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  • Fed's low interest rates could lower interest in annuities

    January 26, 2012 by Darla Mercado

    Extension of cheap money policy seen boosting annuity costs, reducing benefits and commissions

    By Darla Mercado

    January 26, 2012

    Reduced commissions for agents, more tweaking to annuities and lower profitability could be in store for life insurers now that the Federal Reserve has committed to keeping interest rates low until late 2014.

    The Fed announced last week that it will maintain the target range for the federal funds rate at 0% to 0.25% until late 2014, extending the period from mid-2013. So far, the rate has been at a near-rock-bottom level for about three years.

    Life insurance companies have been struggling with the low-rate environment for some time, as puny rates have sapped profits from their own corporate-bond investments.

    Slumping interest rates also have wreaked havoc on life insurance companies’ annuity businesses, boosting the cost of hedging variable annuities with living benefits. That, in turn, has led to a reduction in guaranteed-withdrawal and guaranteed-income percentages to 5%, from as much as 7% just a few years ago.

    The low rates also have made it tougher for insurers to pay attractive crediting rates on fixed and indexed annuities.

    Consequently, advisers can expect even more belt-tightening on the part of insurers in the months ahead.

    “We’re in the same boat as before: Prices are going to go even higher, and the guarantees are going down,” said Randy Binner, an analyst at FBR Capital Markets Corp. “This does hurt profits instantly, though. Insurers are making less of a spread.”

    He added that it will take a few years of rock-bottom interest rates before life insurance companies start to feel the effect of low rates on their reserves.

    Most likely, insurers will find ways to mitigate the hit to their profitability.

    “On fixed annuities, including the indexed side, it’s possible that interest rates being credited could go even lower than they are now as an effort to soften the squeeze in profit margins,” said Noel Abkemeier, a consulting actuary at Milliman Inc. “If things get really tight, the commissions will fall.”

    He noted that compensation to agents is often where carriers will start their trimming.

    The Fed’s announcement came with a silver lining, however. The S&P 500 climbed about 4.5% to close at 1,314.65 last Wednesday, the day the Fed made its announcement.

    If the stock market continues to climb, variable annuity sales could get a boost, even as advisers and clients get accustomed to less rich products, Mr. Abkemeier said.

    Further, indexed annuities could receive some benefit from a stronger stock market, which would make them look better than traditional fixed annuities.

    But all isn’t lost for customers who have retained their old fixed annuities and continue to contribute to them.

    Clients seemingly out of fixed-income options could add to their old fixed annuities that still credit an attractive guaranteed-minimum rate of 3% or 4%, noted Robert Kline, a rep with National Financial Partners Corp. “If you have a lot of old annuities on the books, you might be able to add to them and get a higher rate on the contribution,” he said.

    Originally Posted at Investment News on January 26, 2012 by Darla Mercado.

    Categories: Industry Articles
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