The latest annuity innovation: Contracts with structured products

The latest annuity innovation — contracts that use structured products to buffer clients’ account values against downside losses — is starting to gain interest among financial advisers.

Structured-product annuities are the latest concoction to emerge from life insurers’ test kitchens. In most cases, these annuities place a premium on principal protection and steady account value growth rather than rapid accumulation.

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Generally, they allow clients to receive returns that are linked to a stock market index over a limited period of time. Those returns are subject to a cap or limit determined periodically by the life insurer.

At the same time, insurers use options to duplicate the performance of the index and to buffer a percentage of downside risk, which varies across the board on products offered by the insurers.

SLOW START

The market for these products is fairly small. Three major providers offer contracts in the market: Allianz Life Insurance Co. of North America, Axa Equitable Life Insurance Co. and MetLife Inc.

Axa was the first among the group to launch, with its Structured Capital Strategies variable annuity making its debut in 2010. Thus far, the firm has garnered more than $3 billion in sales since it first became available.

The firm has a variety of indexes as linked investments within the contract, and it added emerging-markets and real estate investment trust index options toward the end of last year, according to Steve Mabry, senior vice president at Axa.

Meanwhile, at Allianz, which brought its Indexed Advantage annuity to the market last September, sales rose to a range of $200 million to $300 million during the last three months of the year, according to Robert DeChellis, president of Allianz Life Financial Services.

He was able to provide only a range rather than specific figures because the insurer hasn’t yet released its 2013 earnings results.

The insurer is aiming for a half-billion in sales this year, Mr. DeChellis said.

Spokesman Shane Winn de-clined to provide an executive to comment on how sales of MetLife’s Shield Level Selector have progressed since the annuity’s May launch.

As rosy as insurers’ prospects are for this annuity, the reception from broker-dealer annuity gatekeepers has been a little more guarded.

Sales of these annuities have been “modest” at Commonwealth Financial Network, according to Ethan Young, annuity research manager at the firm.

He declined to disclose exact numbers.

Some firms are still reluctant to take the product on in the first place.

Bernie Gacona, director of annuities at Wells Fargo Advisors, still won’t carry these annuities on the firm’s platform, largely because of the complexity that comes from combining an annuity with structured products.

MOVING PARTS

“A variable annuity already has a lot of moving parts, and now you want structured notes inside of the variable annuity?” he said. “We’re not there yet, where we feel comfortable that brokers can be properly trained on it.”

As far as how it is being used, experts see it more as a potential fixed-income substitute, an instrument for those who want returns that are better than what they would get on a fixed annuity.

Zachary Parker, first vice president of income distribution and product strategy at Securities America Inc., sees these structured-product annuities as an investment for clients with a five- to seven-year time frame.

“If you have that five- to seven-year window, you have options,” he said. “There’s a fixed annuity with rates of 2.5% at best, an indexed annuity or a structured product [annuity].”

Other products, including structured certificates of deposit, are facing challenges due to low interest rates, Mr. Parker said.

From the perspective of advisers in the trenches, these products are an alternative to indexed annuities and might be ideal for clients who want cap rates that are a little more favorable than what they can get on an indexed annuity.

ALTERNATIVE STRATEGY

Carrie Turcotte, president and senior financial consultant at Crest Financial Strategies, initially wasn’t interested in structured-product annuities, but she took a liking to them as an alternative to other fixed-income products.

“This is more like a buffered note than a CD, and it’s the closest thing we have with respectable upside,” she said. “The caps are a little bit better.”

As far as finding the right client, Mr. DeChellis noted that data from Allianz show that about 30% of the clients who are using its structured-product annuity are over 70, and about 25% are younger than 55. The average client tends to be younger than that for traditional VAs.

In practice, Ms. Turcotte has recommended structured-product annuities for older clients within five to seven years of retiring, rather than for younger clients.

“If you’re very young, a buffered note isn’t necessarily the best,” she said. “If that’s where your comfort level is, we’d want to know why you’re so risk averse.”