Structured note variable annuities (SNVAs) have been gathering assets at an increasing pace. MetLife and AXA Equitable were the first to offer the products; Allianz Life launched its product in the third quarter of 2013. If you’re unfamiliar with SNVAs, here’s what you need to start learning about the products.
Structured notes 101
Structured notes allow banks and other institutions to design financial products with customized investment outcomes. They combine the potential to earn a market index-linked return with an element of loss protection. The investors’ return usually is subject to a limit—the “cap.” If the index earns a positive return but less than the cap rate, the investor is credited with the index return. If the index return is above the cap, the investor receives the cap rate.
For downside protection, notes typically include a “buffer” that offers some degree of principal protection against market losses. By varying caps, buffers, maturity dates and other product features, structured notes can be designed to fit a variety of risk-return profiles.
Combining Notes and VAs
A SNVA embeds a structured note inside a VA. With the Allianz Index Advantage VA, for instance, investors can choose from two profiles. The Index Protection Strategy is the more conservative option. It uses the S&P 500® as the benchmark index and for June 2014 it had a “Declared Protection Strategy Credit” of 4 percent. If the index return is flat or positive for the year, investors’ accounts receive that credit. This strategy also provides a full buffer. That means when the index’s return is negative, no gain or loss is credited to the account.