#65 | Structured Annuities – Part 2

Three incumbents make up the Structured Annuity space today and I’ll walk through each one of them in detail over the next few posts. All told, the market today is probably in the range of $8B in deposits, with AXA accounting for a little less than half of that, Brighthouse taking something like 30% and Allianz taking the rest.

AXA is the vanguard of the category and its product series, Structured Capital Strategies (SCS), continues to post significant sales gains year over year. The product line is pretty full. They have the stock SCS product in B-Shares, C-Shares and ADV-Shares. They have lots of buffer and index options. Now they also have SCS Plus, which is essentially ripoff of Brighthouse’s successful Shield product. From the outside, it looks like AXA’s real differentiator is their Annual Lock strategy, that essentially is a long-dated bucket (5 or 6 years) with annual crediting mechanics. In other words, it locks you into a specific cap for 5 or 6 years and only credits at the end of a term. The upshot of the strategy is that the stated caps are higher than a typical 1 year credit bucket and AXA certainly isn’t shy about marketing the comparison, even though it’s not a completely fair one. More on that in another post.

Brighthouse Financial, then MetLife, followed AXA into the market a few years later with a completely different and unique offering totally unlike AXA called Shield Level Selector, or SLS. Wait, SCS and SLS? Yes, but remember, totally different. Where AXA offered 5 year segments, MetLife offered 6 year segments. You see? Totally different. Whereas AXA offered 10%, 20% and 30% buffers, MetLife offered 10%, 15% and 25% buffers. Guys, seriously, totally different!

I’m kidding, obviously, but there actually are some material differences that are often underappreciated by reps. Shield is a Single Premium product, SCS is not. This is a significant difference when advisors are looking to do dollar cost averaging into the product. SCS can facilitate it under one contract, but you’d have to buy 12 separate Shield contracts to make it happen. For the calculation that determines the account value between credits, SCS uses a standard, but still pretty complex, option valuation formula that exactly zero clients and maybe 5% of advisors will understand. Shield uses a simple and straightforward pro-rata share of gains and losses based on how much time has elapsed in the segment. SCS has separate account options where the client can invest in equity and bond funds alongside their structured allocation, Brighthouse only has a fixed account that pays a low rate. Brighthouse also tends to split its offerings across products rather than just share classes. For example, AXA’s fee-only offering is an ADV share of SCS, Brighthouse brands its fee-only offering as separate product called Shield Access. Brighthouse offers its C-Share(ish) product as Shield 3, AXA just has a C-Share on SCS. I don’t think these differences make one product absolutely better than the other, but they are material factors for some clients and should be a bigger part of the discussion than they usually are.

And then there’s Allianz. Hats off to these guys for actually doing something different. They offer accounts with a floor (which they call Guard) return in addition to accounts with a buffer. They have a charge in their flagship product of 1.25% that allows them to offer more upside and sort of muddies the comparison between that product and no-fee products. Elsewhere, Allianz borrows from the two incumbents. Its interim value calculation is like AXA’s. It offers accounts with a binary payoff structure (if the index is up, you get the same amount no matter how much it’s up) called Protection that looks like Shield’s Step Rate option. It now has a No-Fee version that does not have the 1.25% fee, obviously, and is more comparable to SCS and Shield. It also has an ADV share like AXA’s and Shield Access. Finally, Allianz files their product as a VA (hence the name, Index Advantage Variable Annuity) and has a few separate account fund options to compliment the structured accounts.

But when you really look at the three products, it’s fairly obvious that the general mode of progress for all three has been to look more like the others, rather than less. What started out as three fairly distinct offerings looks more like one product offered by three companies. This is, of course, bad for the companies and bad for the category. The best part about selling Structured Annuities for the last 5 years has been that you don’t have competition or, at least, not competition that steps all over your toes. The product now appears to be fairly commoditized and so there’s some pretty whacky stuff going on to win sales. Brighthouse’s caps are at the top of the market (cap-setting will be the topic of another post) and Allianz fought back with a limited run of higher caps until they’d hit a certain sales number. Really? That’s a strategy? What happens when the fire-sale ends? Is Allianz just betting that Brighthouse can’t sustain their caps, when the two companies have very different financial perspectives on this business? The rational move would be for Allianz to do something Brighthouse is not doing that really resonates with customers like, I don’t know, porting over a living benefit from their fabulously successful 222 FIA or creating a crediting strategy that looks better on paper, like AXA is doing with Annual Lock. But instead, Allianz decided to throw a straight punch with a fire sale on caps. I guess that’s what you think the market is commoditized.

Which leads me to the question we’ll explore in the next post – why is it that, on paper, AXA is the hands-down laggard in caps and yet it continues to be the dominant player and post significant year-over-year growth? There must be something else to the puzzle. And, as it turns out, there is.