Leverage

  • Walker v Life Insurance Company of the Southwest
  • 3. Leverage in the financial sector.
    • The pandemic stressed the resilience of banks, but they remain well capitalized.
    • Leverage at broker-dealers also remains low.
    • In contrast, measures of leverage at life insurance companies are at post-2008 highs..... (p7)

2020 11 - FRB - Financial stability report - Leverage - [link]

  • The changes in the nature of the insurance industry over the past several years, both in terms of product diversification and asset diversification, has created considerable stress on the regulatory control mechanisms. 
  • Some of the symptoms of the problem are:
    • 2. Increased leveraging of insurance companies through long-term interest rate guarantees on an increased scale.  (p265-266)

1984-1, NAIC Proceedings - Valuation of Assets and Liabilities 

  • 2022 - FRB - Financial Stability Report - 86p
    • Leverage at life insurers remained near its highest level of the past two decades (figure 3.6).
      • Life insurers continued to invest heavily in corporate bonds, collateralized loan obligations (CLOs), and CRE debt, which leaves their capital positions vulnerable to sudden drops in the value of these risky assets.
      • Gradually rising interest rates improve the profitability outlook of life insurers, as their liabilities generally have longer effective durations than their assets, and higher interest rates may reduce life insurers’ incentives to invest in riskier assets.
      • However, a large and unexpected increase in interest rates could induce policyholders to surrender their contracts at a higher-than-expected rate.
      • If the increase in surrenders is substantial enough, it could put downward pressure on life insurers’ financial performance.
      • 2022 0512 - ThinkAdvisor - Treasury Secretary Worries About Leverage at Life Insurers, by Allison Bell - [link]