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The Federal Reserve Board has just cut a closely watched, mostly symbolic interest rate it controls by a quarter of a percentage point.
Players out in the bond market itself have been pushing down the market's own rates for months.
The shift has come after a few years in which rates had been starting to creep up, from levels somewhere down near the center of the Earth.
Executives from some annuity issuers are still emphasizing during their second-quarter earnings calls how much flexible product design decisions and hedging arrangements will protect them from the chill in the air.
Why Rates Matter
Traditionally, life insurers have supported annuities with guarantees and other products that offer long-term guarantees, such as term life insurance and long-term disability insurance, by investing the capital supporting those products in high-grade corporate bonds, and a smattering of some other assets.
The idea is that the gap between what life insurers charge the customers, and what they earn on their own investments, will help pay for the benefits, and also help provide cash the life insurers can use to pay for distribution and their own administrative costs, and to increase their profits.
Candor
Jim Brannen, the chief executive officer of FBL Financial Group Inc. has admitted that he is not a fan of cold interest rate weather.
He told securities analysts Friday, during FBL's second-quarter earnings conference call, that his company has seen the 10-year Treasury yield decrease by 0.69 percentage points in the first half of this year, to 2% at June 30.
"The biggest challenge we currently have is the decline in market interest rates," Brannen said. "It appears we're back to an environment with declining market interest rates."
Annuity issuers like FBL need higher rates to offer products that are more attractive to our customers, maintain strong agent compensation levels, and earn profits, Brannen said.
Issuers have some control over the crediting rates they offer customers, but their ability to cut rates is limited partly by product guarantees, and partly by competitive pressure, Brannen said.
Lemons, and Lemonade
Over at Athene Holding Ltd., an annuity insurer and reinsurer, executives conceded that falling rates make achieving good investment yields challenging.
Marty Klein, the chief financial officer, said falling rates could have two, opposing effects on reinsurance deals: falling rates could cut valuations of the assets supporting blocks of business, and make reinsurance deals more expensive for the direct writers to complete.
But "that doesn't mean there aren't people who want to transact," Klein said. "Their issues are bigger."
