The Role of Interest Rates in Investments

Through the years the Company has taken the position that the character of the Life insurance business does not allow of investments with a speculative element. Even during the financial fever that raged prior to the stock market debacle of 1929, when many people advocated the purchase of common stocks for trustee funds, Mr. Ecker took every opportunity to caution against departures from the established standards of investment. When attempts were made to modify investment laws to allow common stocks in Life insurance company portfolios, he repeatedly and tenaciously opposed the weakening of the legal standards.

With serious misgivings as to the trend of the times, Mr. Ecker, on September 26, 1929, spoke before the National Association of Life Underwriters in Washington, D. C., and again emphasized that life insurance investments were held to insure the faithful performance of the policy contract. He took the uncompromising position that even the best common stocks should have no place in the investment program of Life insurance companies.

"Common stocks," he said, "are inherently speculative. Profits are large if the enterprise is eminently successful; but, in the event of failure, losses may be correspondingly large, or even larger, since the entire value may be wiped out. Of a given number of enterprises started each year, a certain number fail. We are today riding on a high wave of prosperity. We want to foster it and to have it roll on, but we do not entirely forget that there will always be an ebb and flow of the business tides. The curve of advancing prices has, in the past, invariably been offset by cycles of declines of equal degree." Within a month these words proved prophetic.

In 1931 Mr. Ecker, in studying the immediate effects of the stock market crash, reviewed the experience of about 50 common stocks that had been urged for Life insurance investments. Prior to October 1929, experienced financiers would have characterized the list as a very select one. They were the stocks of outstanding business organizations in the United States which had either no bonds or practically no funded debt ahead of them.

Nevertheless, between December 31, 1929, and June 30, 1931, the average depreciation in market value of these common stocks amounted to more than 30 percent. During that very period, the investment account of the Metropolitan showed a profit. On December 31, 1929, the Company had in its portfolio about 1,300 separate items of bonds as well as preferred and guaranteed stocks, the market value of which was approximately $1,200,000,000.

Between the end of 1929 and the middle of 1931, securities of market value of about $74,000,000 matured or were sold out of that portfolio, from which the net profit amounted to something in excess of $1,000,000. The securities remaining un-matured and unsold on June 30, 1931, had then a market value of $1,139,000,000, which sum, taken with the amount matured or sold, showed a total of $1,213,000,000. Thus, in market value of securities still owned, plus market value of securities sold in the interim, the Company had a profit between December 31, 1929, and June 30, 1931, of $13,000,000.

The second cardinal principle of the Companies investment policy is to obtain as high a return as possible commensurate with safety. It has already been pointed out that the insurance contract is predicated upon the earning of adequate interest. The actual investment yield, if it exceeds the rate assumed in calculating the premium, is one of the three principal sources from which dividends are paid. Therefore, the rise and fall in interest rates necessarily affect the cost of insurance to the policyholder.