How does a life insurance company manage its general account portfolio?

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AcadiFi · Accepted Answer

A life insurer's general account backs its long-duration insurance liabilities — whole-life, universal-life, deferred annuities, pension reinsurance. The defining features: 1. **Long-dated, interest-rate-sensitive liabilities** — 15-30 year duration common. 2. **Spread business** — the insurer earns the difference between its investment yield and the crediting rate promised to policyholders. Profitability depends on spread management. 3. **Regulatory capital framework** — RBC in the US (NAIC), Solvency II in Europe, assign capital charges based on asset credit quality and mismatch. 4. **Accounting asymmetry** — liabilities are often at book value; assets include both amortized-cost (HTM) and fair-value buckets, which can create accounting volatility. **Portfolio composition** is dominated by investment-grade corporate bonds (60-70%), government bonds, mortgages/CLO-style structured, and typically 10-15% in equities/alternatives. Private credit is heavily represented because its yield premium over public IG is attractive for spread business. **Asset-Liability Management** sits at the center. Actuary-driven cash-flow matching, key-rate duration matching, and convexity management dominate the process. A CIO named Arden Whitfield at a large US life insurer matches her 22-year duration liabilities with a barbell of long Treasuries, callable corporates, and private placements that amortize on schedule. ```mermaid flowchart LR A[Premiums] --> B[General
Account] B --> C[IG Bonds
60-70 pct] B --> D[Mortgages] B --> E[Alts 10-15] B --> F[Claims] ``` **Risks to manage**: - Disintermediation (policy lapses rise when rates rise) — modeled as an embedded short put. - Reinvestment risk on long liabilities. - Credit migration raising RBC capital charges. - Equity/alternatives volatility hitting surplus. Life insurers are classic LDI practitioners before the term existed. Taxes matter (tax-paying, unlike pension trusts). Liquidity needs are modest but stress-tested against mass-lapse scenarios.

How does a life insurance company manage its general account portfolio?

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