Impact of low interest rates on
life insurance industry
Actuaries Club of Philadelphia – annual meeting
February 12, 2013
BACKGROUND
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How low are rates?
►
Average 30-year mortgage rate in 20121:
3.66%
►
Annual money market yield in 20122:
0.04%
1Source:
Associated Press. “30-year mortgage rate rises to 3.42%.” USA Today. January 24, 2013.
http://www.usatoday.com/story/money/business/2013/01/24/mortgage-rates/1861865/
2Based on Vanguard Prime Money Market return in 2012: (https://personal.vanguard.com/us/funds/snapshot?FundId=0030&FundIntExt=INT#tab=1)
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CAUSES
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Federal Funds Rate
Source: “Effective Federal Funds Rate (FEDFUNDS).” Economic Research Federal Reserve Bank of St. Louis. February 7, 2013.
http://research.stlouisfed.org/fred2/series/FEDFUNDS
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Federal Open Market Committee (FOMC)
“…the Committee decided to keep the target range for the
federal funds rate at 0 to 1/4 percent and currently
anticipates that this exceptionally low range for the federal
funds rate will be appropriate at least as long as the
unemployment rate remains above 6-1/2 percent…”
- FOMC Press Release, December 12, 2012
Source: “Press Release.” Board of Governors of the Federal Reserve System. December 12, 2012.
http://www.federalreserve.gov/newsevents/press/monetary/20121212a.htm
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Quantitative easing (QE)
Source: O’Brien, Matthew. “The 1 Thing the World’s Smartest People Don’t Get About the Fed.” January 4, 2013.
http://www.theatlantic.com/business/archive/2013/01/the-1-thing-the-worlds-smartest-people-dont-get-about-the-fed/266812/
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Investing trends
Source: “Flows and Liquidity.” Global Asset Allocation. JP Morgan. January 11, 2013.
https://mm.jpmorgan.com/EmailPubServlet?h=129diuua&doc=GPS-1025162-0.pdf
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IMPACTS
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Collateral damage
Source: Shilling, A. Gary. “Who Loses When the Fed Keeps Interest Rates Low?” Bloomberg. October 30, 2012.
http://www.bloomberg.com/news/2012-10-30/who-loses-when-fed-keeps-interest-rates-low-.html
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Impact on stock prices
Source: “Facing the Interest Rate Challenge.” Swiss Re Sigma. 2012. http://media.swissre.com/documents/sigma4_2012_en.pdf
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Product-specific impacts
Source: “Low Interest Rates and the Implications on Life Insurers.” NAIC CIPR Newsletter. April 2012.
http://www.naic.org/cipr_newsletter_archive/vol3_low_interest_rates.htm
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Financial reporting impacts
“In instances where GAAP requires best-estimate
assumptions, the actuary should choose assumptions
that, in his or her judgment, reflect the most likely
outcome of events…Relevant accounting standards call
for best estimate assumptions to be periodically reviewed
and updated to reflect emerging experience”
- ASOP 10, Methods and Assumptions for Use in Life
Insurance Company Financial Statements Prepared in
Accordance with GAAP
Source: “Actuarial Standard of Practice No. 10.” Actuarial Standards Board. March 2000.
http://www.actuarialstandardsboard.org/pdf/asops/asop010_068.pdf
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MITIGATION
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Reaching for yield
“However, a more disturbing effect of the lower bond yields
is that they may have induced a growing appetite for risk.
In the case of insurance companies, with contractual
obligations to pay high rates of return on their liabilities,
such behaviour became almost a matter of survival.”
- BIS 74th Annual Report, June 28, 2004
Source: “BIS 74th Annual Report”. Bank of International Settlements. June 28 2004. http://www.bis.org/publ/arpdf/ar2004e1.pdf
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Investing trends
Source: “Seeking Return in an Adverse Environment, Insurance CIO Survey”. Goldman Sachs Asset Management. July 2012.
http://www.goldmansachs.com/s/GMeT_othermailings_attachments/6347837329351787503251.pdf.
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Hedging
“The interest rate scenario we discussed last fall assumed a
rate curve with a 10-year Treasury rate held flat at 2% for
5 years. We reran that scenario using a more recent yield
curve with a 10-year Treasury at a record low 1.4%. The
result was essentially no incremental impact on MetLife's
earning per share for 2012 and 2013 and only roughly
$0.05 per share in 2014.”
- Steve Kandarian, CEO, MetLife
Source: Armistead, Tom. “MetLife: Low Interest Rates Are Not A Problem.” Seeking Alpha. August 3, 2012.
http://seekingalpha.com/article/779731-metlife-low-interest-rates-are-not-a-problem
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Hedging interest rate risk
88%
increase in the notional amount of
interest rate hedges from 2010 to
2011
Source: “NAIC Capital Markets Weekly Special Report.” NAIC. January 9, 2013. http://www.naic.org/capital_markets_archive/130109.htm
Source: “NAIC Capital Markets Weekly Special Report.” NAIC. June 10, 2011. http://www.naic.org/capital_markets_archive/110610.htm
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Product allocations
“Our pivot to the sale of higher return products like Variable
Universal Life, Indexed Universal Life and term insurance
grew 23% from a year ago. These products now
comprised 32% of our total Life sales while GUL accounts
for just 22%.”
- Dennis Glass, CEO, Lincoln National Company
Source: “Lincoln National Management Discusses Q3 2012 Results – Earnings Call Transcript.” Seeking Alpha. November 2, 2012.
http://seekingalpha.com/article/973701-lincoln-national-management-discusses-q3-2012-results-earnings-call-transcript?part=single
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FUTURE
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The “Great Rotation”
“I think the 'great rotation' has already started in
terms of flows and returns”
- Michael Hartnett, Chief Investment Strategist, BofA Merrill Lynch Global Research
Source: Aneiro, Michael. “Again With The ‘Great Rotation’: Signs Of Shift Out Of Bonds?” Barron’s. January 14, 2013.
http://blogs.barrons.com/incomeinvesting/2013/01/14/again-with-the-great-rotation-signs-of-shift-out-of-bonds/
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Potential Treasury spike
10-year Treasury yields in January 2013
2.05%
2.00%
Treasury spike in late
January
1.95%
1.90%
1.85%
1.80%
1/2/2013
1/7/2013
1/12/2013
1/17/2013
1/22/2013
1/27/2013
Source: “Daily Treasury Yield Curve Rates.” US Department of the Treasury. 2013.
http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2013.
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QUESTIONS
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