Insurers, Industry Watchers Welcome Fed Rate Hike, but See Long Road Ahead
December 17, 2015 by Dennis Gorski, managing editor-online, BestWeek: Dennis.Gorski@ambest.com, and Frank Klimko, Washington, D.C. correspondent, BestWeek: firstname.lastname@example.org
WASHINGTON – Life insurers welcomed the news that the Federal Reserve had hiked interest rates on investments by 0.25%, after nearly a decade of leaving the benchmark effectively at zero.
Robert Tipp, managing director and chief investment strategist at Prudential’s fixed income division, said the company sees the move as “a first step for the Fed, but presumably they’ll tread cautiously from here. The bond market, importantly, looks well-braced for the rate hike cycle, setting up 2016 to be a year of decent returns from fixed income — especially the higher yielding sectors.”
Although the hike is relatively small, Catherine Theroux, a spokesman for LIMRA, told Best’s News Service it will have a positive impact, particularly on the fixed annuity market. “As the rate increases, as policymakers have indicated that they will do, it will have an impact on 2016, keeping in mind that there are other factors that will impact the market into 2017.”
The hike is the first in “presumably of what will be a multiyear rate hike cycle,” Tipp added. It “has been a long time coming. In some sense, ever since the last rate cuts to zero and quantitative easing arrived in 2008, the Fed has been very concerned with how they would extricate themselves from their multiyear exercise in non-conventional monetary policy. And now we are finally seeing that process set in reverse. We’re beyond bond buying and taper; beyond the cooling-off period; and now, just past the first rate hike.”
MetLife in a statement said a rising rate environment “will help make financial protection more affordable and accessible to those who need it.”
Steve Weisbart, senior vice president and chief economist at the Insurance Information Institute, said the move is a first step rather than a solution. “We’re basically taking a step up the stairs from the first floor to the second floor, but we have lots of other stairs to climb.”
That view was echoed by Mohamed A. El-Erian, chief economic adviser for Allianz. In a blog posting headlined “The Loosest Tightening in the History of the Fed,” El-Erian wrote, “This interest rate hike is the first element of what is likely to be a very shallow path.”
He predicted the Fed “will not follow its usual ‘hike at every meeting’ process. Instead, the pace of the campaign will be irregular, of a stop-go variety, and highly dependent on conditions.”
When the Fed completes the rate-raising cycle, “the policy rate will be below historical averages,” El-Erian wrote.
Weisbart said life insurers hope the rates eventually return to a 5% level, but “we’re not going to be there for probably a couple of years.”
For years, life insurers have said the low interest rate environment was pressuring its bottom line, especially in annuities, many life insurance products and even long-term disability products.
That was emphasized by Howard Mills, global insurance regulatory leader for Deloitte and the former New York State insurance commissioner.
“The interest rates have been a concern for some time, especially on the life side, where they are eager for something to happen,” Mills told Best’s News Service just before the hike’s announcement. “The question is, will it be enough? If they do a small hike, will that mean it will be untenable for them to come back and do another hike later? It’s a big concern.”
In a Special Report Oct. 5, A.M. Best said “the persistent low interest rate environment continued to further limit the number of (ratings) upgrades and drive a higher number of downgrades” in the first six months of 2015.
Weisbart said it’s important to remember that the Fed hike is a range, not a number. Whereas the range was 0% to 0.25%, for an effective near-zero rate of about 0.1%, the hike means that range now goes from a bottom of 0.25% to a top of 0.5%.
“The number will be somewhere in the middle of that, like 3/8ths of a percent. That will be determined day to day and hour to hour,” he noted.
He added interest rate hikes are good for the life insurance business.
“Obviously if you have more human capital to protect and the industry can show that the use of life insurance and annuity products are appropriate for that, then you’ll have better sales.”