# IV. INVESTMENT AS$ETS

# a. Guiding Principles of Investment Policy

Investment practices of life insurance companies are shaped by two key factors: the nature of the liabilities froin insurance and annuities on their books, and the restrictions imposed by state insurance regulators on their investments.

As to the nature of liabilities, not all life insurance companies offer the same mix of product lines. Many larger companies provide employee pension and thrift planr, while a greater number do not. Some companies specialize in particular products, such as credit life or single-premium annuities, while others concentrate on traditional whole-life policies. Interest-sensitive products such as universal life were introduced by a large number of companies during the past decade, but many others have not attempted to market such policies. Because of this diversity in product mix, there is no typical or standard pattern for the range of company liabilities; consequently, there is no standard pattern for the mix of investment assets. In the Discussion that follows, industry totals and averages will be shown, but such data should not be taken as reflecting the practices of a typical or 'average" company.

A fundamental principle of life company investment practices is the matching of assets and liabilities according to (a) duration or average life, (b) need for liquidity to meet possible withdrawals, and (c) earnings performance to maintain competitive position. In earlier times, when whole-life policies were the predominant product, death benefits were normally preceded by 30 years or more of premium receipts and reserves could be invested in long- term bonds or real estate mortgages with maturities of 25 or 30 years. The net inflow of premiums, augmented by investment income and amortization, normally exceeded the outflow of death benefits so that total assets were constantly rising and the need for liquidity was small. In contrast, many of the investment-oriented products marketed in the last decade have shorter duration and require greater liquidity than was needed in earlier years.

Asset/liability matching today often involves setting up a series of segmented asset accounts or portfolios, with each account designed to stand behind a particular class of policies or product line. Thus, the portfolio mix assigned to the universal life policy line would require shorter maturities and more liquid assets than those used to back traditional cash- value life policies. In the case of employee thrift plans, where funds can be readily switched on short notice to another carrier, it would be unwise to invest incoming funds in longer-term securities. Moreover, such thrift plans often allow the individual participants to redirect their funds between fixed-income accounts and equity accounts at any time, so that the uncertain duration of such money requires readily liquifiable investments. Corporate pension plans have made increasing use of guaranteed investment contracts (GICs) which specify a fixed period of three to five years before withdrawal or renewal; investment of such funds by the insurer must take account of the probable duration of the arrangement. Close working relations between investment officers and marketing executives have become essential to developing the appropriate match for maturities, risk elements, liquidity and investment yield.

State investment laws have clearly shaped the investment policies of life companies, by setting forth quantitative limits on the percentage of assets permitted in various forms, and by requiring minimum credit standards on permitted investments. Although these laws differ in their specific content from state to state, they have focussed on the diversification of assets among permitted investment outlets, along with qualitative standards for the safety of principal amounts invested. Further description of these state 14