Fog is still covering up the numbers for today, but, as of last week, conditions for U.S. life and annuity issuers were fine.
That's the message delivered by the federal Office of Financial Research market conditions monitoring tools, which, as of press time, included the investment market storms that raged Thursday, the day after President Donald Trump announced a big wave of trade tariffs, but not yet the turmoil that continued Friday and on until today.
The OFR financial stress index stood at negative 0.074 as of Thursday, meaning that, even after the "tariff tantrum" upheaval, the overall measure of financial stress was low.
The index was up from negative 2.41, the low for the past 12 months, which was recorded on May 21, 2024, but it was down from positive 1.913, on Aug. 6.
OFR saw stock prices gyrating somewhat more than normal last week, but credit spreads, or the difference between the interest rates that relatively risky borrowers were paying for loans and the rates that the safest borrowers were paying, were relatively narrow, showing that investors were not yet panicking about the ability of the riskier borrowers to make their loan payments.
Similarly, prices of relatively safe assets, such as Japanese yen and Swiss francs, looked relatively stable to OFR, and financial institutions' access to funding looked stable.
For life and annuity issuers, which might need access to liquidity in some situations but usually are the cash-rich companies that help other players with liquidity, the funding measure could be particularly important.
"In times of stress, funding markets can freeze if participants perceive greater counterparty credit risk or liquidity risk," according to OFR.
What it means: The companies that supporting your clients' life insurance policies and annuity contracts might be muddling through these days of storms.
The backdrop: Congress put the law that created OFR in the Dodd-Frank Act, in response to the 2007-2009 financial crisis. The office is an arm of the U.S. Treasury Department that helps the federal government promote financial stability by collecting and standardizing financial data and measuring and analyzing financial risk.
A few big U.S. life and annuity issuers sell stock to the public, but most issuers are owned by their customers or by private individuals or companies, and the issuers invest most of their assets in investment-grade bonds, mortgages, mortgage-backed securities, securities backed by assets like auto loans and credit card receivables, and other assets other than common stocks.
That means the performance of stock indexes, like the S&P 500, has little direct connection with how the issuers are doing. If the market is having a terrible day, and the price of big life insurance companies' stocks are falling, too, that might have nothing to do with the performance of or the outlook for the big life insurers. Investors who borrowed money to pay for stock, and who are facing "margin calls," or the need to feed more cash into their accounts to increase the amount of collateral used to support their borrowing, may have simply sold their life insurance company stocks to come up with the cash to satisfy the margin goals.
The future: For the life and annuity issuer watchers, one source of anxiety is the possibility that the issuers of the derivatives and other arrangements that they use to hedge against investment market volatility could run into trouble.
So far, no one seems to be talking about problems at big derivatives counterparties.
Another source of an anxiety is the possibility that the Federal Reserve Board could try to lower the interest rates it controls in an effort to shore up people who have bought stock on margin and other hard-hit borrowers. Lower rates could hurt the returns on life and annuity issuers' investments in bonds, mortgages and mortgage-backed securities.
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