Commodities Debut in Indexed Annuities

By Linda Koco
Contributing Editor, InsuranceNewsNet

May 5, 2011 -- At the behest of their distribution channels, two annuity companies are offering commodity accounts as part of their indexed annuities.

Symetra Financial, Bellevue, Wash., is offering the S&P GSCI commodity index in two interest crediting strategies or accounts — point-to-point and monthly average. The strategies are available in the company’s new indexed annuity, the Symetra Edge Pro, which also offers strategies using the S&P 500 index plus a fixed account.

The S&P GSCI tracks 24 commodities in the energy, industrial metals, agricultural, livestock and precious metals sectors.  Many view it as a measure of commodity price movements and inflation in the world economy, according to Symetra.

The other commodity move comes from Legacy Marketing Group. The Petaluma, Calif. marketing firm says it will include its Gold Commodity strategy in a new series of three proprietary indexed annuities it will debut this summer. The strategy bases interest crediting on changes in the price of gold, as published in the Wall Street Journal, from the beginning to the end of the specified term.

Legacy already offers the Gold Commodity strategy in a series of three proprietary index annuities issued by Investors Insurance Corp., Jacksonville, Fla. subsidiary of SCOR Global Life U.S. Re, a member of SCOR, France. This product offers other strategies as well.

Why commodities?

At least 12 other indices are available in indexed annuity interest-crediting strategies today, according to AnnuitySpecs.com, Des Moines, Iowa. These include the well-known S&P 500, Dow Jones Industrial and the NASDAQ-100 indices.

So. why offer strategies linked to performance of a commodity or a commodities index, both of which may have less widespread name recognition?

For one thing, producers are asking for the option, says Jack Marrion, president of Advantage Compendium, St. Louis.

“At least one producer in every agent audience I talk to asks about when a gold commodity account or index option will become available,” Marrion says.

One reason for this might be that funds allocated to a commodity-linked account inside an index annuity have the potential to generate higher interest crediting than the client might get in other options, Marrion speculates. “This would depend on pricing trends, however.”

In addition, it’s possible that funds linked to changes in a commodity index or price “might zig when other accounts zag,” he says, meaning the commodities-linked accounts might perform well when others do not. Advisors may view that as advantage for some clients, he says.

Dan Guilbert, executive vice president-retirement division at Symetra, reinforces that view. In five of the eight market downturns over the last 40 years, he says, commodities went up when equities declined. 

Commodities and equities are not always in negative correlation, he allows. But the fact that commodities often do better when equities are underperforming is a “compelling” story, especially when a client can link to a commodity index inside an indexed annuity, he maintains.

Policyholders are not getting a “naked exposure” to the commodities market inside the indexed annuity, he explains. They are getting the upside potential from the interest crediting that links to the commodities index, but if the index goes down, the minimum performance guarantee in the annuity means the client won’t lose money, he says.

Flexibility is another advantage, according to Diane Shermi, director-product management at Legacy. The Gold Commodity strategy in the PremierMark indexed annuities enables advisors and clients to accommodate changes that may occur in the environment and their own lives, she explains.

For instance, due to changes in the commodities market, policyowners may want to move into or out of different strategies, Shermi says. The Gold Commodity strategy provides them with them one more option for that purpose.  In annual point-to-point index annuities, policyholders could move the money once a year, if they want.

Likewise, for agents. They may not recommend putting money in the Gold Commodity option right away, Shermi says, but “they want to have the option available to the client down the road.”

Diversification is major factor, too, says Guilbert. Many customers in Symetra’s target market—people in their 60s and 70s with investable assets of several hundred thousand dollars to $2 million—are already invested in U.S. equities and bonds. For them, having access to an account that links growth to movement of a commodities index would help them diversify their holdings, he says.

The insurer’s distribution partners told the company that they wanted this type of differentiation in an indexed annuity, he adds.

It’s true that some people may not understand commodities, or they may be less familiar with them than with their core asset classes, Guilbert allows.

“But they feel commodities every day when they go to the gas pump,” he says. He thinks that advisors will be able to help index annuity clients understand the commodities index in the Symetra product. Marketing materials from the company will also help. 

Marrion believes that many people do understand commodities, or they understand them as well as well as they understand stocks. “In fact,” he says, “commodities may actually be easier for some people to understand than stocks,” if for no other reason than that people already know that the prices of food, gas and gold are going up.

Shermi thinks the awareness of gold and the rising price of gold helps with customer understanding of the Gold Commodity strategy. “People always feel comfortable with gold, and they know that in some periods, it’s a good hedge,” she says.

More indices now available

The fourth quarter 2010 Indexed Sales and Market Report published by AnnuitySpecs shows that the number of indices available for interest crediting inside index annuities is increasing. The report shows that 12 indices were available in products in that quarter, up from seven the year before.

Indexed annuities may also offer fixed accounts.

Legacy’s proprietary indexed annuities are available in the majority of states where Investors Insurance does business. Their distribution is through independent agents who place business with Legacy.