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  • On the Matter of Indexed Annuity Performance…

    April 30, 2018 by Sheryl J. Moore

    Recently, a vendor released a “research” paper on indexed annuity performance. I will refer to said “research” as a paper, as I have concerns with using the “research” terminology.

    Research– studious inquiry or examination; especially: investigation or experimentation aimed at the discovery and interpretation of facts, revision of accepted theories or laws in the light of new facts, or practical application of such new or revised theories or laws.

    I was asked by more than one journalist to provide commentary on the paper. In the following commentary, I will share my concerns.

    It is worth noting that the principal of the firm that published this paper is a good friend of mine, and I respect him tremendously. This is not personal. I feel a responsibility to provide honest feedback about my findings, after a careful review of this paper.

    First, I believe in being accurate in all things. While it may seem petty, a few things caught my attention from the start in this paper.

    Page two of the paper indicates:

                “The S&P 500 Index is the only index that is common across all insurers and products in the [indexed annuity] market.”

    This is not accurate.

    The S&P 500 Index is not a featured index on the following four indexed annuities:

    • Ameritas Life Insurance Corp of New York’s Compass Flexible Premium Deferred Annuity;
    • Symetra Life Insurance Company’s Symetra LINK;
    • The Standard’s Strategic Choice Annuity 7; and
    • Voya Insurance and Annuity Company’s Voya Journey Index Annuity.

    Page two of the paper also indicates:

                “Today, each FIA manufacturer also offers a unique index…”

    This is not accurate.

    The S&P 500 is the only index used by the following 15 indexed annuity manufacturers:

    • American National Insurance Company;
    • American National Life Insurance Company of New York;
    • Annuity Investors Life Insurance Company;
    • Atlantic Coast Life Insurance Company;
    • Bankers Life & Casualty Company;
    • CUNA Mutual Life;
    • Farm Bureau Life Insurance Company;
    • Greenfields Life Insurance Company;
    • Oxford Life Insurance Company;
    • Principal Life Insurance Company;
    • Reliance Standard Life Insurance Company;
    • Sentinel Security Life Insurance Company;
    • The United States Life Insurance Company in the City of New York;
    • Thrivent Financial for Lutherans; and
    • Washington National Insurance Company.

    Further, page two of the research indicates:

                “Many [indexed annuities] are designed to provide a more competitive return with a longer duration and they also provide the option of an income rider [in comparison to a MYGA].”

     This is not accurate.

    There are seven multi-year guaranteed annuities (MYGAs) that offer Guaranteed Lifetime Withdrawal Benefits (GLWBs), which are often referred to as an “income rider.”

    • American General Life Insurance Company’s Assured Edge Income Builder;
    • New York Life Insurance and Annuity Company’s Clear Income Fixed Annuity;
    • New York Life Insurance and Annuity Company’s Clear Income Fixed Annuity – FP Series;
    • New York Life Insurance and Annuity Company’s Clear Income Fixed Annuity with MVA;
    • New York Life Insurance and Annuity Company’s Clear Income Fixed Annuity with MVA – FP Series;
    • Security Benefit Life Insurance Company’s RateTrack Plus; and
    • The United State Life Insurance Company in the City of New York’s Assured Edge Income Builder NY.

    Now, all of the inaccuracies aside, I had some other concerns. First of all, we do not refer to fixed and indexed annuity purchasers as “investors” in the United States; regulators do not take kindly to it. This is because these products are not investments; they cannot lose value as a result of market conditions. Given that the authors of this paper are not from the U.S., I give them the benefit of the doubt on this matter.

    However, I do take issue with a couple of matters relative to the benchmarking and research methods in this paper. First, it is like comparing apples-to-oranges to compare indexed annuities to MYGAs. The rates on indexed annuities can change annually (with annual reset crediting methods, which are most common on the products), which makes it appropriate to compare these products to fixed annuities with a one-year guaranteed rate. Only two companies even offer the ability to guarantee their indexed annuity rates for the surrender charge term. To compare indexed annuities to MYGAs seems an exercise in futility; why would one even do so?

    My next material concern is also related to benchmarking. Did the authors of the paper compare products sold in like distribution channels? We don’t know. We do know that they compared 7-year MYGAs against 7-year indexed annuities sold by the same product manufacturers, which is good. However, I can attest that just one of the 63 companies offering indexed annuities today offers a staggering 19 different 7-year indexed annuities; and yet they sell these products through five different distribution channels.

    The commission paid on a bank indexed annuity would be very different than the commission paid on an independent agent indexed annuity; the same could be said for MGYAs. For this reason, it would be disingenuous to compare a MYGA sold through banks to an indexed annuity sold through independent agents, etc. We have no way to validate if sound benchmarking methods were used in this company’s analysis, as the author makes no mention of this matter. This is of concern to me, as the amount of commission paid to the salesperson has a direct impact on the annuity’s interest rate/cap/etc.

    Also on the matter of benchmarking: why did the authors choose to use the most competitive MYGA rate offered by the manufacturer in their analysis? Did they choose the indexed annuity with the most competitive cap/participation rate/spread in their analysis? They do not state such.

    It would seem most-logical to use a mean credited rate, should the product manufacturer offer multiple MYGA products that meet the criteria for the study. However, the mere selection of the most advantageous MYGA rate appears to be “cherry-picking,” and putting the MYGAs at an advantage from the start in this comparison of indexed annuities to MYGAs.

    All other things aside, my greatest concern is over the following statement:

                “The analytic platform uses a simulation engine to test the performance of the strategies under a range of random scenarios. This allows us to come up with an average effective return along with statistical metrics of the distribution results.”

    This roughly translates to “our system is proprietary.” Has the “analytic platform” been reviewed by an outside source that can validate it? A long-time respected colleague of mine, who is an actuary (and used to work for the top-selling indexed annuity manufacturer), provided feedback that he requested information on the aforementioned methodology a month ago, and has not received a response. This causes me a greater level of concern.

    Ultimately, my feeling is that I, as an annuity expert, earned 12.00% on one of my indexed annuities this year, and I earned only 3.10% on my MYGA during the same period. I have been working with annuities and life insurance for just shy of 20 years, and seen piles and piles of policyholder annual statements that show indexed annuities outperform fixed annuities by 1%-2% over the life of the contract.

    I have dismissed this “research.” A journalist argued with me that because the industry is lacking “better research” on indexed annuity performance (outside of the 2008 Babbel/Wharton study), that perhaps we should give this paper a chance. My response was that flawed research is invalid research. Further, the Babbel/Wharton study was regarding actual policyholder performance; this paper hypothesizes about hypothetical performance, which may never be realized.

    All of the data used to provide the response for this blog was provided by the AnnuitySpecs tool, which is powered by Wink, Inc. at www.LookToWink.com.

    So, let’s clear the air…am I a hater? Not at all. I do not compete with this firm, to the best of my knowledge. Neither Moore Market Intelligence nor Wink, provide income annuity quotes or indexed annuity hypothetical performance data information at this time. Will we in the future? Perhaps. Then again, I have this whole taking-over-the-VA-competitive-intel-world-thing that I’ve been working on…

    That aside, this has nothing to do with Wink, and everything to do with Moore Market Intelligence. As the recognized expert in the indexed annuity space, I put no salt in the findings in the aforementioned “research.” The conclusions in this paper are not consistent with my nearly 20 years of product administration, illustration development, and product development experience. I have likely developed more indexed annuities than any single individual in this industry, and I have seen hundreds and hundreds of policyholder annual statements not only in my policyholder administration days, but over the past 13 years from agents, distributors, and during my expert witness work. More importantly, I have owned nearly a dozen indexed annuities with as many different insurance companies over the past 19 years, and my personal experience has been inconsistent with the findings in this paper.

    I have copies of redacted policyholder annual statements with annual interest credited as low as 0.00% and as high as 47.65%. I do not believe in positioning indexed annuities as an equities alternative. These products are intended to perform favorably against fixed annuities and certificates of deposit. My experience has shown me that indexed annuities will outperform fixed annuities with a one-year rate guarantee by 1.00% – 2.00% over the life of the policy. Some years, indexed annuities will earn 0.00%. Some years, they will earn double-digit returns. Yet, over the life of the policy, they will outpace fixed annuities by 1.00% – 2.00%. THAT, my friends, is how indexed annuities have performed. Thirteen years ago, I was given the moniker “Indexed Annuity Rockstar” by the number one selling company of indexed annuities. That has to count for something.