|By Fran Lysiak|
|A.M. Best Company, Inc.|
The Federal Reserve's
The Fed announced that economic conditions are "likely to warrant exceptionally low levels for the federal funds rate at least through late 2014," changing its previous statement in August that the federal funds rate would remain low "at least through mid-2013," said
The central bank is also now releasing participants' projections of the appropriate timing for raising the federal funds rate, Gillard said. "We expect the Federal Reserve to follow through on its intention to keep interest rates near zero until at least late 2014." Finally, the Fed announced it's continuing "Operation Twist," which is serving to bring down long-term interest rates, Gillard said, referring to the central bank's "Maturity Extension Program and Reinvestment Policy," instituted last September (Best's News Service,
These actions are creating "an unprecedented period of low interest rates," Gillard said, noting short-term rates will have been near zero for six years if rates remain at these levels through late 2014, which will continue to put pressure on investment income and reinvestment return.
The Federal Reserve's announcement means reduced reinvestment rates, less competitive spread-based products and compressed interest rate margins for life insurers, wrote
Information received since the Federal Open Market Committee met in December suggests the economy has been expanding moderately, notwithstanding some slowing in global growth, according to a statement from the Federal Reserve's board of governors. While indicators point to some further improvement in overall labor market conditions, the unemployment rate remains high.
The Fed has the dual mandate of controlling inflation while maximizing employment but "these can conflict," said
The large cap life insurers most exposed to sustained low interest rates, are
The Fed is focused on fixing the housing market with Operation Twist,
"Quantitative easing" is a monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective. A central bank buys financial assets to inject a predetermined quantity of money into the economy.
If the Fed does a quantitative easing 3 later this year, "they'll likely be buying mortgage assets in an attempt to bring down mortgage rates even further," Schwartz said.
According to the
In this environment, the life industry is mostly buying investment-grade corporate bonds with high credit quality that provide good spreads, and isn't making big buys into Treasuries,
Stock life insurers tend to focus more on "spread-based" products, taking on more investment risk than underwriting risk, Schwartz said (Best's News Service,
Speaking during an
Other products that could be impacted most are universal life insurance with secondary guarantees; long-term care and long-term disability, Frino said (Best's News Service,
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