A New Option Among Variable Annuities

By Cyril Tuohy

InsuranceNewsNet

With insurance carriers charging more and offering fewer features on their traditional variable annuities (VAs), a new chapter has started in the variable annuity story: indexed variable annuities (IVAs).

AXA Equitable was an early entrant into the segment and in October 2010 launched its Structured Capital Strategies IVAs. Recently, Allianz Life of North America followed suit with the launch of its Allianz Index Advantage IVAs.

There’s a trend here, for sure, even if IVAs remain a niche product and don’t generate anywhere near the sales volume of their traditional VA siblings or even their fixed indexed annuities (FIA) cousins, said Frank O’Connor, director of insurance solutions with Morningstar.

What separate IVAs from other annuities products is the strategies they use with respect to the use of options and mutual funds, he said.

“AXA may have been the first with this concept, the idea that you would invest in the product and you would have a loss floor as opposed to having 100 percent guarantee of principal, in exchange you have upside potential,” O’Connor said in an interview with InsuranceNewsNet.

Are we in a new era of “upside potential, downside protection"? Yes and no, O’Connor said. While it’s a stretch to say that IVAs are the “first of its kind,” there’s no question that IVAs are a post-financial crisis innovation, and that there are more than two companies selling them.

There are losses associated with IVAs which is why IVAs are filed with the U.S. Securities and Exchange Commission as securities, not insurance products. But the sales pitches are much the same as those used for fixed indexed annuities: upside potential with downside protection.

Experts like O’Connor can see where this is all going. In an era devoid of yield because of low interest rates, life insurers are nibbling at areas traditionally considered part of the alternative risk and investment bucket.

Advisors, he also said, have embraced IVAs because they are less of an insurance protection story and more of an investment-oriented strategy story. It’s a more compelling growth story to tell than the one told by fixed indexed annuities (FIAs) because of their cap.

“The FIA product has gotten awfully hard [to sell] because of such persistently low interest rates,” he said. “It’s hard to give a decent participation in the index. You’ve got to credit enough to the product to get the guaranteed growth and there’s no excess interest there to buy the options to give the upside.”

Even for the best financial advisors, capping the upside to 5 percent is a hard sell when the S&P 500 is galloping at 15 percent or 20 percent a year.

What the industry has come up with is a hybrid between the FIA and the VA, a middle ground of sorts, which appears to be what a slice of that massive baby boomer generation is looking for. Given the S&P’s return of 13.4 percent last year and a return of 13.8 percent in the first half of this year, retirees living off income from fixed instruments are turning crimson with envy.

Allianz Life Financial Services president Robert DeChellis said in a statement that the Allianz Index Advantage offers a solution for investors wanting enough protection from down markets because of their shorter time horizon, but with a lot of upside potential in robust markets for investors with longer time horizons.

IVAs offer protection from the first 10 percent of losses per year compared with guarantees of no losses with traditional FIAs. “This is a fundamental shift for accumulation choices among variable annuities,” Allianz said in a news release.

The market has spoken, O’Connor said, and IVAs appear to be selling well, as least compared to other niche products. IVAs are never going to approach the sales volume of VAs with guarantees nor does Morningstar classify IVAs as their own category for further scrutiny.

Still, AXA’s Structured Capital Strategies, which O’Connor compared to a “dial-a-loss” concept, are selling in the hundreds of millions of dollars, which make IVAs “more formidable as a niche product than they have been in the past,” he said.

The dial-a-loss idea allows contract holders to decide how much loss they are willing to take in exchange for what they are willing to gain. Financial details of sales charges and redemption fees aside, dialing in your losses isn’t bad idea.

But what if rates, which have been going up over the past three months, were to double in the next 12 months; Would IVAs still be as attractive?

Higher interest rates would spur carriers to make changes to their VA guarantees and ease up on prices, O’Connor said, so it’s hard to say if that would signal the death knell of IVAs. For the moment, like FIAs, and deferred income annuities (DIA), IVAs are another arrow in a financial advisor’s quiver.

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].