Performance metrics for index annuities stir up a hornet's nest

Mar 27, 2006 @ 12:01 am

By Gary S. Mogel

NEW YORK - An annuity expert who thinks that analyzing equity index annuity performance is a science has calculated that many of the products of the industry's top company have performed dreadfully, but those who see more art in the process say that it isn't so.

"Many [equity index annuities] sell the sizzle and don't deliver the steak," said Mitchell Maynard, chief executive of MCP Premium Software in Fullerton, Calif. Earlier this month, the firm released EIA Rating Tools, a product that analyzes the performance of about 200 equity index annuities of 17 insurers.

According to MCP's tool, equity index annuities of the industry's dominant company, Allianz Life Insurance Company of North America in Minneapolis, are almost all poor performers.

Allianz had a 32.4% market share in equity index annuities last year, reported Advantage Compendium Ltd. in St. Louis, which tracks annuity sales. No other insurer had more than 10% of the market.

"We've worked very hard to provide a value proposition and

producer-devoted philosophy that's best in the industry," said Patrick Foley, chief marketing officer of Allianz.

Marketing savvy - not product quality - accounts for Allianz's success, Mr. Maynard contended.

"Allianz owns or has substantial influence over the insurance marketing organizations that distribute [equity index annuities]. That's a conflict of interest," Mr. Maynard said.

"We do have an ownership interest in several marketing organizations, but they sell a variety of companies' products," Mr. Foley said. "It wouldn't make sense to recruit independent advisers and then push products on them."

Subsidiaries sell Allianz products about a third of the time, Mr. Foley noted.

Beacon Research Publications Inc. in Evanston, Ill., has rated Allianz's MasterDex product the top-selling equity index annuity for the past seven quarters.

However, MasterDex received a grade of D on an A+ to F scale, similar to student grading, developed by MCP.

"There will always be that conflict regarding strong distribution versus strong product. I don't know whether MasterDex is the best product or the best-marketed product," said Jeremy Alexander, Beacon's president.

"MasterDex's 10-year annualized average rate of return was 4.65%, putting it in the bottom 35th percentile of performance," Mr. Maynard said. An A+-rated annuity such as the Secure Index7 from ING North America Insurance Corp. in Atlanta would have returned 7.27% during the same period, he said.

"The actual return figure depends on the time horizon being measured," Mr. Foley said. "That annuity hasn't been around for 10 years."

The flaw in Mr. Maynard's science is that he back-tests performance over 10-year periods when the products didn't exist, according to Mr. Alexander. The many "moving parts" of equity index annuities, including their caps, spreads and participation rates, make such analysis questionable, he added.

"A back-tested performance measurement is not permitted by regulators for other types of investments, such as stocks and mutual funds," Mr. Alexander said.

"We've had our people take a look at [the MCP tool]," Mr. Foley said.

"The problem is that it uses current environmental situations, and we're currently in a low-cap environment, with lower long-term rates and market volatility," he said. "To use assumptions in software and apply them over a period in the past is not an accurate depiction."

But Mr. Maynard insists that his figures are legitimate mathematical comparisons that demonstrate how the plethora of factors used in equity index annuity formulas make the products' returns vary drastically, even though almost all are tied to the performance of the same index: the Standard & Poor's 500 stock index. For instance, a product can have a terrible crediting method for index gains which cuts down on returns, he noted.

"You can't take a product and say, 'Here's what it would have done had it been around 10 years ago.' That's misleading to the potential client and can result in product mispricing," Mr. Alexander said.

"Back testing through implementation of a discipline is an accepted way of measuring performance and would be accepted by the [Securities and Exchange Commission] and NASD [of Washington]. There is nothing wrong with back testing equity index annuities using their current attributes," Mr. Maynard said.

"You have to look at an actual crediting history and track record to get a true picture of performance," Mr. Alexander said.

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