AnnuitySpecs.com CEO: ‘Relatively Attractive Rates’ Helping US Sales of Indexed Annuities

Total third-quarter 2011 sales of indexed annuities in the United States were $8.7 billion, down less than 1% from the same period a year ago but up 5% from the second quarter, according to AnnuitySpecs.com, a firm that tracks the data.

The third-quarter sales volume was second only to the same quarter a year ago, said Sheryl Moore, president and chief executive officer of AnnuitySpecs.com. Sales of indexed annuities are strong now "because of the relatively attractive rates" they offer, Moore said. Rates on fixed annuities are currently averaging 2.8% and bank certificates of deposit are averaging just 0.35%, she said. Indexed annuities, however, can now offer buyers the ability to earn up to 7.25% or more, she said.

Allianz Life Insurance Company of North America, a unit of Germany'sAllianz SE, remained the market leader, with sales of $1.55 billion and a 17.8% market share, according to AnnuitySpecs.com.

Speaking during a recent A.M. Best Co. webinar, Ken Frino, group vice president of A.M. Best's life/health rating division, said variable annuities with guarantees and traditional fixed annuities are the annuity products that could be most impacted by low interest rates. To watch a replay of the webinar, "The Impact of Low Interest Rates on Life and Annuity Insurers," visit http://www.ambest.com/webinars/rates2011

The past three years since the market's collapse have been particularly challenging for annuity writers. "I have never seen more changes to annuity products in my life than in the past year in particular, whether the annuity is fixed, indexed, or variable," Moore said.

In 2010, the life insurance industry had about 8% of its bond portfolio invested in U.S. Treasuries, according to Conning. Treasuries and corporate bonds are based off the Federal Reserve funds' rate, and new issues of Treasuries are based off this rate, plus inflation, according to LIMRA.

In September, the Federal Reserve's latest move to spur economic activity in the United States meant more dismal financial news and likely lower earnings for the life insurance industry. The central bank instituted its "Maturity Extension Program and Reinvestment Policy," or "Operation Twist."

The "plan is to push long-term rates down to spur economic activity," said James Gillard, senior managing economist at A.M. Best Co. This may lead to small increases in short-term rates but the Federal Open Market Committee "is relying on poor economic conditions" and a commitment to keep the Fed Funds' rate at 0% until 2013 to keep short-term rates low (Best's News Service, Sept, 23, 2011).

A low-interest rate environment generally refers to the 10-year Treasury note, according to Steven Schwartz, an equity analyst with Raymond James. Also, "investors fleeing the stock market tend to move into bonds — driving the price of bonds higher" and as bond prices move higher, the yield on bonds goes down (Best's News Service, Aug. 15, 2011).

"If you think of a low interest rate environment as a period of time when investment spread pressure became a concern, 10-year T-note yields really began to decline at the beginning of the century and bottomed out in late 2003, around when spread pressure first became a concern," Schwartz said in an email on Nov. 18, when asked when this latest period of persistent low interest rates actually started.

The industry "got a reprieve after that but yields again began sliding in 2006 and concerns began to arise in the middle of last year," Schwartz said. "We got a break early this year but the situation got worse with Operation Twist."

Through July, the 10-year was still in the 3% range "but then dropped like a stone, closing out in the 2% range," Schwartz said, noting it's still around there.

Capturing second place in indexed annuity sales was Aviva USA, a unit of U.K.-based Aviva plc, with sales of $1.35 billion, according to AnnuitySpecs.com. American Equity Investment Life Insurance Co., a unit of American Equity Investment Life Holding Co. (NYSE: AEL), with sales of $1.05 billion, ranked third; and Great American Financial Resources Inc., with sales of $602 million, took fourth place.

Lincoln National Life Insurance Co., a unit of Lincoln National Corp. (NYSE: LNC), captured fifth place, with sales of nearly $462 million.

(By Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com)