More insurers are turning to structured products to protect themselves from market risk while staying in the annuity game.
Last week, for example, MetLife Inc. released its Shield Level Selector, a single-premium deferred annuity that combines aspects of an indexed annuity and a structured product. Axa Equitable Life Insurance Co. has had its Structured Capital Strategies variable annuity since 2010, and a similar product could be released as early as this fall by Allianz Life Insurance Co. of North America.
These hybrid products offer clients downside protection but come with upside limits. The value proposition is also different.
Neither Axa nor MetLife provides living benefits on their structured product annuities, though the latter offers two types of death benefits: a return to beneficiaries of premium or the account value.
The prospect of having greater control over account growth without being on the hook for lifetime-income payments is attractive to insurers. As the pioneer in the business, Axa has sold $2.2 billion of its Structured Capital Strategies in the past two years.
“Hybrids are more complex,” said Walter White, chief executive of Allianz Life. “From the company's standpoint, it takes the risk of the conventional variable annuity off the table. Carriers want less volatility and less exposure to swings on their books.”
Sales success aside, however, some broker-dealer gatekeepers remain skeptical of the product concept, its cost structure and the fact that clients won't get the income benefits that they have grown to love.
Raymond James Financial Inc. is reviewing it for approval. If approved, these annuities will be subject to a suitability review for structured products, said Scott Stolz, president of Raymond James Insurance Group. Axa's structured-product variable annuity is being analyzed alongside the new MetLife product. Meanwhile, Wells Fargo Advisors has decided to keep structured-product annuities on the back burner.
“We found it to be complex,” said Bernie Gacona, director of annuities at Wells Fargo. “This is clearly an accumulation product, and we're concerned about the issue that when most people think of annuities, they think of guarantees. This product doesn't have guarantees.”
Steady growth
What makes a structured-product annuity fundamentally different from a traditional variable annuity is the fact that the former prizes steady growth over rapid accumulation that moves with the markets. Traditional variable annuities tie their performance to that of a mutual fund clone, allowing the account value to reflect market performance — be it up or down.
Structured-product annuities, however, allow clients to invest indirectly in the performance of an index such as the S&P 500, the MSCI EAFE — or in Axa's case, an index based on the London Gold Market Fixing Ltd. — over a limited period of time. Axa offers 1-, 3- and 5-year durations, while MetLife offers 1-, 3- and 6-year durations.
Investors don't capture the full performance of the indexes they select. Rather, their gains are subject to a cap that's determined periodically by the insurer: every two weeks for MetLife and every month for Axa.
Upfront, clients pick out the index they'd like their account to follow. Behind the scenes, however, the insurer uses the premiums to buy a zero-coupon bond and an options package to duplicate for the client the performance of the index, subject to buffers and performance caps, according to Steve Mabry, a senior vice president at Axa. Customers invest in “segments,” which offer index-linked performance for a set period, subject to caps and downside buffers.
The tactic is similar to a collar strategy, in which the insurer uses options to limit positive and negative returns, he noted.
When cap rates are determined, they depend on that particular day's interest rates and volatility, and their impact on options pricing, Mr. Mabry added.
The insurer also buffers a percentage of the downside risk. In this manner, Axa covers 10%, 20% or 30% of the loss, while MetLife covers 10%, 15%, 25% or 100% of the loss.
The companies limit the risk they take by limiting the investment options or the duration available for the higher level of protection. For example, MetLife offers only the S&P 500 when the company covers 100% of the loss for a 1-year duration, and the maximum growth available to the client is 1.65% from May 1 to May 15. The cap is reset every two weeks.
Fees for structured-product investment options are not explicit, so while the annuities are subject to surrenders, depending on the share class, there aren't any asset-based charges to the account. Rather, carriers collect their fees through the performance cap rate: Part of the underlying index's performance is going toward cost coverage.
For reps, the products and their new value proposition — steady performance and principal preservation, as opposed to strong accumulation and income — have been a lot to swallow. Both the insurers and the broker-dealers who sell these annuities are taking great pains to ensure that reps understand how they work and can explain them to clients.
“It definitely warrants additional training,” said David Peterson, head of insured solutions at UBS Wealth Management Americas. “It's taking a complicated product and making it a little more complicated.”
Elizabeth Forget, senior vice president of MetLife Retail Annuities, envisions MetLife's Shield Level Selector complementing rather than replacing the traditional VA.
“The sentiment we hear is that investors want to know they can get the money back if they need it,” Ms. Forget said. “'I need growth, but I don't want to go whole-hog into equities.' People are saying that living benefits are great, but they may not be the right decision for every client.”
