Archives: Articles

IssueM Articles

A ‘Nesting Doll’ of an In-Plan Annuity

Posted on April 3, 2024 by Kerry Pechter -

More asset managers and life insurers are pitching new annuity products to 401(k) plan sponsors, for both altruistic and selfish reasons. That is, they want to help participants turn their tax-deferred savings into safe retirement income and, simultaneously, to retain or grow the level of participant assets in their funds and annuities.

One recent entry in this market, State Street GTC Retirement Income Builder, is a target date fund (TDF) with an annuity inside. It’s backed by a deep-pocketed strategic partnership that currently includes ARS (formerly part of Annexus), State Street Global Advisors, Athene Annuity and Life, Nationwide Financial, Transamerica Life (as recordkeeper), and Global Trust Company (GTC; a unit of Community Bank).

Annuities are still new to most 401(k) plan sponsors and participants. State Street GTC Retirement Income Builder seems to anticipate (and remove) most of the usual objections to weaving annuities into plans. But this product may be especially hard for the average plan sponsor or participant to understand. (The product’s offering memorandum and brochure are available.)

Aimed at auto-enrolled participants who don’t actively sign up for their employer’s 401(k) plan, the State Street GTC Retirement Income Builder is a target date fund (TDF) containing both mutual fund-like investments and an “in-plan” group deferred fixed indexed annuity (FIA). Participants contribute while they are employed by the plan sponsor.

All TDFs are qualified default investment alternatives (QDIAs), into which plan sponsors can automatically move auto-enrolled participants’ contributions. The annuity can grow like the other funds in the TDF, whose allocations to equities and bonds become more conservative over time. The TDF is always liquid; participants can move their money to another investment option or, if they leave the plan, pull it out of the plan.

‘Nesting doll’ structure

The structure of the overall product is like a matryoshka or nesting doll. At the core is the group deferred FIA designed by ARS. The annuity tracks an index with an underlying asset pool of 55% equities and 45% fixed income. The index is custom-built and governed by a stabilizer or volatility-control mechanism.

The annuity sits inside the TDF alongside State Street funds. When TDF investors reach age 47 or so, some of their monthly contributions start going into the annuity instead of into a fixed income fund. Through an auction process, five or six life insurers (Athene and Nationwide, initially) can bid for a portion of the incoming premium by offering a competitive crediting rate (a “participation rate,” or percentage of the index return). At the maturity date of the TDF, when the participants start reaching age 65, about 65% of the value of the TDF will be in the ARS Lifetime Income Builder FIA and about 35% in State Street equity funds.

Each insurer deposits its share of the premium into its general fund. Just as it would when managing an individual FIA, the insurer uses an amount roughly equal to the anticipated annual return on its general fund as a budget for buying a call option on the index. The insurer also guarantees that the annuity will provide the contract owner (or joint owners) with income for life.

All of these investment and insurance assets are held inside in a collective investment trust (CIT), a tax-exempt investment vehicle provided in this case by Global Trust Company. As the TDF’s investment fiduciary, Global Trust Company is responsible for choosing the TDF provider (State Street in this case) and the insurers (Athene and Nationwide, so far). Transamerica is the recordkeeper.

All of the insurers use the ARS Lifetime Income Builder FIA, so it’s a more or less level playing field for the insurers. Over time, index gains are locked in and credited to the annuity. Participants who own the TDF accrue units in the annuity, whose value is calculated daily, like that of a mutual fund share.

Dave Paulsen

“We unitized the indexed annuity, so that it trades like a mutual fund,” Dave Paulsen, chief distribution officer of ARS, told RIJ. “If it were sold to individuals, they could buy into it at today’s NAV [net asset value]. It’s fully liquid and transparent. We embed this in the TDF.” The daily NAV is calculated independently by Milliman, the global actuarial consulting firm.

The annuity “is a ‘holding’ in the TDF,” Paulsen told RIJ. “The value that participants see on their statements is fully liquid and available to move or withdraw. So participants get the growth of Lifetime Income Builder regardless of whether they stick around until retirement, when income payments begin. This is a key point. The participant does not give up growth during the accumulation phase, and has full flexibility to transfer or move the assets at any time.”

The income stage

At age 65 or so, the retired participant begins receiving an income stream fixed at 6% of the TDF’s peak value. Of that fixed income amount, about three-quarters (4.5%) will come from the annuity and about one-quarter (1.5%) from the equity funds. The product aims for the 6% payout, but doesn’t guarantee it. If the equity funds are ever depleted (by a combination of withdrawals and market volatility), the income will drop to 4.5% and remain there until all owners have died.

Distributions begin automatically when the TDF reaches its maturity date; the participant makes no active choice to enter the income phase and no IRA rollover is needed. The payments, Paulsen said, would move into a separate tax-deferred sleeve.

Glidepath of Retirement Income Builder TDF/FIA/GLWB (Click for full brochure)

The retiree can either start spending that money or leave it in the plan (until Required Minimum Distributions begin) for continued growth. The annuity remains permanently deferred, so retired participants can always withdraw lump sums or liquidate their accounts (and receive proportionately less income).

The expense ratio of the State Street GTC Retirement Income Builder TDF is nine bps (total) per year until the participant reaches age 47. At that point, when contributions start going into the FIAs and the insurers set a floor under the value of the participant’s credits in them, the fee goes up to 20 basis points.

These costs are only a fraction of the annual costs of an income guarantee on a variable annuity, which can run as high as 1.5% per year. That’s because the FIA’s income rider wraps only around the value of the annuity, not the entire TDF value, and because the performance of the FIA is much more predictable than the performance of risky portfolio.

Insulating sponsors from liability

The use of the CIT (collective investment trust) to package the TDF, in lieu of a mutual fund structure, reduces the cost of the product while further distancing plan sponsors from legal responsibility for choosing insurers that will always keep their contractual promises. While the plan sponsor bears fiduciary responsibility for choosing the TDF provider (State Street, in this case), the CIT (Global Trust Company) is liable for selecting solid life insurers to underwrite the FIA.

CITs are gradually becoming the preferred legal structure for 401(k) annuity providers. In August 2023, Nuveen, the investment manager of TIAA, introduced its Lifecycle Income Series, a TDF containing the TIAA Secure Income Account deferred group annuity. “The trustee for the new CITs is SEI Trust Company, a leading provider of collective investment trusts to the U.S. retirement market and the ultimate fiduciary authority over the management of and investments made in the CIT, with Nuveen serving as advisor,” a Nuveen release said.

According to a white paper from MFS, “total CIT assets have doubled over the past decade due to its increased adoption among 401(k) plans. In 2022, total CIT assets were $4.6 trillion, and comprised 37%, or about $2.5 trillion, of total 401(k) plan assets. CIT growth has come primarily at the expense of mutual funds, which saw their share of 401(k) assets decline to 42% of total 401(k) assets.”

“The upswing in CITs, relative to mutual funds, as the vehicle of choice for TDFs appears largely due to cost,” writes attorney Maureen Gorman of the law firm of Mayer Brown, in a recent white paper. “For structural and regulatory reasons, they do not have boards of directors and are not subject to SEC filing requirements, and their target market consists of institutions rather than individual investors, resulting in lower marketing costs. With the explosion of excessive fee litigation relating to 401(k) investment options, plan fiduciaries have become increasingly sensitive to cost. Although mutual fund expense ratios have generally declined, CITs remain a bargain in many cases.”

Gorman touched on the idea that plan sponsors can reduce fiduciary responsibility for the choice of insurer by letting the CIT investment manager choose the insurer to guarantee the annuity embedded in a TDF that’s packaged in a CIT.

“Many employers who are reluctant to cause their plans to enter into insurance contracts directly with insurers on account of the fiduciary exposure are more comfortable selecting a CIT TDF, with an investment manager responsible for choosing the insurers backing the lifetime income options offered by the TDF,” she wrote.

“While the choice of the TDF as an investment option is itself a fiduciary act, many plan fiduciaries are more comfortable with evaluating the fund and its manager than with evaluating different insurance carriers. In the Setting Every Community Up for Retirement Enhancement Act (“SECURE”) Act of 2019, Congress created a new fiduciary safe harbor for choosing an annuity provider of “in-plan” annuities, but plan sponsors may continue to prefer that the choice of insurers (and satisfaction of the conditions of the safe harbor) be performed by a TDF investment manager.”

“Unfortunately,” she added, “the published guidance did not address several aspects of these products, especially those of guaranteed minimum withdrawal products, and the gap in guidance has widened with the development of more, and more sophisticated, versions of these products.”

Target market

Despite its internal complexity, State Street GTC Retirement Income Builder is meant to be virtually self-driving for the participant. “The annuity is purchased at the investment manager level,” Paulsen said in an interview. “There are no participant-level decisions. The complexity is taken off of the individual. If you force participants to make tradeoffs, take-up of the product will be low. By not asking people to make decisions that they are not prepared to make, but still making the fund fully liquid, you’ll see adoption rates increase rapidly.”

Paulsen sees middle-class plan participants as the product’s target market. “I think the top 10-15% of savers, those with the most assets, are likely to go to a financial adviser and roll assets over to a brokerage IRA. The bottom 15% probably won’t have enough savings to fund an annuity,” he said.

“For the remaining 75% in the middle, it will be important to have more guaranteed income in retirement. State Street GTC Retirement Income Builder can complement Social Security. If we attract the mass affluent, I think we can make a difference in how people retire.”

News in brief

Posted on April 3, 2024 by Editorial Staff -

Researchers probe tie between auto-enrollment and household debt in the UK

In a new working paper from the National Bureau of Economic Research, researchers in the U.S. and U.K. report the results of their study of the impact of automatic enrollment pensions on the borrowing behavior of households covered by the NEST national defined contribution employer-based savings plan in the U.K.

“Individuals in many countries are automatically enrolled to save in retirement pensions unless they opt out—perhaps the most widespread policy implementation of nudging. Automatic enrollment is intended to raise household net wealth during the accumulation phase of retirement saving,” the researchers write in the paper, “Does Pension Automatic Enrollment Increase Debt: Evidence from a Large Scale Natural Experiment.”

“We show that the additional observed pension balances created by the introduction of automatic enrollment pensions are accompanied by significant increases in debt during the first 41 months after enrollment,” the paper said. The authors are John Beshears, Matthew Blakstad, James J. Choi, Christopher Firth, John Gathergood, David Laibson, Richard Notley, Jesal D. Sheth, Will Sandbrook and Neil Stewart.

According to the authors, who looked at the experiences of defined contribution plan participants at 160,000 employers with between two and 29 employees, the average automatically enrolled employee accrues an additional £32-£38 ($40.40 to $48 on 4-3-2-24) of observed pension savings per month within the automatic enrollment pension, of which £16-£19 are employer contributions, £13-£15 are employee contributions, and £3-£4 are tax credits deposited to the pension.

But researchers found that the average employee simultaneously accrues an additional £7 ($8.84) of unsecured debt (such as personal loans and bank overdrafts) per month of enrollment, which is 19-23% of the increase in total pension savings and 47-58% of the increase in employee contributions.

Further, the probability of having a mortgage increases by 0.05 percentage points per month of enrollment (a cumulative 1.9 percentage points at 41 months after enrollment), against a baseline prevalence of 38%, and the average mortgage balance correspondingly increases by £118 per month of enrollment.

“Surprisingly,” the researchers noted, “time under automatic enrollment progressively reduces loan defaults and increases credit scores, so that by 41 months after enrollment, the probability of having defaulted within the previous six years has fallen by 1.6 percentage points (13% of the baseline rate) and credit scores have increased by 0.07 standard deviations. We estimate no statistically significant effect on the likelihood of bankruptcy.”

Previous research had shown that the auto-enrollment substantially increases pension participation rates, leading to higher average saving within the pension. However, the effects of automatic enrollment could be offset on other margins.

Automatic enrollment is legally required of employers in the United Kingdom, New Zealand and Turkey. In 2019, 40% of US private industry workers and 28% of US state and local government workers participating in a savings and thrift plan did so in one with automatic enrollment, and most 401(k) and 403(b) plans established from year-end 2022 onwards will be required to automatically enroll employees by 2025.

Prudential closes $12.5 bn reinsurance deal with Somerset Re

Prudential Financial, Inc. announced that it has successfully closed a reinsurance transaction for a portion of its block of guaranteed universal life insurance policies with Bermuda-based Somerset Re.

Under the terms of the agreement, Somerset Re reinsured approximately $12.5 billion of reserves backing Prudential’s guaranteed universal life policies issued by Pruco Life Insurance Company and Pruco Life Insurance Company of New Jersey.

The transaction released about $425 million of capital that Prudential had provided to support the block. This transaction covered policies written prior to 2015, representing about one-third of Prudential’s total guaranteed universal life statutory reserves.

First announced on July 24, 2023, the deal “advances the company’s strategy to reduce market sensitivity and increase capital efficiency,” a Prudential release said. Prudential Financial, Inc. had approximately $1.4 trillion in assets under management as of December 31, 2023. It has operations in the United States, Asia, Europe, and Latin America.

Somerset Reinsurance Ltd. is a provider of reinsurance solutions for asset-intensive life insurance and annuity business “helping its clients manage capital efficiency and improve their financial results,” the release said. The firm’s solutions include programs for new business flow and management of legacy blocks of life insurance and annuities, and capital-motivated reinsurance solutions globally. Large Insurers ranked Somerset No. 1 in the Business Capability Index (BCI), as measured by NMG Consulting’s 2023 U.S. Structured Financial Solutions study in the Asset-Intensive Segment.

Strong fourth-quarter for pension risk transfers: LIMRA

Total U.S. pension risk transfer (PRT) premium was $12.7 billion in the fourth quarter 2023, 53% higher than fourth quarter 2022, according to LIMRA’s U.S. Group Annuity Risk Transfer Sales Survey.

“Fourth quarter PR sales historically tend to be elevated and we saw this again in 2023. Plan sponsors often want to close the deal before the end of the year to remove some of the pension risk off their books,” said Keith Golembiewski, assistant vice president, head of LIMRA Annuity Research.

“Strong economic conditions have encouraged more plan sponsors to think about de-risking their pension liability. We continue to see a record-level number of deals, suggesting broader awareness and interest in these contracts. LIMRA expects this trajectory to continue with 2024 PRT sales results similar to the results seen 2022 and 2023.”

In 2023, PRT sales were $45.8 billion. While this is 13% lower than the record set in 2022, it does represent the second highest annual sales since LIMRA began its benchmark study.

LIMRA’s findings show there were 296 PRT contracts sold in the fourth quarter of last year, up 26% year-over-year. In 2023, there were 850 PRT contracts completed, a 25% jump from 2022. This is the highest number of contracts sold in a quarter and annually.

Single-premium buy-out sales were $12.5 billion in the fourth quarter, up 73% from prior year’s results. In 2023, buy-out sales fell 14% to $41.3 billion, as compared to the record buy-out sales in 2022. There were 280 buy-out contracts in the fourth quarter of 2023, up 40% from the fourth quarter 2022. For the year, there were 763 buy-out contracts completed, 36% higher than the number of buy-out contracts sold in 2022.

There were no buy-in contracts reported in the fourth quarter. At year-end 2023, there were eight buy-in contracts sold, totaling $3.9 billion.

Single premium buy-out assets reached $263.4 billion in 2023, up 12% from the prior year. Single premium buy-in assets were $6.9 billion, 2% higher than in 2022. (Two single-premium buy-in contracts were converted into buy-out contracts in the fourth quarter, lowering the total assets.) Combined, single premium assets were $268.5 billion in 2023, an 11% increase from the 2022 results.

A group annuity risk transfer product, such as a pension buy-out product, allows an employer to transfer all or a portion of its pension liability to an insurer. In doing so, an employer can remove the liability from its balance sheet and reduce the volatility of the funded status.

This survey represented 100% of the U.S. Pension Risk Transfer market. Breakouts of pension buy-out sales by quarter and pension buy-in sales by quarter since 2016 are available in the LIMRA Fact Tank.

PE-backed insurers control almost 10% of life/annuity assets: AM Best

The U.S. life/annuity insurance segment remains well-capitalized after a nominal 1.6% increase in statutory capital and surplus through Sept. 30, 2023, from year-end 2022, and steady net income, according to AM Best’s annual Review & Preview report on the industry segment.

But the report also showed lingering concerns for 2024 about uncertainty and volatility in financial markets, risks contained within certain asset classes, and remaining legacy liabilities. The Best’s Market Segment Report, titled, “US Life/Annuity Insurers Stay the Course as They Prepare for 2024 Uncertainty,” said that “the rising interest rate environment has affected assets and liabilities, but the overall realized impact to balance sheets has been manageable, owing primarily to companies’ strong asset-liability management frameworks.”

The report discussed the rising number of private equity- and asset manager-owned insurers, which now represent nearly 10% of the total life/annuity industry by admitted assets. Despite the rapid growth in premiums, operating results for these types of organization structures have largely followed the greater industry, and returns on equity have mirrored those of stock companies, with results only minimally below those achieved by the stock entities.

Over the near term, most insurers plan to hold assets to maturity, driving unrealized losses, but they unlikely will be forced to sell to meet liquidity needs. AM Best estimates modest 4% growth in the industry’s capital and surplus for 2023 and expects net income to approach pre-pandemic levels in 2023 and continue growing in 2024.

“With inflationary pressures expected to subside in 2024, the industry has more consensus about the investment landscape but with similar levels of uncertainty as in 2023,” said Michael Porcelli, senior director, AM Best. “Shifts in asset composition has helped insurers mitigate the impacts of rising interest rates while minimizing cash flow volatility; however, these asset allocations cannot completely mitigate all risk, as evidenced by the material decline in the market value of invested assets on insurers’ balance sheets over the past two years.”

According to the report, the industry’s net income of $31.6 billion through third-quarter 2023 was unchanged compared with the same prior-year period. For most companies, COVID-19 mortality had affected earnings, as opposed to balance sheets, suggesting no significant impact on reserves or capital, but the overall impact has declined since early 2022.

The longer-term implications of COVID-19 and other mortality factors on liabilities and future pricing assumptions are still uncertain, with most companies not yet making significant changes to their mortality assumptions.

The report also explores a host of other issues impacting the life/annuity industry, including sales trends, artificial intelligence and accounting changes. Overall, AM Best expects expect segment challenges to remain manageable given insurers’ robust risk-adjusted capital, favorable liquidity profiles and effective ERM practices.

“Uncertainty about the US economy and geopolitical risks could create significant headwinds in 2024, but life insurers have mostly favorable risk management practices, including the use of hedges, adjustments to crediting and discount rates, business mix re-evaluations and a focus on technology and innovation,” said Porcelli.

NewRetirement raises $20 million in venture capital

NewRetirement, a digital-first financial planning platform for consumers and enterprise partners, announced that it has closed its Series A round with $20 million in funding. The infusion brought the company’s total funding to $20.8 million.

NewRetirement founder Stephen Chen said the firm will use the new funding to expand its enterprise offerings, scale onboarding and support for new partners, enhance R&D efforts aimed at helping its user base, integrate LLMs (large language models) and AI (artificial intelligence) to provide more personalized recommendations, and build capacity to meet growing demand.

The round was led by Allegis Capital and joined by Ulu Ventures, Nationwide Ventures, Fin Capital, Frontier Venture Capital, Cameron Ventures, Marin Sonoma Impact Ventures, Northwestern Mutual Future Ventures, Plug and Play Ventures and Motley Fool Ventures.

The NewRetirement planning and modeling engine considers thousands of scenarios, enabling individuals to do holistic accumulation and decumulation planning with digital guidance. NewRetirement’s direct-to-consumer product currently powers financial planning for 70,000 active users who are managing close to $100 billion dollars in their own financial plans.

Employer plan sponsors and plan providers can offer NewRetirement’s planner, calculators, and educational classes to their employees as a self-directed financial wellness benefit. Wealth managers, banks, and insurance companies can use the company’s APIs, planner, calculators, and advisor tools to develop a white-labeled or co-branded platform, enabling them to leverage new business models, retain assets, and drive revenue with more engaged consumers.

Data Connection

Posted on April 2, 2024 by No Author -

Auto workers’ DC plan will link to Hueler Income Solutions

Posted on April 2, 2024 by Editorial Staff -

In recent wage negotiations in Detroit, the United Auto Workers union couldn’t persuade the big automakers to restore its members’ defined benefit pensions. The last of those beloved but antiquated retirement-financing vehicles rolled off the Motor City’s unionized assembly lines circa 2007.

But last fall’s compensation agreement contained a consolation prize, thanks to the efforts of retirement entrepreneur Kelli Hueler, CEO of Hueler Income Solutions.

Union workers at General Motors and Stellantis (the Netherlands-based owner of Chrysler, Dodge, Jeep, and Ram, as well as several European brands) in Detroit will have a direct internet link from an employee benefit portal to Hueler’s online annuity platform, where they can use part of their savings to buy a guaranteed income stream.

Long before the SECURE Acts began encouraging annuity vendors and 401(k) plan sponsors to think seriously about forming relationships, Hueler started using her forceful entrepreneurial personality and her connections in the retirement industry (thanks to her stable value fund business, sold to Morningstar in 2020) to talk companies like Boeing and Vanguard into linking their DC plans to her site.

There’s an old saying that “annuities are sold, not bought.” But Hueler has always believed that, properly educated about financial risks in retirement, some 401(k) participants will actively choose to buy income annuities at retirement.

Anyone, including financial advisers, can visit the Hueler platform and solicit competitive income annuity quotes participating life/annuity companies. They can also get quotes for interest-rate yields on fixed deferred annuities. Hersh Stern’s immediateannuities.com and Stan Haithcock’s stantheannuityman.com serve an overlapping but not identical audience.

Income Solutions is a so-called “out of plan” annuity option. It requires retired participants to roll over plan assets to an individual IRA by a prior to the annuity purchase. Plan sponsors bear no fiduciary responsibility for offering access to the site. Hueler asks little of plan sponsors beyond a link to Income Solutions on one of their employee benefit portals and a commitment to encourage its use. Income Solutions doesn’t replace a plan sponsor’s existing 401(k) plan providers.

Six highly-rated annuity issuers currently bid on new business on the Hueler platform. They are the Integrity Companies, Lincoln Financial, Mutual of Omaha, Nationwide, Symetra, and Securian. Hueler ordinarily charges a 2% (of premium) sales charge for brokering the sale. According to Hueler’s agreement with UAW members, they will pay only a one percent fee.

According to a January 5, 2024 article in the Detroit News, “The UAW contracts… ratified in November after a 46-day strike, received more attention for other gains, including a total pay increase of 25% over the course of a 4½ year contract, the resumption of cost of living adjustments and a pretax, $5,000 ratification bonus for all employees, including temporary workers.”

The article continued, “The UAW contracts at the three automakers all included a significant boost in the automatic employer contribution to 401(k) plans — with no required employee contribution — for eligible UAW members who are not covered by pensions. The Detroit Three employers will contribute 10% of base pay for these eligible hourly workers. That’s up from 6.4% for those hired after the fall of 2007.”

Michigan has lost more than half of its auto assembly plant jobs over the past 35 years, with auto employment there falling from 98,258 jobs in 1990 to 44,900 jobs last year. U.S. auto assembly plants employed some 278,000 workers last year, according to the Bureau of Labor Statistics, but many workers were employed at non-union plants in the South.

Purchasing power for both unionized and nonunion workers has stagnated since the early 1990s. The average real auto manufacturing wage today is $22, or about the same as 30 years ago, according to data presented on MSNBC last fall. UAW workers earn $18 to $32 an hour, depending on seniority.

Hueler’s headquarters is in Edina, Minnesota, hundreds of miles west of Detroit’s auto assembly plants. But Kelli Hueler is no stranger to large automakers. More than eight years ago, Hueler concluded a deal with General Motors that gave its defined contribution plan members direct access through their plan website to the Hueler platform.

At the time, GM’s 401(k) and profit-sharing plan had 58,000 salaried participants in the U.S., with $11 billion in assets and an average account value of $190,000. The largest single holding was the GMAM Investment Holdings Trust. Hueler has had similar relationships with Boeing and with 401(k) plans administered by Vanguard.

According to the 2015 article in RIJ about Hueler’s deal with GM:

Hueler’s main business contacts are on the institutional side of the retirement industry. Ten years ago, while running a stable value fund data business for retirement plans, she noticed that near-retirees were at a disadvantage in the marketplace because they couldn’t readily compare the prices of a broad range of annuities, whose prices by manufacturer and from month to month.

She knew that an unsavvy or ill-timed purchase by an individual could easily reduce monthly income benefits by as much as 10%. Captive agents promoted only their employers’ products. Open-architecture Internet platforms such as immediateannuities.com were available to individual purchasers, but not as retirement plan option.

“In 2014 we revamped our delivery of the program, and required collaborative communication and ongoing communication. It’s very different from way we started the platform in the early days. The communication is key. We also service the plan participants. Our help center is able to assist the participants. Our goals in help center are to explain annuitization, to assist participants with purchasing as the need arises,” she told RIJ.

“We play a more active role today than organizations may remember us having. In the last five or six years, it’s become a more high touch program. There’s a lot of e-messaging. We have communications where they can use the income estimator right in the communication. Our approach focuses on partial annuitizations. If the plan sponsors don’t already allow partial annuitizations, we advocate for that. We also advocate for participants to keep the rest of their assets in the plan.”

Amid the current debate over the Department of Labor’s proposed fiduciary rule, which aims in part to shield participants from aggressive rollover marketing at the point of retirement, plan sponsors are sensitive about whom they let approach their participants about rollovers. In such a climate, the Hueler model appeals to them.

“We’re not a product manufacturer that might want to sell other products to the participant. It’s clear what our goal is,” Hueler told RIJ. “When we started this business, we structured the program so that it could fit any fiduciary process. We wanted to remove conflicts, ‘pay-to-play’ arrangements, and issuer selection objectives, and to provide level fees and full disclosure.

“If you keep the process opaque and you’re steering people to one product or another, you lose all credibility. We made strategic decisions early on that were unpopular at the time, and very different from the rest of the marketplace. All of that was self-imposed. But now the world around us has woken up to all of that. Those things are seen as the future.”

Here Come the Suits

Posted on April 2, 2024 by Kerry Pechter -

Participants in two different multi-billion-dollar defined benefit pension plans filed three separate federal class action lawsuits in mid-March, claiming that the corporate sponsors of their plans breached their “fiduciary duties” when they decided to sell the assets and liabilities of the plans to Athene Annuity and Life in so-called pension risk transfer (PRT) deals.

Two of the suits are filed against AT&T, former sponsor of an $8 billion pension, and its investment adviser, State Street Global Advisors. Lockheed Martin is the defendant in the third suit. Athene is not a defendant in the case, but plaintiffs in all three actions criticized the choice of Athene as the issuer of the giant annuities that replaced their DB plans.

Pensioners at AT&T and Lockheed are represented by Darby Law Group and by St. Louis-based Schlichter Bogard in two of the suits. Jerry Schlichter achieved both fame and notoriety for his suits against 401(k) plan sponsors a decade or so ago. His clients charged plan sponsors with choosing plan investment options with “excessive fees.” In the third suit, pensioners at AT&T are represented by four law firms.

Plaintiffs’ attorneys are doing what they always do—trying to catch deep-pocketed targets in an egregious legal blunder, while angling for as much as a third of the dollar-value of a potential settlement or judgment. But it’s not surprising that Athene, an affiliate of Apollo Global Management, has attracted such suits.

The suits claim that, by purchasing an annuity from Athene, AT&T and Lockheed violated the Department of Labor’s requirement (Under the DOL’s Interpretive Bulletin-95) to find the “safest annuity available.” The plaintiffs charge that an objective review of Athene would have shown that an Athene annuity didn’t meet that requirement.

Athene and Apollo pioneered what RIJ has called the “Bermuda Triangle” business strategy. The strategy varies, but often involves selling long-dated fixed indexed annuities, using some of the proceeds to finance high-yield “leveraged loans” to risky companies, and reducing surplus capital through the purchase of an unusual form of reinsurance from affiliated reinsurers. RIJ articles about the Bermuda Triangle strategy are referenced in the Schlichter Bogard lawsuits.

One of the suits against AT&T and SSgA alleges that “Athene lacks a sufficient track record to be entrusted with guaranteeing such a massive amount of pension liabilities” and because:

“Athene today is, compared to traditional providers, invested in riskier assets to support participants’ payments, Athene’s risk is increased by its reinsurance of annuities with offshore companies affiliated with Athene which are not as transparent or required to set aside as much capital as U.S.-based insurers; Athene employs questionable accounting strategies to overvalue its assets; and the risks inherent in Athene’s strategies are magnified by unstable economic conditions.”

It’s too soon to say whether the lawsuits might harm Athene, or affect the thriving pension risk transfer business, which allows corporations to offload their DB pensions and allows annuity companies to acquire large asset pools, but deprives pensioners of certain protections under the Employee Retirement Income Security Act of 1974 (ERISA).

The outcomes may depend on the mindsets of the federal judges who hear the cases in Massachusetts (AT&T) and Maryland (Lockheed), and whether they tend to believe that DB pensions are safer in the hands of life/annuity companies and NOHLGA (the association of state guaranty associations, which try to protect annuity owners’ savings in the event of insurer insolvency) or in the hands of the ERISA-regulated DB corporate sponsors and the federal Pension Benefit Guaranty Corporation.

A Potential Alternative to the Rollover IRA

Posted on April 2, 2024 by Mark Shemtob -

Many employers may hesitate to add retirement income options and applicable education to their 401(k) plans. This is especially true for smaller employers where cost, administration and liability are of great concern. Many retirement plan participants are therefore left to use rollover IRAs (Individual Retirement Accounts) to fund their retirement income streams..

Rollover IRAs may not be the best solution to this income challenge for many retirees. IRA products and investments often have higher expenses than employer-sponsored 401(k) plans do. The IRA advisor may not be an expert on retirement income strategies, may not be a fiduciary (as a 401(k) plan adviser would be), and may offer only limited distribution options.

Congress should create a new type of institutional entity that could help retirees while releasing many employers from the responsibilities of providing retirement income options and education to plan participants. Employers would continue to focus on helping employees accumulate a retirement nest egg without the income payout burden.

These proposed entities might be called Qualified Retirement Income Providers (QRIPs). Here are some questions about them, with my answers.

Q. Who could sponsor a QRIP?

A. Any organization, subject to regulations and an approval process through the Department of Labor (DOL), could sponsor a QRIP. The sponsor would have ongoing annual reporting and disclosure requirements.

Q. What would be required of a QRIP sponsor?

A. The QRIP would need to serve as a fiduciary consistent with the rules of ERISA. A QRIP must be able to offer both insured and investment-based institutional retirement income solutions. Fees for investors would be subject to limits and would be fully transparent. Inclusion of products or investments not institutionally-priced could cause the QRIP to be fined.

Q. Who could have their money held in a QRIP?

A. Any individual with an IRA (including prior employer plan rollovers) or a qualified retirement plan account balance with a prior employer.

Q. Would a QRIP add another layer of custodianship to a 401(k) or IRA?

A. No, a QRIP is a totally new and separate entity designed to provide retirement income. It would be another retirement income option for those not comfortable with options that their employer 401(k) plan or individual IRA make available.

Q. Could a QRIP accept direct employee contributions like an IRA or qualified plan?

A. No. QRIPs could only hold rollovers from IRAs or prior employer plans. The accumulation process would remain with the employer plan or IRA.

Q. How would funds be invested in a QRIP?

A. Amounts would be held in target date funds, balanced funds, or other options as permitted by the DOL. Retirees could elect to purchase an annuity with a portion of their accounts that provides some guaranteed lifetime income.

Q. What types of annuities would be permitted?

A. QRIPs should offer single premium immediate annuities as well as Qualifying Longevity Annuity Contracts. Annuities could be provided through an exchange like Hueler Income or directly from insurers as long as priced institutionally. Other options such as variable annuities or fixed index annuities would also be permitted if they include a guaranteed lifetime minimum benefit rider and satisfy regulations to be proposed by the DOL.

Q. How would amounts not used to purchase an insured annuity be paid out to the retiree?

A. A monthly amount would be paid based upon the retiree’s account balance, a hypothetical investment rate of return, and life expectancy. This will be recalculated annually. The retiree can elect to withdraw more or less than this calculated amount provided that the minimum required distribution rules are not violated commencing at age 73.

Q. What other services would the QRIP provide?

A. The QRIP would offer broad-based education on various retirement income strategies and products and implement the actual elections. Modeling tools could also be available. For an additional hourly fee, the retiree could use the services of a fiduciary advisor. The QRIP would be responsible for processing payments and tax withholding and reporting. The QRIP would assist individuals in initiating the transfer of funds to the QRIP.

Q. Would using a QRIP be required?

A. No, this would be voluntary on the part of the individual. Many retirees may prefer using their own IRA account. Others may be able to secure retirement income solutions directly from their employer plan.

Q. How would individuals learn about available QRIPs?

A. The Department of Labor would post them on its website with all relevant information regarding fees, investment options, retirement income alternatives, and other available services.

Q. How is a QRIP different from an IRA rollover?

A. A QRIP would be required to offer both insured and non-insured institutionally priced products and investments. The QRIP sponsor would be required to serve as an ERISA fiduciary and report to the DOL.

Q. Can one change his or her QRIP?

A. Yes. In addition, an individual could have more than one QRIP.

Q. Can a QRIP be set up today?

A. No. There is no provision in the law that would allow for this type of program. The closest thing would be a Pooled Employer Plan (PEP). Different from a PEP, a QRIP would be joined by individuals and not employers, would not allow new contributions (only rollovers), and would be subject to limitations on fees. Legislative action would be required to allow for QRIPs.

There are many reasons why retirees from employer-sponsored defined contribution plans shouldn’t expect their former employers for help with retirement income planning. In addition, a few individuals spend their entire career with one employer. Their retirement nest eggs are often scattered about.

Providing secure and cost-efficient retirement income is a challenging responsibility that many employers can’t handle well or don’t wish to spend resources on. QRIPs could specialize in providing retirement income and would be required to serve the best interest of the retirees.

Though workers would use QRIPs primarily during retirement, they could also use them during the accumulation years as tax-deferred vehicles for consolidating rollovers from prior employer plans or transfers from other IRAs. This might reduce “leakage” from tax-deferred savings vehicles and encourage portability of savings.

Life Insurers as LEGO Monsters

Posted on April 2, 2024 by Kerry Pechter -

Imagine a life insurer made of Lego blocks. Or imagine, in the future, a larger-than-life life insurer as a Lego King Kong, striding through Manhattan and dwarfing the golden pyramid of the New York Life Building and the gray monolith of MetLife.

Michael Gordon, the CEO of Axonic Insurance, a new project at Axonic Capital in Manhattan, has thought similar thoughts. He wants to mix-and-match insurance and investment functions in agile, novel, and efficient ways, and eventually to help other companies do the same.

Michael Gordon

“We’re decomposing the insurance industry into its parts,” Gordon told RIJ in a recent interview. We want to make Lego sets, and put pieces together.”

That the life insurance business became the annuity business, that insurance has long since become an investment business, and that former buyout firms have invaded the annuity business—these are well-known facts by now.

The exact nature of tomorrow’s life/annuity business model, we don’t know yet. But we’re finding out.

Axonic Capital, manager of $4.3 billion in assets, introduced Axonic Insurance earlier this year. The unit has been managing chunks of life insurer general account assets, but has higher ambitions. It hopes to become a one-stop shop (or platform) for an a-la-carte, or plug-and-play, or just-in-time insurance/investment business.

Eventually, Gordon hopes to accumulate and sell industry data and market intelligence to fixed annuity product designers, underwriters and distributors.

“Our primary focus is to design products and collect data about the way pricing decisions are made. To create new products today, it usually takes a year and a seven-figure commitment. It typically takes six or nine months to a year just to modify a product. We can remove time and expense from that process, so that you can spend more time on managing the assets and liabilities,” he told RIJ recently.

“We’re saying, ‘Here are all these skills you need to launch an annuity and life insurance business. You can either create the whole thing yourself. Or, if you have only one piece of the puzzle, we can provide the rest. Sometimes they understand investment management, but not liability pricing. Or they understand the math but don’t have the technology platform. In each case, we’ll be the investment manager for certain assets,” he added.

“The concept is to create a common platform where carriers can go through our wizard, and within certain parameters, experiment with different spreads and crediting rates. Carriers would be able to get feedback on how risky their annuity product designs might be and how they might sell before putting them in the market,” Gordon said. “We look at product experience as empirical experiments… and use the results for faster, real-time decision-making.”

Gordon spent 11 years at New York Life, the largest mutual. So it’s not surprising to hear him say, “We’re working on concepts similar to what you’d see in a mutual insurance company. Mutual companies can make products that I consider very resilient. Rather than take [more investment risk], a mutual lets its investment experience emerge. Then it shares its experience with its clients. If we get our pricing right, we can provide the insurance coverage at cost and give back to the policyholder in the former of dividends or longer rate guarantees.”

Axonic is entering a field pioneered by Scottsdale-based Annexus, which designs fixed indexed annuities in collaboration with annuity issuers and wholesalers. Acquired by Integrity Marketing Group in 2022, Annexus is partnering with Athene, Nationwide, State Street Global Advisors, Transamerica and Global Trust on a fixed indexed annuity with a guaranteed lifetime withdrawal benefit for 401(k) plans. [See story in today’s RIJ.]

“We do some of the same things that Annexus does,” Gordon acknowledges. “We focus on deciding what products will best fit certain distributors. The main difference between us and Annexus is that we do more of the administration. We’re very new, of course, and they’ve already had a lot of success.

“We’re not trying to do everything ourselves. We hired Prudential to do investment grade fixed income, Blackrock for municipal bonds. We use reinsurance for risks we don’t like. In the longer term, if you disaggregate the pieces, the individual could create their own bundle.”

Of course, there’s an international aspect to Axonic Insurance. “Our focus in the beginning is on launching the offshore annuity business, which means international sales of FIAs and MYGAs. International annuities are a big market, [there’s a lot of interested in] dollar denominated assets,” Gordon said.

“Then we’ll go domestic. Our software will come to market in the second quarter of 2024. By then we’ll be working with other institutions—existing life insurers or folks who want to be involved in this but aren’t yet. We bring all the pieces together and help them in deploying their particular product. We work with them on making the right decisions.”

MassMutual platform to distribute Aspida Life fixed-rate annuities

Posted on March 13, 2024 by Editorial Staff -

Aspida Life Insurance Co. said it has reached a deal with financial platform Flourish, a MassMutual subsidiary, to distribute deferred fixed-rate annuities through registered investment advisers using the platform, the company said.

The agreement will see life and annuity insurer Aspida partner with Flourish to distribute the Aspida Advisory Multi-Year
Guaranteed Annuity, Aspida said in a statement reported by A.M. Best. Flourish will offer the products through its Flourish Annuities platform designed to give registered investment advisers and clients improved efficiencies and reduced complexities in sales of the contracts.

Flourish is a wholly owned and independently operated subsidiary of the Massachusetts Mutual Life Insurance Co. that is used by more than 750 wealth management firms representing more than $1.5 trillion in assets under management, the statement said.

“We are excited to partner with Flourish and offer our annuities on their new digital platform, which expands access for RIAs,” Chad Burns, Aspida’s chief distribution officer, said in a statement. “Our Aspida Advisory MYGA supplies a secure, low-risk option to grow tax-deferred money for retirement and allows individuals to choose the timeline they prefer while ensuring direct access to their money when they need it.”

Aspida is backed by alternative investment manager Ares Management Corp. It focuses on fixed and fixed-indexed annuities and doesn’t offer life coverage. The MYGA product is a fixed-income solution providing growth free from market risk, Aspida said. It is a single-premium deferred product offering durations of two, three, five and seven years.

“The Flourish Annuities platform was created to alleviate the critical pain points that have prevented RIAs from including annuities in client portfolios,” Max Lane, chief executive officer of Flourish, said in a statement. “Flourish Annuities’ curated marketplace of fee-based annuities from carefully vetted carriers is a key part of bringing RIAs access to this growing asset class.”

Aspida Life, a recent entrant into the annuities market backed by alternative investment manager Ares Management Corp., said last year it sold $627 million worth of multiyear guarantee annuities in 2022 after selling none at all in the prior year (BestWire, Sept. 22, 2023).

Ben Koziol, vice president product/pricing at the company, said the genesis of the carrier was a desire on the part of Ares to move into the insurance realm after advising carriers on investments. Aspida Life Insurance Co. has a current Best’s Financial Strength Rating of A- (Excellent).

Reinsurance on NAIC agenda this week

Posted on March 12, 2024 by Editorial Staff -

At the Spring National Meeting of the National Association of Insurance Commissioners (NAIC) this week (March 14-15) in Phoenix, two actuaries are scheduled to make presentations related to the role of reinsurance as it pertains to what RIJ calls the Bermuda Triangle strategy.

The meeting will take place both in person and virtually. Here are links to the registration page and materials page.

Patricia Matson, chairperson of the Asset Adequacy and Reinsurance Issues Task Force of the American Academy of Actuaries, will give a presentation titled, “Asset Intensive Reinsurance Ceded Offshore from U.S. Life Insurers (with focus on Bermuda).” Fred Andersen, chief life actuary at the Minnesota Department of Commerce, will speak on “a Proposal to Require Asset Adequacy Analysis for Certain Reinsurance.”

Private ownership of life re/insurers may affect credit ratings, says Fitch

Private ownership could affect an insurance company’s credit rating; a focus on short term gains would be among the biggest risks, Fitch Ratings has warned.

In a commentary, Fitch said the credit impact of private ownership on an insurer hinges on the owner’s strategy, including influence on the insurer’s business plans, investments, capital management and dividends. Fitch issued the commentary in the wake of Zurich Insurance’s January decision to call off the sale of a book of life policies to German consolidator Viridium, majority-owned by a private equity firm.

But the issue has been in the spotlight for longer, with the International Monetary Fund’s flagging of the vulnerabilities of privately owned life insurers in its October 2023 Global Financial Stability Report, citing their exposure to illiquid investments, sometimes controlled by the private equity firms themselves.

The IMF particularly noted the growth of the life re/insurance sector in Bermuda, which now manages $1 trillion of assets or about 4% of the global pension market.

“Some private equity firms may prioritize short-term gains for shareholders over longer-term considerations for policyholders and debt holders,” Fitch said. “This may result in riskier business and investment strategies for the insurers they own, and aggressive extraction of capital, which is credit negative. In addition, financial disclosures tend to be less transparent due to the lack of public reporting requirements.”

Fitch said that in “developed markets,” regulatory oversight significantly limits the risks that are often associated with privately owned insurers. “In most cases, regulatory approval is required for a change of ownership or senior management, and privately owned insurers are subject to the same regulation as publicly owned insurers, including scrutiny of governance and risk management frameworks,” the ratings agency said.

But it added: “Private ownership is not, in itself, automatically credit negative for insurers. We assess each case on its own merits in accordance with our Insurance Rating Criteria. For ownership to potentially influence the insurer’s ratings, the owner has to exercise control, as is usually the case with 100% ownership or if there are very strong operational, governance or financial ties.

“Private ownership may be negative for the ratings if the owner has weaker credit quality than the insurer or is likely to govern in an adverse manner. Conversely, if the owner has stronger credit quality and is likely to be supportive, the ownership may be positive for the ratings.”

In assessing the credit implications of private ownership, we focus, in particular, on the owner’s influence on the insurer’s business plans, investment and capital management strategies, and policies for shareholder dividends and capital returns. For example, rapid growth through aggressive sales could increase reputational and regulatory risks, while underpricing to gain market share could lead to financial losses. A riskier investment strategy in pursuit of higher returns could also be credit negative. Capital management is among the most important considerations, given the prevalence of private equity firms focused on short-term gains for shareholders.”

Fitch said that when the Zurich-Viridium transaction was called off, Viridium cited its ownership structure as a factor in the decision. “Viridium is majority owned by Cinven, a UK private equity firm. Cinven also owned the Italian life insurer Eurovita, whose policies were transferred to a newly established entity owned by several other insurers following a capital shortfall and intervention by the Italian insurance regulator last year.”

AM Best this week downgraded the ratings of Bermuda-based life re/insurer 777 Re for a second time in six months, citing its holdings of illiquid investments, some of which were invested in holdings of its ultimate parent, 777 Partners.

F&G issues its first RILA

F&G Annuities & Life, Inc. (NYSE: FG), a leading provider of insurance solutions serving retail annuity and life customers and institutional clients, has launched its first registered index-linked annuity (RILA), F&G Confidence Builder. The product “addresses retirement challenges from volatility to inflation, seeking to find a balance between managing risk and long-term growth potential,” F&G said in a release.

RILAs are structured products that use the purchase of options, primarily on the movement of equity market indexes or balanced indexes, to deliver returns within certain upper and lower bounds. They are cousins to fixed index annuities, which are also structured products. RILAs differ from FIAs in important ways, however. FIAs do not permit market losses; it is possible to lose money on a RILA over a specific crediting period, but only down to a floor rate or net of a buffer rate.

FIAs yield returns up to a cap or with a certain participation rate; RILA caps and participation rates tend to be higher, since they offer less downside protection. While FIAs are fixed insurance products that can be sold by insurance agents, RILAs are registered securities that are sold only through brokerages.

Since Equitable introduced RILAs in 2010, the category has grown quickly. Total industry RILAs sales are forecasted by LIMRA to be at a record level between $44 to $48 billion in 2023. Allianz, Brighthouse, Equitable, Jackson National, Lincoln Financial Group, and Prudential are among the leading RILA issuers.
F&G’s Confidence Builder offers a proprietary “Hindsight 20/20 strategy.” The strategy simultaneously tracks three Bank of America balanced indexes: BofA MP Balanced Index, BofA MP Growth Index and BofA MP Defensive Index. At the end of each crediting period, Hindsight 20/20 credits applies the “best-of performance” among these three indexes, allowing customers to benefit from the best performing of these indices.

“The BofA MP Indices are inspired by model portfolio strategies and include equity exposure ranging from 40% to 75% to meet different risk tolerance levels as well as varying allocations to four familiar, commonly used assets,” said William Holligan, managing director and head of Structured Equity Derivatives Sales at BofA Securities.

The best-performing index may have negative performance, under-perform the general market, and/or be subject to a buffer, F&G disclosed in its product announcement. The Confidence Builder is available with a downside buffer but not a downside floor. Buffers offer protection from initial losses up to a certain pre-determined threshold, then you’re responsible for any additional losses. Hindsight 20/20 strategy is only available on 6-year segments.

AEL reports record FIA sales, high surrenders of FRAs

American Equity Investment Life Holding Company (NYSE: AEL) reported record full-year annuity sales of $7 billion for 2023, with sales of two fixed indexed annuities with guaranteed income riders, Income Shield and Eagle Select Income Focus, accounting for over 60% of premium deposits.

“Our in-house expertise in tactical asset allocation and asset manager selection positioned us to achieve a 26% allocation to private assets, company president and CEO, Anant Bhalla, said in a release. “We delivered a 23-basis point increase in yield compared to full year 2022 and 92 basis points of yield improvement compared to full year 2021.”

AEL reported a fourth quarter 2023 net loss of $(475.9) million, or $(6.04) per diluted common share compared to $21.7 million, or $0.25 per diluted common share for fourth quarter 2022. Full year 2023 net income was $166.9 million, or $2.06 per diluted common share compared to $1.9 billion, or $20.50 per diluted common for full year 2022.

Bhalla said, “Our agreement to merge with Brookfield Reinsurance was an important marker in our transformation of the American Equity business model, delivering both shareholder value creation from the AEL 2.0 strategy and validation of our capabilities in insurance liability origination asset management.” He added:

“In the latter, we have proven out the ability to both source robust returns on private assets and then restructure these investments to deliver a superior return on equity for the insurance balance sheet. This strategy has created a more than three-fold increase in value for American Equity shareholders based on the average volume-weighted stock price of $17.86 in March 2020 while also returning approximately $1.1 billion to shareholders over that period over the ten quarters from the fourth quarter of 2020 to the first quarter of 2023.”

Effective October 1, 2023, the company completed its second Vermont-domiciled redundant reserve financing facility. Backed by a new relationship with a leading international reinsurer, the new facility reinsured approximately $550 million of in-force statutory reserves for lifetime income benefit guarantees resulting from sales of both American Equity Life’s IncomeShield product and Eagles Life’s Eagle Select Income Focus product freeing up approximately $450 million, pre-tax, of capital at close. In addition, the financing facility allows future new business to automatically benefit from the financing of redundant reserves, thereby enabling the capital-efficient growth of our guaranteed retirement income products going forward.

Fourth quarter 2023 sales were $2.0 billion, substantially all of which were in fixed index annuities. Total enterprise FIA sales decreased 11% from the third quarter of 2023 but were up 153% compared to the fourth quarter of 2022. Despite the sequential quarterly decrease, the level of quarterly FIA sales was still the third highest in the company’s history.

Compared to the third quarter of 2023, FIA sales at American Equity Life in the Independent Marketing Organization (IMO) channel fell 10%, while Eagle Life FIA sales through banks and broker-dealers fell 14%. The decrease in FIA sales relative to the third quarter was driven by lower sales in the accumulation product space.

Bhalla said, “We continued to record strong FIA sales in the fourth quarter of 2023, despite lowering S&P 500 caps on our accumulation products late in the third quarter, in line with our product profitability targets in light of lower interest rates.

“We were particularly pleased that sales of income products, which we believe is the most attractive sector in the FIA marketplace, were up 4% from the third quarter on a total enterprise basis to nearly $1.5 billion.

“Income product sales are not as subject to churn as are accumulation products in a higher interest rate environment and have weighted average life duration characteristics that best match our at scale capabilities in originating and structuring private asset strategies.”

Global Atlantic closes $10bn block reinsurance deal with Manulife

Global Atlantic Financial Group, the insurance subsidiary of KKR, the global investment firm, has closed its expected reinsurance transaction with Manulife Financial Corporation (NYSE: MFC). General account assets under management supporting the transaction at closing are approximately $10 billion.

Under the terms of the transaction, signed and announced in December 2023, Global Atlantic will reinsure “a seasoned and diversified block” of Manulife’s life, annuity, and long-term care (LTC) insurance business originated in the US and Japan. It represents the third block transaction between the two firms and includes Global Atlantic’s first block reinsurance transaction in Japan.

Simultaneously, Global Atlantic retroceded 100% of the LTC insurance risks to a “highly rated third-party global reinsurance partner,” retaining only “the underlying spread-based risks on the subset of the block that involves the LTC business.”

Global Atlantic said it has now completed more than 40 transactions with nearly 30 clients and reinsured more than $140 billion of assets since inception. Global Atlantic was originally formed as the Goldman Sachs Reinsurance Group in 2004 and became a privately-held independent company in 2013. KKR acquired a majority state in the firm in 2021 and became 100% owner in 2024.

MetLife to offer income annuities on Fidelity’s platform

Posted on March 4, 2024 by Editorial Staff -

MetLife is working with Fidelity Investments to offer the MetLife Guaranteed Income Program, a fixed immediate income annuity, through Fidelity’s new retirement income solution, Guaranteed Income Direct, according to a news release. The program relies on Micruity data-sharing technology.

MetLife said its research indicates “growing interest in these fixed immediate income annuities products among plan participants and an increasing number of plan sponsors taking actions to implement them” as a result of the passage of the SECURE Act in 2019. The Act helped ease plan sponsor concerns about potential liability for the failure of the annuity provider they chose.

The MetLife solution enables participants at all savings levels to purchase an immediate income annuity through an insurer selected by their employer and annuitize any portion of their savings, the release said. Assets not used to purchase the annuity remain invested in the plan.

Retirees who choose to receive their savings as a lump sum rather than annuitize can face significant risk of depleting their money too quickly and having no guaranteed income other than Social Security, MetLife said. A MetLife survey found that among retirees who took a lump sum from their DC plan, 34% depleted the lump sum in 5 years, on average.

Micruity is a data infrastructure company on a mission to improve retirement income security. The Micruity Advanced Routing System (MARS) facilitates frictionless data sharing between insurers, asset managers, recordkeepers, and connected stakeholders through a single point of service that lowers the administrative burden and enhances the user experience of retirement income products, enabling plan sponsors to turn retirement savings plans into retirement income plans at scale.

Meet the Newest Platform in the 401(k) Annuity Space

Posted on March 4, 2024 by Kerry Pechter -

The co-founders of ALEXIncome, Ramsey Smith and E. Graham Clark, believe they’ve “built the best process for integrating annuities into retirement accounts.” Their philosophy is similar to the TIAA/Nuveen Secure Income Account (SIA), which combines a group deferred income annuity with a Nuveen target date fund.

As an application of the now-familiar internet platform model, ALEXIncome will try to serve would-be players in the rapidly expanding 401(k) annuity space—like target date fund (TDF) providers and annuity issuers—by connecting them with partners, capabilities, or data that will help them get started.

Ramsey Smith

“We’re a product design firm,” Clark said in a phone interview. “We can work with an asset manager, carrier, or recordkeeper to design an annuity that fits into their target date structure and hook up all the other components.”

In an email, Smith added, “We call our product a ‘flexible premium deferred annuity. We chose the structure for its simplicity and scalability, in the face of a retirement income opportunity that will eventually test the capacity of the life insurance industry.”

ALEXIncome embeds a deferred group annuity into a TDF. Since TDFs can be “qualified default investment alternatives,” 401(k) plan participants who neglect to choose their own investments can be automatically assigned to invest in them. ALEXIncome would modify TDFs to allocate participants’ contributions from bond funds to the deferred annuity, starting as early as age 40. Individual group annuity accounts would be marked to book value, not market value.

As they do at TIAA, ALEXIncome’s group annuity accounts could grow faster than bond funds because they’d be less liquid—but still liquid enough to satisfy 401(k) requirements. At retirement, participants could apply the account value to the purchase of an immediate income annuity or perhaps (as a future ALEXIncome product extension) a Qualified Longevity Annuity Contract, which postpones the payout of monthly income until age 80 or so.

Over time, “we entirely replace the fixed income allocation with the annuity allocation, and we never sell the annuity [during the accumulation period]. The crediting rate resets every year. If you do it our way, and you start it early, this method will generally outperform bond-based and other guaranteed income-drive TDF strategies,” Clark told RIJ.

E. Graham Clark

“Our defining intuitions were,” he said, “that contributions to the group annuity inside the TDF should start earlier in the participant’s career and that the deferred group annuity would always be priced at book value. That’s what drives performance. That’s the secret sauce. Ideally, we would have allocated part of participants’ balances to traditional deferred income annuities [and lock-in chunks of future income prior to retirement], but that’s not eligible in an ERISA plan. So we did the next best thing.

“If the 401(k) plan sponsor decides to replace the annuity contract or the insurance carrier, the carrier will pay the assets back to the plan over six years at book value or pay the assets to the plan immediately with a market value adjustment. This protects the carrier from the risk of losing the entire liability at once and allows it to invest in a longer duration and hopefully a better crediting rate for participants.

“We believe that TIAA’s experience is that their annuity account in 403(b) have a low and stable annual surrender rate. We also have access to historical data about how many people will move in and out, because plans had already had that experience with their existing QDIA investment. We can pay participants a lump sum or partial lump sum at retirement,” Clark said.

ALEXIncome echoes the design of “SponsorMatch.” In 2007, MetLife and Barclays Global Investors proposed a plan where the participant’s own salary-deferral would go into a traditional 401(k) account while the sponsor’s matching contribution would go into a group annuity—leading to an optional income annuity at retirement. That program vanished in the Great Financial Crisis.

Kevin Hanney

Kevin Hanney, an independent pension trustee, told RIJ, “ALEXIncome is similar to what we were looking at when I left RTX. There’s a floor on the market value and guaranteed accrual. We arrived at similar conclusions: That participants must start contributing to the group annuity early and that, by reducing the variability of your performance, you improve your long term return.

“The tortoise and the hare is a pretty good analogy. A slow and steady pace can improve your compounded annual return by 50 to 100 basis points, even in less volatile conditions.” Hanney was in charge of pension investments at United Technologies (now RTX, since its 2020 merger with Raytheon) when it switched its retirement benefit from a defined benefit plan to a variable annuity with a guaranteed lifetime withdrawal benefit, underwritten by three life insurers.

The co-founders of ALEXIncome also have large-company experience. Clark and Smith each spent years with big Wall Street firms. Smith was a managing director at Goldman Sachs for more than 20 years. In 2018, he started Alexfyi, a digital insurance agency specializing in the distribution of fixed-rate annuities, including the Nassau Simple Annuity. (Alexfyi was named in honor of Alexander Hamilton.)

Alexfyi collaborated with Nassau Financial on the development of “That Annuity Show,” which has run for more than 200 episodes. Clark, an insurance solutions specialist, was a managing director at BNP Paribas, Merrill Lynch and Citigroup. A self-described “derivatives geek,” Clark is also a cigar aficionado and a model railroad hobbyist. Both men sport Ivy MBAs: Smith from Harvard and Clark from Cornell.

As for ALEXIncome’s own business model, “we offer ourselves as a consultant to help asset managers, insurers and recordkeepers get into the 401(k) business. Today we get a monthly retainer or a project fee. Our flexible deferred annuity is a spread product, with no fees, and the carrier can pay all of the component providers out of its spread because of the lower administration cost of the product,” Clark said.

Today, ALEXIncome’s primary customers are carriers. If Smith and Clark partner with a specific life/annuity company on a bundled solution, plan sponsors would become its customers as well. “If we do the ‘build’ all the way through—that is, if we partner with a carrier and bring in the other service providers—part of our contract would include some basis points on AUM for us. But that’s down the road,” Clark told RIJ.

Two retirement experts launch a planning start-up

Posted on March 4, 2024 by Kerry Pechter -

Two retirement industry thought-leaders, Michael Finke and Tamiko Toland, have launched IncomePath, a goals-based retirement income planning tool that financial professionals can use to help their clients better visualize the income challenge and test alternative strategies.

“By clarifying how investment volatility and an unknown lifespan impact spending, IncomePath allows a client to select the right combination of investment risk, portfolio withdrawals, and annuity income,” Finke and Toland said in a release.

IncomePath (www.incomepath.com ) is expected to be available for individual financial professionals in early 2024. Finke and Toland introduce the methodology behind the IncomePath In a new white paper . (See excerpt below.)

From “Freedom to Spend,” by Michael Finke and Tamiko Toland.

Finke

“Most planning software focuses on failure,” said Finke in the release. Finke is IncomePath’s co-founder and chief strategist. He was a former chief academic officer and current professor at The American College of Financial Services.

“But failure isn’t a realistic way to plan since it ignores our ability to adjust spending in response to uncertainty. What people really need is a better way to understand the choices they can make to build an income that fits the way they want to live,” he wrote.

IncomePath’s visualizations help an individual see how “good” or “bad luck,” and the use of financial products that transfer risk could shape their retirement.

Toland

“We want to help consumers to make a personal decision about how much lifetime income they want— if any—through a simple planning experience,” said Toland in the release.

Tamiko Toland is IncomePath’s CEO. Self-described as the “annuity Yoda,” she advises clients on retirement income through her consulting firm and has held leadership positions at TIAA, Strategic Insight, and Cannex Financial Exchanges.

Data Connection

Posted on March 4, 2024 by No Author -

This Year’s Legal Battles

Posted on March 4, 2024 by Kerry Pechter -

The life/annuity industry entered 2024 with unresolved issues: the enduring conflict over the Department of Labor’s latest “fiduciary rule,” the harder-than-it-looks insertion of annuities into 401(k) plans, and the problematic capital-reduction strategy that I’ve called the Bermuda Triangle.

These stubborn issues all involve deferred fixed index annuities, or FIAs. They also stem from the patchwork regulation of financial products in the US, our out-of-date pension laws, and the specious treatment of all annuities as a single type of product. Let’s consider them.

The new DOL fiduciary rule

The outcome of the fight—or rather, re-match—over the fiduciary rule will determine whether insurance agents are free to encourage older investors to buy fixed indexed annuities with the tax-deferred savings in their rollover IRAs, and to earn substantial commissions on the sales.

During the Obama and Biden administrations, the DOL has viewed the consumer value of FIAs with skepticism. It has tried to make insurance agents who sell FIAs to IRA owners as accountable to clients as sellers of mutual funds to 401(k) plan participants are. Prohibitively so.

It’s an odd situation. Pension law clearly lets the DOL regulate 401(k) plans. But the Employee Retirement Income Security Act of 1974 (ERISA) predates IRAs, and isn’t clear on whether the DOL has any authority over savings in IRAs (most of which was rolled over from 401(k) plans). In 2018, the US Court of Appeals, Fifth Circuit, said the DOL doesn’t. But that 2-1 split decision is open to question.

I once assumed that, since rollover IRAs contain tax-deferred money, that the DOL’s ERISA duties should extend to those accounts. (The DOL seems indifferent to sales of FIAs for after-tax savings.) But state insurance commissions regulate insurance agents and tax-deferred insurance products. So they can arguably claim IRAs as their turf.

In states where large insurance companies are domiciled, state insurance commissioners are protective of their income-generating jurisdiction over them, which the McCarran-Ferguson Act granted in 1945. Many life/annuity companies rely on state-regulated insurance agents to sell FIAs to the $12.6 trillion IRA market. There’s a lot at stake.

Annuities in 401(k) plans

The introduction of annuities into 401(k) plans faces no apparent legal hurdles at the moment. But some people see them looming on the horizon. While Congress smoothed the path for annuities in 401(k) with the SECURE Acts of 2019 and 2022, legislators left plan sponsors to sort through the diverse set of products called “annuities.”

Congress seemed not to recognize the crucial differences among annuities. Two annuities might have different underlying investments, distributors, regulations and levels of transparency. Different annuity issuers have different business models, sell different kinds of annuities, levy implicit or explicit fees, and have different relationships with their policyholders.

Some products will, in hindsight if not at first, reveal themselves to be more legally problematic than others. Plan sponsors who have a fiduciary duty to select the best possible annuity for their participants may not understand the products well enough to compare and contrast them.

Not all annuities may be equally fiduciary, or equally defensible in a lawsuit over breach of fiduciary duty. Financial strength ratings, as awarded by NRSROs (nationally recognized statistical rating organizations), may not be sufficient grounds for a choice.

A fixed indexed annuity with a volatility-controlled index and a lifetime withdrawal guarantee, embedded in an auto-enrolled target date fund and assessing insurance fees prior to retirement, for instance, is impossible to compare to a single premium fixed immediate income annuity that participants must actively choose to buy at retirement.

No law compels plan sponsors to bring an annuity or annuities into their plans. Annuities are sold, not bought, and issuers will bear the burden of proving that their product is not only the best of its breed, but also better than other annuity breeds. The SECURE Acts notwithstanding, plaintiffs’ attorneys will be waiting for a big plan sponsor to blunder.

The “Bermuda Triangle”

The Bermuda Triangle strategy spills across state, national and international jurisdictions. The strategy is typically led by an asset manager that designs leveraged loans (“private credit”). The asset manager coordinates the activities of an affiliated US-based seller of deferred fixed annuities and of an affiliated reinsurer, often domiciled in Bermuda.

This three-way strategy uses the sale of annuities as a way to source long-term funds, in part for the purpose of reaching for higher yields through the extension of riskier loans than a traditional life insurer might make. Reserving for the annuity liabilities can be cheaper in Bermuda, where reinsurers operate under a less stringent accounting regime.

Over the past decade, there’s been almost a gold rush among affiliated asset managers, annuity issuers and reinsurers to use the strategy to make certain annuity products less capital-intensive and more profitable. (Bermuda Triangle reinsurance is not to be confused with “captive reinsurance,” where a company reinsures itself, or with unaffiliated reinsurance, where an annuity issuer buys reinsurance from an unrelated, independently-capitalized third-party reinsurer, or with the sale of blocks of annuity assets and liabilities to third-party insurers.)

Here too, the deferred FIA plays an important role. With its contract lengths of up to 10 years, the FIA provides insurers with liabilities that have durations of up to 10 years. Those long durations match up well with the long durations of the high-yield leveraged loans in which the Bermuda Triangle’s private credit experts specialize. Deferred fixed-rate annuities can also serve as fuel for the strategy, but the contracts have much shorter durations than FIAs and they are more vulnerable than FIAs to an environment of declining interest rates.

The prudence and legality of the Bermuda Triangle strategy have been questioned. Life/annuity companies aren’t supposed to buy reinsurance from sister companies purely for the purpose of reducing the amount of surplus capital they hold. The Senate Banking Committee, the Treasury’s Federal Insurance Office (Dodd-Frank’s toothless invention), the International Monetary Fund and others have shown concern that the Bermuda Triangle strategy could raise the fragility in the financial system. The use of loans to high-risk companies and of CLOs (collateralized loan obligations) in the strategy, for instance, reminds some of the use of sub-prime mortgages and CDOs (collateralized debt obligations) before the 2008 financial crisis.

The NAIC and insurance commissioners have pushed back, however. They say they’ve monitored the strategy for about a decade and have it under control. To me, it appears that the asset managers have exploited cracks, loopholes and discontinuities in regulatory regimes to turn insurance into a servant of the investment business, while simultaneously benefiting from the tax advantages of insurance, the thin resources of state insurance regulators, and opportunities for regulatory arbitrage offshore. Stay tuned.

After record sales year for annuities, LIMRA predicts strong 2024

Posted on March 4, 2024 by Editorial Staff -

Sales of fixed rate deferred (FRD) annuities will likely exceed $100 billion in 2024 and 2025, according to LIMRA. Analysts at the marketing and research arm of the life/annuity industry expect FRD sales to be well below 2023’s record but double 2021’s sales.

Even though equity volatility has calmed down, the inflation rate is still above 3%. So the Federal Reserve isn’t likely to rush into rate cuts this year, LIMRA believes. The Fed’s caution on rates should continue to support sales of FRD annuities over the next few years.

Renewals should be strong. Most of the FRD products (88%) sold over the past few years were 3-year and 5-year contracts. Many contracts will leave their surrender periods in 2024 and 2025. LIMRA predicts that many of these contracts will be renewed or rolled over into another FRD product and that FRD sales will continue to be much higher than pre-2022.

In January of this year, LIMRA announced preliminary fixed-rate deferred (FRD) annuity sales of $58.5 billion for the fourth quarter of 2023. That was 52% higher than fourth quarter 2022 sales and 10% higher than all FRD annuity sales in 2021. For all of 2023, FRD annuity sales totaled $164.9 billion, up 46% from the record set in 2022, and more than triple the 2021 sales ($53.1 billion).

All annuity sales in 2023

Propelled by $286.6 billion in fixed annuity sales, total U.S. annuity sales reached a record-high $385.4 billion in 2023, jumping 23% year over year, according to final results from LIMRA’s U.S. Individual Annuity Sales Survey.

“For the second consecutive year, annuity sales have surpassed previously held records, largely due to broader engagement with independent distribution. Rising interest rates have made annuities very attractive to a larger group of investors who are served by independent advisors and broker dealers,” said Bryan Hodgens, head of LIMRA research. “LIMRA data shows independent agents’ and broker-dealers’ sales collectively grew 70% from 2022 and represented 41% of 2023 sales.”

In the fourth quarter, total annuity sales were $115.7 billion, a 29% increase from the fourth quarter of 2022 and 23% higher than the record set in first quarter 2023.

Fixed-Rate Deferred

Total fixed-rate deferred annuity sales were $58.5 billion in the fourth quarter, 52% higher than fourth quarter 2022 sales. This is the best sales quarter for fixed-rate deferred annuities ever documented. In 2023, fixed-rate deferred annuities totaled $164.9 billion, up 46% from the 2022 annual high of $113 billion.

“In addition to favorable interest rates, demographics have also played a role in the surge of fixed-rate deferred sales,” said Hodgens. “The number of Americans over age 60 continues to grow and many more of them will be relying on Social Security and their savings to fund their retirement. Given the economy of the past few years, it isn’t surprising that more are buying a product offering investment protection and guaranteed growth at a higher rate than money market accounts and CDs.”

Fixed Indexed Annuities

Fixed indexed annuity (FIA) sales also had a record year. In 2023, FIA sales totaled $95.9 billion, up 20% from the prior year. In the fourth quarter, FIA sales were $24.9 billion, a 12% increase from fourth quarter 2022.

“FIA sales by independent agents and independent broker dealers increased 29% year over year and represented more than 74% of the total FIA sales,” noted Hodgens. “We continue to see a shift to independent distribution. Rising interest rates helped increase demand for clients looking to protect their principal investment from equity market volatility while benefiting from higher crediting rates.”

Income Annuities

Higher interest rates also lifted income annuity product sales. Single premium immediate annuity (SPIA) sales were $3.6 billion in the fourth quarter, 13% higher than the prior year’s results. In 2023, SPIA sales jumped 45% to $13.3 billion, setting a new annual sales record.

Deferred income annuity (DIA) sales were $1.3 billion in the fourth quarter, increasing 32% from sales in the fourth quarter 2022. For the year, DIA sales nearly doubled (up 97%) to $4.2 billion.

Registered Index-Linked Annuities

Registered index-linked annuity (RILA) sales were $13 billion in the fourth quarter, up 29% from the fourth quarter 2022. This marks the first time RILA product sales have surpassed traditional variable annuity sales. Total RILA sales reached $47.4 billion in 2023, 15% higher than prior year and a new all-time high for the product line’s sales.

Traditional Variable Annuities

Despite the strong equity market growth in 2023, traditional variable annuity (VA) sales fell for the quarter and the year. Fourth quarter traditional VA sales fell 3% year over year to $12.3 billion and total 2023 sales dropped 17% to $51.4 billion.

For more details on the sales results, go to Fourth Quarter 2023 Annuities Industry Estimates in LIMRA’s Fact Tank.

To view the top 20 rankings of total, variable and fixed annuity writers in 2023, see 2023 Top 20 Annuity Rankings.
To view the top 20 rankings of traditional VA and RILA sales leaders in 2023, visit 2023 Variable Annuity Breakout Rankings.
For the top 20 rankings of fixed-rate deferred, fixed indexed and payout annuity writers in 2023, visit 2023 Fixed Annuity Breakout Rankings.

Third quarter 2023 annuity industry estimates are based on LIMRA’s quarterly annuity sales survey, which represents 88% of the total market.

Tailwinds for FRD annuities

While certificates of deposit (CDs) and FRDs offer similar benefits—relatively short-term commitment, principal protection and a guaranteed rate of return—CD rates haven’t kept pace with FRD rates. The average crediting rate for a 3-year FRD annuity product has routinely outperformed the average 3-year CD rates, often at least doubling the return, research shows.

FRD annuity issuers can offer better rates because their underlying investments are more diverse. Banks, the primary seller of CDs, make money on loans (commercial loans, mortgages, and personal loans), where the margins are much smaller. Life/annuity companies invest in corporate and government bonds, stocks, mortgages, real estate and policy loans. These investments are often longer-term than bank loans and therefore can offer higher returns.

More than four million Americans turned 65 in 2023, according to the Retirement Income Institute. That trend will continue through 2029. The Organization for Economic Co-operation and Development says that the number of Americans ages 60–64 has doubled to over 21 million since 2000. The average age of a fixed rate deferred (FRD) annuity buyer is 62, LIMRA research shows.

A recent LIMRA study showed that, among those who said they would choose an FRD product in 2023, their top three motives were safety (66%), a preference for protection over gains (54%), and desire not to experience investment loss (47%).

NAIC Urged to Limit ‘Bermuda Triangle’ Strategy

Posted on February 12, 2024 by Kerry Pechter -

Concerned that some life/annuity companies may hurt their policyholders’ interests by using offshore reinsurance to reduce the capital backing annuity- and life insurance-liabilities, two regulators have urged the National Association of Insurance Commissioners (NAIC) to tighten its rules on the practice.

The NAIC’s Life Actuarial Task Force, which oversees such issues, will meet February 15. In RIJ‘s reporting, we have described this form of regulatory arbitrage as the “Bermuda Triangle” strategy. It is typically coordinated by triads of affiliated US annuity issuers, “alternative” asset managers, and offshore reinsurers,

In their February 5 letter to the Life Actuarial Task Force, David Wolf, New Jersey’s acting assistant commissioner, Office of Solvency Regulation, and Kevin Clark, Iowa’s chief accounting and reinsurance specialist, wrote:

State insurance regulators in various forums have discussed and identified the need to better understand what assets, reserves and capital are supporting long duration insurance business that relies heavily on asset returns (“asset-intensive business”).

In particular, there is risk that domestic life insurers may enter into reinsurance transactions that materially lower the total asset requirement (the sum of reserves and required capital) in support of their asset-intensive business, and thereby facilitate releases of capital that prejudice the interests of their policyholders.

The purpose of this letter is to propose enhancements to reserve adequacy requirements for life insurance companies by requiring that asset adequacy analysis (AAA) use a cash flow testing methodology that evaluates ceded reinsurance as an integral component of asset-intensive business. The asset adequacy analysis requires reserves to be held at a level that meets moderately adverse conditions, or approximately one standard deviation beyond expected results.

When a reinsurance transaction lowers the ceding insurer’s reserves, the new reserves established by the reinsurer could be materially less than what would be needed to meet policyholder obligations under moderately adverse conditions in addition to providing an appropriate level of capital.

May 30, 2023, Moody’s Investors Service.

“The ability of insurers to significantly lower the total asset requirement for long-duration blocks of business that rely heavily on asset returns appears to be one of the drivers of the significant increase in reinsurance transactions,” Wolf and Clark wrote, adding:

The ceding company’s Appointed Actuary might not recognize this insufficiency for the following reasons:

Some Appointed Actuaries believe that the requirements of AAA for reinsured business only require evaluation of the counterparty risk. So, if the counterparty is financially strong, no testing is done to assess whether the invested assets supporting the reserves are sufficient under moderately adverse conditions.

Some Appointed Actuaries may combine the reinsured business with other direct written business, so that the inadequacy in the reinsured business (and the associated shortfalls in the reinsurer’s assets supporting that business) are offset by margins in the cedant’s other lines of business.

Some Appointed Actuaries may not be able to obtain sufficient information from their reinsurers in order to do AAA, and therefore place reliance on the reinsurer to do so.

The letter continued:

Regulators are concerned that the level of policyholder protection may be declining for the reasons outlined above. Therefore, this proposal intends to ensure that the AAA safeguard continues to apply within the domestic cedent for all business for which it remains directly liable to pay policyholder claims.

This will ensure that the assets supporting reserves continue to be held based on moderately adverse conditions, whether those assets are held by the direct insurer or a reinsurer. Specifically, we recommend the following requirements for all reinsurance transactions, including but not limited to long-duration business that is subject to material market or credit risks or is subject to material cash flow volatility.

AAA must be performed using a cash flow testing methodology.

AAA must be performed at the line of business and treaty level (so within each individual treaty,

AAA must be performed standalone for life insurance, annuities, long duration health insurance, etc.).

These requirements could be incorporated into VM-30 via an Amendment Proposal Form (APF) or as an Actuarial Guideline.

These requirements will allow for reserve levels, and associated supporting assets, that will be sufficient under moderately adverse conditions consistent with the minimum reserve requirements. This approach would also still allow companies to enter into reinsurance arrangements with reinsurers subject to various formulaic, economic or principles-based reserving standards, and would still allow for application of judgement by the Appointed Actuary in determining the methods and assumptions underlying the cash flow testing analysis.

In order to conform with these requirements, consideration should also be given to updating the Life and Health Reinsurance Agreements Model Regulation (#791) and SSAP No. 61R—Life, Deposit-Type and Accident and Health Reinsurance in the Accounting Practices and Procedures Manual to require reinsurance treaties to include the necessary information for the cedent to perform cash flow testing.

Several steps remain to be taken and hurdles cleared before any rule changes are enacted. Clark and Wolf noted that “To move forward with the requirements proposed above, we recommend LATF consider drafting an Amendment Proposal Form for changes to VM-30. The APF could then be referred to the Reinsurance Task Force for consideration and support. Additional referrals may be necessary and/or desired to be made to the Statutory Accounting Principles Work Group, the Macroprudential Working Group and the Financial Stability Task Force.”

Annuity Sales Reach Record Highs, Again

Posted on February 6, 2024 by Editorial Staff -

For the second consecutive year, U.S. annuity sales set an all-time record high, according to preliminary results from LIMRA’s U.S. Individual Annuity Sales Survey, representing 83% of the total U.S. annuity market. Powered by unprecedented fixed annuity sales, total annuity sales were $385 billion in 2023, 23% higher than the record set in 2022.

“Economic conditions and growing demand for protected investment growth propelled fixed annuity sales to a remarkable $286.2 billion, a 36% jump from the record sales set in 2022,” said Bryan Hodgens, head of LIMRA research, in a release. “To put this into perspective, prior to 2022, total annuity sales never reached this level. Despite equity markets climbing more than 20% in 2023, investors worried about a downturn. This sentiment, combined with strong interest rates, prompted investors to lock in crediting and payout rates offered in fixed annuity products.”

In the fourth quarter, U.S. annuity sales set a new record. Total annuity sales were $115.3 billion in the fourth quarter, a 29% increase from the fourth quarter of 2022 and 23% higher than the record set in first quarter 2023.

Fixed-Rate Deferred

Fixed Indexed Annuities

Fixed indexed annuity (FIA) sales also had a record year. In 2023, FIA sales totaled $95.6 billion, up 20% from the prior year. In the fourth quarter, FIA sales were $24.6 billion, a 10% increase from fourth quarter 2022.

“Insurers were able to offer very competitive crediting rates while protecting the principal investment from equity market volatility, making FIA products more attractive to investors in 2023,” noted Hodgens. “With interest rates expected to pull back in 2024, LIMRA is predicting a slight decline for FIA sales in 2024, but product sales will remain historically strong and are forecasted to reach nearly $100 billion in 2025.”

Income Annuities

Similarly, income annuity product sales had a spectacular year due to rising interest rates. Single premium immediate annuity (SPIA) sales were $3.5 billion in the fourth quarter, 9% higher than the prior year’s results. In 2023, SPIA sales jumped 43% to $13.2 billion, setting a new annual sales record.

Deferred income annuity (DIA) sales were $1.3 billion in the fourth quarter, increasing 81% from sales in the fourth quarter 2022. For the year, DIA sales nearly doubled (up 96%) to $4.1 billion.

Registered Index-Linked Annuities

Registered index-linked annuity (RILA) sales were $13 billion in the fourth quarter, up 29% from the fourth quarter 2022. This is the first time RILA product sales have surpassed traditional variable annuity sales. Total RILA sales reached $47.4 billion in 2023, 15% higher than prior year and a new all-time high for the product line’s sales.

Traditional Variable Annuities

Despite the strong equity market growth in 2023, traditional variable annuity (VA) sales set a different kind of record, marking the lowest sales ever recorded for the quarter and the year. Fourth quarter traditional VA sales fell 3% year-over-year to $12.3 billion and total 2023 sales dropped 17% to $51.4 billion.

“The introduction of RILAs in recent years and expansion of FIAs have offered investors options to buy a product that provides upside investment potential with limited to no downside risk — a value proposition increasingly attractive to today’s investor,” said Hodgens. “That said, LIMRA predicts the continued equity market growth over the next two years will propel traditional VA sales to grow as much as 10% in 2024 from current levels.”

Preliminary fourth quarter 2023 annuity industry estimates are based on monthly reporting. A summary of the results can be found in LIMRA’s Fact Tank.

The top 20 rankings of total, variable and fixed annuity writers for 2023 will be available in early March, following the last of the earnings calls for the participating carriers.

Fidelity’s Plan Sponsors Can Now Offer Annuities

Posted on February 6, 2024 by Kerry Pechter -

Fidelity Investments, which provides qualified retirement plans to some 24,000 U.S. businesses, is making it possible for plan sponsors to offer group annuity contracts to participants in those plans, according to a January 25 Fidelity announcement. The new program is called Guaranteed Income Direct.

After Fidelity’s announcement, Prudential announced its SimplyIncome program, which will offer single-premium immediate annuities (SPIAs) within Fidelity’s employer-based savings plans.

A Fidelity release said, “Guaranteed Income Direct allows employees to set up pension-like payments by purchasing an immediate income annuity through an insurer selected by an employer. The solution offers access to lifetime income for employees at all savings levels, with the flexibility to convert all or a portion of one’s retirement plan savings – regardless of where their money is saved – into monthly income based on their personal needs. In addition, savings not converted can remain in the workplace savings plan.”

Income products issued by MetLife, Pacific Life, Prudential Financial and Western & Southern Financial Group are available on the Fidelity platform, with additional insurers to be added in the future, Fidelity said in its release. Employers can choose insurers to include in their Guaranteed Income Direct benefit.

Fidelity has long offered annuities on its website for retail investors. It currently offers fixed immediate income annuities from The Guardian, MassMutual, New York Life, USAA, and Western & Southern.

The retail site also offers deferred income annuities, deferred variable annuities and deferred fixed rate annuities, including a Fidelity deferred variable annuity, two New York Life deferred (fixed and variable) annuities with flexible income benefits (guaranteed lifetime withdrawal benefits, or GLWBs), and deferred variable annuities with GLWBs from Nationwide and Pacific Life.

Toronto-based middleware provider Micruity, Inc., created a web-based hub for connecting plan participants and annuity providers. Micruity was the subject of a 2020 article in Retirement Income Journal.

RIJ sent five questions to Fidelity about the new service and received these answers:

RIJ: Why will employers choose which annuities to make available to their participants?

Fidelity: We have found that employers understand the needs of their employees the best and therefore determine the best plan options for them. The insurers for Guaranteed Income Direct are leading insurers who offered a group annuity structure for an immediate fixed income annuity. The Guaranteed Income Direct platform also allows for flexibility and choice, so plan sponsors can select up to five insurers which gives the participant optionality when selecting which insurer they want to purchase from. As a result of the SECURE Act, it is now easier for plan sponsors to offer annuities to their participants, as [SECURE] includes a safe harbor intended to clarify plan sponsor requirements for evaluating the annuity providers.

RIJ: Will participants get better-than-retail prices when buying annuities through Fidelity?

Fidelity: Through the insurer selection process, each insurer considered will underwrite annuity rates for the plan based on unisex tables per regulations. Our goal is to create an offering that has competitive rates but these will vary from insurer to insurer and employer to employer, based on a number of factors. The goal in offering an annuity option through a workplace retirement savings plan is to provide the consumer with a range of options when it comes to financing retirement, as there is no one-size-fits-all approach to retirement.

RIJ: Is this an “in-plan” purchase, or will it be executed through a rollover to a Fidelity IRA?

Fidelity: With Guaranteed Income Direct, participants can a purchase a guaranteed income annuity directly through a plan benefit from their workplace retirement plan. Guaranteed Income Direct allows the employee to access assets from their 401(k), 403(b) or 457(b) plans to make a purchase directly with the third-party insurer selected by their employer. The assets do leave the plan and go to the insurer for purchase, with monthly cash flow views available on NetBenefits [a web portal for Fidelity plan participants]. The assets not used to purchase an annuity will remain in the plan. This process benefits the participant by avoiding any possible portability issues.

RIJ: Will a Fidelity insurance-licensed adviser will guide participants through all this?

Fidelity: We provide both a digital experience and, when needed, access to licensed representatives for support and guidance in navigating the retirement planning process and how guaranteed income may play a role for their income needs.

RIJ: Does Micruity give employer-sponsors the flexibility to switch annuity providers if they wish?

Fidelity: Our platform was built to allow for flexibility and choice. At any point, a plan sponsor has the ability to elect to change insurers, based on the needs of their participants. We have started this offering with four insurers but the plan sponsor can also work with any other insurer as long as they offer a group annuity contract. Micruity is a middleware provider that assists with the digital experience of the platform.

‘Sticking to the Plan’ While Taking Income

Posted on February 5, 2024 by Kerry Pechter -

Shlomo Benartzi, the renowned behavioral finance expert whose ideas have nudged millions of people into deferring more money into their defined contribution (DC) accounts, has started a fintech firm to help the same people spend their savings after retirement without ever leaving their plans.

Shlomo Benartzi

The startup is called Pension Plus. Benartzi has secured venture capital and hired Mike Henkel, a retirement industry veteran, to run Pension Plus, Benartzi told RIJ. So far, American Funds and OneAmerica have agreed to offer the service to their institutional clients.

Pension Plus is not a managed account, a single premium immediate annuity, or a deferred annuity sleeve inside a target date fund. It’s a $9-a-month “guidance service” that participants can adopt at age 50. “To do this right, you have to create relationships before retirement,” Henkel said. When participants retire, the service will distill their plan assets and other liquid assets into a single monthly “paycheck.”

“We put it all in terms of paychecks,” he told RIJ. “When you retire, we’ll replicate a paycheck for you using Social Security and your savings. We start getting that money transferred to your checking account. We’ll adjust the paycheck to keep up with inflation, and help you stay on track for the rest of your life.

“To size the paycheck correctly, you have to model longevity,” Henkel added. “So we ask if they’re in good health and if they’ve been smokers. We’ve found that self-assessment works almost as well as a 15-page insurance form. We don’t have a default death date, and we never ask people when they think they will die.”

An acute imperative

Pension Plus is a recent entry in the race to sell decumulation tools to 401(k) plan sponsors. Enabled by the SECURE Acts of 2019 and 2022 and driven by the imperative—felt most acutely among “Defined Contribution Investment-Only” (DCIO) providers and some DC recordkeepers—to stanch the rollover of money from 401(k) plans to brokerage IRAs. DCIOs are asset managers that distribute proprietary mutual funds through the plans but provide no other plan services.

“Recordkeepers lose roughly 80% of client assets at retirement,” Henkel said. “[DCIO] Asset managers have the same problem. Money moves on. If we can help our partners lose only 50%, that’s better than losing 80%.” But plan sponsors aren’t necessarily on board with the idea. Only 40% to 50% of them say they want to maintain qualified accounts for separated employees, Henkel added.

Since 2005, the amount of savings in IRA accounts (primarily IRAs funded by rollovers from qualified retirement plans) has been growing faster than the amount in DC plans. In 2005, DC plans held $3.7 trillion in assets, while IRAs held $3.4 trillion. In 2023, DC plans held $9.9 trillion and IRAs held $12.6 trillion.

Mike Henkel

Henkel has been president of Ibbotson, managing director of Envestnet and CEO of Achaean Solutions. Benartzi wrote Save More Tomorrow (Penguin Group, 2012) and taught at UCLA. With Nobel Prize-winning economist, Richard Thaler, who co-wrote Nudge with Cass Sunstein, Benartzi provided a scientific rationale for auto-enrollment in 401k plans and auto-escalation of 401k contributions.

Benartzi left UCLA in 2019 and sought out venture capital for Pension Plus. American Funds became a partner, as asset manager, and OneAmerica, a diversified financial services firm. Both firms intend to cover the costs Pension Plus for participants prior to retirement. All envision a service that can be tailored to each retiree, addressing the uniqueness of each retirement path.

“We’re trying to make it an [ongoing] service. With most tools, you run the program once. With Pension Plus, if something changes dramatically, we’ll rerun the plan. Once you start, we’ll run the financial model quarterly. There will be a series of communications. For instance, we’ll remind you when to claim Medicare and when to take RMDs. We’ll help you stay on track for the rest of your life,” Henkel said.

Within retirement, Pension Plus will favor the strategy (a “bridge” to Social Security) of not claiming Social Security benefits until age 70, when payouts are highest, and using one’s own qualified savings to cover living expenses until then, if necessary. Pension Plus’ target market will be mass-affluent participants with investments worth $250,000 to $1 million at retirement.

Not all recordkeepers are hurt by rollover losses. Fidelity, Vanguard and Schwab, for instance, are full service plan providers, with capabilities as recordkeepers, broker-dealers, and IRA custodians. Schwab is also a bank, so their clients never need to leave. Aside from those firms, “nobody else has figured out how to keep the assets under control,” he told RIJ.

We’re Baaaaaaaaack

Posted on January 14, 2024 by Kerry Pechter -

Retirement Income Journal is returning to publication on a monthly basis.

Since the last regular weekly edition, more than 18 months ago, I have been busy. I published a thoroughly revised edition of Annuities for Dummies, wrote a couple of book reviews for the Journal of Retirement, released a monograph on Iceland’s retirement system, and wrote two white papers for a life/annuity company. I’m working on other long-term projects now.

Until those are completed, I hope to publish an email newsletter version of RIJ nine times a year. This latest issue is not behind a paywall. I haven’t sorted out the subscription details yet. There will be an annual ($199) and a monthly subscription ($25) option. The first 25 annual individual subscribers (email me and I’ll invoice you) will receive a complementary copy of the 2023 edition of Annuities for Dummies. Group subscriptions will also be available; please inquire.

The retirement industry is changing fast. There’s a lot of pressure to make annuities available in qualified plans—most of it coming from the sell-side. The outcome of the latest battle between the Labor Department and the life/annuity industry could forever alter the way annuities are distributed. Private equity firms continue to disrupt the life/annuity industry with their “Bermuda Triangle” strategies. As 2034 approaches, debate over the future of Social Security will only intensify.

Then there’s the 2024 presidential election. Federal regulatory policies change abruptly when control over the executive branch of government switches from one political party to the other. That inconsistency creates uncertainty and discomfort within the highly-regulated financial services industry. It also generates news.

‘Nesting doll’ structure

Insulating sponsors from liability

Target market

Researchers probe tie between auto-enrollment and household debt in the UK

Prudential closes $12.5 bn reinsurance deal with Somerset Re

Strong fourth-quarter for pension risk transfers: LIMRA

PE-backed insurers control almost 10% of life/annuity assets: AM Best

NewRetirement raises $20 million in venture capital

Private ownership of life re/insurers may affect credit ratings, says Fitch

F&G issues its first RILA

AEL reports record FIA sales, high surrenders of FRAs

Global Atlantic closes $10bn block reinsurance deal with Manulife

All annuity sales in 2023

Fixed-Rate Deferred

Fixed Indexed Annuities

Income Annuities

Registered Index-Linked Annuities

Traditional Variable Annuities

Tailwinds for FRD annuities

Fixed-Rate Deferred

Fixed Indexed Annuities

Income Annuities

Registered Index-Linked Annuities

Traditional Variable Annuities

An acute imperative

Data Connection

Lists*