Ease of purchase, simplicity, income planning – those are some of the themes that drive fixed index annuity (FIA) business at a carrier that has been in the FIA market for 19 years.
That carrier is Life Insurance Company of the Southwest (LSW), Addison, Texas. The company issued its first index annuity on April 7, 1996. It continues to write FIA business today, 19 years later, as an operating business of its parent, National Life, Montpelier, Vt.
Other players from that early FIA era have stopped writing FIAs in their own names, merged their FIA books with other carriers and/or otherwise left the FIA business. That makes LSW the industry’s oldest FIA carrier still writing FIAs in its own name.
In a wide-ranging interview with InsuranceNewsNet, LSW head of retirement Wade Mayo and LSW executive vice president Carl Lutz provided some insight into their company’s staying power in the FIA market, and into the FIA industry in general.
The observations come on the occasion of the 20th anniversary of the debut of FIAs to the public. That’s when Keyport Life launched KeyIndex, the nation’s first-ever FIA policy.
Keyport later merged into Sun Life Financial, but that first policy altered the product profile of the entire fixed annuity industry. It did this by offering a fixed annuity that offers upside potential with downside protection and features an interest crediting strategy that links to a financial index.
Today, the FIA business has grown into a multibillion-dollar industry. At year-end 2013, the industry’s total sales came to more than $38.6 billion, according to figures from Wink Inc.
The LSW Story
“LSW is the largest provider of FIAs in employer-sponsored plans,” Mayo said. The company’s niche is selling FIAs to teachers and government workers in 403(b) and 457 plans, respectively.
In terms of industrywide sales, the FIA production of LSW combined with its parent put the company in the top third of the 40 players shown on Wink’s list of FIA writers for the first nine months of 2014. The carrier was in 13th place at that time.
The company’s lead product type is flexible-premium FIAs, which Mayo said are compatible with the monthly-pay nature of its market. It also sells single-premium FIAs and accepts “single sum” rollovers from other qualified plans. The primary distribution channel is independent agents and agencies in the tax-sheltered annuity market, but LSW also sells through career agents of its parent company, National Life.
This targeted structure sets LSW apart from the many FIA carriers that do brisk FIA business selling single-premium FIAs through insurance marketing organizations (IMOs) and other channels.
A Formula That Works
Mayo thinks the LSW approach helps explain why the carrier has stayed in business as an operating FIA company for the past 19 years. As he sees it, selling FIAs that are easy to sell and purchase (via monthly payments), are simple to understand (not too many options and crediting approaches), and provide for lifetime income is a formula that works.
Easy to sell and understand. “We don’t play in the IMO world,” Lutz said. The teachers and government workers market is a defined benefit type of market, he noted. The buyers tend to be risk averse. They also are receptive toward making periodic contributions (as opposed to paying single premiums). So the FIAs that LSW offers are not designed for sale on spreadsheets or based on commissions and rates, he said.
Instead, LSW keeps the focus on offering agents a way to differentiate themselves with a product that provides accumulation and (once LSW added its living benefits rider) guaranteed lifetime income.
“Our intent is not to compete with equities,” Mayo said. Rather, he said, the company focuses on offering opportunity to earn better interest than in a traditional fixed annuity if the buyer is willing to accept a little more risk.
“We say, ‘There won’t be gyrations or volatility, and there will be no downside such as a 40 percent decline in one year,’” Lutz added. “We show the value of the guarantee that the policies offer even when the equities market drops – when ‘zero is your hero.’”
Simple to understand. Innovation in the FIA business has been a constant throughout the years. That has led a number of carriers to develop contracts that offer lots of index-linking options and interest crediting strategies.
The carriers that have these multi-featured products may be trying to differentiate themselves that way, Mayo speculated. “But I think that has obscured things.”
By comparison, he said, LSW keeps its FIAs “as simple as possible.” For instance, he said, the products credit interest annually, and they have a floor and cap but no spread loads. The policies offer only two indexes and two crediting options.
“We don’t compete on complexity,” Mayo said. “We don’t want our products to be seen as obscure.”
Regarding the customized indexing strategies that some carriers are offering today, Mayo said he thinks they’ve been generated by back-casting to find the strategy that looks best. He predicts that over time “people will gravitate back to the S&P 500” and other index options that are simpler.
The specialty indexes are “something new for agents to talk about,” Lutz reasoned. “But I think the client’s money will go to where they get the best execution and the best value.”
Lifetime income. A variety of approaches is bound to occur in the guaranteed living benefits riders that FIA carriers are increasingly offering with their policies, Lutz predicted. The riders are attracting money to the contracts industrywide, he noted.
The LSW leaders definitely see this as an important innovation in the market. The company has been offering a guaranteed lifetime withdrawal benefit in the 403(b) market since 2007, and overall about 40 percent of policyholders have elected the rider, Lutz said. In 2014, most of LSW’s single-premium sales had the rider attached. The buyers tend to be aged 55 and up.
“Now people are finding that a product that delivers a paycheck for life is attractive,” Mayo commented. The riders plus the policy annuitization options built into the annuities provide people with a range of guarantees and benefits from which to choose.
Mayo predicts FIA income features will continue to grow in popularity industrywide. With more and more baby boomers retiring, and with more and more corporations no longer offering defined benefit pensions, “income planning has become a huge deal.”
The FIA as Security Battle
The Dodd-Frank Act of 2010 brought to an end the multiyear effort by the Securities and Exchange Commission to have FIAs treated as securities. Looking back on that battle, Mayo described the contentions that FIAs are securities as “bogus, disingenuous and with no substance.”
As he sees it, “a lot of companies in the mutual fund and variable annuity space didn’t want us to be in this business. So they produced theoretical complaints that were never proven.”
Today, he said, “plenty of people still don’t want the competition, so they will always complain about something.” For instance, recent complaints have tended to deal with disclosure, suitability and other sales practice issues.
The Indexed Annuity Leadership Council, of which LSW is a member, is “all for disclosure and straightforward crediting methodologies, and we’re willing to complete,” he said. “Can we make it better? Sure, we’re happy to do that. It makes for a better market.”
But taking issue with the sales practice is not the same as taking issue with the product itself, he stressed. People should be able to construct portfolios they want with the products they want, he said, adding that “the closer to retirement they get, the more important it is.” There is room for FIAs in the market, he indicated, and based on LSW’s experience with the product, there is demand for it.