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Ernst Analyst: Fixed Annuity Spreads Still Tight

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NU Online News Service, Feb. 25, 2004, 6:48 p.m. EST – Some big insurers could be having trouble with fixed annuity earnings.[@@]

Peter Porrino, an insurance specialist at Ernst & Young L.L.P., New York, suggests in an industry review that the difference between what some insurers are paying fixed annuity holders and what the insurers are earning on the investments backing the annuities is below the level that FA issuers have required to earn an acceptable return.

In the past, FA issuers have required a spread close to 2 percentage points, Porrino writes.

Porrino says some of the insurers who had spreads at that level even in the second quarter of 2003, when spreads plummeted, include units of Jefferson-Pilot Corp., Greensboro, N.C.; John Hancock Financial Services Inc., Boston; Lincoln National Corp., Philadelphia; and MetLife Inc., New York.

But Porrino lists several other insurers that had FA spreads below 1.5 percentage points.

“Although interest rates have risen a bit recently, spreads are not likely to expand much, at least over the next few quarters, because a number of contracts are still at contractual minimums or within 30 to 50 basis points of the minimums,” Porrino writes.

A basis point is equal to 1/100th of a percentage point.