Recently, insurers have begun to develop annuity products that are hybrids between fixed indexed annuities and structured products. These hybrids are designed to offer consumers downside protection (at the expense of upside limits), while also protecting insurance companies from the market risk that comes with traditional variable annuity product designs. To date, only two companies, AXA Equitable (AXA) and MetLife, have begun to offer these products for sale, with Allianz also having filed a similar product with the SEC. As more companies begin to file these products, there is likely to be some evolution in product design, but it is not completely clear what future iterations may look like and how advisors will respond. Regulators, meanwhile, have begun to give these products some consideration and will likely continue to do so as these products increase in size.
AXA was the first insurer to offer these hybrid products, having introduced its Structured Capital Strategies variable annuity product in 2010. Over the past two years, AXA has sold more than $2 billion of this product. MetLife is the most recent entrant into the market, introducing its Shield Level Selector single premium deferred annuity for sale in early May. Allianz represents the other potential market participant, having filed a variable annuity contract prospectus with the SEC.
A key difference between these products, as compared to many variable and fixed indexed annuity products on the market, is that these products are designed as accumulation vehicles, not income products. Neither product has any guaranteed living benefits and only the MetLife product has an optional death benefit of the greater of account value or premiums, less withdrawals.
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At their heart, these products function like traditional fixed indexed annuities without guaranteed living benefits. To support the product, the insurer will invest most of the premium in bonds and use the remainder to buy equity index options to support the interest credited rate that is based on the performance of an underlying equity index. However, the key difference between these products and traditional fixed indexed annuities is that investors can lose money on these products, whereas traditional fixed indexed annuities guarantee that investors will never lose money.
Similar to traditional fixed indexed annuities, these products allow investors to invest indirectly in the performance of an index and share in a portion of the index return. This differs from variable annuity products, which allow investors to invest directly in separate accounts that closely track index returns through a mutual fund-like structure. The products from AXA and MetLife offer the choice among many traditional equity index options (e.g., S&P 500, Russell 2000, MSCI EAFE) and some commodity-based indices. Additionally, the products offer different maturities for index returns, with AXA offering one-, three- and five-year buckets and MetLife offering one-, three- and six-year buckets.
What’s the downside?
One of the key final choices investors have to make is how much of the downside risk are they willing to take. The AXA product offers three different “buffer” levels, where they will absorb the first 10 percent, 20 percent or 30 percent of any loss, while the MetLife product offers four different levels (10 percent, 15 percent, 25 percent, 100 percent). The amount of losses the investor elects to have the insurance company shoulder impacts the crediting rate terms. As more of the loss is assigned to the insurance company, the credited rate terms and index options become more restrictive to the investor and vice versa. In other words, the higher the buffer levels chosen by investors, the less they get to share in any upside market performance.