The interest rate environment may no longer be the source of acute pain it once was in the annuity industry. It’s still a tender issue because the rates are still pretty low, but a few annuity carriers actually said something good about interest rates in their third quarter reports — namely, that the slowly rising interest rate environment is helping their businesses.
No one is singing “Happy Days Are Here Again” but, in comparison to a year ago when rates were not far from rock bottom and the source of much unrest in the business, there is a certain lilt to some of today’s interest rate discussions.
For example, in noting that its annuity operations hit a record for quarterly statutory premiums in the third quarter, American Financial Group said that that its annuity business — and “the entire annuity industry”— have benefited from the rise in interest rates.
American Financial also gave credit to its expanded distribution channels, product offerings and company ratings as reasons for the third quarter growth, which was up 61 percent to $1.2 billion over third quarter last year. (It was also up for the first three quarters, by 9 percent from the first nine months last year.)
As for the increase in rates this year, that “provided us the opportunity to write increased premiums at favorable returns,” said co-chief executive officer S. Craig Lindner, who also is president and chief executive officer of Great American Financial Resources, a fixed, indexed and variable annuities subsidiary of American Financial.
Genworth Financial likewise credited the higher interest rate environment for increases the carrier experienced in fixed annuity sales. Compared to the prior quarter, the company said in its third quarter report, fixed annuity sales were up due to “more competitively priced products in the higher interest rate environment.” (Specifically, sales in third quarter totaled $760 million, up from $487 million in the same quarter last year and from $212 million in second quarter 2013.)
American Equity Investment Life Holding Company, a sales leader in indexed annuities, acknowledged the upward tick in rates in its third quarter report in this way:
“Although investment yield for the quarter increased due to the deployment of excess cash and short-term investments, new premiums and cash flows from the investment portfolio continued to be invested at rates below the portfolio rate. However, with the general movement in interest rates being up, new investments in the third quarter were made at yields that were better than those available earlier in the year.”
For example, the carrier said, the average yield on fixed income securities purchased and commercial mortgage loans funded in the third quarter of 2013 was 4.37 percent. By comparison, the average yields in the first two quarters of 2013 were 3.49 percent and 3.48 percent, respectively.
A number of other annuity carriers have remained totally silent about the interest rate environment. That third quarter silence is a statement in itself — an indication that rates may no longer be the sore point they were a year ago.
Throughout last year and even into the first part of this year, many carriers made no bones about how the prolonged low interest rates had forced them to make sometimes sweeping changes to their annuity businesses. The rates contributed to decisions to curtail annuity features, for instance, and/or for decisions to limit sales to levels that would not create capital constraints, especially for annuities with lifetime benefit guarantees.
It is commentary like that which is starting to wane. This may be expected, since most annuity carriers, especially the large carriers, have introduced new products that are designed for sale in a period of low interest rates. Companies also have taken other steps, including exiting some product lines and sometimes even selling subsidiaries, to “de-risk” their businesses.
So, even if rates had not gone up in recent months, it’s likely that some of these carriers would, by now, no longer be feeling the interest rate squeeze they once did.
That said, industry thinking has not jelled on the question of whether the current interest environment is good for the business. For instance, in their third quarter reports, a few firms identified the low interest rate environment as among the challenges that insurers continue to face.
One example is Allstate . The insurer said that annuity returns improved in the quarter due to higher limited partnership income, but that “the long-term outlook remains challenged by continued low interest rates.”
(Note: In July, the company announced it was selling its Lincoln Benefit Life subsidiary, a 75-year-old annuities and life carrier, to a British-owned U.S. company, Resolution Life Holdings. The sale, which is pending regulatory approval, is pertinent to this discussion because the sale was positioned as part of Allstate’s move to reduce exposure to spread-based business and interest rates.)
Another example is Protective Life. “Notwithstanding the headwinds created by the low interest rate environment, an unsettled regulatory environment and intense competition across all retail product lines,” chairman, president and chief executive officer John D. Johns said in the company’s third quarter report, “we continue to stay on track to meet our sales, capital and earnings plans for the year.” The comment referenced the business overall, not just annuities, but the message — that rates continue to be one of the headwinds in retail products — was clear.
What is a low rate anyhow?
A common benchmark that people use for tracking overall rate trends is the 10-year Treasury bond yield. Carriers may (and do) use other interest rate measures when designing products and doing projections. But the 10-year Treasury rate is the one used in general conversation.
On Nov. 7, the 10-year yield was approaching 2.7 percent, up from just under 2 percent a year earlier and from the record low of just under 1.5 percent in June 2012. The yields in 2013 have been consistently over 2 percent since mid-May. In early September, the 10-years approached nearly 3 percent.
Although no one knows what will happen in the future, many experts are predicting that rates will stay in the 2 percent to 3 percent range for quite a while.
That range may not seem like much of an increase from a year ago, but rate-watchers focus on the overall direction, and the staying power, of the trend-line. The upward slope from May to today is what has some executives saying the words “higher rates.”
Five years ago, in mid-November 2008, the 10-year rates were in the neighborhood of 3.75 percent, even though the recession was in full swing.
The 10-years reached their high in 1981, when double digits were common. The highest 10-year rate at the time was approaching 16 percent in July of that year.
By comparison, today is still a low interest rate environment, but one that appears to be upward bound.
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