New York Life Insurance Co., the insurer with a portfolio of more than $170 billion, limited the investment duration and hedged against higher yields to prepare for a rise in interest rates after U.S. bond buying ends.

The firm has “hedges designed to produce substantial payoffs in the event of a spike-up in rates,” Chief Financial Officer Michael Sproule said Monday. “We’re at the end of a 30-year period of rates coming down.” He spoke at a panel discussion at the American Council of Life Insurers’ annual conference in Washington.

While a rise in rates will boost income from new bonds, it can also depress the value of existing securities. That may strain insurers’ balance sheets, he said.

Yields will remain depressed as the Federal Reserve buys bonds and targets low rates through the middle of 2015 to boost growth in the world’s largest economy. An eventual rise in rates probably won’t be gradual, Sproule said.

“We all have our goldilocks scenario in mind which is the forward curve, rates go up 30 to 50 basis points a year for a decade,” he said. “That’s nirvana. And the chances of that happening are probably pretty darn low.”

New York Life, the largest U.S. life insurer owned by policyholders, had $174.9 billion in cash and invested assets as of Dec. 31, including $132.7 billion of fixed-income securities.

Genworth Financial Inc. is limiting the duration of its overall portfolio, said Chief Investment Officer Dan Sheehan. The Richmond, Virginia-based insurer is investing in higher- quality bonds at longer durations while taking credit risk in securities that mature more quickly.

Credit Risk

“There was a time when we were willing to take lower-rated credit risk at long durations,” Sheehan said. “We’re much more invested in higher quality in the long-duration assets than we had been traditionally.”

Sheehan said the Fed’s program of buying agency mortgage bonds has soaked up supply and limited investment options.

“We were I think a beneficiary because we were in early in that market and we benefited from the aggressive Fed buying, but it makes it much less attractive going forward,” Sheehan said in an interview in Washington. “All of us have less places to go, so it affects the spreads across the whole market.”

Genworth’s $73 billion investment portfolio included $59.8 billion in fixed-maturity securities as of June 30.

Sheehan said he prefers asset-backed securities that the Fed isn’t buying, because Fed purchases have pushed down yields on agency mortgage-backed securities by about 25 to 30 basis points. That will reverse when stimulus efforts end, he said.

“I’d hate to be in the agency market when the Fed lets go,” he said. “When they stop playing in that market, there’s going to be a bounce back up.”