in it’s respective industry. Although private equity companies performance can vary substantially ,comparing them to a piano company with no annuity or insurance experience is a bit ludicrous. The private equity firm I represented along with quality private equity managers like Bain Capital, Apollo Group or Soros may have different time spectrum’s from moribund management at insurance companies.They also can turn a pretty good profit that can mutually benefit policyholder, shareholder and agents. At one time, Julian Robertson, at Tiger Management, in 1997 had a 44% average annual return with less risk than the S&P 500 and owned a few insurance companies. I am not saying that private equity companies are good for the annuity industry but neither is mediocre management.
Metlife and many other insurance companies foray into banking after the passage of Ghram-Leach Blikey in 1999 and the erosion of Glass Steagall was made before the passage of Dodd-Frank and after a string of disappointing results to shareholders including large write-downs. It was not made, however, by a piano company buying an annuity company but by private equity managers who are paid richly to help industry laggards earn a fair return for stockholders, policyholders and their agents. Certainly, George Soros billion dollar bet against the yen yields a short term profit that is totally different than Carl Lindner’s 30 year bet on Great American which has turned out splendidly for shareholder, policyholder and agent alike.