A federal financial system risk tracking unit talks a little about life insurers and a lot about COVID-19 in its new annual report to Congress.
Dino Falaschetti, director of the Office of Financial Research — an arm of the U.S. Treasury Department — writes in the report that the COVID-19 pandemic is an example of why the country needs the Office of Financial Research.
“This year’s report is unique in that it was written in the wake of a material threat to financial stability,” Falaschetti writes. “Economic indicators on the eve of the global pandemic showed little if any concern about a slowdown, let alone a sharp but short economic contraction.”
But the pandemic, and the response to the pandemic, caused the U.S. unemployment rate to spike to 14.7% in April, from 3.5% in February, Falaschetti writes.
- A copy of Office of Financial Research 2020 Annual Report to Congress is available here.
- An article about the 1918 influenza pandemic is available here.
“Our office plays a complementary role in supporting financial stability, which is always important, and especially so during the natural disaster triggered by COVID-19,” Falaschetti states.
Office analysts refer directly to life insurers in the report only briefly, in discussions of the state of the commercial real estate market, leverage in the financial markets, and insolvency risk.
Commercial Real Estate
In discussing commercial real estate, the analysts suggest that life insurers may be in a relatively safe position.
They note that life insurers invest directly in commercial real estate and also invest in commercial mortgage-backed securities.
Insurers have extensive experience with commercial real estate market and tend to have conservative holdings. They have relatively low levels of exposure to hotels and retail properties, which are now suffering due to COVID-19-related social distancing efforts, the report states.
But life insurers tended to see hotels and retail properties as being high-risk properties even before the pandemic started, the analysts say.
“Insurers have benefited from relatively favorable credit performance on their [commercial real estate] lending in past stress periods,” the analysts write. “This will likely be the case for the current credit cycle.”
In another section discussing leverage in the financial system, the Office of Financial Research analysts say that leverage, or use of debt, can increase a company’s returns but can also increase losses.