Today one of my co-workers in Tailor Made, our elite agent services group at Creative Marketing, Nick Michale sent me the following email:
Just got my North American annuity statement. I have owned it for five years now. A charter 14. Up until now, the last four years my contract gave me an average compounded yield of 3.95%. I have been in the monthly point-to-point/monthly cap sum bucket for all four years. This last year, the fifth contract year, I earned a whopping 12.30% return! That took my average yield from 3.95% for the last four years to 5.50% for the five-year yield. I want to thank you for being instrumental in the development of the monthly point-to-point strategy. I love that strategy. Yes, I have been the recipient of some years where there was ZERO return, but for a five-year yield now at 5.50%, my contract is doing exactly what I hoped it would do—giving me a very fair return on very SAFE and secure money. That money will need to be there for me and my family when I am ready to retire! Thanks very much for your foresight!”
This message was not solicited, and I sought his permission to publish it here.
We started using the monthly point-to-point method of calculating interest credits in Fixed Indexed Annuities in 2001. Our concept was to change the profile of interest credit outcomes to offer more upside potential. The participation rate-only and fee-only approaches was rapidly being diminished by a combination of declining interest rates and high-option prices driven by high-stock market volatility. This left the playing field to the capped approach, which now in our crushingly low-interest rate environment, is limiting upside potential and compressing returns into a much narrower range. We implemented the Monthly Point-to-Point concept, which we borrowed from some bank CDs and European traded options, to measure monthly changes in the index (S&P 500), cap the positive changes at a percentage specified in advance, then add all 12 up, but of course, credit no less than 0.00%. This creates the potential for “home runs,” much as Nick experienced, even in today’s low-cap milieu.
Apparently, the strategy works, but don’t just take Nick’s word for it. According to Sheryl Moore, Author and CEO of Moore Market Intelligence, the Monthly Point-to-Point (MP2P) strategy represented 20% of all index selections in the Q4 of 2012 and Q1 of 2013. But how would Nick have done versus an Annual Point-to-Point Cap (AP2PCap) allocation? Maybe he just got a lucky issue date. The last five years have all been low-interest times like today, so let’s assume today’s relative caps applied throughout that period: 3% for Annual Point-to-Point and 2% for Monthly Point-to-Point. Let’s look at five-year compounded annual returns for all issue days from 1/2/2008 to 5/15/2008. The chart below shows that AP2PCap has all of its results between 1.79% and 2.39%, while MP2PCapSum is spread much more levelly between .31% and 4.58%, with a higher mean and median. If you can handle the possibility of a CD-like return today, in exchange, you get excellent upside potential.
High cap strategies like Monthly Point-to-Point and uncapped strategies like the Annexus BalancedAllocation Annuity™ (BAA), the Security Benefit Total Value Annuity (TVA), and the new Aviva TargetHorizon offer robust results and high-earnings potential in these low-rate times, often better than low-capped strategies, all with safety, principal protection and tax-deferral. The choice is up to clients following your good professional guidance. We at Creative Marketing are happy to have contributed to our industry with this design and the resulting financial benefits to millions of clients. We look forward to continuing to develop and introduce innovative financial ideas for many years to come.