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Economic volatility has led investors, including insurers, to consider buying gold as a secure asset. The risk of inflation— prominent in the minds of insurers at present—has often led cash- rich individuals and companies to invest in gold. However, there are potential pitfalls for any insurers choosing this option.

it. However, the enduring popularity of gold as a secure investment could mean that this is set to change.

T Milwaukee-based Northwestern Mutual Life Insurance Co., the largest

direct provider of individual life insurance in the US, bought gold in 2009 for the first time in the company’s 153-year history. Chief executive officer Edward Zore believes that gold just seems to make sense; “it’s a store of value”, he said during a conference in New York last year, adding that the price could double or even rise fivefold if the economy continues to weaken.

Jean Towell, a spokeswoman for Northwestern Mutual, said that the company held $366 million in gold as of September 9, 2010. This is about 0.25 percent of its approximate $150 billion investment portfolio.

“The downside risk is limited, but the upside is large,” Zore said. “We have

stocks in our portfolio that lost 95 percent. Gold is not going down to $90.” Gold has been used as a hedge against inflation ever since governments

found that they could print money and keep on printing it in ever higher denominations until the entire monetary system collapsed. Runaway inflation destroys assets, but gold tends to move up in value with inflation. And gold as a physical commodity retains its intrinsic value and never becomes worthless.

Regulators of US insurers would not consider gold speculation with

premium dollars or retained earnings as a conservative investment, according to Andy Barile, Andrew Barile Consulting Corp. “The

hrough the ages, pure and precious gold has lured and excited multitudes of people and institutions—some to their destruction— but insurance and reinsurance companies have mainly spurned

insurance business by its very nature creates risk, so investments have to be conservative,” he said. “The boards I sit on now have strict investment parameters, even requiring reporting to the audit committee.”

A chief executive of a reinsurance department, who wished to remain

anonymous, noted that insurance companies have been subject to regulations that restricted investments to the conservative side. That is why, in previous years, they bought treasuries and other very low-risk portfolios. “In the last 10 to 20 years, they seemed to get more risky and moved more into equities, only to get their socks knocked off when the market fell,” he said.

“I think the insurance companies would have been wise to stick to conservative underwriting types to run the companies,” he continued, “rather than the ‘smart’ investment types who led them into equities and things like derivatives and mortgage-backed securities. Those worked okay in the up market but were totally exposed in the down market. Fast growth with high risk led to insolvencies and bail-outs.”

Over a 30-year period, from 1970 to 2000, the price per troy ounce of

gold rose from $35 in a jagged up and down cycle to $275. Then with powerful booster rockets attached, the price skyrocketed to more than $1,315 an ounce in early October 2010. Such an astounding performance may have softened the resolve of insurers and reinsurers, who now look at the commodity as a possible investment, albeit with heavy sceptism still and with limited intention of stuffing their vaults with shiny gold bars.

One stimulus for stirring up interest in gold has come from the enthusiastic endorsements for investing in gold by several high-profile financiers. One is John Paulson, the hedge fund manager, who made billions several years ago by selling short on mortgage-backed securities. He has said that he believes gold prices will move up to between $2,000 and $4,000 an ounce

November 2010 | INTELLIGENT INSURER | 43

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