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.
Those investing in the Index Performance Strategy can select the S&P 500 (13 percent cap as of June 2014), the Russell 2000® index (15 percent cap) or the Nasdaq-100® index (12.25 percent cap). This strategy provides a 10 percent buffer. In other words, if the index return is negative but less than 10 percent, the account is protected against that loss. If the loss exceeds 10 percent, the account receives a negative performance credit of the negative index return minus the 10 percent buffer.
Annual fees and contract maintenance can still result in a loss of principal in either strategy, however.
The three insurers’ products offer a range of contract features so you’ll have to compare them to determine which, if any, meets your clients’ needs. The Allianz product uses one-year periods to determine index performance, according to Matt Gray, vice president of product innovation with Allianz life in Minneapolis. AXA Equitable offers one-, three- and five-year terms (referred to as “segments”), and MetLife has one-, three- and six-year options. Downside buffers also vary among the insurers.
Joe Halpern, CEO of Exceed Investments in New York City believes that structured note annuities will benefit both the insurers and investors. Insurers can hedge their risks more effectively with structured notes, he points out in an article in the April/May 2014 issue of The Actuary. SNVAs also give insurers another option in their annuity product lines. For investors, he says, SNVAs offer “more risk-reward alternatives in a defined way.” Sales figures support Halpern’s contention that SNVAs will interest investors: Allianz Life’s sales grew from $33.1 million in the fourth quarter of 2013 to $53.4 million in this year’s first quarter.