Following the first foray into the fee-based fixed index annuities (FIA) in the US by Allianz Life via its Retirement Foundation ADV Annuity, launched in late February, SRP spoke to Matt Gray, senior vice president of product innovation at Allianz Life Insurance of North America, about the increasing weight of fixed-index annuities in retirement portfolios, the plans at a company level and the criteria used to select proprietary indices for these products.
"We see this as an opportunity to leverage our product development capabilities and educate advisors about FIAs, and about how these products can play a role in the overall planning of clients' portfolios," said Gray. With this kind of product, FIAs can build lifetime income for investors nearing retirement, or "transition boomers", 50 to 60-year old individuals close to retirement. "The trend is that these individuals have a need to grow their assets, but cannot put their money in cash because there is a gap with what they are trying to generate in terms of accumulation and lifetime income. This product helps them address that need by enabling them to continue growing those assets while building a guaranteed future lifetime income stream at the same time."
The fee-based advisors targeted with this new product are new to the FIA market, which is why the structure of the product is fairly simple, according to Gray. "We have other products with more index choices and index crediting options for advisors that are more familiar with the products and the client risks that these additional options can address," said Gray.
Education will be important, according to Gray. "A few years ago, FIA sales were marginal through broker dealers, whereas today most of our annuities sales come from registered reps that are affiliated with a broker dealer," said Gray. "There's been a huge shift in the market, and although we think it will take some time for these products to become mainstream in the fee-based space, there will be significant growth in this segment over the next few years."
This product type addresses specific needs and there will be an increase in their weight in portfolios "once advisors realise that they can be deployed as an insurance solution to hedge longevity risk, as opposed to going naked into the market and trying to manage this risk just through asset allocation", said Gray.
Allianz's new fee-based FIAs complement the company's "comprehensive range of annuities", which includes fixed-index universal life products - the life insurance version of FIAs - index variable annuities and traditional variable annuities.
The market has been adding volatility controlled indices to FIAs. "Occasionally, we will add new indices or crediting methods to our products, if they are a good fit for what the consumer is trying to achieve," said Gray. "We have the popular Barclays (now Bloomberg) US Dynamic Balance Index II in our products, and we are fortunate to have the affiliation with Pimco that has enabled us to launch a very nice complement to our index line-up with the addition of the Pimco Tactical Balance Index."
The Bloomberg US Dynamic Balance Index has a mechanism that reallocates between an equity index and a bond index on a daily basis, according to Gray. "Controlling volatility directly in the index allows for more potential upside and a higher cap than we would be able to offer otherwise," said Gray. "We also offer this index with no cap on the upside, but with a spread so clients may not get the first 2% or so of the return, but they get everything beyond that. This kind of feature has been very popular in the FIA segment."
The Pimco Tactical Balance Index is the next evolution of this, according to Gray. "It is a volatility-controlled index that has a built-in duration adjustment so that it has the potential for positive performance in periods of steadily rising or falling rate environments compared to indices with a more fixed duration bond component," saidGray.
Post-2008, clients "really appreciate volatility-controlled mechanisms embedded in indices, because it provides a smoother ride, and can provide higher potential upside return than other index allocations or allocations to a fixed account", said Gray.
"Clients are seeking performance and protection, and a volatility-controlled indices like the Pimco Tactical Balance Index allow to them to potentially offset to the risk of a rising rate environment," said Gray. "When you are structuring 10-30 year income products, you have to be very methodical in the way you choose the reference assets. This is not about introducing a marketing fad or something that makes only sense in a certain market environment, but about structuring something for the long term that provides enough choice so that consumers and advisors can diversify their positions over time."
Allianz is very selective when choosing underlyings, and many that do not meet the company's criteria around liquidity, complexity and so on, are discarded. "We are very fortunate to have an in-house hedging platform that has been in place since 2006, because it provides us with a lot more flexibility in terms of what we can offer and gives us a wider scope in the selection process," he said. "We are open to innovation, if it brings value and addresses client needs."
According to Gray, 2016 was "a very good year" at Allianz, as suggested by its operating profit (up 14% to US$1bn) and its dividends. "Asset under management have also increased and our overall sales were very strong in 2016," said Gray. "However, our performance can also be assessed by the benefits Allianz Life has paid out, which amount to US$2.6bn, an 8% increase compared to the previous year. This means US$2.6bn in promises we kept over the year, which gives a good measure of our strength as a provider of retirement products and just feels good."
Allianz Life surpassed the US$1bn mark for the first time in the company's history and reported an increase in assets under management to US$125.3bn, up 7% from the previous year, according to the company's 2016 financial results. Net income was also up 15% in 2016, reaching $757m.
Results were driven by strong FIA sales, which increased by 16%, to US$10.2bn, in 2016. Variable annuity sales experienced slight growth, but indexed variable annuity sales rose significantly by 118% in 2016 over 2015, and stood at US$1.45bn. "The market is challenging at the moment but we think we have something special to help clients navigate that market uncertainty," said Gray. "We remain focused on tapping into new opportunities, such as the RIA segment and in articulating and educating people about how our products can be used within a holistic financial plan.
"I was in a recent meeting with about 150 attendees, a third of which were Allianz employees (part of our sales teams), and twio-thirds were external independent distribution reps, and almost everyone in the room owned an Allianz product and had a family member who owned them as a result of their recommendation as well," said Gray. "That's the best endorsement we can get about our products. Our challenge is to get more people to use these products and to educate advisors on how they can be deployed in the portfolios they manage. We believe these products offer one of the most powerful income planning strategies for people saving for retirement."
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