New structured annuities grab market share as banks jump in

(Bloomberg) — Buyers of U.S. annuities are clamoring for new products linked to indexes that may use elaborate strategies to control risk, attracting regulatory scrutiny as they widen a market that favors more traditional structures.

A total of 27.7 percent of indexed annuities sold in the third quarter of last year are tied to measures that track stocks and other types of assets, such as cash or commodities, according to Wink's Sales & Market Report. A year ago, these types of indexes didn't exist in Wink's market data.

Consumers last year purchased an estimated $47 billion of indexed annuities, which are structured insurance products, according to Alan Grissom, global head of insurance at S&P Dow Jones Indices, in a Jan. 22 webcast hosted by the National Association for Fixed Annuities. That would be a 21 percent jump from the $38.7 billion sold in 2013, Wink's data show.

"I don't know if there's ever been a better time to be involved in index-linked insurance products," Grissom said on the program. S&P licenses indexes for structured products and annuities.

Fixed annuities offer investors a series of guaranteed payouts in retirement. In the mid 1990s, some insurers began offering a kind of structured annuity that layered an index on top of the fixed annuity to potentially enhance returns.

The indexed versions are typically linked to well-known benchmarks, in particular the Standard & Poor's 500 Index. As interest rates continue to hover close to record lows and investors regard a six-year bull market with caution, indexes created to reduce risk or target certain volatility levels are gaining popularity.

Bank Interest

The 10-year Treasury note traded at a yield of 1.8 percent Wednesday at 10:17 a.m., less than half a percentage point higher than its record low in 2012. The S&P 500 has risen 87 percent over the past half decade.

Banks are trying to soothe investors expecting volatility to climb by offering strategies like the GS Momentum Builder Multi-Asset Class Index, which is meant to cushion the impact of large price swings.

Goldman Sachs Group Inc. said in September that it had collaborated with annuity and life insurance distributor W&S Financial Group Distributors Inc. to introduce a product tied to the new measure. The index rebalances monthly to track assets including bonds, U.S. and foreign stocks, commodities and cash and has a 4.5 percent volatility target, according to marketing materials from W&S Financial.

Other indexes in the category include the Annuity Linked TVI Index and the BNP Paribas High Dividend Plus Index.

The growth in indexed annuities is coming as demand for traditional variable annuities slows, said Samuel Rosenberg, head of equity-derivatives sales and financial engineering for the Americas at Natixis SA.

Regulator Watches

A state regulator is also taking notice. Iowa Commissioner of Insurance Nick Gerhart warned in September about an increase in "misleading advertising" in annuity sales. The regulator flagged marketing that advertises high or uncapped rates of return on indexes. He also said some marketers are projecting historical performance of proprietary indexes backward to a time period before they existed, a practice known as backtesting.

With backtested returns, "we have a much greater concern that a consumer won't be able to anticipate how that contract will perform," Doug Ommen, deputy commissioner at the Iowa Insurance Division, said in an interview Jan. 12. Ommen has been monitoring the products for more than a year, he said.