Not All Guarantees Are Created Equal

Not All Guarantees Are Created Equal – An Independent Review of the Brighthouse Financial Shield Annuity

financial comparison

Ever since Brighthouse Financial was established by Metlife, they have been on a marketing blitz.  I’ve seen Brighthouse ads pop up several times during various sports broadcasts.  Last summer, I was walking through the Charlotte airport and felt like there was a Brighthouse banner every ten feet – granted they are headquartered directly outside of Charlotte.

Every top selling product in the financial services industry has a good story to go along with it.  The Shield VA from Brighthouse is no exception to this principle and has been one of the company’s most successful product lines.  Right on their brochure it states, “Growth is realized in up markets… Protection is provided in down markets.”  Oh, and it comes with no annual fees.  If I didn’t know any better, I would think this is a brochure for their latest Fixed Indexed Annuity.  With that in mind, I set out to compare the Shield annuity to a run-of-the-mill FIA to determine if the product is as good as the story.

The way Shield works is fairly simple – there is an 11% cap on the upside of the S&P 500.  On the downside, Brighthouse will eat the first 10% of any loss for the contract year.  Any gain beyond 11% in the market will be forfeited and any loss below 10% will have a negative effect on the account value.  The annuity offers other term lengths and protection levels as well.  However, for the best “apples to apples” comparison, I am solely looking at annual resets based on the S&P 500 for both Shield and the FIA.  I did not use a specific FIA product, rather just made some assumptions based on what is generally available in the FIA space right now.  Current participation rates on FIAs are approximately 45% of the upside and, by definition, there is no downside risk.

FIA Return Difference by Period
Starting Year 5-year 10-year 20-year
1988 -5.4% -4.3% 0.2%
1989 -4.1% 1.5% 47.3%
1990 -5.2% -1.7% 45.0%
1991 -1.5% -1.5% 38.2%
1992 -3.9% 0.8% 37.1%
1993 1.1% 19.2% 34.1%
1994 5.8% 24.6% 42.1%
1995 3.7% 19.0% 34.6%
1996 -.1% 12.6% 29.5%
1997 4.9% 9.5% 25.4%
1998 17.9% 4.7% 19.7%
1999 17.8% 45.1%
2000 14.7% 47.5%
2001 12.7% 40.3%
2002 4.5% 36.0%
2003 -11.2% 12.6%
2004 23.2% 14.0%
2005 28.6% 13.1%
2006 24.5% 15.0%
2007 30.2% 14.5%
2008 26.7% 14.3%
2009 -7.5%
2010 -12.0%
2011 -7.6%
2012 -12.1%
2013 -9.8%
Average: 5.2% 16.0% 32.1%

(Values show in each of the 5, 10 and 20-year columns are illustrative and represent the hypothetical excess return (over the Brighthouse Shield Annuity) of a Fixed Index Annuity with a 45% participation rate when applied to a rolling period of S&P 500 index performance beginning January 1 of the starting year)

Going back 30 years, I looked at all the rolling 5, 10 and 20-year periods and determined the cumulative outperformance of an FIA compared to the Shield annuity.  As you can see from the chart, there were 15 periods – only 35% of the time – where the FIA underperformed the VA.  All of those periods were within the 5-year timeframes.  Put another way, as you stretch out the time horizon, there were only a few rolling periods over a 10 or 20-year timeframe that the VA even came close.

Before I move on to an explanation for the outperformance of an FIA vs. the Shield VA, I want to address what many readers may be thinking: “Is this comparison intellectually honest?”  After all, neither of these products were available for the last 30 years.  Furthermore, I am assuming constant cap and participation rates for both products.  True enough – varying interest rates and volatility would have had a significant impact on the options pricing behind both of these products.  But that’s the key here.  I’m more interested in the comparison on a relative basis, not so much on an absolute basis.  Any swings in interest rates and volatility would have had a similar effect on both products.

Getting back to the reasoning, it seems as though the Shield annuity was designed around both recent history as well as the average return on the market.  If the S&P 500 has averaged roughly 9-10% historically, it should stand to reason that the annuity with an 11% cap rate would capture nearly all of the upside of the market.  Except that’s not even close to being accurate.  In fact, over the last 90 years, the S&P 500 returned between -10% and +11% in only 30% of the years.  For the other 70% of the time the client would have either eaten losses below -10% or forfeited gains above 11%.  More succinctly put, markets don’t move up in a straight line.

In case there are still questions about the pricing comparison of the annuities, Brighthouse initially offered a Shield annuity with 100% downside protection.  However, the trade-off is a lower cap rate of 2.8%. In essence,  this structure is  an FIA.  FIAs structured with a cap rate (as opposed to participation rate) have been in the range of 4%-6% over the last year.  Brighthouse has since stopped offering the 100% downside protection level, likely because it shed too much light on their poor competitive pricing.

As with all sales literature, it pays to dig into the numbers behind the brochure.

Disclosure:

It is important to note that there are a number of important factors used in determining and calculating an annuity’s policy values. These factors can drastically differ insurance carrier by insurance carrier and product by product.

This hypothetical index annuity example used the following assumptions:
1) FIA product returns based on the SP500 Index generally use price returns.  Since the Brighthouse annuity also uses price returns, the historical S&P500 data used in the analysis are based on price returns, which do not include dividends.  SP500 values are for illustrative purposes only, since investors cannot directly invest in the SP500 index. Past performance is not a guarantee of future results. 2) Annuity performance is calculated using an annual point-to-point measurement. 3) The index annuity shown used a 0% asset fee.  4) The index annuity shown is calculated using annual participation rates on the interest that is credited, at 45%. Index annuity participation rates are based on a number of factors, including but not limited to: whether or not the policy offers any bonus, as well as the surrender charge percentage and duration of the surrender schedule.

In applying the information provided in this material, you should consider your clients’ other assets, income, and investments – such as the equity in their home, Social Security benefits, any IRAs, savings accounts, and other plans that may provide retirement income, as those other assets may not be included in this discussion, model, or estimate.

This analysis should not be interpreted as a recommendation or as investment advice. Before recommending any investment company product, please review and provide a copy of the prospectus.

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