From: Sheryl Moore
Sent: Monday, June 08, 2009 7:24 PM
To: 'readers@forbes.com'
Subject: FW: ARTICLE: Equity-Indexed Annuities: A Costly Way To Limit Your Losses
Dear Forbes Editor,
I am an independent market research analyst who specializes exclusively in the indexed annuity and indexed life markets. I have tracked the companies, products, marketing, and sales of these products for over a decade. I do not endorse any company or financial product specifically, but I do believe in the value proposition of indexed products. I recently had the occasion to read your article, “Equity-Indexed Annuities: A Costly Way To Limit Your Losses.” As the foremost authority on indexed annuities, I wanted to personally respond to the material misstatements and misleading testimonial by Scot Woolley in this article. I was absolutely appalled that a source as credible as Forbes would publish such a blatantly false and ignorant article. Scott Woolley appears to be very uneducated on indexed annuities, and the insurance industry in general. I would like to think that Forbes generally does a better job at monitoring the accuracy of their contributors’ articles than they did on this occasion.
Specifically, the most shocking and obvious mistake in Woolley’s piece is the fact that Massachusetts Mutual Life Insurance Co, and Prudential Financial have never offered indexed annuities, EVER. Yet, he sites them as being carriers that underwrite these products. In addition, MetLife does not offer indexed annuities themselves, but instead offers their agents a choice of four indexed annuities that are offered by other insurers. Genworth Financial exited the indexed annuity market on September 20, 2008. Certainly Woolley could not have done his homework on this article, as all one needs to do is Google “first quarter 2009 indexed annuity sales,” and they would have found the most credible resource on current carriers in the market: my firm’s sales data. It is distressing that this reporter put so little effort into backing-up his information.
In addition, indexed annuities have not been referred to as “equity indexed annuities” since the late 1990s. The insurance industry has been careful to enforce a habit of referring to the products as merely “indexed annuities” or “fixed indexed annuities,” so as not to confuse consumers. This industry wants to make a clear distinction between these fixed insurance products and equity investments. It is the safety and guarantees of these products which appeal to consumers, particularly during times of market downturns and instability (such as what we are experiencing now).
Also, indexed annuities are not a “combination investment and insurance product[s].” They are not an investment at all. They are a fixed insurance product that provides minimum guarantees, death benefits, and an income stream that consumers cannot outlive. Excess interest is credited based on the performance of an outside stock index, such as the S&P 500. The indexed annuity consumer is never directly invested in the stock market, and thereby never subject to the risk of loss due to market downturn. These benefits, coupled with this unique interest crediting, are what makes indexed annuities such an appealing, value-added product- particularly during times of market turmoil. The products are regulated by state insurance divisions, like other fixed insurance products.
Indexed annuities do provide limited upside interest potential, unlike securities products. This is what allows the insurance company to be able to afford the minimum guarantee that is provided to the consumer. So, regardless of the market’s performance, the worst the client can receive is zero interest crediting- no risk to principal as a result of market losses. No other product can offer such a strong value proposition, coupled with the insurance benefits of the indexed annuity. It is important to note that if the potential gains were unlimited on indexed annuities, there would be no guarantees, and THAT would be a variable annuity, not a fixed insurance product. We in the indexed annuity industry, are happy for this differentiation, as it is what drives the sales of these products.
Scott Woolley’s understanding of the basic pricing of indexed annuities is flawed. He believes that “the insurers who sell the annuities use derivatives to put collars around the annuities with limit both the upside and downside for investors.” In reality, the insurance company invests the majority of their funds in bonds, which cover the indexed annuity’s minimum guarantees. The invest a minute percentage of the funds in options, which provide the index-linked interest on the products. Contrary to Woolley’s allusions, the insurance companies have no control over the prices for the bonds and options. So, when the market becomes volatile, the same dollar that purchased the company a potential indexed annuity gain of 8% last month, may only purchase them a potential indexed annuity gain of 6% presently. So, while “the counterparties selling the hedges” may “jack up their fees,” as a result of market volatility, that merely translates into lower caps, participation rates, and higher spreads that are passed on to the consumer. This is not discretionary on behalf of the insurance company. Indexed annuities not only have minimum guarantees, but also minimum guaranteed caps/participation rates, and maximum spreads that are approved by the insurance divisions in the state the product is being offered in, prior to the product ever being made available for sale. When these caps, participation rates and spreads become unattractive compared to fixed annuities, sales of indexed annuities decline.
As far as “other fees” being “so high as to make the product a lousy buy”- indexed annuities do not have fees. A few indexed annuities offer an optional rider that has an explicit, stated account valued-based charge. However, these products are not like variable annuities which have numerous fees such as administrative fees, mortality & expense charges, as well as fees for optional riders. There are no “fat expenses” on these products, nor “ways to make it hard” to understand what you are really paying. All annuity costs and benefits are clearly disclosed in the disclosures that the consumer signs at the time of purchase. Yes, all indexed annuities have surrender charges. All fixed annuities have surrender charges. These charges are ten years on average, but can be as low as one year. In addition, a large percentage of the longer-term products offer an up-front premium bonus to provide an incentive to the annuity consumer. A surrender penalty is merely what allows the insurance company to credit competitive interest rates to the annuity, while the client has agreed to keep their money with the insurance company. The insurance company invests the consumers premiums, in order to make a return on the money, and credit this competitive interest rate. Without a surrender penalty, the insurance company would incur tremendous expenses that they would not be able to recover. In short, surrender charges are a pricing measure that allows insurance companies to make good on their promises, and back-up their claims-paying abilities.
Woolley’s citing of firms that are seeking to extend their regulatory authority beyond the scope of their purview is incredulous. Both the SEC and FINRA have vested interests in regulating these fixed insurance products. They do not regulate these products today, and therefore the state insurance division would be a far more credible resource on these products. They cannot be considered a reliable source on indexed annuities, as they have a plethora of inaccurate information on the products on their public websites and “alerts.”
Unfortunately, a few complex products have afforded this industry the perception of complexity over the past 15 years. However, the bulk of indexed annuities sold today are very simple to understand. In fact, 95.2% of indexed annuities offered today have crediting methods based on the simple formula of (A – B)/B. All indexed annuities limit potential indexed interest through the use of a pricing lever such as a participation rate, a cap, or a spread. Typically, only one of these levers is used to limit the potential indexed interest on the annuity. However, the bottom line is that the crediting method and pricing lever used are irrelevant. Indexed annuities are priced to return about 1% - 2% greater than other traditional fixed money instruments. So, if fixed annuities are earning 5% today, and indexed annuity consumer can expect to receive 6% - 7% interest over the life of their indexed annuity. Sure, some years they will receive zero, and other years they may receive double-digit gains. However, the end goal is to receive a rate that is competitive with other safe money places, not to compete with securities products.
Every single indexed annuity ever sold limits the consumer’s risk of loss as a result of the market downturn at ZERO. No indexed annuity consumer has ever received a negative adjustment to their annuity’s value as a result of a market decline. This is precisely why these products are so appealing. In addition, when the annuity receives zero crediting, the market’s low point (the end measurement for the crediting method) is now the beginning date for the next index measurement on these products. This provides a tremendous opportunity for indexed gains when the market rebounds.
As a the foremost expert and consultant in this market, I can tell you that I have never heard of David Babbel. I can neither confirm nor deny the validity of his study, as neither myself nor my clients use him as a resource on these products. The bottom line is that indexed annuities are a great solution for millions of Americans that cannot stomach putting their retirement dollars at risk in the market. On the other hand, these same consumers can look forward to the opportunity for greater interest crediting than what they could earn at their local bank.
I was astounded to see Mr. Woolley’s statement that “getting stuck in these contracts if you need the money early” is a big problem. In reality, every indexed annuity sold today allows consumers annual penalty-free access to their account value, should the need arise. This amount is typically 10% of the annuity’s value annually, but it can be as high as 20%. In addition, 9 out of 10 fixed annuities provide penalty-free access to the account value in the event of certain triggers such as nursing home confinement, terminal illness, disability and even death. Quite contrary to this article’s statements, indexed annuities are some of the most liquid retirement vehicles available today.
Even more damaging was Scott Wooley’s statement that “many insurers rescind gains you may be owed if you get out early.” Exactly ONE of the 275 indexed annuities sold today works in this manner. In addition, sales of this product accounted for less than 2% of total industry sales as of the first quarter of 2009.
While it is true that all annuities are intended to be a long-term commitment, Mr. Woolley seems to miss the big picture. What makes indexed annuities the most important part of millions of American’s retirement plans is that indexed annuity consumers are more risk averse than individuals investing in securities products such as stocks, bonds, and mutual funds. Indexed annuities are a “safe money place,” intended to be compared against other safe money places (i.e. fixed annuities and certificates of deposit). Any insurance agent or advisor selling these products knows the difference. Why doesn’t Mr. Woolley, who purports himself as an expert on these products?
In closing, it would be so greatly appreciated if you would provide a correction to your readers on this blatantly false article. There are millions of Americans relying on the accuracy of your information, and clarifying Mr. Woolley’s article is a good way to attempt to repair the damage of his statements.
Please feel free to let me know if I can serve as a resource to you or your editorial staff in the future.
Thank you.
Sheryl J. Moore
President and CEO
Advantage Group Associates, Inc.
(515) 262-2623
