bond portfolio credit quality in the life insurance industry declined as insurers sought higher yields from riskier bonds, according to a recent Conning & Company study. Holdings in below investment grade (BIG) bonds increased from 5.6 percent of the industry average bond portfolio in 1994 to 7.3 percent in 1998, a better than 30 percent increase.

The Conning study, "Investment Profile of the Life Insurance Industry'', reports that while insurance companies are generally getting more conservative in their investments, they are making up for decreasing market interest rates by investing in riskier fixed income investments.

Isurers buy riskier bonds This focus on lower quality bonds is happening at both mutual companies and stock companies in all six line-of-business peer groups analysed by Conning.

"The insurance companies are backing away from risk in mortgages, real estate and other asset classes, but they are getting aggressive with bonds,'' said Kevin Gough, vice president of Conning and author of the study. "This is a scenario worth watching because for the insurance companies there is a fine line between maximizing their investment income and avoiding asset defaults.'' The Conning study looks at approximately 90 percent of the industry, covering 220 companies with more than $2.5 trillion in assets and $400 billion in annual premiums and deposits, as of year-end 1998. The 220 companies were divided two ways: by stock company /mutual company status and into six peer group segments by primary product focus, namely, life, annuity, accident & health (A&H), life and annuity, mixed and reinsurance.

The Conning study reports that there has been a shift toward bond investments, which have increased by roughly three percentage points, from 72.9 percent of industry assets at the end of 1994 to 75.6 percent of assets at the end of 1998.

Mortgage investment has fallen from 15.0 percent of invested assets in 1994 to 12.2 percent in 1998, while real estate investments have been nearly cut in half. Insurers wanting exposure to the latter asset classes can do so with greater liquidity via commercial mortgage-backed securities and real estate investment trusts.

Bond holdings of stock companies are, on average, approximately ten percentage points higher than those of mutual companies. Half the difference comes from mutuals' higher equity holdings -- just over 11 percent versus 6.7 percent for stock companies.

Equity allocations differ significantly by line. Professional reinsurers, 'mixed' companies and, surprisingly, accident & health companies have the highest company equity allocations, all well above the industry average. Also, mixed company equity investment has been increasing in recent years, likely an indication that their product diversification allows them more leeway for long-term investing.