Financial analysis of equity-indexed annuities

Abstract

This study examined historical returns on four equity index annuity (EIA) contract designs and 13 contracts for 1957-2008, the period since the S&P 500 began. None of these contracts could match returns on one-month Treasury bills. Based on alphas and Sharpe ratios, none of the contracts could produce competitive market-based returns. More important, because of their design, index annuities must underperform returns on similar risk portfolios of Treasury's and index funds. EIAs impose several risks that are not present in market-based investments including surrender fees and loss of return on funds withdrawn before the end of the term. This research suggests that salesmen have not satisfied and cannot satisfy SEC requirements that they perform due diligence to ensure that the indexed annuity provides competitive returns before selling them to any client.