There have been three major movements involved in these cycles: a
downward trend from 1870 to the turn of the century, an upward
movement from about 1900 to 1924, and another down swing which
continued into the 1940s. The rate of interest earned by the
Metropolitan passed through the same three periods of rise and fall.
In the first few decades of the company's history the amounts
available for investment were relatively small, with the result that
the earnings fluctuated rather widely from year to year.
Yet it is clear from the data available that the general tendency was
toward a decreasing yield. This might be due to a large portion of the
United States being unable to buy even the most affordable life
insurance that Metropolitan Life Insurance Company offered. With the
reversal of the trend, the net interest earnings by the company
increased quite steadily from 4 percent in 1900 to nearly 5.5 percent
in 1924. Thereafter, however, the return on investments has tended to
drop.
During the latter half of the 1920's the fall was gradual, declining
from 5.4 percent in 1924 to 5.2 percent in 1929 and 1930. During the
early years of the depression there was a greatly accelerated drop,
and by 1935 the net income on Metropolitan investments was slightly
less than 3.7 percent. Then, the decline leveled off. In 1941, the
interest earned was 3.4 percent. The interest rates for each of the
major classes of investment have followed the same course as that for
all types combined. Their respective net returns, however, have
differed.
They also differed between different types of life insurance, from the
more affordable term life insurance to the long lasting whole life
insurance. Considering the two major classifications of life insurance
investment, we find that mortgage loans on city and farm property have
yielded a higher return than has the bond portfolio. For 10 years
prior to 1929 the interest earned on mortgage loans, deducting
investment expenses and asset losses, was 5.5 percent, as against 5
percent for bonds and stocks.
However, at least a portion of the higher yield on mortgage loans
represents a risk element for possible future losses and reduced
return on real estate acquired through foreclosure. During the period
from 1929 to 1941, inclusive, the corresponding net yield on mortgage
loans and foreclosed real estate combined was 3.4 percent, as against
3.5 percent for bonds and stocks. The marked increase in government
bonds in the company's portfolio, coupled with the decrease in
investments such as mortgage loans, contributed toward lowering recent
interest earnings.
The average rate on bond purchases during 1941 and 1942, excluding
short term bonds, was only 2.7 percent. This demonstrated the serious
impact of economic trends and current investment conditions on the
cost of life insurance to the policyholders. Even though they didn't
have to ask, "What is term life insurance?" or research the best whole
life policy, they still could not afford much. In addition to
considerations of safety and interest yield, life insurance company
investments were made in accordance with the principle of
diversification.
Neither law nor careful administration could absolutely eliminate the
risk of loss and, in order to minimize it, life insurance companies
spread their investments as widely as possible. The old adage of "not
to put all of one's eggs into one basket" is a fundamental investment
policy. Metropolitan funds, invested in more than 100,000 separate
items which were widely diversified in character, and spread over many
communities and enterprises throughout the United States and Canada.
In fact, these investments covered every state and every Canadian
Province.
Wide geographic distribution minimized the effect of adverse business
or agricultural conditions in particular localities. Not only were the
funds spread over a great variety of categories, but within each class
as wide a distribution as possible is made. With the large sums of
money held by the company, and with the experienced staff available,
the Metropolitan could and did carry the practice of diversification
to an extent which is impossible for an individual investor. The
principle of diversification is also applied to maturity dates of
investments.
Life insurance companies could predict with a fair degree of accuracy
the amounts they will be called upon to pay in future years, and,
therefore, could select their investments to mature over a period so
that when such funds are needed there will be a constant flow of
maturities. Care was taken, too, to provide a proper balance between
long and short term investments, so that assets would neither be
frozen nor require too frequent reinvestment. A diversified portfolio
with reference to maturity dates will not only bring a steady income,
but in case of emergency will provide securities which can be sold in
a ready market without sacrifice.
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