Rates of Return on Common Stock Portfolios of Life Insurance Companies

Abstract

This is an empirical study of rates of return on the common stock portfolios of thirtythree large life insurance companies for the period 1956-1967. Annual compound rates of return were calculated for each portfoio, allowing for continuous reinvestment of net contributions, equity purchases minus sales, plus dividend inflows. There is a marked difference in the rates of return earned by individual life companies. Company mean returns for the twelve years range from 18.08 percent to 4.99 percent. These annual rates of return on the life company equity portfolios are compared to the returns on the Standard & Poor's 500 index. The life companies tended to outperform the index in the early years of the study but this relationship was reversed in the last five years. Overall there was no significant difference. The relationship between rate of return and portfolio size was tested and the results showed no significant relationship. An analysis of changes in the structure of common stock portfolio indicated a relative increase in industrial equities and a relative decrease in holdings of other equities. performance has recently emerged as a major concern of financial institutions and their customers. Ready availability of data and widespread interest in their performance have made investment companies the subject of a number of studies and continuing investment performance reviews.' Although data James A. Gentry, D.B.A., is Assistant Professor of Finance at the University of Illinois. John R. Pike, Ph.D., was Assistant Professor of Finance at the University of Illinois when this article was written. He is now Director of the State of Wisconsin Investment Board. The authors are deeply indebted to members of the 1968 Risk Theory Seminar and to Thomas A. Hannagan, graduate research assistant, for their helpful comments and assistance. The views expressed in this article are those of the authors only, and they do not necessarily reflect the opinion of the State of Wisconsin Investment Board. This paper was submitted in August, 1968. 1 See for example, U.S. Congress, House Committee on Interstate and Foreign Commerce. A Study of Funds, 87th Cong., 2nd Session (August 28, 1962), especially Chapter V; Irwin availability is limited, sample pension fund performance has also been subjected to the same kind of analysis.2 Paradoxically, common stock portfolio performance of life insurance companies has not been reported in the same way in spite of full public disclosure of their Friend and Douglas Vickers, Portfolio Selection and Investment Performance, Journal of Finance (September, 1965), pp. 391-415; Ira Horowitz and Harold B. Higgin, Some Factors Affecting Investment Trust Performance, The Quarterly Review of Economics and Business, III (Spring, 1963), pp. 41-50; William F. Sharpe, Mutual Fund Performance, Journal of Business, XXXIX (Supplement January, 1967), pp. 119-138; Arthur Wiesenberger and Company, Investment Companies, published yearly. 2Peter 0. Dietz, Pension Funds: Measuring Investment Performance (New York: The Graduate School of Business, Columbia University and the Free Press, 1966). A. G. Becker & Co., an investment banking firm, is doing extensive analysis of bank managed pension fund portfolios. The NABAC Study on pension funds will provide a wealth of data for future research.