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Posted on December 15, 2021 by Editorial Staff -

Retirement Income Journal takes a holiday break

A Merry Christmas and Happy New Year to all of our readers and advertisers. Retirement Income Journal will take its annual holiday break after today, returning with the January 6, 2022 issue. Next year will be our 14th year of publication, with 624 weekly issues published so far. Thank you for making subscription journalism and enterprise reporting possible.

Great American offers fixed multi-year guaranteed rate annuity for RIAs

Great American Life Insurance Co., a subsidiary of MassMutual, has launched the Advantage 5 Advisory, its first fee-based fixed annuity. In a release, the company said the move “deepens its commitment to the registered investment advisor (RIA) channel.”

The Advantage 5 Advisory offers an annual interest rate yield (3.00% for premiums of $250k or more and 2.75% for premiums of less than $250k, as of December 6, 2021) that is guaranteed for the product’s initial five-year term. It is designed for investment advisors whose clients want complete protection from market risk and an alternative to volatile or low-yielding cash allocations, the release said.

“Since launching the industry’s first fee-based fixed-indexed annuity in 2016, we’ve prided ourselves on being a leader in the RIA space,” said Tony Compton, Great American Life’s Divisional Vice President of Broker/Dealer & RIA sales.

The Advantage 5 Advisory is designed to integrate within advisors’ existing toolkits. It can be displayed on many popular fee-based platforms used for portfolio management, reporting and billing.

The Advantage 5 Advisory is Great American Life’s fourth product developed for the RIA space and is available alongside the Index Protector series of fixed-indexed annuities.

Lincoln’s 401(k) adds Income America 5For Life

Lincoln Financial Group will offer Income America 5ForLife, an in-plan target date fund series to participants (generally all employees of Lincoln) in the Lincoln National Corporation 401(k) Savings Plan. This option enables plan participants to turn their savings into monthly retirement income for life.

Income America 5ForLife is built on a target date glide path designed by American Century and held in a portable, non-proprietary, multi-insured and multi-managed Collective Investment Trust (CIT). It is designed to be SECURE Act-compliant and to meet ERISA 404 and 3(38) fiduciary requirements.

Income America is a series of target date funds with a novel type of guaranteed lifetime withdrawal benefit (GLWB) rider attached. The rider, called “5ForLife,” promises to pay plan participants 5% of their benefit base (the greater of the account value or net contributions at age 65) every year for the rest of their life. It doesn’t guarantee accumulation. The all-in expense ratio: 1.3% per year.

Income America is a cooperative venture by Prime Capital Investment Advisors; Lincoln Financial and Nationwide (as co-guarantors of the 5ForLife group annuity); American Century (as TDF glide-path designer); Vanguard, Fidelity and Prudential (as fund providers); Wilmington Trust and Wilshire (as fiduciaries); and SS&C, whose “middleware” would wire it all together and ensure portability when participants change jobs.

Jackson buys back 2.2 million shares of common stock; promotes Romine and Reed

Jackson Financial Inc., as part of its previously disclosed $300 million share repurchase program, has signed agreements to repurchase Class A common stock from Prudential plc (which is not related to Prudential, the US company) and Athene Co-Invest Reinsurance Affiliate 1A Ltd. for about US $125 million.

Jackson is repurchasing a total of 2,242,516 shares of its Class A common stock from Prudential, consistent with Prudential’s previously disclosed intent to sell a portion of its ownership of Jackson shares. Jackson is also repurchasing a total of 1,134,767 shares of its Class A common stock from Athene. The transactions are being funded with cash on hand.

The repurchases bring Jackson’s total share repurchases to approximately US $185 million under the share repurchase program. “Additional repurchases under the program may be made through open market purchases, unsolicited or solicited privately negotiated transactions, or in such other manner and at such times as management determines in compliance with applicable legal requirements. The number of shares to be repurchased and the timing of such transactions will depend on a variety of factors, including market conditions. Management reserves its right to amend or terminate the program at any time in its discretion,” a Jackson release said.

Jackson Financial also announced that Scott Romine has been appointed President of Jackson National Life Distributors LLC (JNLD), the marketing and distribution business of Jackson National Life Insurance Company. Scott will also be a member of Jackson’s Executive Committee, reporting to Chief Executive Officer, Laura Prieskorn.

In addition, the company said Alison Reed would be the Chief Operating Officer of JNLD, with responsibility for Distribution Services, Distribution Marketing and Product Solutions. She will report to Romine. Reed has been with Jackson almost twenty years, with leadership roles in annuity product management and National Planning Holdings.

SEC proposes more disclosure of stock buybacks

The Securities and Exchange Commission has proposed amendments to its rules regarding disclosure about an issuer’s repurchases of its equity securities, often referred to as buybacks.

The proposed rules would require an issuer to provide a new Form SR before the end of the first business day following the day the issuer executes a share repurchase. Form SR would require disclosure identifying the class of securities purchased, the total amount purchased, the average price paid, as well as the aggregate total amount purchased on the open market in reliance on the safe harbor in Exchange Act Rule 10b-18 or pursuant to a plan that is intended to satisfy the affirmative defense conditions of Exchange Act Rule 10b5-1(c).

The proposed amendments also would enhance existing periodic disclosure requirements regarding repurchases of an issuer’s equity securities. Specifically, the proposed amendments would require an issuer to disclose: the objective or rationale for the share repurchases and the process or criteria used to determine the repurchase amounts; any policies and procedures relating to purchases and sales of the issuer’s securities by its officers and directors during a repurchase program, including any restriction on such transactions; and whether the issuer is making its repurchases pursuant to a plan that it intends to satisfy the affirmative defense conditions of Exchange Act Rule 10b5-1(c) and/or the conditions of the Exchange Act Rule 10b-18 non-exclusive safe harbor.

The proposed rules apply to issuers that repurchase securities registered under Section 12 of the Securities Exchange Act of 1934, including foreign private issuers and certain registered closed-end funds.

The proposal will be published on SEC.gov and in the Federal Register. The comment period will remain open for 45 days after publication in the Federal Register.

US life/annuity sector now ‘stable’: AM Best

AM Best has revised its market segment outlook to stable from negative as the segment has experienced a number of improvements, including capital market gains and diversified earnings streams that helped offset the mortality impacts of the pandemic.

In its new Best’s Market Segment Report, “Market Segment Outlook: U.S. Life/Annuity,” AM Best states that underpinning the outlook revision are record levels of capitalization and improved earnings. Death claims have impacted earnings, but many leading companies have reported strong product sales in the second and third quarters of 2021. Additionally, credit losses in commercial mortgages and fixed-income assets have been muted and well below expectations. Insurers also have benefited from stronger risk management frameworks to shed legacy businesses in a robust transaction market.

The low interest rate environment remains, but has fueled the acquisitions of legacy block of business, including variable annuities, pension risk transfer blocks and interest rate-sensitive blocks. According to the report, current market dynamics are allowing for liability-side balance sheet restructuring. Insurers are benefitting from lower costs of capital and strong liquidity, which will position them well as the economy improves and if interest rates rise and inflation recedes.

Several pre-COVID-19 pandemic trends have accelerated, including the pivot by life/annuity insurers to fee-based business models that are less sensitive to capital market movements. Although shifts of this kind take time to materialize fully, the formation of new reinsurers, most often backed by private equity, has allowed for a more rapid flow of capital into the industry. This also has intensified the competition for available legacy books of business. AM Best views the additional capital as a positive, while also recognizing a still-developing business model that tilts to riskier but with higher-yield assets.

Although the life/annuity segment faces hurdles heading into 2022, including continuing COVID-19 cases and death claims, as well as inflationary headwinds, AM Best’s view is that carriers will be able to address these challenges because of the improvements in capitalization, profitability and enterprise risk management practices.

To access the full copy of this market segment report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=315385.

Athene Holding invests in Hong Kong insurer

Bermuda domiciled Athene Holdings is among the investors that have helped FWD Group raise $1.425 billion, it was announced today, according to reports by Reuters and Bermuda: Re+ ILS.

FWD, the Hong Kong insurer founded by Richard Li and backed by Swiss Re, will use the funds raised to help boost growth and reduce leverage, the reports said.

Retirement services business Athene invested through a subsidiary, and the deal was led by Athene’s asset manager Apollo Global Management with Canada Pension Plan Investment Board. Other investors included Li Ka Shing Foundation, Metro Pacific Investments Corporation, Pacific Century Group, The Siam Commercial Bank Public Company Limited and Swiss Re.

According to Reuters, FWD is expected to launch an initial public offering in Hong Kong after regulatory approval for a $2 billion to $3 billion US IPO was delayed. The size and time frame of the Hong Kong IPO has yet to be determined, according to Reuters’ sources.

Athene and Apollo merged earlier this year in an all-stock transaction after a long-standing partnership.

Capitalism, And Other Myths

Posted on December 15, 2021 by Jonathan Gregory -

In November 2008 Her Majesty The Queen visited the London School of Economics to open a new building. During a briefing on the calamitous chain of events that had recently brought the global financial system to near ruins, the Queen asked, “If these things were so large, how come everyone missed them?” Quite.

A few months later a broad group of leading academics, politicians, members of the Bank of England, finance journalists and investment bank economists attempted to answer the question in an open letter to the Queen.

Any attempt, in just two-and-a-half pages, to admit all the hazards in the run-up to the Great Financial Crisis (GFC) could hardly be called definitive, but the authors made a decent and honest stab at it. They zeroed in on four areas:

The global savings glut—as they called it—and very low returns on safer long-term investments which led many investors to seek higher returns at the expense of greater risk
Inflation remained low and gave no warning sign the economy was overheating
The failure to see collectively a series of interconnected imbalances over which no single authority had jurisdiction, combined with the psychology of herding and the mantra of financial and policy gurus
And ultimately that the crisis was principally a failure of the collective imagination of many bright people (their words), globally, to understand the risks to the system as a whole

So, perhaps inadvertently, Her Majesty helped in the very public debunking of several myths at once. (Click here to see the unabbreviated original article.)

The situation today
Although the letter slayed a few of the myths of policy-making (and efficient markets) that unravelled in 2008, surveying the investment landscape today one cannot help but wonder if others have proved more enduring. There are aspects of the world today that will feel eerily familiar to investors who lived through that crisis.

One striking lesson from 2008 was that the price stability targeted by central banks did not, in itself, generate financial stability. That is, a period of very low and stable inflation did not lead to a new era of financial prosperity. In fact, a long period of macroeconomic stability and exuberance in asset prices and credit markets helped build up instability in the financial system.

Many central banks in the world support an even more activist approach to price stability today (their inflation targets) than in the run up to the GFC. This trend quickened during the global pandemic as central banks, rightly, gave life support to economies in lockdown.

But if the financial cycle is heavily influenced by monetary policy, then that influence is far greater today than before the GFC. It would be extremely dangerous to assume that very easy monetary policy today does not bring the potential for broad macroeconomic shocks later.

I do believe that central banks are completely alive to these risks and that the bad side effects of unconventional monetary policy for financial stability (and inequality) are important in their thinking around policy choices. In a world of below-target inflation and zero policy rates the idea that ‘There Is No Alternative’ means central banks (and therefore we) walk a tightrope. Sometimes, the problem is just knowing when to stop.

As the chart below illustrates, the global savings glut is still a fact of life; private sector savings exceed desired investment, and so drive very low interest rates. It has been a key reason behind progressively lower real growth rates around the world over the last 30 years. I referred to Table 1 earlier this year to make the same point that, based on IMF data, average forecast growth rates from 2020-26 will be lower than each of the preceding four decades. In the IMF’s view, developed economies will be facing the challenges posed by low aggregate demand for many years to come.

US, UK and German 10-year real yields

Don’t zig-zag

So, in summary, we must learn to live with an expansive monetary policy framework with a relentless focus on price stability that might in fact contribute to systemic risk: Very low real growth rates and associated yields that drive investors out along the risk curve; and global imbalances that in some ways are larger than 2008 and still unresolved.

To be fair, meaningful steps have been taken to clean up some risks. For banks, this means stronger solvency levels, counter-cyclical capital buffers, liquidity and stress tests to help build resilience. Centralized clearing and better reporting have helped reduce risks in some derivative markets.

But ongoing innovation brings risk and complexity anew. The central banks and regulators that drove these reforms had probably not imagined the crypto-exchange traded funds, meme-stocks, high-frequency algo-trading, weapons-grade day-trading accounts and SPACs to come. Markets are not always in equilibrium or efficient, but can be opaque and interlinked in ways that are not fully imagined by regulators, policymakers and investors. High leverage, funding mismatches, complex and opaque funding structures and off-balance sheet liabilities create problems for the assessment of market efficiency.

Perhaps there is an even more fundamental problem. If asked, many people in the US, UK or Europe would describe their economies as capitalist, or market economies, where pricing and investment flow from the interactions of private citizens and businesses for profit. I just wonder how valid a description that can still be, in a world where:

The combined balance sheets of major central banks total $25T
Bond markets are routinely used as a policy tool
Prices and yields are no longer set by a freely trading liquid market based on fundamentals
Some economies teeter so close to deflation that aggressive monetary expansion is the only answer
Bad news on the economy can lift markets in expectation of more central bank largesse

It is not to say these interventions are wrong, far from it — much of the GFC and pandemic response was crucial — it’s just that, given how deep and structural in nature the challenges are, we may even be in the process of rethinking what capitalism actually means.

Of course, identifying and writing about these risks is one thing (the easy thing) but knowing when and in what form they will show, quite another. For now, I advise staying with some time-honored approaches: diversification, avoiding the overly complex or the ‘black-box,’ being wary of leverage in illiquid positions, stress-testing portfolios and staying alive to the changing environment. Keep to a straight line, not a zig-zag.

Insurers fret about meeting ‘return targets’: Cerulli

Posted on December 15, 2021 by Editorial Staff -

ETF asset growth during October nearly reached 6.0% as assets climbed to just below the $7.0 trillion mark, according to the latest issue of The Cerulli Edge—U.S. Monthly Product Trends, which analyzes mutual fund and exchange-traded fund (ETF) product trends.

Asset growth on the mutual fund side was slower, but still an impressive 3.8% during the month, Cerulli found. Total mutual fund assets now rest at $20.8 trillion. Net flows were positive across both mutual funds ($4.9 billion) and ETFs ($79.1 billion).

A vast majority of insurers (81%) are concerned about their ability to meet return targets given the historically low interest rate environment.  The National Association of Insurance Commissioners institutes risk-based capital requirements that obligate insurers to hold a certain level of capital to offset potential losses based on the credit quality of their investment holdings. Without the ability to “move up the risk spectrum” by investing in high-yield fixed-income products, insurers expect to increase their use of private structured products. These are considered high-quality investment-grade products that provide a relatively higher yield than publicly traded investment-grade fixed income.

After inflows in January and February 2020, low volatility ETFs have endured 19 straight months of outflows, while low volatility mutual funds have suffered 11 straight months of outflows since October 2020. Managers hoping to reinstate confidence in their funds will need to work to ensure proper education for investors, aligning a proper understanding of how the fund functions with investor expectations.

If market volatility remains low, it is unlikely we’ll see the trend of outflows reverse in a meaningful way in the near term. However, a reversal in bull market conditions may spur demand for the category, provided investors have relinquished their distaste for the products.

‘iTDFs’ Smooth the Bumps of Retirement Income

Posted on December 14, 2021 by Per U. K. Linnemann -

More than 40 million Americans have invested $1.8 trillion in target date funds (TDFs), which appeared in the 1990s in the US. Yet, despite effort and experimentation by firms that offer TDFs, these funds-of-funds still aren’t designed to convert savings to retirement income.

Those efforts include “glide paths” that reduce investors’ equity exposure as they age, as well as guaranteed lifetime withdrawal benefits (GLWBs). Lately, a handful of asset managers have modified their TDFs to help plan participants to buy annuities at retirement.

These measures haven’t caught on, and probably won’t, because they’re not optimal. They are one-size-fits-all solutions that reduce volatility around the retirement date at the cost of reducing investors’ returns and potentially lowering their incomes throughout retirement.

iTDFs: Smooth transition from accumulation to distribution

Per Linnemann

To bolster retirees’ confidence in investment-based retirement income products, as opposed to insurance-based products, the transition from savings to income needs to be managed in a more capital-efficient way. In Denmark, I’ve designed iTDFs (individualized target date funds) to do that. I think iTDFs could also work in the US.

iTDFs transition seamlessly from the accumulation (saving) to the decumulation (income) phases, providing both a savings vehicle and a regular smoothed retirement income. iTDFs eliminate the need for separate products for pre- and post-retirement; the use of separate products can create an artificial cliff edge at retirement. There is no need to disinvest and then reinvest, and no fear of locking in unfavorably low interest rates when converting savings to income.

Unlike competing products—earlier TDFs, variable income annuities (VIAs) and investment-linked tontines—the new iTDFs approach gives each investor a personalized, dynamically self-adjusting glide path. Asset allocations are automatically adjusted between a risky (diversified) investment fund and a less volatile (diversified) investment fund.

Those adjustments are governed by two variables: the performance of the underlying investments and the current funded status of the retirees’ future income (i.e., the relation between the value of the assets and the value of the liabilities). These factors determine when the retiree can afford to spend more and/or take more investment risk.

That said, the investment risk exposure of the iTDF is reduced as investors get older. Retirees typically have a gradually declining tolerance and capacity for risk. They may not have time to ride out a sharp downturn in the financial markets or to return to work and supplement their income or replenish their savings.

The y axis shows the equity allocation; the x axis shows years before and after retirement. iTDFs can accommodate alternative glidepaths with different starting equity allocations.

The built-in drawdown and investment strategies adapt automatically and dynamically to each other over time. They are integrated and coordinated by mathematical formulae and constitute a unified whole in an innovative way. The investment strategy supports the income-generation objective to smooth retirement income.

iTDFs are stochastic because they respond to changes in a dynamic and path dependent way. Path dependency (where the sequence of events influences the next step) is important to smoothing and sustainability of retirement income. In this way the balance between assets and future liabilities are being adapted and income can be smoothed while remaining responsive to financial markets’ performance.

Flexibility of iTDFs

iTDFs may be designed to provide income for a specific period, such as 10, 15 or 20 years. If the retiree wishes, he or she can eliminate longevity risk by purchasing a deferred income annuity at the start of the iTDF period or an immediate income annuity at the end. Spousal continuation may be added.

Retirees would not be required to buy a life-contingent annuity in advance. If they do choose an annuity, they would have the option to reverse the decision during the drawdown phase for any reason, e.g., deteriorating health. The surviving relatives may inherit the remaining savings if the participant passes away during the drawdown period.

Just as they offer a seamless transition from accumulation to decumulation, iTDFs also offer the option of a smooth transition between a drawdown and an annuity payout phase, avoiding a gap or other unintentional abrupt change in the level of retirement income.

The income stream from iTDFs is highly customizable. Income could be weighted towards the first stage of retirement, when retirees tend to be more active and spend more money. Alternately, income could be weighted toward the latter years to offset the effect of inflation.

Retirees could target a specific annual inflation adjustment to the payments or set an assumed interest rate (AIR) at the beginning of the income phase. The AIR is used to determine the initial payment. Subsequently, smoothed payments are automatically adjusted in response to the difference between smoothed investment returns and the AIR.

A solution to a nasty problem

iTDFs do not require expensive guarantees. The manufacturer does not have to assume investment and mortality risks. The same flexible framework can provide a platform for the creation of a family of products. Different versions of iTDFs can be tailored to local market conditions and modified to fit the needs of certain groups, such as low to medium earners. Relying on a robust algorithmic framework, iTDFs will fit easily into an increasingly digitalized and mass-customized world as fully automated solutions. The algorithm-based product design allows scalability, portability, and low cost.

Nobel economist William Sharpe called optimal decumulation the “nastiest, hardest problem” in retirement. iTDFs may provide a surprisingly simple solution. They provide the missing piece of the puzzle that stymies the asset management and retirement industries, and they could revive the life and pensions industry in a world without (expensive) guarantees.

For more about the author, see “Per U K Linnemann: The Pension Innovator.” To see more articles about iTDF, click here and here.

Re: Allianz Life, F&G, Oceanview Re

Posted on December 9, 2021 by Editorial Staff -

Allianz, the Munich-based global financial services firm, announced December 3 that its US life insurer, Allianz Life of North America, will reinsure $35 billion worth of in-force fixed index annuities (FIAs) with Talcott Resolution Life Insurance Company and Resolution Life, both owned by Sixth Street, a global asset manager.

The reinsurance deal releases €3.6 billion (US$4.07 billion) in surplus cash that had been backing those annuities. Talcott Resolution’s website said Allianz Life would reinsure $20 billion of fixed indexed annuity liabilities with Talcott and one of its Bermuda affiliates.

The unlocking of surplus stems from the fact that reinsurers in certain jurisdictions, such as Bermuda, the Cayman Islands and a few US states, can use a different accounting regime from the one used in the US (GAAP instead of SAP). Relative to SAP, GAAP allows the reinsurer to estimate the value of future obligations at a lower price, allowing the reinsurer to reserve less against them.

The reinsurer passes the savings back to the original annuity issuers as a “reserve credit.” This form of regulatory arbitrage, coupled with investment partnerships with asset managers that have expertise in private credit, has given financial relief to publicly traded annuity issuers whose profitability has been squeezed by the protracted low interest rate environment in the US.

RIJ has called this the “Bermuda Triangle” strategy. (See today’s feature, “A Revolt Against PE-Led Annuity Issuers.”) Allianz Life will continue to manage administration of the policies in the portfolio and will remain responsible for fulfilling its obligations to policyholders.

“The agreement… signals the sustainable growth proposition for Allianz’s life insurance segment through capital-light business models and alignment with its asset management businesses, PIMCO and Allianz Global Investors,” Allianz said in a release.

An Allianz Life manager in Minneapolis told RIJ that the company is still committed to selling FIAs, a product that it has been a leading seller of ever since Allianz bought FIA specialist LifeUSA from entrepreneur Bob MacDonald in October 1999.

RIJ asked Allianz Life this week if the announcement meant that the company would be shrinking its exposure to annuities. Adam Brown, senior vice president of product development at Allianz Life, replied in an email:

“Those comments from our parent company were referencing global products developed for much higher interest rates which have higher guarantees. Allianz Life’s currently offered FIA products are specifically designed to be resilient for low and potentially negative interest rate environments.

“For example, our top-selling product, Allianz Benefit Control, was specifically designed to add strong consumer value while continuing to be sustainable in challenging interest rate environments. Allianz Life’s current portfolio offering of FIA and RILA products are both examples of capital-light products for which we have ambitious growth targets.”

From Allianz Life’s Capital Markets Day presentation, December 3, 2021.

Under the terms of the transaction, Talcott Resolution and its Bermuda affiliate will assume $20 billion of the FIA liabilities while Resolution Life will assume the remaining $15 billion. The credit ratings of the members of Talcott Resolution Group remain unchanged following the announcement, AM Best said in a release.

The transaction is Talcott Resolution’s first acquisition in recent years of a significant block of in-force annuities. It follows Talcott’s recent variable annuity flow reinsurance (that is, of new contracts as they are sold) transaction with Lincoln National Corporation that covers business written by LNC from April 1, 2021, through June 30, 2022, to a maximum of $1.5 billion.

Talcott Resolution was recently acquired by Sixth Street, a global investment firm with over $55 billion in assets under management and committed capital from a consortium of investors.

“The transaction will significantly expand Talcott Resolution’s balance sheet,” AM Best noted. But the ratings agency “expects the company will continue to maintain a very strong balance sheet strength position, with the support of its parent and potential future investors.”

Under its new ownership, AM Best anticipates that Talcott Resolution will engage in future transaction activity as it executes its strategy of engaging in reinsurance flow transactions and block acquisitions.

Upon closing, which is expected by year-end 2021, Talcott and its affiliates will manage approximately $111 billion in liabilities and surplus on a pro-forma basis. Allianz Life will continue to manage administration of the policies in the portfolio with Pacific Investment Management Company, LLC (PIMCO) and Allianz Global Investors remaining the primary asset managers of the reinsured business.

In other “Bermuda Triangle”-related news:

Despite high ratings, F&G’s quality of capital is ‘diminished’: AM Best

AM Best has affirmed the Financial Strength Rating of A- (Excellent) and the Long-Term Issuer Credit Ratings (Long-Term ICR) of “a-” (Excellent) of Fidelity & Guaranty Life Insurance Company (Des Moines, IA) and Fidelity & Guaranty Life Insurance Company of New York, (New York, NY).

The ratings reflect Fidelity & Guaranty Life Group’s balance sheet strength, which AM Best assesses as strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management, the ratings company said.

AM Best also cautioned, “While risk-adjusted capital remains strong, the group’s overall quality of capital is diminished by the significant increase in reinsurance leverage, the use of captive financial solutions, as well as the use of surplus notes.”

Fidelity & Guaranty Life Group continues to maintain a strong level of risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), despite a significant increase in new annuity sales and a decline in capital surplus in 2020 due to merger-related transaction costs and negative mark-to-market impacts within its investment portfolio in the pandemic environment.

Fidelity & Guaranty Life Group benefits from the financial resources and diversification benefits provided by Fidelity National Financial, Inc., which also guarantees the group’s senior notes. Additionally, the group maintains more than adequate liquidity with strong operating cash flows and additional borrowing capacity through the Federal Home Loan Bank.

As Fidelity & Guaranty Life Group continues to grow at a rapid pace, AM Best believes there is an increased level of execution risk in accessing new capital to fund this growth and will continue to monitor the group’s ability to maintain the current level of risk-adjusted capitalization.

The group has also experienced some volatility within its statutory net operating results due to reinsurance transactions, impacts from market volatility and other one-time events. However, interest rate spreads have remained favorable due to steady investment yields despite the low interest rate environment as the company repositioned its investment portfolio into higher yielding structured securities.

AM Best expects overall statutory and GAAP operating results to improve over the near to medium term due to continued premium growth and the maintenance of adequate interest rate spreads within its core fixed annuity business.

Kanelos named executive chairman of Bermuda-based Oceanview Re

Reinsurance Ltd., a Bermuda Class E insurance company, today announced that Andrew Kanelos has been appointed Executive Chairman and Chief Governance Officer, effective December 13, 2021. Kanelos will be based in Hamilton, Bermuda.

He will be responsible for directing the management activities of Oceanview Re and will become a member of the Board of Directors of Oceanview Re, said Bill Egan, Chairman and Chief Executive Officer of Oceanview Holdings Limited, corporate parent of Oceanview Re.

Most recently, Kanelos served as managing director of Transamerica Life Insurance’s Offshore Companies, where he oversaw five of Transamerica/Aegon’s Bermuda life and reinsurance entities. He also has experience in market research, product pricing, annuity reinsurance solutions and captive management at Merrill Lynch, the Chubb Group and consulting services engagements with ING’s Institutional Financial Products Division.

Oceanview Reinsurance Ltd. is rated A- (Positive) by A.M. Best and is a wholly owned subsidiary of Oceanview Holdings Ltd. Oceanview Re provides customized reinsurance solutions for fixed annuities and other asset intensive life insurance liabilities.

Equitable launches RILA with income benefit

Posted on December 9, 2021 by Editorial Staff -

Equitable, the life insurer that originated the registered index-linked annuity (RILA, aka structured variable annuity) over a decade ago, has added a guaranteed lifetime withdrawal benefit (GLWB) rider to the latest iteration of its popular Structured Capital Strategies RILA.

“Structured Capital Strategies Income (SCS Income) allows investors nearing and beginning retirement to take advantage of equity market growth potential while maintaining partial protection against market declines. SCS Income also provides for a predictable stream of income,” said Steve Scanlon, Head of Individual Retirement at Equitable, in a release.

RILAs, which use put and call options on the performance of an equity index or hybrid index to generate positive returns up to a cap and a buffer against initial market losses in a given contract year, have been used mainly as safe investment vehicles that lock in gains or losses at the end of each crediting term. But a few life insurers have added income riders.

Because RILA contracts can lose money, a RILA, like a traditional variable annuity, is a registered securities product that only securities-licensed reps of broker-dealers can sell. A related options-based product, the fixed indexed annuity, can be sold by insurance agents without securities licenses because the contract can’t lose money if held to term.

Industry wide, about $28.4 billion in RILA assets were reported at the end of the third quarter of 2021, according to LIMRA Secure Retirement Institute. According to Wink, Inc., Equitable held an industry-high 21% share of the RILA market.

The annual fee for the GLWB in this contract, according to the prospectus, is 1.50%, with a permissible maximum of 2.50% in the future if the issuer requires it. That’s for either the B-version of the contract, which pays a commission to a licensed broker and has a first-year surrender charge of 7%, or for the fee-based Advisor version, which has no surrender charge period.

The GLWB rider guarantees that the “benefit base”—the notional amount used to calculate the annual income that the client can withdraw from the account for life—will never fall below a certain level. The initial benefit base is the purchase premium. The actual account value—the investor’s money—can go down as a result of poor market performance, withdrawals and fees.

Independent advisors would presumably add a 1% asset management fee, bringing the total annual fees to 2.50%, plus up to 0.71% of any money allocated to a separate account. (According to the prospectus, advisor fees can’t come from the contract itself without adverse consequences; they would have to come from an after-tax side account.)

The GLWB rider rewards the annuity owner for delaying taking income from the contract by offering to increase the benefit base by 5% for every year the owner postpones taking withdrawals from the contract. As a second incentive, the maximum withdrawal rate also goes up by one-tenth of a percentage point for each year that withdrawals are deferred. These incentives reflect the actuarial fact that the owner has aged a year, and has one less year of life expectancy in which to receive payments under the contract.

Here’s an example from the SCS Income prospectus (p. 115) of how the income rider might work.

(Note: The example uses the “accelerated” income option, which over-weights income in the first 10 or so years of retirement with a 6.5% withdrawal rate at age 65, and then offers a reduced benefit of 3% when the contract owner has spent all of his or her own money. The “level” income option offers a lifelong annual payout rate of 5% of the benefit base if income starts at age 65.) For a table of payout rates by age and number of annuitants, click here.

In this example, a single 65-year-old buys an SCS Income contract with a $100,000 premium. Instead taking a $6,500 payment in the first year, he defers income until the fifth year, when his payout rate is 6.9%, his benefit base has risen to between $120,000 and $128,645, and his withdrawals are $7,800 to $8,876, depending on the market performance.

If or when a combination of annual withdrawals, fees, and low returns reduces his account value to zero, the client’s annual withdrawal rate will drop to 3% (because we have used the accelerated income option as an example), or about $3,500 a year.

The prospectus shows us that an unlucky client with zero index returns would have a zero account value when he or she reached age 78. A lucky client who experienced 7% returns every year, however, would continue receiving 6.9% (about $8,800) until age 92, when his account value zeroes out and his withdrawal rate drops to 3%. Alternately, the 65-year-old client could have taken a level benefit of at least $6,480 (5.4% of $120,000) a year for life starting at age 69, after a four-year wait.

The indexes that clients can buy options on include: S&P 500 Price Return Index, Russell 2000 Price Return Index, MSCI-EAFE Price Return Index, NASDAQ-100 Price Return Index, and MSCI Emerging Markets Price Return Index. A “price return” version of a market index, unlike a “total return” version, lacks the dividend yields that would otherwise enhance the index performance.

For the sake of comparison, a 65-year-old could buy a single premium immediate annuity with $100,000 at current rates and receive about $6,700 a year for life (with cash refund of unpaid premium upon death) starting at age 69. The SPIA would not offer liquidity but it would not be subject to any future increases in fees on the part of the insurer.

According to an Equitable press release, SCS-Income options that Equitable describes as “new to the industry” include:

The level income option, which provides an income rate initially based on age at the time of purchase and that does not decrease
The accelerated income option, which provides a higher rate of income in early retirement when individuals may have higher expenses. Income under this option is initially based on the age at which the product is purchased and only decreases if the account balance drops to zero by means other than excess withdrawal.
Both income options offer opportunities to increase income by 5% of contributions per year each year before beginning to receive income, as long as the contract holder has not yet taken a withdrawal. This extra growth will be credited for up to 20 years, or the contract maturity date, whichever is earlier.

Is the Fed Put Gone Forever?

Posted on December 9, 2021 by No Author -

Two extraordinary leads graced major news outlets over the past week. First, Reuters carried an article titled, “WHO chief scientist urges people not to panic over Omicron.” Second, Bloomberg led with “Jerome Powell Ditches ‘Transitory’ Tag, Paves Way for Rate Hike.”

What do both news items assert in common? An egregious example of institutional failure. [For the original version of this article, including charts, click here.]

For the Fed, the failure is in its belated reaction to inflation. If there is anything the Fed ought to get right, it is movement in prices. That is, after all, its mandate! We are not even asking the Fed to predict inflation, just to explain it. But apparently it took until late November for Jay Powell to realize that COVID-19 is not deflationary.

The lesson from how policymakers have reacted to the pandemic and inflation is that they overreact belatedly to yesterday’s news. As they do, material constraints to the overreaction build, forcing an about turn.

In the context of the Fed’s über hawkish pivot, our conclusion suggests that a dovish pivot is coming in 2022. We are taking the other side of the view that the “Fed put is gone.” Why? Because no matter how much inflation hurts the median voter—and we maintain that the actual level of pain is overstated—a recession will hurt more.

The current Fed trajectory, given the peak in growth this cycle, will cause a recession. And a recession is unacceptable in the current US political and macro context.

Where do we go from here? While we think that the Fed is crying wolf on inflation, it is going to take a significant equity market correction to shift its thinking. As such, investors should prepare for a deep correction over the course of December.

The mid-December FOMC meeting—December 14-15—may be an opportunity for the FOMC to change course. But if the underway correction eases by then, we doubt that they will change course so quickly. As such, investors should approach the current selloff with the “no pain, no gain” mentality. More pain is needed to set up the rest of the cycle.

Investors should prepare for more USD strength in the near term, particularly if the market starts pricing in further rate hikes in 2022 (Chart 18). The US 10-year yield could decline further, taking risk assets—especially commodities and especially BTC (Chart 19)—further with it.

However, we expect a big macro context reversal sometime in early 2022, potentially in Q1.

First, as we discussed above, inflation will ease. Don’t get us wrong, we remain in the inflationista camp. To be clear, the membership in the sane inflationista camp carries a low threshold. One simply has to assume that the long-term inflation expectations rise above ~2.3%. Given our structural view that geopolitics is not transitory, we are in that camp.

But with the most severe supply shortages easing and with the Fed clobbering commodities with its hawkishness, prices will ease further, both in the US (Chart 20) and abroad. This will allow it to pivot to the “5% is the new 2%” view elucidated in this missive. In other words, inflation will prove to be “transitory” just as the Fed capitulates that it is not.

Second, Chinese policymakers will wake up to the risks of a severe deleveraging campaign. As we posited in the latest China Macro Watch, the policy inflection is already upon us. We have played this thesis by going long iron ore relative to oil, a trade that has already netted 19% since publishing our missive on November 23.

More importantly, a China that puts a floor to its own growth will put a floor on global growth as well. Given Europe’s high beta to Chinese imports and growth, a shift in Beijing calculus should have a meaningful implication for the USD and commodity prices.

A moderation—if not outright reversal—of Fed hawkishness combined with Beijing policy inflection should allow the US 10-year yield to resume its higher trajectory. In 2021, a number of big trades were essentially correlated to the “one big trade”; the path of US yields. And to our chagrin, the path of the US 10-year bond yield has been influenced by the relative COVID-19 response between the US and the rest of the world (specifically Europe).

Next year, we expect our COVID-19 desensitization thesis to continue as antiviral medication becomes widely available and as investors and the public realize that viruses have a Darwinian logic in mutating into a highly infectious but less virulent forms. This will allow the combination of a Fed dovish pivot and Beijing policy inflection to take over as the major macro catalyst and lead bond yields, globally, higher.

In this environment, investors should expect more commodity strength. If commodities managed to outperform in a year defined by a USD bull market, they will be absolutely set alight in 2022. And no, the correlation between the two has not changed. In fact, the correlation of their daily returns has been as negative as ever. What that means is that commodities would have gone even higher had USD been weak in 2021.

A macro context defined by Chinese policy inflection and high commodity prices should also see the star performer of 2022, India, lose some of its shine. Already this year, India’s outperformance relative to EM was historically illogical given commodity strength. While the overall setting would obviously be positive for EM, India would be the biggest loser. In anticipation of this shift, investors may want to tactically go long China relative to India.

Another reversal in 2022 should be the outperformance of tech, particularly US FAANGs, which have been the “only game in town” for a decade, a decade extended by the pandemic. This year, global tech/global energy has tracked COVID-19 data. Next year, combination of a higher inflation regime, Chinese policy capitulation, and easing of the pandemic should allow energy—and value sectors in general—to finally catch alight. This should also ease capital inflows into the US, a tech heavy economy and market, inflows that in 2021 reached the highest level since pre-GFC 2007. Given the current net longs in the USD, a macro context reversal should see the greenback peak and ease in 2022. Then again, why anyone would take our USD call seriously after our call in 2021 is unclear to us!

Bottom Line: Tactically, the pain and carnage must continue. Investors should avoid risk assets, commodities, and crypto assets in particular. Cyclically, nothing has changed. The Fed has turned hawkish belatedly due to a policy error on inflation. But it will have to back off as asset prices decline, yield curve approaches inversion—a telltale sign of a recession—and as inflation eases in early 2022.

The narrative that the median voter hates inflation only works up to the point of a recession. We may not know everything about geopolitics and politics, but one thing we know is that the public hates a recession. And a recession catalyzed by unelected, millionaire, technocrats is a recipe for la Terreur. Meanwhile, the greatest macro development of November is neither the new COVID-19 variant nor Powell retiring the term “transitory.” Rather, it is the policy inflection in Beijing, which should put a floor on Chinese and global growth in Q1.

Cyclically, we remain commodity bulls. In 2022, the biggest call for investors may be emerging markets. They remain deeply unloved by institutional investors. And yet, they would be the prime beneficiaries of a set of circumstances that sees the Fed ease its hawkish rhetoric, Chinese growth bottom, and dollar peak.

Breaking News

Posted on December 9, 2021 by Editorial Staff -

Net income of life/annuity companies on track to double this year: AM Best

The US life/annuity (L/A) industry doubled its net income in the first nine months of 2021 to $26.1 billion, compared with the same prior-year period, according to Best’s Special Report, “First Look: Nine-Month 2021 Life/Annuity Financial Results.”

The data is derived from companies’ nine-month 2021 interim statutory statements that were received as of Dec. 1, representing an estimated 97% of total US L/A industry premiums and annuity considerations.

According to the report, the U.S. L/A industry total income rose 6.6% from the prior-year period, driven by a 62% increase in other income, a 4.9% increase in net investment income and a 4.5% increase in premiums and annuity considerations.

The pretax net operating gain was $42.5 billion, up 153.3%. A $5.3 billion increase in tax obligations and an additional $7.3 billion of net realized capital losses contributed to the industry’s net income, up from $13.1 billion from the first nine months of 2020.

Capital and surplus rose by 6.7% from the end of 2020 to $468.0 billion, as $64.2 billion of net income, contributed capital, changes in unrealized gains and other changes in surplus were reduced by a $14.1 billion change in asset valuation reserve and $20.7 billion of stockholder dividends.

Pacific Life enhances offerings for RIAs

Pacific Life has established an Advisory Solutions Desk, a “concierge experience” for Registered Investment Advisors (RIAs), the company announced in a release.

“Now, RIAs and their fee-only advisors can access Pacific Advisory Variable Annuity through our new tech-enabled Advisory Solutions Desk or one of our insurance desks or custodial distribution partners,” said Kevin Kennedy, senior vice president of sales and chief marketing officer for Pacific Life’s Retirement Solutions Division.

The Advisory Solutions Desk is part of Pacific Life’s advisory expansion initiative. During 2021, Pacific Life Advisory formed a dedicated advisory team and introduced a fee-friendly variable annuity and optional living benefit for RIAs and their clients.

“The team also tripled data integrations with top advisory software providers, while collaborating with new distribution partners to deliver specialized advisory services with seamless integrations,” a Pacific Life release said.

In addition to strong sales of its fee-friendly offerings, Pacific Life said it has seen strong sales of its fee-friendly offerings and an increase in its overall advisory business across all distribution channels.

Luma enhances annuity and structured product comparison tool

Luma Financial Technologies, a multi-issuer structured products and annuities distribution platform, has added an “annuity replacement analysis” within its comparison tool, “Luma Compare.”

The new feature supplies advanced analytics for financial advisors to compare a client’s existing annuity product features, fees and values to a proposed annuity product replacement, including 1035 exchanges. The analysis that considers current and future market scenarios, as well as tailored breakdowns specific to an individual’s current income and death benefits in their existing product.

“The new tool can also be customized based on a firm’s suitability criteria, further ensuring compliance standards. Through historical data and future projections, Luma Compare offers advisors consistent, simple, and customized solutions with a higher level of accuracy,” said Keith Burger, Head of Distribution at Luma Financial Technologies, in a release.

The Luma structured products platform originated in 2018. In February 2021, Luman added annuities. Luma Financial Technologies, whose CEO and president is Tim Bonacci, was created in 2011.

Headquartered in Cincinnati, OH, Luma also has offices in New York, NY, Zurich, Switzerland, and Chile. Its services and technology are used by broker/dealer firms, RIA offices and private banks to automate and optimize the full process cycle for offering and transacting in market-linked investments. This includes education and certification; creation and pricing of custom structures; order entry; and post-trade actions.

Mutual of Omaha adds 401(k) technology from American Trust

Mutual of Omaha’s Retirement Services division and American Trust (AT) are partnering to offer an “open architecture retirement product” for retirement plan sponsors, participants, financial advisors and third-party administrators. AT Retirement Services is a unit of EdgeCo Holdings.

Laura Huscroft, VP of 401(k) with Mutual of Omaha Retirement Services, and Micah DiSalvo, Chief Revenue Officer at American Trust, made the announcement in a press release.

American Trust is a full-service provider of retirement plan solutions to advisors serving the small- and mid-sized plan market. With offices across the US, American Trust leverages a modern technology stack to offer innovative, high-quality recordkeeping and trust and custody services.

EdgeCo is a provider of technology-enabled solutions for financial intermediaries and their clients. These include full-service retirement plan administration, brokerage, advisory, and trust and custody services. Clients include registered representatives, investment advisors and other financial intermediaries including retirement plan recordkeepers, TPAs, bank trust departments, broker dealers and insurance companies.

The firm services approximately $150 billion under custody, administration and wealth, working with more than 15,000 financial advisors and 500 financial institutions.

Issues of Concern for Insurers in 2021

Posted on December 8, 2021 by No Author -

A Revolt Against PE-Led Annuity Issuers

Posted on December 8, 2021 by Kerry Pechter -

A Pittsburgh insurance broker and a Richmond, Virginia forensic accountant have developed an alternative rating system for measuring the ability of life/annuity companies to keep their promises even in market crises. They call it the Transparency, Surplus and Riskier Assets ratio, or “TSR” for short.

The TSR ratio is counterintuitive: It gives the poorest grades to the private equity-affiliated companies that have grabbed such a big share of fixed indexed annuity (FIA) sales in recent years. The best TSR scores go to mutual and fraternal insurers, which are owned by and serve only their policyholders.

Matt Zagula, the broker, and Tom Gober, the accountant, are bucking a major trend. The PE-affiliated life/annuity companies claim to have increased their solvency by using offshore reinsurance and by investing in sophisticated structured securities. Their FIA sales have grown apace. But Zagula and Gober say that such practices would actually weaken the ability of these insurers to pay their annuity owners in the next financial crisis. The TSR is designed to reveal the weaknesses.

Zagula has set up Smart Advisor Network, which he calls the first field marketing organization (FMO) to offer only annuities issued by mutual and fraternal insurers. He’s already launched a consumer-friendly FIA contract with a fraternal insurer. It’s called Aquila X.

In one sense, they’re merely assembling a modest boutique business for agents who like selling FIAs issued by conservative insurers. But they’re also taking a stand—charging that several major annuity issuers insurers may not deserve their high grades from ratings agencies because some of their operations and assets are too opaque.

In developing the TSR, they’ve dug through reams of official regulatory filings to assess the quantity and quality of the investments that support promises that FIA issuers make to policyholders. “We’re trying to shine a light on some of the shadowy areas that the ratings agencies just don’t call out,” Gober told RIJ in a recent interview.

TSR: ’Transparency, Surplus and Riskier Assets’

In the summer of 2020, one of Zagula’s clients inquired about the stability of GCU, a small Pittsburgh-based fraternal insurer that issues life insurance and fixed annuities. Unable to find a benchmark that satisfied him, Zagula called Gober, a Certified Fraud Examiner who serves as an expert witness in insurance fraud trials.

Matt Zagula

“The TSR ratio was created because of a client inquiry into GCU,” said Zagula, a trial lawyer’s son and former high school wrestler from Weirton, WV, once the home of Weirton Steel, a world-class steel plate producer. “I found Tom and asked him to write a report about GCU’s financial stability. Together we stumbled onto a formulaic approach to a core consideration: the amount of high risk assets combined with non-transparent captive reinsurance transactions, compared with surplus.” [An insurer’s surplus is equal to its assets minus its liabilities.]

There’s a key difference between the TSR and the kinds of complex actuarial processes that an NRSRO (Nationally Recognized Statistical Rating Organization) would use when rating the financial strength of a life insurer. Formal ratings agencies show what percentage of a life insurer’s total assets are risky (i.e., residential mortgage-backed securities, collateralized loan obligations). The TSR tells you what percentage of a life insurer’s surplus are either risky or unidentifiable assets (i.e., assets sketchily reported by a reinsurer in a regulatory haven like Bermuda).

“The TSR ratio tells you, in one number, if these companies have been too aggressive,” said Gober. “The ratings agencies and regulators might say that only 3% of a company’s total assets are in the high risk category. That makes it sound like nothing. But the TSR shows that, for example, the risky assets might be equal to 120% of the surplus. The TSR gives us a meaningful way to migrate policyholders away from [companies with] high risk balance sheets.”

Here’s an example of a TSR calculation from the members-only section of the Smart Advisor Network website. We’ll call it XYZ Lifeco. (The numbers, all from the company’s public regulatory filings, are changed slightly to maintain the company’s anonymity.)

XYZ Lifeco has $200 billion in total assets and a reported surplus of $8 billion. Of the $200 billion, about $30 billion is deemed higher-risk by regulatory standards. These consist mainly of structured securities (bundles of mortgages or loans) and other exotic products that are either less liquid, complex or hard to value. The company also has about $2 billion in assets that are reinsured by one of its own affiliated life insurers.

Add $2 billion to $30 billion, divide by $8 billion, and XYZ Lifeco gets a TSR score of 400%. The lower the TSR ratio, the better. XYZ’s score is on the border of acceptable and too high for comfort. “We like to see a TSR of lower than 400,” said Zagula. “There are a few large companies that are a little over 400 and don’t have a bad pattern of going crazy with their investment policy.”

A TSR score of 400 means that surplus would be wiped out if the risky assets were marked down by 25%. In that case, the company’s assets would be equal to its reserves—what it owes policyholders—and any additional losses would mean insolvency. The problem is that several of the biggest sellers of FIAs have TSR scores in the thousands.

TSR in the thousands

One prominent company affiliated with a giant private-equity holding company has a TSR ratio of more than 6,000. According to the Smart Advisor Network website, this company has a reported surplus of less than $2 billion but combined risky assets (Assets in the NAIC category known as “Schedule D” as well as assets reinsured by related companies or offshore) of more than $80 billion.

If those assets fell only 2.5% in market value during a financial crisis, all of the company’s reported surplus would vanish. This company has an A (Excellent) rating from AM Best, just under A+. An AM Best spokesperson declined our request for comment on the TSR approach.

The risky assets that contribute to a higher TSR rating include collateralized loan obligations (CLOs). Big asset managers can design tailor-made loans to companies with poor credit, then bundle the loans into CLOs. The senior tranches of these bundles are deemed investment grade but pay higher yields than the comparably rated corporate bonds that still make up the bulk of insurers’ general accounts.

Certain reinsurance practices also contribute to a higher TSR rating. Many life insurers reinsure blocks of in-force annuity contracts or even freshly issued annuity contracts. But when they buy reinsurance from a reinsurer in a regulatory haven like Bermuda, or a reinsurer that is a sister company in the same holding company, or when the reinsurer uses assets from a sister company to back the liabilities, those are all red flags for Zagula and Gober. They can’t readily ascertain the quantity, quality, or source of the assets backing the liabilities.

For instance, a life insurer in the US might reinsure $10 billion in liabilities in Bermuda, which uses so-called GAAP accounting rules instead of the SAP rules in the US, along with reserve assets to back them. Under GAAP, the liabilities can receive a lower valuation, so that the reinsurer might only need to post $7 billion in assets to back them. It then issues a “reserve credit” to the original issuer for $3 billion.

“The original issuer drops its liabilities by the full $10 billion but its affiliated reinsurer reserves only $7 billion, freeing up $3 billion for the original issuer to use however it wishes,” Gober said. “That’s not transparent. They should say, publicly, ‘We’ve dropped $10 billion in liabilities but our captive is only setting up $7 billion in assets to back them.’ But if they said it, no one would let them do it.”

A revolt against PE-led life insurers

Tom Gober

The creation of the Smart Advisor Network represents a kind of rebellion by advisors and agents who like the safety and upside potential of FIAs but don’t like the direction in which big alternative asset managers like Apollo, KKR, Blackstone have taken the life/annuity industry in.

Buying, investing in, or partnering with FIA issuers like Athene, Global Atlantic and F&G (respectively), the “insurance solutions” teams of these asset managers have revived yield-starved publicly traded life insurers by helping them move annuity liabilities off their balance sheets and add structured securities and private credit instruments to their general accounts.

Zagula and Gober are not the only ones who are wary of this trend. RIJ has published a series of articles about the trend, which we call the “Bermuda Triangle” strategy. Since 2011 or so, several academics have investigated it. These include Ralph Koijen of the University of Chicago, Motohiro Yogo of Princeton, and Nathan Foley-Fisher of the Federal Reserve.

Regulators are also watching this space. The National Association of Insurance Commissioners has closely tracked the rising use of private assets like CLOs, which closely resemble the CDOs (collateralized debt obligations) that helped cause the crisis of 2008. As RIJ has reported, other observers note the opportunities for conflicts of interest that arise when life insurers, asset managers, and reinsurers are closely affiliated.

Stock life insurers who have not yet partnered with PE firms have evidently expressed nervousness about structured products, which rely on financial engineering to deliver higher returns than corporate bonds at supposedly no higher risk. As a recent report from Cerulli Associates put it, “The resistance to structured products [among board members of stock life/annuity companies] comes from the memories of the great financial crisis.”

Smart Advisor Network

As an insurance agent, Zagula’s response to this trend has been to stop recommending the FIAs issued by PE-led life/annuity companies to his clients. As an entrepreneur, his response has been to start an insurance wholesaling organization doesn’t recommend products issued by PE-led or even publicly traded insurers. “We’re proud to be the first FMO to carry products only from mutuals and fraternal life insurers,” he told RIJ. Gober is a consultant to the business. The network has 186 member agents so far.

“It’s been a game changer for me,” said Terri Collymore, an Investment Advisor Representative, insurance agent and founder at More Advisory Group in Edina, MN, who joined Zagula’s FMO this year. “If you’re selling annuities and you don’t know about them, you’ll be in trouble. If you’re dealing with a stock company, you have to know their TSR. I tell my clients, ‘I work with a Smart Advisor Network, not a dumb advisor network.’” In return for a $197 per month fee membership fee, she said, she gets a wealth of support, data, and training from the Network.

This year, Smart Advisor Network launched Aquila X, an FIA that he calls a “unicorn”; it’s Zagula’s vision of the ideal indexed annuity. The issuer will be GCU, a $2.2 billion, Pennsylvania-domiciled, non-profit fraternal insurance company created in 1892 to serve the “Rusin” community. That is, Greek Catholics whose ancestors came from the “northeastern portion of pre-war Hungary, then-known as Uhro-Rusinia, now Slovakia,” according to GCU’s by-laws. They emigrated to Pennsylvania in the late 19th century to work in the anthracite coal mines.

Zagula’s FIA contract, Aquila X, offers a participation rate of 100% of the Barclays Zorya Index. It will differ from many FIAs in several pro-consumer ways, he said. Its crediting rates will be guaranteed for the 10-year life of the contract, not subject to surprise reductions by issuers. It will allow free withdrawals of up to 30% after the first three years. Its agent commission will be a percentage point lower than the usual rate, with the savings passed to the policyholder. Any used rider fees will be returned to the client, according to the Smart Advisor Network website. GCU has an ultra-low TSR ratio of 45%—its surplus is more than twice its level of high-risk or low-transparency assets.

Deferred Income Annuity Added to U. of California 403(b) Plan

Posted on December 2, 2021 by Editorial Staff -

The University of California (UC) has begun offering participants in its 403(b) defined contribution plan an opportunity to apply part of their target date fund (TDF) savings to the purchase of a deferred income annuity at age 65 and, by doing so, reduce their risk of poverty in old age.

Three financial services companies are working with the university: State Street Global Advisors (SSgA) provides the TDF and serves as the plan fiduciary; SSgA chose MetLife as the annuity issuer for 2021. Fidelity Investments is the recordkeeper of the UC plan, which has more than 300,000 participants and $34.6 billion in assets.

SSgA’s offering is called “IncomeWise.” The annuity is a QLAC, or Qualified Longevity Annuity Contract, which, under IRS regulations, allows retirees to devote as much as 25% of their tax-deferred savings (capped at $135,000) to the purchase of an annuity that starts paying a monthly income (with a 2% annual cost-of-living adjustment) at age 80.

“It’s a Qualified Plan Distributed Annuity,” David Ireland, global head of defined contribution at SSgA, told RIJ this week. “There’s a group life contract that the plan sponsor will sign, and at the point of distribution the participant will receive an individual certificate.”

David Ireland

Since 2017, UC has had a TDF series custom-built by SSgA for their participants. Before buying the annuity at age 65 (or soon after) they can increase the annuitized portion of their assets by moving money into the pre-funding sleeve, up to 25% of their savings. They can leave their remaining 403(b) savings in the UC plan if they wish. They have full flexibility with the rest of their assets.

“Whether the participants decide to purchase the annuity or not, when they reach age 55 we’ll begin to allocate a portion of their assets to the annuity pre-funding strategy. That will provide a fully liquid elongated fixed income exposure designed to look and feel like a fixed deferred annuity, with an LDI [liability-driven investing] strategy,” Ireland said.

“As the participant moves from age 55 to age 65, the proportion in the pre-funding strategy grows to 25%,” he added. “Age 80 is the default start date. [Annuitants] can bring the payment date forward at an age-adjusted payout rate, but by no more than five years. If they don’t decide to buy the annuity at 65, they can still buy it at age, say, 68.”

The plan’s annuity contract is a single premium QLAC. It includes a cash refund if the policyholder dies before income starts and a return of unspent principal if the policyholder dies while receiving income. SSgA’s regular TDF has a net annual expense ratio of 29 basis points (0.29%). Ireland said the UC version, with the QLAC, has an expense ratio that’s higher “by single digits.”

Along with the death benefit, there’s a 2% COLA built into the payout rate. Every September there will be a one-month window where 65-year-old participants can purchase the annuity. The annuities are gender-neutral, and State Street expects them to be priced favorably relative to retail QLACs because there’s no distribution cost. For 403(b) plans, participants do not need to get a spousal permission to buy a single-life annuity, but they would if it were an ERISA-governed 401(k) plan.

Various retirement companies and asset managers—Principal, Fidelity, BlackRock, and others—have been launching initiatives that will give retirement plan participants a chance to buy a lifetime income stream—typically a chance to buy a irrevocable SPIA (single premium immediate annuity) or a more flexible GLWB rider (guaranteed lifetime withdrawal benefit) on a deferred annuity.

State Street chose to offer a QLAC. Given the same purchase premium, the payout rate from a QLAC appears much more substantial than the payout from a SPIA, simply because the first QLAC payment is delayed by a decade or more. QLACs, which were created by the US Treasury in 2014, make it possible for retirees to buy deferred income annuities with tax-deferred money; otherwise that money would be subject to annual taxable distributions starting at age 72.

“At some level, our thinking eventually pointed us to the QLAC. Individuals are averse to allocating a large portion of savings to annuities. It made sense for us to ask them to apply a smaller percentage of their savings to the annuity. If you look at the payout of a QLAC at age 80 versus a SPIA at age 65, you’ll get three times as much money per month,” Ireland told RIJ.

Although MetLife is the annuity provider for 2021, SSgA might pick a different insurer to issue the contract next year. It depends on who wins a bidding contest. “Each year SSgA will go out and, acting as the fiduciary, will vet the potential life insurers and come up with an approved slate of insurers. Then they will have an opportunity to bid on the annuitization,” Ireland said.

The existence of the project has been known for some time, but SSgA didn’t announce it until now, waiting until after the first annuity enrollment period last September. “UC hired us to be their custom TDF manager in 2017 with the end intention of moving toward an income oriented solution. Phase I was the custom TDF part, and then Phase II was the income part,” Ireland said.

TDFs originated as a default investment for participants who weren’t engaged enough in the savings process to choose their own funds. Ireland was asked if TDF investors and annuity purchasers—highly engaged, high-salary employees—might be two different groups. He said that high-salary employees increasingly use TDFs.

“We find that the vast majority of flows [of contributions] are going into TDFs, regardless of the participant’s compensation level,” he said. “TDFs have proven to be a solid default solution. We’re seeing growth across all cohorts. As DC plans become the public’s primary savings vehicle, I think we’ll see balances grow. In the narrow segment of individuals with hundreds of thousands of dollars in the accounts, we’re seeing savvy individuals move money out of the core funds and map them into the TDF.”

At present, UC is the only SSgA TDF client to have the income option. Ireland expects more corporate clients to start asking for it. “We’re approaching $150 billion in our TDF series, so the UC project represents less than 10% of our total,” he said. “I view IncomeWise as the next generation of TDF. I see our entire TDF franchise extending into retirement income. We’re already having conversations with existing TDF clients about it.”

Don’t Fight Inflation with Unemployment

Posted on December 2, 2021 by Kerry Pechter -

Our most basic assumptions about inflation might be flat wrong.

The great danger for policymakers when confronting inflation, warned economist Abba Lerner in an excellent but almost forgotten book, Flation (Not INflation of Prices, Not DEflation of Jobs (Quadrangle, 1972), is to misdiagnose its cause and prescribe the wrong remedy.

Unfortunately, that’s been known to happen.

In the late 1960s, for instance, after military spending on the Vietnam War had begun to overheat the economy, President Nixon prescribed “wage and price controls.” Controls didn’t work (they never do). Neither did Nixon’s fateful decision to end the gold standard in 1971.

Federal Reserve chairman Paul Volcker chose to let the federal funds rate rise to an all-time high of 20% in 1980. For that he is famously credited with ending the inflation of the 1970s. But while Volcker’s action did reduce inflation, it also drove the unemployment rate to 10% and plunged the economy into recession.

The more conspicuous causes of inflation in the 1970s were the oil price spikes and shortages, which were triggered by the dollar’s loss of value after abandonment of the gold standard. And it may well have been the permanent drop in the price of oil in 1981—not the higher interest rates—that cooled the inflation.

Here’s what a 1986 article from the Brookings Institute said:

“In 1973-74, the real price of crude oil more than tripled. After declining slightly in 1975-78, it doubled again in 1979-80. But the 1979-80 price increase was eroded between 1981 and 1985, as price declined by nearly 40%. Price then collapsed in the first half of 1986, falling by more than 50%. Within the past five years [since 1981], the real price of oil has fallen from more than a five-fold multiple of its 1970 value to less than a two-fold multiple.” (Brookings Papers on Economic Activity, 2:1986.)

Maybe it’s a mistake to remember Chairman Volcker as the person who doused the inflation fire in the early 1980s. Maybe we should remember him as the man who, more like Mrs. O’Leary’s cow and the Great Chicago Fire of 1871, sent asset prices down and sparked a 40-year bull market in stocks and bonds.

At the end of September 1981, the 10-year Treasury rate peaked at 15.84%. In 1982, the S&P 500 Index fell to 312.5, a level it hadn’t seen since the middle of 1954—lower than it had been in the 1974 recession. Since prices of existing bonds move in the opposite direction of interest rates, Volcker’s actions also drove down the prices of existing bonds and set the table for a decades-long bond rally.

Those were not the worst of times for investors. They were the most opportune time.

Anyone who recognized the exquisite buying opportunity of the early 1980s—when know-nothings like me started getting cold calls from the newly hired army of stockbrokers—was able to get in on the ground floor of a boom. The falling interest rates and rising government spending that followed has kept the boom alive.

If you were smart enough, prosperous enough, or lucky enough to start throwing money into stocks, bonds or a house in the 1980s and 1990s, you’re probably well-fixed for retirement. But if you couldn’t afford to save much, or if your blue-collar job was effectively doomed by the trade deals with Mexico (1994) and China (2000)—you’ve probably experienced the bitter end of the growth in “inequality” that belies our immense aggregate wealth.

An increase in unemployment is worse than an increase in inflation, according to Lerner. Mild inflation isn’t very dangerous, he wrote. On the contrary, it often accompanies a rise in purchasing power and prosperity. Unemployment, on the other hand, is “the basic sickness” that must be avoided. When policymakers react to inflation by raising interest rates, businesses borrow less, asset prices get marked down, factories cut back production, and people lose their jobs. A wicked cycle begins.

I’m not an economist. Someone else might choose a different set of historical “dots” to connect, and arrive at a completely different explanation for the past 40 years of American economic history. History furnishes us with as many dots as there are stars in the night sky, and we can create any pattern of constellations with them.

I do not buy the popular assumption that the federal government bleeds the private sector for financing, that we must eradicate the national debt and the boomers must die before the US economy can normalize. In this “freshwater” economics view, the federal government is trapped. Keeping rates low will stoke inflation and raising rates will make it too expensive to service the federal debt.

If all that were all true—if the insatiable government snake were in fact consuming the private sector tail—the economy would have collapsed by now. Rather, the evidence suggests that the federal government finances the private sector. If Uncle Sam stopped spending or the Fed raised rates sharply, prices of stocks and bonds would collapse. It was the government that bailed out the private sector in September 2008 and March 2020, not the reverse.

Most people think my view is nonsense. But that’s my story and I’m sticking to it.

Looking to the future, it would be a shame if Fed chairman Jay Powell decided to fight an inflation that is caused by supply chain bottlenecks by raising the fed funds rate. Higher rates won’t unload Chinese container ships any faster, or increase the flow of computer chips from Taiwan.

I’m not against higher rates. Near-retirees would probably enjoy more savings options—and life insurers would not be so constrained—in a world where the 10-year Treasury bond yielded 3% per year and A-rated corporate bonds a bit more. But restoring a “Goldilocks” rate environment without a painful mark-down in fixed income and equity prices—and without higher unemployment—will be difficult.

How to Dodge the ‘Inflation Ninja’

Posted on December 2, 2021 by Kerry Pechter -

Like a tropical storm, inflation is whirling toward our shores—and wallets. But will we suffer a full-blown price hurricane, a transitory bout of excess liquidity, or just hot air from forecasters? No one is sure.

That leaves investors and their financial advisers scrambling to batten down their savings and purchasing power. People want to know: What’s the asset-allocation equivalent of plywood-ing your windows and sandbagging your doors?

A recent article in The Journal of Investing, “Protecting Portfolios Against Inflation,” provides a compilation of anti-inflation pills that might chill your anxious clients. The authors don’t offer silver bullets; instead, they’ve culled a lot of sensible advice from “the literature.”

“We do not present original research,” write Eugene Podkaminer and Wylie Tollette (both of Franklin Templeton), and Laurence Siegel (of the CFA Institute), “but we believe that our style of compiling, curating, and explaining established concepts will be helpful to most readers.”

Noting that only one major inflation tornado (in the 1970s) has ever ripped across America, they review US financial history and weigh in on the pros and cons of holding stocks, bonds, commodities, real estate, international assets, and Treasury Inflation-Protected Securities (TIPS) during (and after) an inflation shock.

Larry Siegel

Instead of looking at inflation as a storm, they compare it to a Japanese martial arts expert.

“Inflation is like a ninja,” they write, in a style that bears the imaginative stamp of Siegel’s books and essays. “Although inflation has not seemed like a threat to portfolio values for a very long time, the winds have shifted and investors are, and should be, more vigilant. Beware the ninja.”

Assets and inflation

Here’s their summary, verbatim:

Bonds. The conventional wisdom that bonds are a poor (or negative) hedge against inflation shocks is correct, for mechanical reasons: an increase in interest rates caused by an increase in inflation expectations causes bond prices to fall.
However, if the inflation shock is one-time, and a new, higher but stable inflation rate is established, the new, higher yield of the bond compensates for the higher inflation rate and the real return of the bond going forward is similar to what it was before. The shock is reflected in a one-time loss of value.
TIPS. Inflation-indexed bonds, such as Treasury Inflation-Protected Securities (TIPS), hedge against inflation shocks. Their chief drawback is their low—at this time, negative—real yields. However, if inflation becomes very severe, TIPS will offer protection that cannot easily be obtained in any other way.
Equities. The relationship between inflation shocks and equity returns is complex. Conceptually, equities as a class are real assets (claims on factories, trucks, patents, labor contracts, and so forth) and are intrinsically inflation-protected.

Empirical evidence from the one major upward inflation shock in the US in the past, however, shows the opposite relationship: inflation hurts stocks, at least in the short and intermediate runs. Stocks are thus a plausible inflation hedge only for the longest-term investors, those who can wait for a disinflationary period (if it occurs) after inflation rates have peaked; at that later date, stocks should perform very well.

Different stocks react differently to inflation shocks. A company that easily can pass cost increases on to its customers is much better protected against inflation shocks than a company that cannot. Thus, careful active management may benefit investors who foresee an inflation shock.

For a US investor, non-US stocks are a potential hedge against a US inflation shock, partly because of the foreign currency exposure.
Alternative assets. Real estate is a traditionally good hedge against inflation. In particular, residential real estate values tend to rise with incomes. The relationship is not perfect, as we saw with the housing bust in 2007–2009, which took place under conditions of mostly stable and positive inflation.

Commodities are another traditional inflation hedge and are negatively correlated to growth assets (equities) but are extremely volatile.

A bright, post-Boomer future?

Looking to the future, the paper’s authors see a major macroeconomic bind ahead for US policymakers. On the one hand, the US government wants interest rates to stay low so that it can finance the national debt and deficit spending relatively cheaply. On the other hand, they say, inflation is inevitable if the government doesn’t run budget surpluses and use the excess to reduce its debt.

A combination of enforced low interest rates and high inflation would mean negative real returns on government debt; they don’t think investors would agree to finance the government on that basis. So we can’t borrow our way out of the bind, we can only grow our way out of it by increasing productivity.

“There is a way to solve the debt problem. This does not mean it will be solved. Increases in government spending beyond the growth rate of productivity seem to be baked into the cake for quite a while. Mostly, the increases consist of entitlement spending for aging baby boomers, who are scheduled to receive large Social Security and Medicare benefits,” they write.

“Eventually, they’ll die and the country will be younger and fiscally healthier, but that is in the far future, beyond the maturity date of all but the longest-term Treasury bonds and beyond the time horizon of most investors.”

Relief might not be so far off. According to the US Baby Boomer Generation Population Death Clock, more than 28% of the original 85 million baby boomers (born 1946 to 1964) have already died. By 2034, when the Social Security trust fund is expected to run dry, more than half of boomers are likely to be dead—and no longer a burden.

FIAs maintain sales momentum in 3Q21: Wink

Posted on December 2, 2021 by Editorial Staff -

Total deferred annuities sales in the third quarter of 2021 were $59.8 billion, down 7.1% from the previous quarter but up 10.4% from the same period in 2020, according to the 97th edition of Wink’s Sales & Market Report for 3rd Quarter, 2021.

The Wink survey included 63 indexed annuity providers, 46 fixed annuity providers, 69 multi-year guaranteed annuity (MYGA) providers, 14 structured annuity providers, and 43 variable annuity providers.

“Indexed annuity sales not only increased [to $17.3 billion] in the third quarter, but they are up more than 25% from this time last year. If it not for this, annuity sales would have been down across the board this quarter,” said Sheryl Moore, CEO of Wink, Inc. and Moore Market Intelligence, in a release.

Sales of structured annuities—aka Registered Index-Linked Annuities—in the third quarter were $9.1 billion, down 7.5% from the previous quarter, but up 45.8% from the previous year. Structured annuities have a limited negative floor and limited excess interest that is determined by the performance of an external index or sub-accounts.

“After four straight quarters of sales increases, structured annuity sales took a hit. That said, structured annuity sales YTD already put the line of business in a record sales position,” Moore said.

Survey highlights

Jackson National Life ranked as the top seller of deferred annuities overall, with a market share of 8.0%, followed by Allianz Life, Equitable Financial, AIG, and MassMutual. Jackson’s Perspective II Flexible Premium Variable & Fixed Deferred Annuity, was the top selling deferred annuity and the top-selling variable deferred annuity or the 11th consecutive quarter.

Jackson National Life also ranked as the top seller overall of variable deferred annuity sales, with a market share of 15.4%, followed by Equitable Financial, Lincoln National Life, Brighthouse Financial, and Nationwide.

Total third quarter non-variable deferred annuity sales were $29.2 billion, down more than 7.4% from the previous quarter and down 5.5% from the same period last year. Non-variable deferred annuities include the indexed annuity, traditional fixed annuity, and MYGA product lines.

Non-variable deferred annuities

MassMutual was the top seller of non-variable deferred annuities, with a market share of 10.0%, followed by Allianz Life, Athene USA, AIG, and Global Atlantic Financial Group. The Allianz Benefit Control Annuity, an indexed annuity, was the top-selling non-variable deferred annuity.

Total third quarter variable deferred annuity sales were $30.6 billion, a decrease of 6.8% when compared to the previous quarter and an increase of 31.73% when compared to the same period last year. Variable deferred annuities include the structured annuity and variable annuity product lines.

Indexed annuities

Fixed indexed annuity (FIA) sales for the third quarter were $17.3 billion, up 4.0% from the previous quarter and up 25.6% from the same period last year. Allianz Life ranking as the top seller of indexed annuities, with a 13.3% market share. Athene USA ranked second, followed by AIG, Fidelity & Guaranty Life, and Sammons Financial Companies. Allianz Life’s Allianz Benefit Control Annuity was the top-selling indexed annuity.

Traditional fixed annuity sales in the third quarter were $360.7 million. Sales were down 21.9% when compared to the previous quarter, and down more than 26.1% when compared with the same period last year. Traditional fixed annuities have a fixed rate that is guaranteed for one year only.

Traditional fixed annuities

Global Atlantic Financial Group sold the most fixed annuities, with a market share of 22.6%, followed by Jackson National Life, American National, EquiTrust, and AIG. Forethought Life’s ForeCare Fixed Annuity was the top-selling fixed annuity, for all channels combined for the fifth consecutive quarter.

Multi-year guaranteed annuity (MYGA) sales in the third quarter were $11.5 billion, down 20.2% from the previous quarter, and down 30.8% from same period last year. MYGAs have a fixed rate that is guaranteed for more than one year. MassMutual ranked as the top seller, with a market share of 17.5%, followed by New York Life, Global Atlantic Financial Group, AIG, and Symetra Financial. MassMutual Life’s Stable Voyage 3-Year was the top-selling MYGA for all channels combined for the second consecutive quarter.

In structured variable annuities, Equitable Financial ranking was the top seller in the quarter, with a market share of 20.9%, followed by Allianz Life, Brighthouse Financial, Prudential, and Lincoln National Life. The top-selling structured annuity contract was Pruco Life’s Prudential FlexGuard Indexed VA.

Variable annuities

Variable annuity sales in the third quarter were $21.5 billion, down 6.5% from the previous quarter and up 26.5% from the same period last year. Variable annuities can lose money; gains are determined by the performance of the assets in the subaccounts. Jackson National Life was the top seller of variable annuities, with a market share of 21.9%, followed by Nationwide, Equitable Financial, Lincoln National Life, and Pacific Life.

Denmark’s ‘Arnes’ can apply for early pensions

Posted on December 2, 2021 by Editorial Staff -

Nearly 30,000 Danes have applied for early retirement under a new program set up by the Danish government, IPE.com reported. The popularity of the option, which became available last August 1, is seen as validation for the idea that blue collar workers may need to retire early.

“The figures tell me that there has been a need for a solution, with an objective right for those citizens who have slaved away in the labor market for a great many years,” said Mattias Tesfaye, Denmark’s acting minister for employment and gender equality.

Danes who were born before December 31, 1953, qualified to receive the state pension at age 65. The pension age has gradually risen; those born after January 1, 1967, won’t qualify until age 69 (depending on future indexation for changes in longevity), according to lifeindenmark.borger.dk.

The program—the “Arne” pension, using a popular nickname for older male Danish workers—allows people to retire up to three years before reaching the national pension age if they have already worked for 42, 43 or 44 years (including periods of unemployment, parental leave and training).

Insurance and Pensions Denmark (IPD), a lobbying group, has objected to the new financial tax that will pay for it. IPD said that the proposed financial tax could extract as much as 1.5 times the revenue needed from companies, and that revenue from better enforcement of the existing tax laws could pay for Arne instead.

According to a report in IPE.com last October, around a third of the annual extra pension costs of 2.4 billion Danish krone ($370 million) in 2022, rising to 3.5 billion krone ($530m) in 2026, will be paid for starting in 2023 by a “social contribution from the financial sector,” with the rest being largely financed by taxing companies’ property holdings and a reorganization of municipal job center work.

The Ministry of Employment said of the 29,893 applications it received in the last four months, around 10,500 people had been granted the maximum early retirement entitlement. More than 11,500 had been allowed to retire one or two years early, and more than 14,500 had been asked to provide additional documentation.

Federal Spending in 2021

Posted on December 2, 2021 by No Author -

Share of ‘advisor-reliant’ investors grew since 2015: Cerulli

Posted on November 25, 2021 by Editorial Staff -

Affluent investors are more frequently seeking advisor guidance while also becoming more involved in their portfolios, creating a complicated engagement environment for advisors, according to the latest issue of Cerulli Edge—U.S. Retail Investor Edition.

The proportion of affluent investors who consider themselves predominantly “advisor-reliant” rose to 42% in 2021 from 37% in 2015. The incidence of maintaining self-managed accounts rose to 69% from 35% during the same period. More than two-thirds (69%) of affluent investors now report owning self-managed accounts, encompassing 33% of their overall investment assets.

Mid-life, affluent investors (ages 40–49) report the highest incidence (77%) of maintaining self-managed accounts. They often carry legacy accounts established earlier in life and lifecycles and have self-managed accounts as a result of rollovers from retirement plans with previous employers. Rising account balances and “taking retirement planning more seriously” in middle age increases their interest in engaging with advice professionals.

“In these cases, advisors are well served by acknowledging the progress the self-managed investor has made on their own, and then highlighting the additional value their practice can provide,” said Scott Smith, director. “Investing can seem easy with a long-time horizon and few obligations, but as these investors encounter the intersection of funding their children’s post-secondary education and their own retirement, spreading the responsibility can be a welcome relief.”

Regardless of where investors fall on the self-managed continuum, the responsibility lies with the platforms they use to make sure that these investors are provided with access to both usable and worthwhile research tools and the opportunity to easily broaden the depth of their advice relationship, Cerulli believes.

“Moving forward, self-managed accounts will increasingly serve both as an acquisition tool to develop lifetime wealth management clients and as a long-term complement to fully advised relationships,” said Smith. “To optimize their market opportunity, firms will need to both prove the value they can provide in each setting and make the interaction between them seamless based on the user’s preferences rather than their platform’s limitations.”

Personal Consumption Expenditure (US, 3Q2021)

Posted on November 25, 2021 by No Author -

Pacific Life and tech partners develop annuity tool

Posted on November 25, 2021 by Editorial Staff -

Pacific Life is collaborating with Ensight and Insurance Technologies on a new sales tool that links to its current illustration software to create an “interactive, personalized presentation or e-brochure” that advisers and agents can share with clients, the Newport Beach, CA-based mutual insurer said in a release.

Financial professionals can use the tool to help clients compare and contrast two or more annuities, based on separate illustrations. The tool shows the hypothetical performance of the annuities over time and the amount of lifetime income they could provide under different circumstances.

To receive the tool, financial professionals should ask their Pacific Life consultative wholesalers for the Ensight presentation or e-brochure when they request an illustration. If more than one illustration is requested—showing more than one product or solution—the resulting interactive output may help determine which product and optional benefit may be most suitable for that client.

“We have enhanced our application programming interfaces to allow our carrier partners to easily integrate their illustrations within new solutions,” said Doug Massey, EVP of Sales & Relationship Management, Insurance Technologies. “By integrating Ensight presentation with ForeSight, Pacific Life can leverage its compliant illustration calculations in an interactive solution that makes it easy to communicate the value proposition in its products and riders that best meets the client’s needs.”

For more information about this new tool, financial professionals are invited to contact a Pacific Life consultative wholesaler at (800) 722-2333 or visit Annuities.PacificLife.com.

How inflation impacts 2022 tax provisions: Wolters Kluwer

Posted on November 25, 2021 by Editorial Staff -

With inflation rising in 2021, the tax provisions subject to automatic inflation adjustments in the Internal Revenue Code are also seeing somewhat larger adjustments for 2022 than in recent years, according to tax and accounting division at Wolters Kluwer.

Congress continues to increase the number of tax provisions subject to automatic inflation adjustments. There are over 60 provisions in the Tax Code subject to inflation adjustments, and an additional set of retirement plan limits subject to a separate inflation adjustment calculation.

Taxpayers with the same income in 2022 as in 2021 will tend to experience a lower tax rate in 2022 than in 2021 due to automatic inflation adjustments. Taxpayers can use many of the inflation adjustment figures to modify their tax planning for 2022.

Some of the changes include:

Individual tax rates. The top of the 10% tax rate increases to $10,275 in 2022, an increase of $325 over 2021, as compared to an increase of $75 from 2020 to 2021. The bottom of the 37% tax bracket will rise $19,550 for 2022, to $647,850, after rising $6,250 from 2020 to 2021

Standard deduction. For single taxpayers, the standard deduction increases to $12,950 in 2022, up $400 over 2021, after increasing $150 from 2020 to 2021. For joint filers, the standard deduction increases to $25,900 in 2021, up $800 over 2021, after increasing $300 from 2020 to 2021

Estate tax unified credit. The estate tax unified credit for 2022 is $12,060,000, up $360,000 from 2021, after increasing $120,000 from 2020 to 2021

401(k) employee contributions. The elective deferral limit for 401(k) plans increases to $20,500 for 2022, up $1,000 from 2021, after an increase of $500 from 2020 to 2021

IRA contribution limits. The IRA contribution limit remains unchanged at $6,500 between 2021 and 2022 after increasing $500 between 2020 and 2021. (Increases to this limit are made only in $500 increments.) The phase-out range for deductible contributions for single filers starts at $68,000 for 2022, up $2,000 over 2021, after increasing $1,000 from 2020 to 2021. The phase-out range for deductible contributions for joint filers starts at $109,000 for 2022, up $4,000 over 2021, after rising $1,000 from 2020 to 2021.

Retirement Income Journal takes a holiday break

Great American offers fixed multi-year guaranteed rate annuity for RIAs

Lincoln’s 401(k) adds Income America 5For Life

Jackson buys back 2.2 million shares of common stock; promotes Romine and Reed

SEC proposes more disclosure of stock buybacks

US life/annuity sector now ‘stable’: AM Best

Athene Holding invests in Hong Kong insurer

Don’t zig-zag

Despite high ratings, F&G’s quality of capital is ‘diminished’: AM Best

Kanelos named executive chairman of Bermuda-based Oceanview Re

Net income of life/annuity companies on track to double this year: AM Best

Pacific Life enhances offerings for RIAs

Luma enhances annuity and structured product comparison tool

Mutual of Omaha adds 401(k) technology from American Trust

TSR: ’Transparency, Surplus and Riskier Assets’

TSR in the thousands

A revolt against PE-led life insurers

Smart Advisor Network

Assets and inflation

A bright, post-Boomer future?

Survey highlights

Non-variable deferred annuities

Indexed annuities

Traditional fixed annuities

Variable annuities

Data Connection

Lists*