Signs that a period of ultra-low interest rates may be coming to an end has stirred optimism that revenues, profitability, employment and stock prices of insurers will skyrocket, with agents – as well as mutual insurance companies – benefitting. In its outlook for the life insurance industry for 2014, released in early January, Standard & Poor’s Ratings Service said that low interest rates “remain the primary impediment” to life insurers' earnings and “appear poised to increase.” The reality, however, is far more nuanced.
Many forecasts within the industry predict a gradual growth – instead of a return to pre-2008 levels – for at least three years. That’s because general fund book-yields will continue to decrease during that period, even though interest rates are projected to slowly rise.
As Chris Blunt, co-president of the Insurance and Agency Group of New York Life, put it: "While gradually rising interest rates certainly lessen the pressure on life carriers, they do not eliminate it.”
Blunt said the rise in rates will have an immediate impact on the competitiveness of fixed deferred and income annuities relative to alternatives such as Certificates of Deposit. Also, as rates rise, bond funds will see declining Net Asset Values, “which will make the stability of products like whole life and income annuities that are much more attractive to consumers," he said.
Total fixed annuity sales improved 31 percent in the third quarter of 2013 over the prior year to reach $23.5 billion — a level they have not reached since the third quarter 2009. Year-to-date, fixed annuity sales rose 6 percent, totaling $58.0 billion.
Todd Giesing, a staff official at LIMRA’s SRI unit, said that, since fixed-rate deferred annuities are purchased for principal protection and growth, the rise in interest rates was the main factor in the 66 percent increase in fixed-rate deferred annuity sales in the third quarter of 2013.
Sales of index annuities, which are dominated by independent agents, have been expanding into other distribution channels, particularly banks. “Index annuity crediting rates are also impacted by interest rates, and the rising interest rate environment is helping index annuity sales,” Giesing said.
He added that distribution of indexed annuities and variable annuities is quite different and indexed annuity sales do not appear to be materially affecting VA sales at this time.
What a difference a quarter makes in annuity sales results. In the 2013 third quarter, total fixed annuity sales were up 31 percent over third last year, according to LIMRA's new estimated results. Indexed annuities were up by 15 percent and produced a quarterly sales record of $10 billion and a $1 billion increase from second quarter.