Insurers May Be in for More Misery (Update)

Allianz Life (AZ Quote) is the second-biggest seller of equity index annuities in the first half of the year with $2.1 billion. It reported a 2 billion euro net loss for the third quarter, but did not break out performance of equity index annuities.

Rounding out the top five fixed index annuity companies are Midland National Life and Old Mutual, neither of which are publicly traded.

What are Equity Index Annuities?

Buyers of equity index annuities typically pay a lump sum premium up front. The average lump sum amount in the second quarter was $52,460, according to AnnuitySpecs.com. Then the insurance company agrees to pay the annuity holder an amount based on the performance of a stated market index such as the S&P 500 or an aggregate Treasury index. If the return of that stated market index goes below a certain percentage, then the insurer pays a guaranteed minimum on 87.5% or 90% of the initial deposit.

This simple concept then gets much more complicated. First, there is what is known as a participation rate. This essentially determines how much of the gain is credited to the annuity value. If the participation rate is 80%, then the interest rate paid to policy holders will be 80% of the gain in the index.

Instead of a participation rate, some companies use a spread that is subtracted from the index gain before it is credited to the annuity. For example, if the index gains 10% and the spread is 3%, the annuity is credited with 7%.