Insurers are trying to capitalize on an environment of rising interest rates by developing annuities that would benefit investors as rates increase.
Security Benefit Life Insurance Co., Allianz Life Insurance Co. of North America and New York Life Insurance Co. recently launched new products or added features to existing products all within the realm of fixed annuities, which seek to enhance investor returns as interest rates rise.
The Federal Reserve raised interest rates in December for the first time in almost a decade,
setting a new target range for the federal funds rate 25 basis points higher. Further, the Fed signaled four additional quarter-point increases in 2016 (but has
since backed off slightly from the projection).
“With this product development, these companies are finding a way to try and take advantage of a rising-rate environment,” said Sheryl Moore, president and chief executive of Moore Market Intelligence. “This is kind of a trend we've seen really taking flight lately.”
Security Benefit, for example, launched a single premium deferred fixed annuity Monday that credits interest to policyholders based on movement in the three-month IntercontinentalExchange London Interbank Offered Rate (Libor), a common benchmark interest-rate index. Libor has a strong correlation to the federal funds rate, according to Mike Kiley, Security Benefit's chief executive.
The RateTrack annuity resets the credited interest rate on each contract anniversary (over a period of either five or seven years). Investors would receive a 200-basis-point spread over the Libor rate (
currently at 64 bps) in the five-year annuity, and 240 bps over Libor in the seven-year product.
Presently, an investor would be credited 264 basis points and 304 bps, respectively, in the first contract year. The product has a cap of 600 and 640 bps, respectively, and a 1% minimum guarantee. (The average credited rate for five-year fixed annuities is 225 bps, and 265 bps for seven-year annuities, according to market research firm Wink Inc.)
“As rates begin to rise, this will give retirement savers something that will predictably increase as rates increase,” Mr. Kiley said.
New York Life introduced a new rider on one of its fixed annuity products — Secure Term Choice Fixed Annuity II — that operates similarly. The Interest Opportunity Rider — released Mar. 14, according to Wink — provides a one-time step-up in the contract's credited interest rate based on increases in the 10-year Treasury rate.
Allianz is taking a different approach, allowing investors in some of its fixed indexed annuities to choose an index that can control for bond duration. So, as interest rates rise, duration in the index falls; conversely, there would be a longer duration if interest rates start to drop, according to Jason Linn, senior director of product innovation at Allianz. The approach plays off the principle that bond prices move opposite interest rates.
The Tactical Balanced Index — developed by Pacific Investment Management Co. (Pimco) and owned by Allianz — has been available on two of the firm's fixed indexed annuities since March 1, and the insurer is adding it to two others in early May.
Voya Insurance and Annuity Co. also debuted an interest-rate strategy on two fixed indexed annuities in 2014, a spokesman said.
“Will we see more of this kind of stuff [from other insurers]? Yes,” said Jack Marrion, chief executive at Advantage Compendium, a research and consulting firm.
Aside from trying to capitalize on the current interest-rate environment, insurers are likely hoping these products reduce disintermediation risk, Ms. Moore said. Disintermediation, when investors cash in their annuities prematurely, often occurs in a period of rising interest rates as investors shift funds to other annuities offering more favorable crediting rates to the former policy.
Offering products that allow investors to participate in rising rates could make investor money “stickier” if investors feel they're not missing out elsewhere, Ms. Moore said.
Gregory Olsen, partner at Lenox Advisors Inc., said he'd generally be wary of using such types of products with clients, specifically with respect to fixed annuities.
“Then I have the liability of predicting where interest rate are going to go,” Mr. Olsen said. “I would have trepidation if a client is looking to me to make that decision. I'll take the known upfront and maybe take a couple-basis-points-lower rate of return than take the unknown,” he said, referring to the “known” rates of a fixed annuity that an investor guarantees upfront.
The trend around the world is toward negative interest rates, Mr. Olsen said, which may keep interest rates in the U.S. artificially low long-term. Fed chair Janet Yellen confirmed before Congress in February that a negative-rate monetary policy
is a plausible option. The Bank of Japan and four European economies are currently applying negative rates.
“That said, there's a market” for these types of products, Mr. Olsen added.
