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Index-Linked Annuity Segment Getting Crowded

It’s getting crowded in the index-

linked annuity market, and that presents a good news/bad news situation.

That’s the word from Mark Pearson, president and CEO of AXA Equitable, a pioneer in a market segment that turned in double-digit growth rates last year.

“Yes, there is more competition, particularly in the space where we have our [Structured Capital Strategies] product,” Pearson told analysts recently.

“A number of competitors have come out with similar products in there — so it’s a little bit more crowded there,” he said.

AXA Equitable’s Structured Capital Strategies index-linked annuity has been in the market for several years.

Since the beginning of this year, Lincoln, Great American and Great West have launched index-linked annuities to round out their annuity portfolios. Allianz, CUNA and Brighthouse are also active in the segment.

It was AXA Equitable’s first quarterly conference call since the company was spun off in May from its Paris-based parent AXA SA.

Last month’s initial public offering signaled “an important new chapter” in the company’s 159-year history, Pearson said.


Fast-Growing Product Category

Index-linked annuities use indexes as a measuring stick with which to credit contract holders and most index-linked contracts limit market-related losses.

The product category has grown quickly.

Sales rose 25 percent last year to $9.2 billion compared with 2016, while the overall variable annuity market shrank.

With the Department of Labor fiduciary rule tossed by an appeals court, “we are beginning to see an improved operating environment for our company financial advisors and the services they offer,” Pearson said.

The overall VA market is forecasted to grow again this year.

Many index-linked annuities sit on a VA chassis and come with or without subaccounts, while other index-linked annuities sit on a registered fixed annuity chassis.


Flows Drop

AXA once had the index-linked market segment to itself, but the arrival of new competitors is a sign that maintaining market share is going to be harder.

Product net flows in the first quarter were $579 million, compared with $1.1 billion in the year-ago period, the company said.

Structured Capital Strategies annuities with a term of five years are maturing, and now that the term is up, contract holders are moving out of the product — so the outflows were expected.

First-quarter net income was $168 million, compared to a net loss of $290 million, the company reported.

New York-based AXA Equitable Holdings is a holding company for AXA Equitable Life and asset manager AllianceBernstein.



Juggling The Best VA Benefits For Clients

Meanwhile on the VA front, lower expenses don’t necessarily correlate to a better VA for the client because of other factors such as asset allocation and rate of withdrawals.

Advisors are trying to juggle the best annuity benefits for clients, while seeking accurate expense-to-benefit ratio tools to help protect them in an era of regulatory pressure.

For example, lifetime withdrawal riders allow retirees to receive income for the rest of their lives, even if the account value drops to zero.

Annuity companies charge extra for the riders, however, so there’s a cost-benefit analysis to be done. The advisor needs to figure out which riders are the best fit for the needs of a client, particularly as a fiduciary era takes hold.

A new software tool, branded as Variable Annuity I.Q., is designed to shine more light on the value of lifetime withdrawal benefits attached to VAs and could help advisors in their annuity selection process.

“The Department of Labor’s fiduciary rule has been eliminated, but now [tighter regulations are] under review by the SEC,” said Kevin Porter, chief revenue officer for the analytics firm Hedgeness, which markets the software.


Institutional-Level Analytics

Advisors should think of the tool as “bringing institutional-level analytics to the retail advisor market,” Porter said.

Quantification of the variable annuity is “very much an imperative in today’s market environment,” he added.

“The variable annuity market has been lacking a standardized platform not only from the advisor’s perspective, but from the insurance carrier’s perspective too,” said Jay Singh, CEO of Chicago-based Hedgeness, in a news release.

VAs with income riders make up the bulk of the trillion-dollar VA market, and many people consider a lifetime income stream vital in replacing the role of the defined benefit pension, to which fewer people have access.

New product introductions, higher crediting rates for guaranteed living benefits, and the loosening of investment restrictions are expected to help VA sales rise by 5 percent this year over last year, LIMRA analysts forecast.

VA sales were $96 billion last year, down 9 percent from 2016.


Sample Scenario

The software illustration compares different VAs with lifetime withdrawal benefits from seven top annuity companies.

An analysis was run for a hypothetical retired couple electing joint/spousal lifetime withdrawal benefits, taking out between 4 and 5 percent annually starting one year from the date of purchase.

Allianz’s Connections VA with the Income Protector withdrawal benefit rider had the lowest expense-to-benefit ratio with a score of 40.59.

Jackson National’s Perspective II with the LifeGuard Freedom Flex lifetime withdrawal rider had the highest expense-to-benefit ratio with a score of 52.03.

Brighthouse Financial’s Series VA with the FlexChoice Access lifetime withdrawal rider ended in the middle of the pack with a score of 49.28.

Allianz’s Connections VA with Income Protector had the lowest expense-to-benefit ratio, in part because the product had high restrictions on asset allocations into the subaccounts.


Interplay Between Expenses And Income

“The higher the expense-to-benefit ratio, the more valuable the interplay between the expenses and income benefits when it comes to income distribution,” Porter said.

Benefit variables include the specific features of the lifetime withdrawal riders, the cost of derivatives and a credit rating weighting factor.

Expense variables include the income benefit rider charge, subaccount management fees, and mortality and expense fees.

Other companies such as Morningstar offer VA analytics, but those services are often only available to or priced for institutional clients.


InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected]

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected] [email protected].

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