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Five Year Index Annuity Returns Very Respectable In A Disrespectable Time    11/03
On 30 September 1998 the S&P 500 closed at 1017.01. On 30 September 2003 the S&P 500 closed at 995.97. Although the 2003 value was 28% higher than the nadir reached in the millennium bear market, it was still 2% below where it had been five years before. However, index annuities performed competitively in spite of enduring the worst bear market since the Depression.

There were fourteen carriers available five years ago offering index annuities that today have completed their index period or posted five years of interest crediting, ten of these provided me with copies of 2003 customer statements, or similar documentation, with personal data blanked out, for a customer that had purchased their index annuity as close to 30 September 1998 as possible. I compared the total return of these annuities with various other vehicles for the same period. The results are as follows:

Since the five-year period ended at a lower index value than when it began, term-end point structured index annuities only credited the minimum guarantee for this dismal market period. Term-end point methods tend to perform well in rising market periods.

Although some annuities had higher total returns than others, the focus should be on the success of the index annuity concept and not individual results. This market period rewarded annual reset annuities with strong first year index participation rates. Market dynamics of the next period might favor caps or daily averaging or term-end point structures. The bottom line is index annuities went through their baptism by fire during this period and all performed as they were designed to do.

The annual reset structured annuities did exactly what they were suppose to do – participate in the index advances in 1998 and 1999, protect the interest credited in the early years during the index declines in 2001 and 2002. And then reset at the indices’ lower levels to take advantage of the index climb in 2003. The average total return for only annual reset annuities was 35.67%.

It is interesting to note that all of the index annuities posted higher returns than index funds for the same period and two of the index products bested returns of the nation’s largest bond fund.

The average index annuity total return at 33.7% was considerably higher than the average stock mutual fund or variable annuity equity sub-account return for the period – which is probably not surprising when the swings of the stock market are considered – but the average index annuity return was better than typical bond vehicles during a reportedly strong bond market, and was also almost 50% higher than the return of the average certificate of deposit.

The first index annuity was purchased almost nine years ago. During their brief existence the stock market has produced years of exuberant irrational returns and historical losses, not a gentle environment for a nine-year-old. In spite of this, index annuities are building a tangible record of performance and protection. Although the future path of the market has yet to be walked, index annuities have proven they offer safety in bad times and extraordinary potential in good.

Ignores sales or surrender charges. Mutual fund returns include reinvested dividends; index annuity returns do not include reinvested dividends. Information believed accurate, but not warranted. Standard & Poors does not sponsor or endorse any index product. AmerUs return period 9/28/98-9/28/03, LSW return period 9/21/98-9/21/03, Lafayette return average of periods ending 9/15/03 and 10/15/03. Lincoln Benefit return period 10/2/98-10/2/03, Standard Life return period 9/25/98-9/25/03. Sources: The Advantage Group, Wall Street Journal 10/6/03, Federal Reserve Board.

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