A Look Behind The New ‘Structured Annuities’

By Linda Koco InsuranceNewsNet

Structured variable annuities — also known as indexed variable annuities, registered indexed annuities or just structured annuities — have begun showing up on annuity dance cards, but industry practitioners aren’t quite sure what they are. Or why they are.

One reason for the mystery is there aren’t many on the market just yet, and they do differ. Allianz Life Insurance Co. of North America, which debuted its version (Allianz Index Advantage) this month, is only the third player known to be active in this emerging marketplace right now.

The other two players are MetLife, which debuted its Shield Level Selector single premium deferred annuity (SPDA) in May, and AXA Equitable, which debuted its AXA Equitable Structured Capital Strategies ADV variable annuity two years earlier.

The handle

Getting a handle on them is a challenge because they have elements of fixed indexed annuities and of variable annuities (or SPDAs), to the point that some people just call them hybrids.

In this conversation, the working term is structured annuity, with due acknowledgement that other terms are still floating around.

The most unifying characteristics are: all are registered products, sold by prospectus; all offer linking to an index for potential gain; none offer living benefit guarantees, and all are annuities in the sense that they offer tax deferral, death benefits, withdrawal provisions, etc. The common market positioning is that the products can offer consumers the opportunity for potentially greater upside than traditional fixed indexed annuities in return for reduced downside protection.

It may help to think of them as registered annuities with index linking. How the products go about doing this depends on their, ahem, structure. More on that in a moment.

First, what is behind their development? Many annuity companies today are committed to building “on-the-fly flexibility” into their products, Donnie Ethier said. These products offer that, especially since they do not include the living benefit guarantees that have been so popular in recent years while they do offer various options for structuring the annuity to meet consumer needs and various provisions that enable carriers to make certain changes in response to market conditions.

The yen for flexibility follows the annuity industry’s “derisking” period of the past two years, said Ethier, who is an analyst at Cerulli Associates. Carriers had reined in features and guarantees in their products to lessen pressure on capital reserves during the prolonged period of low interest rates.

The industry does have capacity left to write more living benefits business, he said, citing findings of a Cerulli study on the life and annuity industry he led this year. However, room for growth is “negligible,” he cautioned. As a result, carriers are looking at other annuity designs to grow future sales — annuities without living benefit guarantees (that are not easy to support in a low interest environment) but with features that “resonate” with advisors and consumers and with flexibility, too.

Some carriers also have a yen for indexing. One reason is that indexed products are easier on reserves, experts point out. Another is that fixed indexed annuities have been strong sellers throughout the last recession and on to today, proving popularity with certain advisors and consumers. (In fact, sales of the fixed products reached $9.2 billion in second quarter 2013 alone; that’s up by more than 17 percent from the previous quarter and by more than 5.5 percent compared with the same year-earlier period, according to Wink’s Sales & Market Report.)

Some highlights

Those two “yens” — for flexibility and indexing — have contributed to the creation of the new structured annuities. Following are a few highlights of the current products. This is not easy reading the first time through, and there are many other details to the products, but this should at least give a sense of how the contracts walk and talk.

The MetLife Shield Level Selector SPDA provides growth potential through five index-linking options (which are subject to caps) and a fixed account option (not all states).The indexes are S&P 500, Russell 2000, NASDAQ-100, MSCI EAFE, and/or Dow Jones-UBS Commodity. The product also allows the owner to transfer some or all downside risk (risk of loss) to the carrier by electing one of four “shield,” or downside protection, options. The Shield 10 option, for example, protects against the first 10 percent loss. So, according to the product materials, “If the index is down 12 percent, MetLife absorbs the first 10 percent index loss and the investor's account value only goes down by 2 percent.” The other “shield” options “absorb” the first 15 percent, 25 percent or 100 percent of index loss. There are also “step rate options” that allow lock-in for a pre-determined percentage of growth if the index is either flat or up at the end of the term (which can be one-, three- and/or six-years).

The AXA the Structured Capital Strategies ADV variable annuity for fee-based advisors has a “structured investment option” that allows linking to the upside performance of eight indices (depending on jurisdiction), subject to a cap, in durations of one, three and five years — making for 70 segments in all. The option includes a “downside buffer” which protects the initial negative 10, 20 or 30 percent of loss in index value, depending on options selected. The index options include S&P 500, Russell 2000, and MSCI EAFE. Other indexes, not available in all jurisdictions, include: NASDAQ 100, MSCI Emerging Markets, iShares Dow Jones Real Estate, as well as a gold index and an oil index. Owners can transfer between options at the end of the one-, three- or five-year segments. In addition, three variable investment options (EQ/Equity 500 Index, EQ/Core Bond Index, and EQ/Money Market) are available, exclusive of the segment buffers and performance caps.

The Allianz Index Advantage variable annuity allows owners to invest in three index-linking options (S&P 500, Nasdaq-100 and Russell 2000) as well as three variable options (AZL Money Market Fund, AZL MVP Balanced Index Strategy Fund and AZL MVP Growth Strategy Fund). The contract provides two indexing “strategy” options. The “index performance” strategy includes a buffer, which is set at policy issue, that absorbs the first 10 percent of a negative index return in any given year. Bigger losses will reduce the contract value. The minimum cap on performance for in-force contracts is 1.5 percent but the cap may be higher and many change annually. The “index protection” strategy says that, when the index return is flat or positive, the client receives the potential annual interest credit for the year (minimum is 1.5 percent but this can change annually), but in negative return years, there is no credit (and the contract value reduces by the annual product fee). Owners can use either or both strategies and can transfer between them at policy anniversary.

Since they are registered products, their prospectuses include the requisite caution to consumers that the products may lose value, are not insured by any federal government agency, etc.

About that name

In a speech this summer, Norm Champ, the director of the Division of Investment Management for the Securities and Exchange Commission, discussed these new products briefly, referring to them as “registered indexed annuities.”

That term may or may not hold. Some carriers and broker-dealers want to avoid “indexed annuity” terminology because the words still have stigma, explained Cerulli’s Ethier. That could be due to misunderstandings that people had about the products early on and/or to concerns that the policies were being sold incorrectly, he said.

Today, Ethier added, many advisors do see the value of index products as “good for the right buyer.” But he said the stigma surrounding the words indexed annuities lives on, so that is why some industry people and some analysts are using other terms when discussing index-like registered annuities.

Worth noting is that MetLife is calling its policy a “registered indexed annuity.” The other two carriers do not use that term, even though index-linking is central to their products as well.

Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].

Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].