Low Yields Squeeze Annuity Renewal Rates

Low bond yields may cut the crediting rates some annuity and life insurance policyholders get at renewal time. U.S. life insurers talked about use of crediting rate cuts to cope with low investment returns last week in first-quarter earnings reports and conference calls.

Executives from American Equity Investment Life Holding Co. said Thursday, during a conference call with securities analysts, that their company started to adjust crediting rates for a $16 billion block of annuity renewal business in September. The company began to adjust crediting rates on a $7 billion block of annuity renewal business in December.

“We expect that we will continue to achieve reductions in our cost of money through renewal rate reductions that will be implemented on policy anniversary dates over the remainder of this year,” Ted Johnson, the company’s chief financial officer, said.

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Prudential Financial Inc. estimates in a quarterly report filed with the U.S. Securities and Exchange Commission that it has the ability to adjust crediting rates for about $55 billion of the insurance liabilities and policyholder account balances on its books.

“Although we may have the ability to lower crediting rates for those contracts above guaranteed minimums, our willingness to do so may be limited by competitive pressures,” Prudential warns.

Don Seibel, the chief financial officer of a third annuity issuer, FBL Financial Group Inc., said Thursday, during the FBL analyst call, that he wished FBL had the ability to cut more renewal annuity crediting rates.

The company used rate actions to cut rates for individual annuity holders last year.

This year, however, “it’s difficult to lower crediting rates on our in-force business much further,” Seibel said. “As of March 31, we had only 34% of our annuity business and 22% of our universal life business receiving a crediting rate above the minimum guarantees.”

A crediting rate is the interest rate an insurer agrees to pay the holder of an annuity or life insurance policy over a specified period.

Insurers get much of the cash they use to pay life insurance and annuity benefits by investing the premium dollars. They typically put more than 60% of the reserves in high-grade corporate bonds.

The Federal Reserve Board of Governors agreed in December to raise the federal funds rate, a benchmark rate it controls, by 0.25 percentage points. The board agreed to a second 0.25-percentage-point increase in March, and bond analysts are expecting the Fed to push through more 0.25-percentage point increases in June and December.

Life insurers build up their own general account investment portfolios over many years. Although the Fed is now starting to push rates higher, after years of doing what it could to hold rates close to zero, current rates on high-grade corporate bonds are still lower than the average rate the typical life insurer has been getting on its general account assets.

MetLife Inc., for example, says in its quarterly report that it earned an average yield of 4.7% in the first quarter. That was up from 4.55% in the first quarter of 2016. 

MetLife’s “new money yields,” or the yields the company could get on cash newly invested in the third quarter, averaged only 3.34%, Steven Kandarian, MetLife’s chief executive officer, said during the company’s analyst call.

Lincoln National Corp. says in its quarterly report that the company uses investment strategies, product design changes, crediting rate strategies and other strategies to mitigate the effects of low rates.

In spite of all of those strategies, “prolonged historically low rates are not healthy for our business fundamentals,” Lincoln says.

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A combination of low rates and uncertainty about the U.S. Department of Labor’s fiduciary rule clobbered insurers’ annuity sales in the first quarter.

Annuity sales fell to $1 billion in the first quarter at American Equity, from $1.6 billion in the first quarter of 2016.

At MetLife, fixed annuity sales were down 12%, and variable annuity sales were down 51%. Overall annuity sales were down 35%.

At Prudential, individual annuity sales fell to $1.4 billion, from $2 billion.

The low-rate environment is shaping insurers’ core life insurance product lines as well as their annuity product menus.

American International Group Inc., for example, says in its quarterly report that it has shifted away from life products with long-duration interest rate guarantees, and toward indxed universal life products.

More Defenses Against Low Rates

American Equity executives said during the company’s call that the company is generally trying to take a disciplined approach to managing its business, and to avoid offering unrealistically high rates to keep sales up.

“We are not a company that will sacrifice spread and returns for the sake of higher sales,” said Ron Grensteiner, president of American Equity’s American Equity Investment Life Insurance Co. unit.

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MetLife says in its quarterly report that it tries to handle low rates by using a derivatives-based hedging program; investing some of the assets supporting annuities in funds that are supposed to minimize volatility; and buying reinsurance.

MetLife is an eager annuity guarantee reinsurance shopper. “As part of our overall risk management approach for living benefit guarantees, we continually monitor the reinsurance markets for the right opportunity to purchase additional coverage for our [guaranteed minimum benefit] benefit business,” the company says.

Several annuity issuers say they are trying to cope with the effects of low rates and uncertainty about the U.S. Department of Labor fiduciary rule on annuity sales by increasing sales through banks and wirehouses.

One, FBL, is emphasizing its efforts to attract and train agents.

FBL now has 1,839 agents and agency managers, and it has 60 future agents in the pipeline.

“Our focus is to retain our current agents, add new agents and increase our total agent count,” FBL Chief Executive Officer Jim Brannen said. “We’ve seen steady growth in agent numbers over the last few years.”

FBL has developed an Indexed Academy to help agents understand indexed products. It recently added an Advanced Life Academy aimed at experienced agents.