Life insurers still favor bonds

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Life insurance companies invest pension and life insurance reserves primarily in bonds, according to Federal Reserve Flow of Funds Table F 117 for Q3 2005.

As the graph shows, although life insurers directed a large portion of cash flows into equities and mutual funds in the years 1998-2000, they returned to a more conservative position after the stock market crash of 2000-2001.

The graph suggests, also, that life insurance has not been a growth industry since 2001, with the volume of new funds flowing into portfolios holding more or less steady.

Life Insurers' Assets

However, over the decade, there has been growth.

Life insurers like corporates

Although favoring agency securities and treasuries in 2002, life insurers quickly returned to their traditional investment behavior of buying mostly corporate bonds.

The graph shows that after the stock market crash of 2000-2001, investments in the bond market by life insurance companies more than doubled.

Bond Investment by Insurers

Pensions are central to life insurers

Since 1997, pension funds have become the principal business of life insurance companies, as indicated by the relative size of life insurance and pension funds reserves on the next graph.

Over the last half century, there has been a long-term change in the life insurance business, driven at first by an increased awareness of inflation that moved people out of whole life policies into term insurance, and now by an aging population that has created a large market for pension products.

Life Insurers' Liabilities