21 JULY 1961, Page 32

Investment for Life

By SIMON SHORT usr recently the insurance industry reported that its total investments totted up to £6,600 million. This much-quoted figure breaks down into two significant categories. Approximately one-sixth is the 'float! on which the whole of the general business—motor, fire and accident—is based. The other £5,500 million represents life assurance savings. It is-the. investment of these life funds that commands attention today Before one becomes mesmerised by big figures, let it be said that £5,500 million invested on behalf of the millions of policyholders whose nest-egg it represents is small as against, say, the £50,000 million of total investments quoted on the London Stock Exchange. Looked at another way, new net savings through life assurance, i.e. premiums paid plus investment income, after tax, minus claims paid out and the expenses of run- ning the business, amounted to £490 million in 1960—£1 in every £3 of the nation's net per- sonal saving.

Investing £490 million—equal to nearly £2 million every working day—absorbs the energies of investment managers of the ninety-odd life assurance companies. As the active custodians of these funds they have, so to speak, to roll the 'snowball' of policyholders' savings through the investment markets accumulating investment in- come so that, come what may, as contracts fall due, it materialises in the promised nest-egg. The process is collective, the results are individual.

The two basic criteria of the investment mana- ger are the highest income consonant with maximum safety of the investment. His minimum objective is to secure the rate of interest on which benefits are based. In other words the actuary sets the pattern of terms for policies through his prediction of the future rate of interest in asso- ciation with the expected rate of mortality and future expenses, while the investment manager is set the task of achieving or bettering this rate of interest by shrewd investment. Although obviously actual mortality and expenses are also variables, the future rate of interest is the greatest unknown in the life assurance equation, depen- dent as it is on the course of economic events. Accordingly investment policy is the really critical sphere of life assurance activity. The chief economic problems of recent years have been inflation, the rate of economic growth and adjustment to the ending of economic con trols. Investment against this backcloth has cer tainly wrought changes in customary life asstIr ance portfolio management Inflation put the emphasis on equities, by disturbing the traditional conventions. It upset, the criterion of maximal.' income with security, since the erosion of real value was the 'penalty attaching to the traditional investment in fixed-interest stocks. On the other hand, the investment risk attaching to ordinal'Y shares, especially good-class equities, virtuall disappeared in inflation. Thus the new look of investment opportunities was the apparena `riskless' equity offering growth income on the one hand, and 'gilts' and prior charges, whose fixed income implied loss of real value, on th other. The public, too, learned the lesson of inflation and expressed its awareness in the popularity of with-profits policies. More recentb, a desire to participate in the fruits of economi growth has tended to replace the pure inflation view, and this has sustained the attractiveness of with-profits policies and the emphasis on equities in life assurance portfolios.

Not surprisingly, the proportion of expanding total life funds invested in ordinary shares has grown, from some 10 per cent. before the war l° over 20 per cent. today. Life assurance invest ments in equities are valued in the books at mori than £1,100 million, but before one rushes to lb' conclusion that the business is on the thresholi of controlling industry, it is worth pointing out that the total value of ordinary and deferre+ shares quoted on the London Stock Exchange amounts to some £30,000 million. Moreover, run- ning industry is a full-time job; life assurance has its work cut out conducting its own business.

Property is another sphere that has absorbed more of the attention of investment managers in recent years. From the investment point of view property, together with equities, comprises the classic hedge against inflation. Accordingly, the end of strict control on property development was the signal for a surge of investment in this field by life offices, in company with other institu- tional investors. Here, too, there has been a new emphasis associated with the lesson of inflation. Life assurance companies, more and more, as a condition for advancing mortgage loans, have been demanding a stake in the equities of the property companies. Similarly, there has been a tendency to introduce flexible rates on owner- occupier mortgages. Mortgages, real property and ground rents together now constitute more than 26 per cent. of total life funds compared with over 16 per cent. before the war.

All this is not to say that fixed-interest invest- ment has been neglected by life offices, whose predominant interest remains, very firmly, securing the best income from investments. In equity-obsessed markets fixed-interest securities have declined in value on occasion to such an extent that it has been possible to go shopping and find real bargains. The rise in the long-term rate of interest has also been important. Fixed- interest stocks have been marketed on terms which for the life assurance investment manager amount to a trouble-free high-income invest- ment. Furthermore, where they are redeemable, these stocks help him to arrange his assets to conform to the pattern of his obligations on policies.

Meeting policy obligations when they fall due is the basic raison d'être of life assurance invest- ment policy. The policyholder is in fact supreme. To him, on with-profits policies, is paid in the form of bonuses usually 90 per cent. or more of the profits, being the surplus arising largely from the excess over the predicted rate of interest achieved through shrewd investment. They are not capital profits. In a free market, wise invest- ment will flow into channels which add to the overall strength of the economy, for therein lies the greatest protection of the 'policyholders' interests. It is for this reason that life assurance has been prepared to contribute to such special. ised bodies as the Finance Corporation for Industry and other development projects, and support enterprise which, like the recent con. sortium to provide long-term export credits, is specifically in the public interest. At the same time, as policyholders' trustees, life assurance must object to any monolithic investment control Similarly, equitable stewardship of policy. holders funds together with a highly esoteric accounting procedure designed to hold the scales of justice between one generation and anothel and between with-profits policyholders and the rest, forces the life assurance business to argue its case for non-disclosure of market values.

In an epoch which has been hypnotised bY capital gains it is difficult for a business exclu. sively preoccupied with investing for income t13 make its case on these grounds and to argue that assets must, for life assurance purposes, be valued in relation to the income they produce and the liabilities they are designed to meet. Market values could be very misleading. Theo publication could inspire pressure to distort the equitable treatment of the various classes of policyholder. Inevitably this looks like pontifica- tion of the 'Father knows best' variety—and no doubt the Jenkins Committee will decide on and for all whether he really does—but the fact remains that non-disclosure does not mean steady accretion of so-called 'hidden reserves. The upward trend of bonuses in recent years and the aggressive competition between ninety-odd life offices ensure that.