Winning fixed-index annuity mandates by swinging for the fences


Natasha Dadlani, a director in equity derivatives investor solutions at Societe Generale in New York outlines the brief history of innovation in fixed index annuities in the US. With interest rates seemingly destined to remain low, insurance companies have turned to financial engineering to achieve the higher yields their clients have requested.

The fixed-index annuity (FIA) market in the US is based on the provision of a principal protected life insurance product with a payoff driven by an index and has been rising by around 10% annually since 2003, reaching US$75 billion in sales last year.

In an era of low interest rates, insurance companies have been looking for partners who can offer innovations that enhance performance over fixed-rate and benchmark-linked indices, particularly as the creation of principal protected products becomes increasingly expensive as interest rates fall. Pressed to offer lower participation rates, banks and asset managers have been looking for innovative ways to design indices and FIA strategies that still provide good participation rates.

Societe Generale’s response has been to create innovative indices combined with customised options that extract the most value from these benchmarks. The bank launched a custom index within an FIA for the first time in the US in 2017.

“We were able to do our first deal – with Athene, the number two FIA issuer in the US – by introducing something brand new to the market, combining our engineering expertise along with a simple fundamental story from Janus Henderson, a large global asset manager” said Natasha Dadlani, a director in equity derivatives investor solutions at Societe Generale in New York.

Teamwork makes the Athene work

Success was the result of teamwork: trading and engineering has designed a unique and product payout; legal and compliance combined in a timely fashion; operations and IT streamlined and automated the hedging; and marketing and sales created a unique platform comprising education and training for wholesalers that included webinars, roadshows, videos, public websites, monthly performance analysis and index brochures.

What insurance companies saw was an offering offer and execution on something very different. “Retail clients can benefit from a website dedicated to index information that is appropriate for their use,” said Ms Dadlani. “We also worked alongside the carrier to educate its wholesalers and host webinars. As this solution is new and innovative, it’s important that people understand the offering.”

The Athene deal saw the creation of an insurance task force and the template for what was to come.

The three legs

We have a well-defined deal closing process that has now been refined and industrialised, following the seven mandates we have won so far,” said Mike Clark, managing director in equities and derivatives at Societe Generale in New York. “We can go from mandate to launch in 12 weeks, which is a real added value for the client.”

“From a strategy standpoint, there are three legs,” said Mr Clark. “One is having the right specialisation; the second is partnering with asset managers on co-branded, fundamentals-driven index concepts; the third is innovation - truly a Societe Generale thing – in the form of indices and payoffs.”

It is the combination of these partnerships that the bank has already forged that lie at the heart of the bank’s strength. This includes asset managers and their unique intellectual property in index design (creating fundamentals-driven investment strategies) and their ability to lend their brands, which are often household names in retail investing.

But it also includes ESG data science companies, such as Entelligent and Sustainalytics, for their unique models, especially in environment and social governance, adding incremental value and returns against benchmarks. In line with a group commitment to ESG financing and investment, the bank is designing new index strategies and product offers in partnership with the two ESG companies as part of its 2020 FIA push.

Furthermore, the bank has global distribution relationships that include many independent marketing organisations, or IMOs, and broker/dealers that specialise in the FIA market in the US.

The innovations the bank has introduced in indices and payoffs are an example of what it does best, connected and solutions-oriented engineering, with strong partnerships to get their respective expertise. This is how the clients benefit from the best of all worlds: index management, asset management, ESG criteria experts and financial engineering.