Insurers Win As Fed Hikes Interest Rates Again

News Item: The Federal Reserve hikes interest rates by a quarter-point and signals two additional hikes this year and three in 2019.

Winner: The insurance industry.

After many years of a near-zero Federal Funds Rate, the lid is off and insurers will see several benefits, said Frank O'Connor, vice president of research at the Insured Retirement Institute.

"First and foremost, rising rates are going to mean higher crediting rates on traditional fixed annuities, CD-type fixed annuities and multi-year guaranteed annuities, as well as increase the payouts on immediate annuities," he said.

"You also have those rate increases extending out to the minimum guaranteed rates on fixed indexed annuities," O'Connor explained. "You have the potential to capture at least some of the increase, if any, in a major market index like the S&P 500."

The central bank raised the target range for its benchmark interest rate to 1.75-2 percent at the culmination of its two-day meeting. A mere two months after it hiked rates to 1.50-1.75, the Federal Open Market Committee made news by signaling a fourth rate hike planned by the end of 2018.

It is all in response to a percolating economy that has the Fed more worried about inflation at this point.

Insurers' assets and liabilities are heavily exposed to interest rate movements. Interest rate risk can materialize in various ways, impacting life insurers' earnings, capital and reserves, liquidity and competitiveness.

Once rates get to 3 percent, then insurers start to see a comfort level that makes for good business, O'Connor said.

'More Generous Living Benefits'

Meanwhile, the rising interest rates make for good phone calls to clients as well.

"When interest rates go up, VA and insurance companies are able to offer more generous living benefits," said John McCarthy, senior product manager at Morningstar. "If rates go up, companies, for example, can offer lifetime guarantees of 5.5 percent instead of 5 percent."

The standard rule of thumb for the withdrawal rate from a retirement portfolio is 4 percent, he added. That's considered a safe withdrawal rate. But if you go to 5 percent or 5.5 percent, then it's more attractive to the individual retiree.

If you go to 5 percent or 5.5 percent that makes it worthwhile for the fees you pay on that annuity.

"So as interest rates creep up, you can expect companies to tweak the guarantees and that's more attractive to the individual retiree," McCarthy said.

Remember, in an insurance company you have the product development folks on one side of the house and on the other side the investment management folks looking at investments and what they can guarantee to the client. It's all about the spread.

Fed officials expect the economy to grow at a 2.8 percent rate this year, up from a 2.7 percent forecast in March, according to data released at the meeting. Officials expect the unemployment rate to fall to 3.6 percent by year’s end, down from a March forecast of 3.8 percent.

On the flip side, the inflation rate forecast for the year was hiked from 1.9 to 2.1 percent. Inflation is now expected to run slightly at 2.1 percent through 2020, at slight increase with which the Fed indicated it is comfortable.

Senior writer Cyril Tuohy contributed to this article

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

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