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When the Federal Reserve announced a historic 0.75-percentage-point rate hike last week, it sent many financial markets into a chaotic state. One market that should benefit from the rate hike, however, is the annuity marketplace, experts say. Specifically, indexed products, which thrive on offering stability when the financial landscape is most unstable.
“In a time of uncertainty, a fixed income product that does not carry the capital loss downside of a traditional bond could be attractive,” said Mark Lindbloom, a portfolio manager at Western Asset Management in Pasadena, Calif. “All things considered, indexed product sales should be stronger than they might have been prior to the historic 75bp hike and the Fed’s forward guidance.”
Lindbloom was part of a panel last month sponsored by the Insured Retirement Institute in Washington, D.C. Mike McCarthy, vice president, distribution strategy for Prudential, suggested that slow and steady rate hikes were best for indexed sales.
“But fast and furious could be bad and potentially disastrous,” McCarthy said. Prudential did not return several messages seeking comment from McCarthy on the Fed action this week.
“These rate hikes are already priced into the market (plus some),” Lindbloom said via email. “The unknown remains whether or not the current projections on inflation will play out, or whether further hikes could be needed.”
Attacking inflation
The largest single-day interest rate hike since 1994 will boost interest on mortgages, credit cards, equity loans, and other rate-sensitive products, but also shows the Federal Reserve is seriously attacking raging inflation.
There is expectation that the Fed will raise rates again during its next meeting. Meanwhile, the Dow Jones Industrial Average is down 18% for the year. A typical fixed-index annuity owner, for example, has not lost anything due to a zero floor found on FIAs.
“With equities having sold off as much as they have in response to inflation, Fed policy action, and slowing growth, the ability to participate in possible future upside is a benefit,” Lindbloom noted.
Ray Kathawa is vice president of practice development at M&O Marketing in Southfield, Mich. The company is a annuity and life insurance wholesaler and is seeing consistently strong annuity sales, Kathawa said.
“The same interest rate impact will drive fixed index annuity sales,” he said of the rate hike. “Indexed interest strategy rates are increasing substantially already. Caps and participation rates are going up and spreads are going down. Premium bonuses have begun to increase for the same reason and even some commission boosters have been announced.”
Carriers seem to have confidence that bond-market fixed-interest rates are going up and going to stay up for the foreseeable future, Kathawa explained.
“Carriers concerned by low rates, before, took various defensive strategies for protection against historically low interest rates – rates that were frighteningly close to product lifetime guaranteed rates in some cases,” he added. “Those carrier concerns have now passed.”
With higher investment returns now available for a carrier’s new premium, carrier guarantees can be higher as well.
“This shows up in more aggressive guaranteed lifetime withdrawal benefit riders,” Kathawa said. “We have seen increases in payout rates, in roll-up rates and in income base bonus credits. Those changes should last months, if not years. It will be very exciting again.”
‘More new annuity business’
Higher rates will indirectly improve carrier financial strengths, he said. Any threats of negative interest rates and ultra-low returns on portfolios might be over as rate climb higher.
“Carriers will want more new annuity business and should increase their own income as a result,” Kathawa. “I expect more than a few carriers to enter the annuity markets for the first time or perhaps even re-enter the business.”
Dan Hoover is a director, product analytics and chief compliance officer of compliance and distribution at Castle Funds, based in Richmond, Calif. He called the Fed decision to target higher interest rates “a bit of a paradox.”
While market volatility plus higher interest rates on guaranteed products creates a higher demand for those products, Hoover is unconvinced that carriers will find enough investment opportunities to meet that demand.
“Consumers should carefully consider whether the protection that they are purchasing is properly priced relative to the risks being covered,” he said.
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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