(Credit: Federal Reserve Board)
Recently, there has been speculation that life insurance companies could be facing tough times as a result of COVID-19 and the associated financial crisis.
Even the Federal Reserve in its report on Financial Stability, which was updated May 2020, notes that, "Measures of leverage at life insurance companies […] were at the higher ends of their ranges over the past decade."
Look in the space over this article for a graph from the Federal Reserve report. The graph shows how leverage at insurance companies has changed over time. You can see that these levels have consistently fluctuated from around 8% to 12% over much of the last 20 years.
Leverage was higher in 2004-2005 and again around 2008, so current levels would not seem to pose a major cause of concern for the industry, as a whole.
What about the Financial Crisis?
Since insurance companies invest primarily in bonds, the prevailing low bond yields over the last 20 years have been limiting. During the recent financial crisis, bond yields moved even lower, and now it seems that the Federal Reserve will continue an extended policy of low interest rates to boost the economy.
While continued low interest rates are not a reason for insurance companies to celebrate, it is important to consider that insurance companies of all types have been successfully navigating a low interest rate environment over the last 20 years.
A Silver Lining — Especially for Mutual Life Insurance Companies
Insurance companies with strong cash reserves experienced a window of buying opportunity during the recent downturn when relatively high-yield bonds were dumped on the market at low prices.
Many mutual insurance companies were in a great position to take advantage of this opportunity. For carriers that have made such a move and are willing to wait, it should prove a good decision as those bonds mature.
Obviously, stock-held insurance companies may have realized the same opportunity during this time, but stock-held companies tend to plan over shorter time periods than mutual companies, because they must make quarterly reports to shareholders.
Mutual insurance companies are free to plan over longer time periods — two to three years according to Andrew Rinn, a vice president at Ameritas — as they try to make the best long-term decisions for their policy owners. For this same reason mutual insurance companies tend to assume less leverage (debt) and to hold more cash than stock-held companies.
John T. McFie is a life insurance agent at 
