Indexed Annuity Theory question

[Winter_123]

Why are indexed annuities always linked to the s&p, the dow, lehmans etc. Why are there no indexed-like annuities (that I am aware of I should say) that peg over to and credit off of the performance of select funds for example. So for example you would gain on the upside of the fund and have a floor on the bottom as with an indexed annuity.

Where am I going wrong here. Must have to do with the hedging in the background and purchase of bonds, puts and calls etc that work better with the indexed funds pegged to the s&p, dow etc. I realize that they not an indexed annuity when they dont peg to one of the indexes but you get the drift.

Can anyone help me to get smarter here? Why cant I get the same type of animal but pegged over to the Global Intergalactic Growth fund or whatever. Obviously the volatility would be different so the crediting rate would be different but the puters could work all that out.

Winter

 

[padthaiforlunch]

I'm sure it could be done if a carrier thought there was a fund with such acclaim that it could increase sales. First let's see one based upon the vix.

 

[padthaiforlunch]

In order for a call to be 'covered' the underlying investment must be owned. Now perhaps the sellers are covered, but the carriers are the one doing the purchasing, so naked or covered wouldn't really apply.

If I misunderstood what you were trying to say, then feel free to correct or ignore.

It is more complicated then can be answered in a forum post but I will try.

These products are funded or hedged by "covered call options". No one actually owns the investment holdings.

So because a portfolio manager can change holdings any timer there is no way a covered call option can mirror it accurately.

 

[Winter_123]

It is more complicated then can be answered in a forum post but I will try.

These products are funded or hedged by "covered call options". No one actually owns the investment holdings.

So because a portfolio manager can change holdings any timer there is no way a covered call option can mirror it accurately.

I see. So then, what, the idea with the S&P and DOW indexed annuities is that the composition of the S&P and the DOW only changes incrementally once and a while so they can have a higher level of confidence that the calls they buy are the ones that will be needed if it comes to that?? Whereas with a select fund you might have calls for stocks that are no longer in the fund or need ones for newly added stocks. Is that the basic idea or no??

Winter

 

[JMO Fan]

Indexed insurance products were invented in the 1980s (or earlier). Insurers didn't sell them much, and the indexes were often CPI or other published indexes. When index stock options were sold in the 1990s, they quickly became an acceptable basis for annuities.

Insurers are generally reluctant to sell indexed products if the stock index futures are unavailable. Regulatory restrictions on general account stock investments preclude actually investing annuity money in the stocks themselves. If indexed products were in separate accounts (e.g., if Rule 151a becomes final), many more indexed insurance products could be made available.

 

[Charpress]

The system used by the big IA sellers is elegantly simple: they buy stock options. To have what they purchase match in some general terms the market (S&P, for example), then the options they purchase need to be somewhat representative of the top 500 companies. Same with companies that let you index to the European funds. Have you noticed it is mainly global companies like Allianz and Aviva that are comfortable have these indexes as well?

If the market is down, the options expire and the company does not have to pay. They are still making their money from investments in bonds or whatever. If the market is up, they exercise the options and keep a chunk of what the annuity owner gets. Brilliant all around.

Allianz owns Oppenheimer which gives them terrific help in structuring what options will best suit the company with the given indexes in play for the year and for the anticipated terms of annuity business on their books. I have been told they have something like 40 people on a global basis that do nothing but handle the options trades to fund their index strategies.

As far as indexes go, the companies will get into whatever makes them money. There is even one company now that offers indexing to gold.

Aviva has a strategy that lets you index to S&P, Nasdaq and DJ at the beginning of the year. At the end of the year they allocate 50% of your money to whichever index did best during the year, 30% to #2, and 20% to the third-place runner. This is like betting on a horse race after the race is run. This must be paying off big, because Aviva recently announced they will no longer accept more than 50% of the annuity to this allocation.

 

[Franz Kafka]

You are not buying covered calls on individual stocks within index. You are buying options on index futures. There's no commodity and there are no stocks. It's just a pure gambling like head or tail. Institute managers sell the futures options to hedge their bets and others buy them to bet against them. Again there are no commodities or stocks you are purely betting on a number. Please correct me if I'm way off.

 

[Winter_123]

As far as indexes go, the companies will get into whatever makes them money. There is even one company now that offers indexing to gold.

Are the aforementioned "indexes" true annuities with guarantees and a sharing of the upside as with EIA's or are they just mutual fund/hedge fund types of funds that are pegged over to the performance of a set of stocks where you could also have loss of principal. Are these true annuities with the same annuity features (such as tax deferral) as an EIA with the exception that the underlying equities are different?

I dont know. I am just asking.

Winter

 

[Charpress]

Well said - but MassMutual owns Oppenheimer not Allianz

It is Oppenheimer Capital I am referring to as being owned by Allianz. In any event, it is probably Pimco, which Allianz also owns, that does more of the strategies for them.

The gold index is a true indexed annuity strategy. You have no downside risk. It is just one of the strategies you can choose as all or part of your overall indexing strategy. Like all indexes, the "risk" if you can call it that is how much you can actually put in your pocket after the spreads and caps. There is more to these strategies than trying to beat Vegas at the blackjack tables. Like Vegas, the house has figured most of the angles.

 

[KJ in Miami]

Why are indexed annuities always linked to the s&p, the dow, lehmans etc. Why are there no indexed-like annuities (that I am aware of I should say) that peg over to and credit off of the performance of select funds for example. So for example you would gain on the upside of the fund and have a floor on the bottom as with an indexed annuity.

Where am I going wrong here. Must have to do with the hedging in the background and purchase of bonds, puts and calls etc that work better with the indexed funds pegged to the s&p, dow etc. I realize that they not an indexed annuity when they dont peg to one of the indexes but you get the drift.

Can anyone help me to get smarter here? Why cant I get the same type of animal but pegged over to the Global Intergalactic Growth fund or whatever. Obviously the volatility would be different so the crediting rate would be different but the puters could work all that out.

Winter

There are products like this - they are called variable annuities but you need a 6 to sell them. And some even provide guaranteed minimum income benefits.
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Indexed insurance products were invented in the 1980s (or earlier). Insurers didn't sell them much, and the indexes were often CPI or other published indexes. When index stock options were sold in the 1990s, they quickly became an acceptable basis for annuities.

Insurers are generally reluctant to sell indexed products if the stock index futures are unavailable. Regulatory restrictions on general account stock investments preclude actually investing annuity money in the stocks themselves. If indexed products were in separate accounts (e.g., if Rule 151a becomes final), many more indexed insurance products could be made available.

Then they become variable annuities!