How Much Do Life Insurers Profit from Tobacco?

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L. to r.: Chris Hondros / Getty; Tim Wright / CORBIS

In an era of corporate wellness programs and socially screened investment funds, some of the world's largest life-insurance companies still own billions of dollars in tobacco-industry stocks, Harvard physicians assert in a new report.

These latest findings, published this week in a letter to the New England Journal of Medicine (NEJM), suggest that several life and disability insurers, both in the U.S. and abroad, have yet to acquiesce to calls from the American Medical Association and others to divest their holdings in companies such as Reynolds American, Lorillard and Philip Morris. Many insurers cited in the letter say the study wildly overstates their investments, but the authors disagree. "Insurers continue to put their profits above people's health," said Dr. J. Wesley Boyd, the lead author of the report. "It's clear their top priority is making money, not safeguarding people's well-being." (See pictures of vintage cigarette ads touting their "healthiness.")

It can be argued, of course, that life- and disability-insurance companies have everything to gain from customers who live long and healthy lives — and continue to pay their premiums. So it would not be in the insurers' interest to support tobacco use. But the authors argue that in fact, insurers profit both ways. "Although investing in tobacco while selling life or health insurance may seem self-defeating," the authors write, "insurance firms have figured out ways to profit from both. Insurers exclude smokers or, more commonly, charge them higher premiums. Insurers profit — and smokers lose — twice over."

The new study is a follow-up to a similar one conducted in 1995. For the new report, Boyd and his Harvard colleagues used a proprietary database called Osiris, which updates its financial data daily, to cull information on the major shareholders of tobacco-related equities. The researchers cite New Jersey–based insurer Prudential Financial as a typical example of what they discovered. Prudential, which sells both life and long-term-disability insurance, owned about $264 million in the stocks of Reynolds American, which makes Camel cigarettes, and Philip Morris International, which manufactures the Marlboro brand. (Watch TIME's video "Au Revoir Cigarettes.")

A Prudential spokesperson acknowledged that this figure is "reasonably accurate." But other insurers named in the study strongly dispute its claims. The NEJM letter states that, for instance, Canadian firm Sun Life Financial, which offers life, health and disability insurance, holds just over $1 billion in tobacco investments. In an e-mail to TIME, however, Sun Life spokesman Michel Leduc called this number "categorically incorrect." Although he would not disclose specific holdings, Leduc said that of the company's $100 billion investment portfolio, less than 0.005% was exposure to tobacco stocks. "Sun Life's investments in renewable-energy projects are over $1.2 billion. We also invested about $1 billion in the last three years to help build or renovate about 20 hospitals and long-term-care facilities," Leduc added. "Together, these two categories alone amount to nearly 500 times the size of tobacco stocks."

Two other U.S.-based insurers, Northwestern Mutual and MassMutual, also question the study's data. The NEJM letter places Milwaukee-based Northwestern's tobacco-stock holdings at $235 million in Reynolds, Philip Morris and Lorillard, which produces Newport cigarettes. But spokeswoman Jean Towell says the insurer's investments are actually one-tenth that figure, less than $24 million.

At MassMutual, the gap is even bigger. The study claims the firm's tobacco holdings to be $585 million. That is "absolutely incorrect," says Mark Cybulski, a MassMutual spokesman. "Massachusetts Mutual Life Insurance Company has virtually no equity holdings in companies whose offerings include tobacco-related products. As of December 31, 2008, MassMutual's holdings of tobacco-related equities are approximately $548,000, representing less than 0.001% of consolidated statutory cash and invested assets of $86.2 billion."

Such discrepancies are hard to explain. The Harvard researchers' data, gathered from the Osiris database, was reviewed by both NEJM and TIME and found to be accurate as of March 26, 2009. Osiris, for its part, collects financial information from yet another financial database, FactSet Research Systems, which sources its records directly from public filings by the tobacco firms and the insurers to the Security and Exchange Commission. "I think the numbers in the Osiris database are aggregate numbers from every division of a company like Northwestern, whereas Northwestern might be looking at a subset of their total holdings," Boyd says. Similar questions arose from his 1995 findings, which were ultimately substantiated.

All the insurers in question also sell mutual funds and other retirement products alongside their insurance businesses. That means at least some of their exposure to tobacco stocks stems from client assets in index funds, such as those pegged to the S&P 500, which, of course, includes firms like Philip Morris and Lorillard. Many of the insurers contacted by TIME declined to outline the specifics of their investment portfolios, but a Prudential spokesman, Darrell Oliver, noted that as a policy, Prudential does not invest in tobacco stocks for its own portfolios: "Some Prudential entities hold tobacco stocks. Those stocks are primarily part of index-related strategies managed for separate accounts or other portfolios managed for third parties."

Another life insurer, TIAA-CREF, the largest U.S. education retirement fund, has long been criticized for its billion-dollar investments in tobacco stocks. It now allows clients to opt to avoid such equities through special socially conscious funds. This is an option nearly all insurers now include in their portfolios. "As a TIAA-CREF participant, you do not have to own shares in tobacco companies if you choose not to," says spokesman Chad Peterson.

Purely from an investor's standpoint, however, buying tobacco stocks is a solid long-term bet that historically pays regular dividends. "We ultimately have a fiduciary responsibility to our clients," says Towell, who puts about 5% of Northwestern's tobacco equities in index funds.

Yet that profit-making duty is what troubles the Harvard doctors. Boyd and his colleagues believe that their findings call into question whether insurers ought to have a voice in the ongoing debate in Washington over health-care reform. "These data raise a red flag about the prospects of opening up vast new markets for private insurers at public expense, as has happened in our state of Massachusetts, an oft-cited model for national health reform," the researchers write in their NEJM letter.

The health-insurance industry, by contrast, has largely divested tobacco holdings since the 1990s and has offered to compromise with lawmakers in the health-care debate. In a letter to Congress on March 24, several health insurers indicated they would be willing to stop charging higher premiums to people with a history of medical problems if all Americans were required to purchase health plans. Perhaps the next step will be for life and disability insurers to look at their tobacco stocks and, as they say, kick the habit.

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