FAs Offer Rates That Investors Can’t Refuse
Copyright 2009 SourceMedia, Inc.All Rights Reserved Retirement Income Reporter
January 2009
NEWS; Pg. 20 Vol. 15 No. 1
993 words
FAs Offer Rates That Investors Can't Refuse; Insurers pass along high returns from corporate debt, some say.
Paul Menchaca
With other safe investments paying so little these days, it's hard to ignore the glowing rates that some insurance companies are guaranteeing on long-term fixed deferred annuities.
Take, for instance, the 10-year fixed rates on Nationwide Financial's The Best of America Platinum Edge, at 6.5% for a $10,000 non-qualified premium, according to Dec. 5 data from Annuityfyi.com. The rate of that market-value-adjusted product had been as high as 7%.
Protective's ProSaver Platinum FA offered 6.15% for those who could afford to invest $100,000, while MetLife's Fixed Annuity FA ($25,000 minimum) and Pacific Life's Frontiers product offered 6.25% ($5,000 non-qualified minimum). Hartford CRC Select offers 6% ($5,000 minimum), as does Equitrust Certainty Select ($10,000 minimum).
These rates are driving exceptionally high sales of fixed annuities, which already benefit from the flight from equities to safer instruments that's been gaining momentum all year. A steeper yield curve also gives fixed annuities an advantage over certificates of deposits (CDs), which are pegged to shorter-term securities.
"We've seen two quarters in a row of the largest sales numbers we have ever seen since we started collecting numbers in 2003," said Jeremy Alexander, president and CEO of Evanston, Ill.-based Beacon Research, which collects and distributes FA contract information.
Total U.S. sales of fixed annuities rose to an estimated $27.1 billion for the third quarter, according to Beacon Research's study of 51 insurance companies representing 87% of the market.
Sales were up 54% from last year's third quarter, and up 10% from the previous quarter. "We're almost at $30 billion a quarter, which puts it at $120 billion for the annual number. I'm guessing in the next quarter or two that will rival or exceed variable sales," Alexander said.
Even carriers that aren't offering eye-popping rates are enjoying bumper sales. Tamu McCreary, assistant vice president and fixed annuity branch manager for Jackson National Life Distributors, noted that the company's fixed annuity sales have increased 165% year-over-year. The company placed sixth on Beacon's third-quarter tally with roughly $1.2 billion in sales.
"People are looking for something safer," McCreary said. "There is a flight to safety for fixed rates."
How do they do it?
Some independent advisers have been wondering how rates can be so fetching and still be safe. After all, the yield was 2.67% on 10-year U.S. Treasury notes and 3.41% on 20-year Treasuries on Dec. 5.
Some high-paying carriers may also be scouring the markets to find underpriced but high-quality corporate debt whose higher returns will enable the carriers to offer higher FA rates, said Andrew Murdoch, a registered representative for Raymond James, the national independent broker/dealer.
"Investing in just straight Treasuries is obviously not going to do it," he said. "But there are some pretty big spreads out there in the corporate bond market." Raymond James normally does about $7 million a month on average in annuity business, but this past November it sold almost $25 million. Of that amount, about 65% to 70% was from fixed deferred annuities, Murdoch said.
Others agree that corporate debt is the key. "There's a huge spread right now between corporate debt and treasury debt. Corporate yields are moving up at the same time that Treasuries are moving to 50-year lows. That's the answer. The insurance companies don't invest in Treasuries. They invest in high-grade corporate paper," said one annuity marketer who asked not to be named.
Murdoch noted that Nationwide can offer such a high rate on its America Platinum Edge in part because that is an MVA fixed annuity, a type that can penalize investors who withdraw their money to seek higher rates elsewhere, if available. "That's a product that offers almost zero liquidity," he said. "People that were putting into that product are basically being told that this is money you cannot touch at all."
Potential asset magnet
Not every FA issuer is matching the high rates, and there's no way to tell exactly what rate strategy each company is pursuing or why.
"There are things that nobody can know unless you're a fly on the wall in the boardroom," one observer said. "Not all companies have the money to buy that [corporate] paper though. Other companies have retrenched. They may not be able to set aside the necessary reserves at the moment. It depends on each company's business."
Some insurers may be maximizing their rates in order to attract much-needed assets in troubled times, said Drew Denning, vice president, income management solutions, Principal Financial Group.
"What we're seeing is the insurance companies that are really looking for increased cash flows are offering those higher rates. The question is whether they have the staying power to continue not just those rates, but to even support the lower ones next year," Denning said, referring to the fact that the initial rates on many multi-year fixed annuities are guaranteed for only one year.
Some speculate that carriers might want to use FA sales as a way to raise cash that they can use to acquire one of AIG's divested businesses or carriers that have been weakened by the debacle in the equities markets and declines in their own share prices.
How long might the boom times last for fixed annuities? "These increases seem to be at least a couple of years in duration," Alexander said. The big question is whether consumers remain confident in the insurance sector, he said.
For most of 2008, insurance companies were an oasis in a world of drought-stricken banks. But now that insurance companies have seen dramatic declines in their share prices, they look less impregnable. Fourth quarter sales figures will demonstrate whether insurers still have the public's faith. "If [investors] feel as comfortable as I do with the insurance sector, [the fixed annuity] market will continue to explode," Alexander said.
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