Update: Insurers Welcome Fed Interest Rate Hike; MetLife Forecasts Earnings Growth
December 19, 2016 by Frank Klimko
WASHINGTON – (Corrects information in second paragraph.) Insurers reacted positively to news the Federal Reserve increased interest rates on investments by 0.25% — the second such rate increase in a year — and signaled it was open to more rates hikes in 2017.
The Federal Reserve Board of Governors unanimously voted to raise the benchmark interest rate for the second time in a year, continuing to reverse course on policy that has kept those rates near zero levels since the financial crises. The Fed said it could raise rates another three times next year.
Higher rates could mean a boost of up to $300 million in operating earnings over the next three years, John Hele, MetLife Inc. chief financial officer, said in a conference call with investors.
“We estimate that a 50-basis-point parallel shift up in the long end of the yield curve and no change in the short end at the beginning of the year would result in an increase of $45 million over 2017 annual operating earnings, $105 million in 2018 and $150 million in 2019,” Hele said.
Still, the impact of higher rates on new money will build more slowly as premiums, deposits and investment proceeds are invested, Hele said. “As a final point on interest rates, we estimate equivalence between the new money rate and our portfolio rate at a 10-year Treasury of roughly 3%.”
The increases could take time before they are reflected in earnings.
“While we view rising interest rates positively, there remains a lag between rates moving up and operating earnings following in kind,” Hele said. “For starters, as rates rise, we will immediately forego some derivative income as we are a net payer of short-term LIBOR (London Interbank Offered Rate) through our swap book.”
At about this time last year, the Fed took the first step at ending the low-interest rate environment and hiked interest rates by the same 0.25%. Insurers at the time also applauded the move (Best’s News Service, Dec. 16, 2015).
This second rate hike is also promising, Andrew Melnyk, vice president of research for American Council of Life Insurers, told Best’s News Service. “Prolonged low interest rates harm retirement savers. Higher rates will make it easier for life insurers to help people save for retirement.”
Although the hike is relatively small, Insured Retirement Institute President and Chief Executive Officer Cathy Weatherford told Best’s News Service it will especially boost the fixed annuity market.
“Provided that rates can continue to rise gradually, we may see fixed annuities offer higher crediting rates and more generous payouts on both fixed and variable products offering lifetime income,” Weatherford said. “It will take time, however, for higher interest rates to have an effect. Therefore, rising rates should be viewed as having a late-2017 impact on lifetime income products.”
Life insurers for years have said the low interest rate environment was pressuring the bottom line, especially in annuities, select life insurance products and long-term disability products.
That was emphasized by Howard Mills, global insurance regulatory leader for Deloitte and the former New York State insurance commissioner. “Insurers count a great deal on earnings on their investments,” Mills told Best’s News Service.
“Any move toward higher interest rates is a welcome development, particularly for life insurers who have long tail products,” Mills said. “The question is, is this enough of a rate hike for insurers.”
Steven Weisbart, senior vice president and chief economist at the Insurance Information Institute, was cautious in his assessment.
“The problem is that the last time that the Fed raised short-term rates we thought that long-term rates would also rise and they didn’t,” Weisbart told Best’s News Service. “It could open the door to long-term rate increase. That is the way it is supposed to happen.”
It’s an uncertain time with regard to where interest rates might go, Weisbart said. “There are so many things that could push it in any direction.”
Frank Conde, chief investment strategist, Prime Advisors Inc., said he was upbeat.
“It’s always a positive when the Fed raises rates,” Conde told Best’s News Service. “At last, going into 2017 everyone gets to earn more. It’s almost like a Christmas gift.”
A.M. Best provided a short commentary on the hike. “A.M. Best doesn’t anticipate that the move will provide much relief for insurers from the sustained low reinvestment rates they have been faced with over the past few years,” said Ken Johnson, a senior director in the A.M. Best life/health ratings division. “However, A.M. Best does anticipate some eventual relief on the longer end of the curve, 10 years and out, as inflation starts to play a bigger role in the economy and the Fed finally stops reinvesting the maturing portion of its Treasury and mortgage-backed securities holdings; however, the timing of this impact remains unknown.”
“Life insurers in particular, with concentrations in investment grade fixed-income securities around the 10-year maturity bucket, would benefit from higher rates as they have not experienced 10-year Treasuries over 3% since the end of 2013,” he said.
(By Frank Klimko, Washington correspondent, BestWeek: Frank.Klimko@ambest.com)
