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of petitioner, is primarily responsible for providing actuarial
services to petitioner's life insurance business.
As part of its investment strategy for its U.S. operations,
petitioner sought to avoid the risk of fluctuations in currency-
exchange and interest rates. Petitioner avoids currency-exchange
risk by investing in assets in the same currencies as its
insurance liabilities. Petitioner attempts to reduce its
interest-rate risk by matching the duration of its assets with
the maturity of its liabilities. Washington State law allows an
insurance company to invest up to 65 percent of its portfolio in
mortgages. Wash. Rev. Code Ann. sec. 48.13.265 (West Supp.
1990). Petitioner invested between 58 percent and 63 percent of
its portfolio in mortgages during the years at issue. In order
to match its investments in mortgages with the 1-year rate
guarantees on its annuities and also enjoy a relatively high
return from such investments, petitioner purchases mortgages with
5-year maturities, with a right of renewal for another 5 years at
market-adjusted interest rates. The average duration of these
mortgages is approximately 2 � years. Because petitioner's
5-year mortgages are longer than the 1-year rate guarantees, part
of petitioner's strategy is to balance its portfolio by also
investing in assets with a duration shorter than its liabilities.
Petitioner makes longer-term investments in assets backing
both its individual life insurance policies and payout annuities
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Last modified: May 25, 2011