Equity-indexed annuities poised for growth

Jun 13, 2005 @ 12:01 am

By Gary S. Mogel

NEW YORK - Annuity payments that rise based on stock market performance are expected to become more popular, especially among retirees and those nearing retirement, as inflation makes a comeback, industry observers say.

Equity-indexed annuities accounted for 30% of total fixed-

annuity sales last year, up from 6% in 2002, according to a study released in April by Financial Research Corp. in Boston. Growth so far this year has been even more robust than it was last year, insurer executives say.

In addition, this type of annuity may get a shot in the arm if proposed Social Security reforms, which may require inflation protection for retiree personal accounts, become law.

Insurers are developing, or have started to offer more aggressively, market-indexed-annuity products to meet the anticipated demand.

Nationwide Financial Services Inc. in Columbus, Ohio, is developing an equity-indexed annuity, expected to be available this summer, that increases periodic payments by up to 7%, based on the performance of the Standard & Poor's 500 stock index.

If the S&P 500 goes up by any amount, the client's payment will increase by that same percentage - up to 7%, said John Kawauchi, vice president, business development, of the individual-investment group. If the index declines, the client's payment is unaffected.

The Hartford Financial Services Group Inc. in Connecticut doesn't offer indexed annuities but is looking into the market, according to a spokesman for the firm, which is the largest U.S. annuity provider.

Jackson National Life Distributors Inc. in Denver has been offering equity-indexed annuities since the late 1990s but recently developed a marketing tool specifically designed for this product.

It is a multimedia CD-ROM that educates clients and advisers, said Kristen Billows, vice president of marketing strategy for fixed and indexed annuities.

"When equity-indexed annuities first came out, they were relatively simple," she said. "But when everyone started trying for a better widget, they became confusing, even to advisers. Advisers don't want to talk to clients about products unless they feel that they are well prepared."

The annuities are also recovering from a black eye stemming from some insurers' paying very high commissions, up to 20%, according to Mr. Kawauchi. Some insurers also had complicated participation rates and complex monthly averaging that many clients didn't understand, he added.

Products such as equity-indexed annuities, which have downside protection coupled with upside trade-off, are especially popular with clients in or nearing retirement, as their payments can go up but not down, Mr. Kawauchi said.

"The product will also likely be attractive to bank-type-platform clients, who tend to be older and more conservative but are sitting on cash or certificates of deposit that require growth with downside protection," he said.

"We've been very successful selling in the bank channel," Ms. Billows said. "Also, nest-egg clients who took losses from the last bear market and can't stand the thought of losing principal are prime candidates for equity-indexed annuities."

Other target clients of Jackson National are those rolling over money from retirement accounts, and those who want to use the annuity as a hedge against potential losses from bond funds, whose values generally decline as interest rates rise.

While the vast majority of equity-indexed annuities are tied to the S&P 500, Ms. Billows said, there are insurers that use other indexes such as the Dow Jones Industrial Average, the Russell 2000 Index and the Nasdaq 100.

"There are about 190 equity-indexed-annuity products in the market, using 35 different crediting methodologies," she added.

Some of Jackson National's products have one-year caps of up to 10%, while others have multiyear caps, such as 31% over a five-year period. Annuities may also have minimum guarantees, usually about 2%.

A small number of insurers, including New York-based American International Group Inc., have annuities linked to the consumer price index. But many clients and their advisers don't like CPI-linked annuities, because they often have lower initial payments as a trade-off for higher payments in the future.

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