Structured VAs a Bright Spot in Slumping Market

By Cyril Tuohy

With interest rates still low and the market for variable annuities slumping fast it’s hard to be cheerful about the immediate future of annuities — except when it comes to structured VAs.

And what a bright shining light structured VAs have been for the handful of insurers who sell the most of them.

Allianz Life Insurance of North America sold $1.45 billion worth of structured VAs last year, compared with $592 million for traditional VAs. It marked the first time the former version came out on top, the company said.

Archrival AXA racked up an estimated $10 billion in structured VA sales since the company launched them in 2010, said Kevin Kennedy, managing director and head of individual annuity for the company.

AXA has just under 100,000 contracts on structured VAs, and all company VA sales rose 4 percent last year over 2015, Kennedy said.

In general, however, traditional VA sales are wilting. In 2016, year-over-year sales are expected to drop about 23 percent industrywide to around $100 billion, Morningstar estimated.

Also known as hybrid, index or buffer VAs, the three major insurers in the structured VA market include MetLife (distributor of Shield Level Selector), Allianz Life (Index Advantage), and Axa (Structured Capital Strategies).

Other sellers include Member Life Insurance Company’s CUNA Members Horizon, said Kevin Loffredi, senior product manager, annuity solutions with Morningstar.

Downside Buffers

Traditional VAs offer mutual fund subaccount allocations, living benefits and optional income riders with contract fees typically deducted from the fund performance.

By contrast, variable index-linked annuities generally stick with index allocations, fewer subaccounts, no living benefits, no lifetime income riders and commit investors to shorter terms. Contract expenses are factored into the performance cap rate.

Unlike fixed indexed annuities that protect annuitants from market losses, structured VAs expose policyholders to the possibility of losses beyond a protection buffer offered by the insurer.

Buffers typically protect investors from market dips of 10, 20 or 30 percent after which policyholders take on the remaining exposure.

In exchange, contract holders can participate in market gains to a higher degree than they would in an FIA.

When AXA launched the structured annuity segment seven years ago, “We held focus groups with retirees and pre-retirees and said ‘What do you want?’ and they said downside protection, upside potential and simplicity,” Kennedy said.

While the market has matured, the need for variable index-linked annuities and their “protected accumulation” qualities remain, insurers say. In particular, for investors looking to accumulate retirement assets but also looking to protect a portion of those assets.

Thirst for Capital Efficient Products

Insurers like structured VAs because these hybrid products require less capital to support than traditional VAs that come with lifetime income guarantees, which some insurance companies have found difficult to honor with interest rates still historically low.

Sustainable VA designs differ during a low-rate environment from those that work in a high-rate environment, said Matt Gray, senior vice president of product innovation with Allianz Life.

“Depending on the environment, capital requirements on traditional variable annuities can be significant so there’s volatility in the capital backing these annuities,” Gray said.

Rising sales of structured VAs are no accident and come at a time when, at least in the case of Allianz, the company is shifting its business mix toward what senior company executives call “capital-efficient” products.

Last year 39 percent of new business premium in life and health insurance lines for Allianz SE, Allianz Life Insurance of North America’s parent company, was generated by capital-efficient products, Allianz SE executives told analysts in early February.

In 2015 only 30 percent of new business premium was generated by capital-efficient products, Allianz SE said.

Meanwhile, traditional VAs, or unit-linked annuities with or without guarantees, last year accounted for 18 percent of the company’s new business premium, down from 22 percent in 2015, the parent company said.

Since structured VAs don’t have living benefit guarantees, they don’t require the same level of reserves as traditional VAs, hence the term “capital efficient.”

From the perspective of the insurance company structured VAs represent a diversified approach to a marketplace hobbled by low rates.

Distribution Channels

Allianz’s Index Advantage is sold on a commission basis, but the company is developing a fee-based version, Gray said.

For the moment, banks, broker-dealers and wirehouses appear to be the main distribution channels for structured VAs.

In the first three quarters of 2016, Allianz Life sold $194 million worth of its Index Advantage through independent broker-dealers, $145 million through banks, $53 million through wirehouses and $14.5 million through regional broker-dealers, Morningstar data show.

Over the same period, AXA sold $349 million worth of its Structured Capital Strategies variable annuity through banks.

The company also sold $274 million worth through independent broker-dealers, $167 million through captive distribution, $21 million through wirehouses and $14 million through regional brokers-dealers, Morningstar data indicate.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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].