Some insurers find profit in corporate investment.

Mutuals ponder profit while casualty insurers stay put

Life insurance firms, stuck with too much commercial real estate and fretting that U.S. Treasury Bond yields will keep dropping, are investing more of their portfolios into corporate bonds.

Analysts say casualty insurers, particularly publicly held companies, will keep most of their assets in government bonds but mutual companies will channel more money into corporate bonds. A few think they will invest in well-managed upstart companies.

Most of the $1.5 trillion dollars of insurance industry investments are held by Midwest and East Coast insurance firms. Newport Beach-based Pacific Mutual Life is one of the few mutual life insurance companies based in the Southland. Southern California corporations and bond-issuing agencies compete for their investments.

High quality corporate bonds are now yielding about 9.75 percent per year while commercial real estate has dropped as much as 30 percent in value in some areas. The mutual life insurance companies are hanging onto the real estate they own, waiting for the market to come back, but are not buying any more. Likewise, they are shying away from single-family home mortgages as the rates drop below 9 percent.

Publicly held casualty insurers must answer to boards of directors and stockholders who want no risk. Consequently, they must settle for more modest returns and keep their funds in short-term government securities. Their yields also are declining.

As a result, mutual life insurance companies have invested more of their reserves in stock mutual funds and publicly held life insurance companies -- particularly casualty insurance firms -- have invested in short-term, lower-yielding government bonds, said Chuck Ronson, a securities analyst for New York City-based Baird Patrick & Co. Inc.

"The life insurance firms traditionally realized returns on their investments that were 100 basis points (1 percent) higher than casualty firms. Many of their holdings are providing better yields than the government-insured bonds," Ronson said.

Casualty companies on the other hand, are probably too conservative. "They should look too conservative. "They should look beyond the bond market to realize better returns on their reserves," Ronson said.

Eight-year U.S. Treasury notes sold in 1984 yielded investors 8.91 percent in tax-free income. The same notes sold in 1991 yielded 7.36 percent and they may keep dropping. Even so, shareholders in stock insurance companies want their boards of directors to play it safe.

Mutual and stock insurance firms also want shorter-term investments, said insurance analyst Michael A. Lewis of New York City-based Dean Witter Reynolds Inc. They are moving their money out of high risk assets -- such as junk bonds and real estate -- and into government and corporate bonds. They also are buying bonds that mature in five to seven years instead of 10, Lewis said.

Mark Matheson, an analyst with Newport Beach-based Crutten & Co., said insurance companies still will invest money with real estate developers with whom they have long-term relationships. Some of them will invest some of their reserves into growing companies in partnerships where they will receive a guaranteed interest return plus a percentage of the firm's equity, Matheson said.

Los Angeles-based insurance expert Greg Ochalek of Arthur Andersen & Co. said six life insurance companies with total admitted assets of $42 billion were seized in the past two years because they had invested too much in junk bonds and real estate. The value of their holdings dropped so far they were seized by regulators.

"In all six cases, the main problem wasn't the junk bonds. It was the real estate. The whole process educated buyers that they have to investigate the company they buy insurance from," Ochalek said. Bad insurance buys were made in Florida, the Northeast and Washington as well as California, he noted.

"The companies I talked to are taking a conservative attitude," Ochalek added. "They aren't buying anymore stocks, nor more real estate. They are looking carefully at corporations, their debt exposure and the market potential for the product they make."

Having learned to diversify their investment portfolios for the type of insurance they provide, 130 United States insurance companies participated in the New York State Experimental Target Surplus Formula Survey. The study recommended that firms needed to keep their adjusted capital ratios over 80 percent, according to the study. Fifty-nine of the companies had adjusted capital ratios under 80 percent. The group had an average adjusted capital ratio of 85.6 percent, a median of 84 percent.

Some of the better-known insurance firms whose adjusted capital rations fell below 80 percent are:

* Mutual of Omaha -- 78.1 percent * Aetna Life & Annuity -- 75.9 percent * IDS Life Insurance Co., Minnesota -- 68.3 percent * Kemper Investors -- 55.2 percent * Equitable Life Insurance -- 45.5 percent

"The target surplus percentage is just one of eight factors that should be considered when evaluating the strength of a life insurance company," Ochalek said.

Reserves against casualty policies should be placed in short-term, low-risk investments. Reserves against adjustable-premium life insurance must be put into shorter-term investments than reserves against whole-life policies, Ochalek said.

The United States life insurance industry invested $1.5 trillion during 1991, according to the American Council of Life Insurance. The industry split up its investments as follows:

* Corporate Bonds -- 42 percent * Government Securities -- 16 percent * Other Assets -- 7 percent * Real Estate -- 3 percent * Policy Loans -- 4 percent * Mortgages -- 18 percent * Stocks -- 10 percent

Newport Beach-based Pacific Mutual Life cut its $9.51 billion investment pie differently than its East Coast counterparts, according to the company's 1991 annual report:

* Bonds and Preferred Stocks -- 61.8 percent * Mortgages -- 20.9 percent * Policy Loans -- 9.2 percent * Stocks -- 2.6 percent * Real Estate -- 2.6 percent * Cash & Short Term Investments -- 1.9 percent * Other Invested Assets -- 1.0 percent