The Insurance Industry and Investing

Keynes was chairman of the National Mutual Life Insurance Company and president of the Finance Committee of Provincial Insurance Company.

Insurance companies operate by taking insurance premiums from their customers and, in return, agreeing to pay money to the customers when specific circumstances arise - for example, if customers crash their cars, or if their houses burns down, or when they die.

Alternatively, insurance companies are paid money by customers in return for annuities. In these circumstances, customers pay premiums to the insurance company and, in return, are provided with a guaranteed income for the rest of their lives. Most people who buy annuities buy them with a lump sum at the end of their working lives to provide a guaranteed retirement income.

In order to be successful, it is vital that insurance companies use the premiums they are paid by customers wisely. If they fail to do this, they will be unable to meet their obligations and will go bankrupt.

Generally, insurance companies invest the money they are paid by customers in stocks and bonds. Warren Buffett's insurance company, Geico, has been a particularly successful insurance company, because Buffett has invested the premiums Geico has received exceptionally well.

Maynard Keynes played a key role in directing the investment strategies of the National Mutual Life Insurance Company and the Provincial Insurance Company.

He could not, however, manage the insurance company investments in the same way as he managed King's College's Chest Fund. With Kings, he was concerned with capital growth and dividends. He also had to exercise a considerably greater degree of caution than he did in his personal investment activities. With the insurance companies, in addition to caution, capital growth and dividends, he was also concerned with liquidity - the ability of the insurance companies to meet their financial obligations to their customers in the event of an unusually large number of claims being made.

While one of Keynes's biographers, Sir Roy Harrod, notes that the insurance companies prospered under Keynes's financial management, Keynes's involvement was not always a happy one. Indeed, another biographer, Robert Skidelsky notes that in 1938 Keynes wrote to Francis Curzon, who, when Keynes was absent, chaired the weekly meetings of the National Mutual board, "I feel no shame at being found still owning a share when the bottom of the market comes .....".

The board, apparently, did not share Keynes's outlook and he resigned his chairmanship in the same year, writing, "One naturally chooses [to give up] that part of one's activities in which one finds the least satisfaction."

Keynes, whose investing strategy had become increasingly contrarian, wrote about stock market investing in 1937,

"It is the one sphere of life and activity where victory, security and success is always to the minority and never to the majority. When you find any one agreeing with you, change your mind. When I can persuade the Board of my Insurance Company to buy a share, that, I am learning from experience, is the right moment for selling it."

Clearly he could not convince the board of National Mutual that this philosophy was the correct one, despite its undoubted success when applied to King's College's investments.

Sources:
Annuities Explained
R.F. Harrod - The Life Of John Maynard Keynes, 1951
Robert Skidelsky, John Maynard Keynes 1883 - 1946, 2003