Ugh. I have been dreading this

April 11, 2023 by Sheryl J. Moore

Another lawsuit has been filed around the issue of a non-performing hybrid index on an indexed annuity. *wince*

The proposed class action targets both the insurance company, AND the index provider. The suit is centered around the assertion that the illustrations were “too rosy” and the index didn’t perform.

Apparently, nine plaintiffs claim that they earned “very low or zero returns” last year, when the S&P 500 was up over 16%.

However, it is alleged that the illustrations for the index in question showed “on average a return of more than 6% over the past 10 years.”

KEY POINT: The index in question “…never existed during most of that period…so the returns were arrived at through a practice called backtesting.”

*Here’s the part that has scared me about some of these indices*

What many don’t realize is that the constituents in many multi-asset indexes can be re-weighted arbitrarily. In this case, the insurance company “allegedly said that [the index provider] had moved all the funds in the index to Treasury bonds.” Apparently, shifting all of the funds in the index to Treasury securities wasn’t in the product disclosures. Further- it is alleged that the index provider never adjusted the weightings of the constituents back, once the market made a comeback.

Man, this is no bueno.

Ultimately, I have to agree with Moshe Arye Milevsky on this one: these cases don’t “look good for the industry.”

Thanks to Cyril Tuohy at Life Annuity Specialist for the heads-up. -sjm