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.
The 10-year fixed rate on Nationwide Financial's Best of America Platinum Edge is 6.5% for a $10,000 non-qualified premium. Protective's ProSaver Platinum is 6.15% for a $100,000 minimum investment, while MetLife's fixed annuity ($25,000 minimum) and Pacific Life's Frontiers product ($5,000 non-qualified minimum) both offer 6.25%, while Hartford's CRC Select ($5,000 minimum) and Equitrust's Certainty Select ($10,000 minimum) both offer 6%.
These rates are driving exceptionally high sales of fixed annuities, with the industry selling $27.1 billion worth in the third quarter alone, $24.6 billion in the second quarter and $18.8 billion in the first. A steeper yield curve also gives fixed annuities an advantage over certificates of deposit (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 Beacon Research.
"We're almost at $30 billion a quarter, which puts it at $120 billion for the annual number," Alexander said. "In the next quarter or two, that will rival or exceed variable sales."
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. With $1.2 billion in sales in the third quarter, it had the sixth-largest sales among carriers for the period.
"There is a flight to safety for fixed rates," McCreary said.
But some independent advisers are wondering how rates can be so attractive and still 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 under-priced but high-quality corporate dept whose higher returns will enable the carriers to offer higher FA rates, said Andrew Murdoch, a registered representative for Raymond James.
"Investing in just straight Treasuries is obviously not going to do it," he said. "There are some pretty big spreads out there in the corporate bond market." Raymond James normally sells $7 million a month in annuities, but in November, it sold $25 million, 70% of which was from fixed deferred annuities.
"There's a huge spread right now between corporate debt and Treasury debt," agreed an annuity marketer who asked not to be named. "Corporate yields are moving up at the same time that Treasuries are moving to 50-year lows. That's the answer."
Murdoch said Nationwide can offer such a high rate on its America Platinum Edge in part because it penalizes investors who withdraw money to seek higher rates elsewhere.
But not every FA issuer is offering such high rates, and there's no way to tell exactly what rate strategy each company is pursuing.
"There are things that nobody can know unless you're a fly on the wall in the boardroom," said one industry observer. "Not all companies have the money to buy that corporate paper. Others have retrenched. They may not be able to set aside the necessary reserves at the moment. It depends on the company's business."
But some carriers may be pushing their risk models to the limit in order to attract much-needed assets in troubled times, said Drew Denning, vice president of income management solutions at Principal Financial Group.
"The question is whether they have the staying power to continue not just at those rates, but to even support the lower ones next year," Denning said.
Eye On AIG
Some speculate that some carriers might want to use FA sales to raise cash 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 predicted. The big question is whether consumers remain confident in the insurance sector, he added.
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 indicate 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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