Archives: Articles

IssueM Articles

Breaking News

Posted on January 14, 2022 by Editorial Staff -

DPL and Security Benefit add ‘total return’ index option to FIA

DPL Financial Partners, the insurance purchasing platform for Registered Investment Advisors, has partnered with Avantis Investors and Security Benefit Life on the design of a new, no-commission, fixed indexed annuity contract availability only to DPL customers.

The contract, Security Benefit Life’s ClearLine fixed indexed, will feature the Avantis Barclays Volatility Control Index, created by Eduardo Repetto and Pat Keating of Avantis Investors.

A total return index, its performance of the Avantis Barclays Volatility Control Index includes the dividend yield of the underlying companies.

(Many indexed annuities now offer bets on price return indices that don’t include dividends. Since options on those indices tend to be cheaper than options on total return indices, issuers can set afford to higher caps on their performance. Whether a higher cap on a price-return index will beat a lower cap on the total-return version of the same index, it’s impossible to predict.)

In a release, Avantis Chief Investment Officer Eduardo Repetto said, “FIAs can complement an existing allocation of equity and fixed income. FIAs offer risk mitigation, like fixed income, while diversifying the driver of returns away from bond yields. I think this structure can help advisors improve their clients’ portfolios, in particular during these times of extremely low bond yields.”

Security Benefit’s ClearLine Annuity, designed by DPL with Security Benefit, also offers a lifetime income rider with a 2% annual increase on income.

Americans expect market volatility in 2022: Allianz Life

The average American worries a lot: about COVID mutations, potential blitzkrieg in eastern Ukraine, and the rising prices of gas and groceries. That’s in addition to the baseline “It’s-always-something” problems that they wake up to each morning.

In the financial realm, more than 75% of Americans believe the markets will be “very volatile” in 2022, according to the 2021 Q4 Quarterly Market Perceptions Study from Allianz Life. Two out of three American fear that a COVID-driven recession ad almost three-fourths fear worry about an imminent loss of purchasing power.

Another 64% of those surveyed say their income isn’t rising as fast as their expenses. The same percentage worry about tax increases. In Allianz Life’s other findings:

57% say risks from market volatility will have a major impact on their plans to retire in the next few years
61% say they are worried their current financial strategy won’t provide the lifestyle they’d like to have in retirement.
One-third say that putting some money into a financial product that provides a guaranteed stream of income in retirement is the most important step in having a secure retirement
39% of Gen Xers expressed the most interest in a product that offers guaranteed income, compared with 33% of Millennials and 30% of boomers
66% of Americans believe it’s important to own a financial product that protects their retirement savings from market loss

Allianz Life conducted an online survey, the 2021 Q4 Allianz Life Quarterly Market Perceptions Study, in December 2021 with a nationally representative sample of 1,004 respondents age 18+.

Lincoln redesigns participant-facing website

Lincoln Financial Group has elevated a new retirement plan participant website, featuring “intuitive navigation” and “innovative tools to help participants plan for and achieve income in retirement,” according to a Lincoln release this week.

The new mobile-adaptive design provides “a simple and secure digital experience” including “a clear picture of where they are on their paths to retirement” and making it easy to “increase contributions.”

“Through our newly redesigned site, participants can access personally relevant information and streamlined plan transactions — all designed to drive positive outcomes,” said Sharon Scanlon, senior vice president of Customer Experience, Producer Solutions and Retirement Plan Services Operations at Lincoln Financial Group.

“Through research, user analytics and usability testing, this new digital experience is designed to help meet the evolving needs, wants and expectations of plan participants, and help them save for and work toward the retirement they envision.”

The pandemic has inspired almost 80% of US workers to reevaluate their finances, career and retirement, according to Lincoln Financial Group’s 2021 Retirement Power study. Lincoln’s new participant site features include:

“My Target” tool: This personalized digital calculator helps participants estimate their retirement income and determine if they are on track for retirement.

Investments: New, easy-to-understand investment graphs help participants understand where their money is allocated and how their account has grown over time.

My Next Steps: This feature shows participants how to improve retirement readiness.

Mobile-Enabled Navigation: Participants can now manage their account anytime, anywhere with a mobile adaptive design, while ongoing investments in cybersecurity help keep plan and participant information secure.

The new platform also features a content hub with videos, articles and tools to educate participants, as well as single sign-on access to Lincoln WellnessPATH, an online financial wellness solution.

MassMutual flies into the ‘Bermuda Triangle’

Posted on January 14, 2022 by Kerry Pechter -

MassMutual is now active in what RIJ calls the “Bermuda Triangle” business. There’s no reason why a strategy that’s been productive for publicly traded life insurers can’t work for a big mutual company. And, since buying Great American, MassMutual sells fixed indexed annuities—a key input of the triangle play.

This week, the 160-year-old giant mutual insurer helped launch Martello Re Limited, a licensed Class E Bermuda-based life and annuity reinsurance company. A consortium of MassMutual, Centerbridge Partners, Brown Brothers Harriman, and Hudson Structured Capital Management Ltd. capitalized Martello Re with equity of $1.65 billion.

Centerbridge, an alternative asset manager, and Barings—MassMutual’s own $300 billion investment arm—will act as asset managers for Martello Re, “providing access to extensive public and private asset origination and underwriting capabilities across all asset classes.”

Roger Crandall, chairman, president and CEO of Massachusetts Mutual Life Insurance Co.

MassMutual, based in Springfield, MA, and its subsidiaries will initially reinsure approximately $14 billion of general account liabilities with Martello Re and also enter into a flow arrangement to reinsure new business. Both transactions are expected to close in February 2022 and have received regulatory approval.

By reinsuring those liabilities in Bermuda, MassMutual will likely see a big drop in its required surplus, which means it will suddenly have perhaps hundreds of millions of dollars freed-up for new uses. Many publicly traded life insurers are spending their “released capital” on share buybacks. It’s not clear what a mutual insurer, which has policyholders rather than shareholders, might do with such a windfall.

Martello Re “will initially focus on providing MassMutual and its subsidiaries with reinsurance capacity on current product offerings, after which it will offer its services selectively to other top insurers in the life and annuity space,” according to a release.

All three corners of the Bermuda Triangle strategy are here: A life insurer that gathers lots of fixed-rate and fixed indexed annuity premiums each year; a well-capitalized reinsurer in a jurisdiction with a GAAP accounting regime; and an alternative asset manager that originates customized private credit instruments.

In the first half of 2021, MassMutual sold $1.7 billion worth of fixed-rate annuities, $618 million worth of fixed indexed annuities (FIAs) and $553 million of payout annuities (immediate income annuities, deferred income annuities, and structured settlements) in the US, according to LIMRA. In May 2021, MassMutual paid $3.5 billion for Great American, a well-established FIA builder. In the first half of 2021, MassMutual and Great American combined for $1.85 billion in sales of FIAs—enough to rank fifth in FIA sales overall.

In the strategy, the life insurer sells annuities, then reinsures the liabilities (releasing priceless surplus capital as a result) and sends the money to the alternative asset manager for deployment. The asset manager lends that money to credit-starved businesses (currently underserved by banks), using its financial engineering skills to turn those loans into sophisticated assets with a variety of risk/return profiles.

Some of those assets—collateralized loan obligations, senior tranches of mortgage backed securities—are held by the original life/annuity company. But the asset managers are also feeding an enormous global demand from endowments, family offices, corporations and other insurance companies who can no longer get the yield they need by buying plain-vanilla corporate bonds in the public markets.

What’s confusing is that life insurers appear in different roles at different times in this drama—sometimes as the targets of acquisition, as clients of alt-asset managers, often as purchasers of exotic risk-managed products, and sometimes as part of a holding company that brings the whole business under one roof—thus enjoying all sorts of synergies, efficiencies and, sometimes, conflicts of interest.

Martello Re will be led by CEO Dennis Ho, a 22-year industry veteran and life actuary who most recently founded Saturday Insurance, an online insurtech platform. Prior to founding Saturday, Ho held a range of other leadership roles including CEO for Longitude Re, Managing Director at BlackRock Solutions, and Head of US Life Insurance Solutions at Deutsche Bank.

Martello Re will be overseen by a Board of Directors made up of investors and Martello Re’s CEO. The initial members of the Martello Re Board of Directors will include Chairwoman Ellen Conlin from MassMutual and Michael Baumstein of Barings, Matthew Kabaker and Eric Hoffman from Centerbridge, Jeff Meskin and Taylor Bodman from Brown Brothers Harriman, and Mr. Ho.

Following MassMutual’s announcement, AM Best commented, “The credit ratings of Massachusetts Mutual Life Insurance Company and its life/health subsidiaries, remain unchanged following the Jan. 12, 2022, announcement that it has launched a licensed Class E Bermuda-based life/annuity reinsurance company, Martello Re Limited (Martello Re).”

‘Smart,’ from UK, Enters the US PEP Market

Posted on January 14, 2022 by Kerry Pechter -

During a Zoom conference last fall on the future of defined contribution (DC) plans, I used the “Chat” function to chat up another attendee. Sidebar conversations during webinars are wrong, apparently—like passing notes in class. I might have lost my seat at the conference because of it.

But I wanted to make contact with that other attendee, Catherine Reilly. She’s the director of Retirement Solutions at Smart, the recently established US branch of a substantial defined contribution retirement plan recordkeeper in Britain called Smart Pension.

In the UK, Smart runs a $2.7 billion, 80,000-employer “master trust.” That’s the British version of Pooled Employer Plans (PEP), the multiple-employer plan design enabled by the SECURE Act of 2019. In the US since October 2020, Smart’s “recordkeeping solutions and retirement income solutions are purpose-built for PEPs,” according to its website.

With US headquarters in Nashville, Smart is moving fast. With capital from JP Morgan, Barclays, Natixis, Chrysalis, and Legal & General Group plc, Smart has just bought Stadion Money Management, a managed account provider, and is partnering with Finhabits, a provider of bilingual (Spanish/English), smartphone-mediated financial services.

For RIJ, Smart is interesting because it aims to reduce the often clunky process of accessing 401(k) savings in retirement to a few thumb strokes on a smartphone or key strokes on a laptop, while also helping retirees bucket their savings into short-term, medium-term and long-term money.

Historically, US recordkeepers have performed this critical function reluctantly, inefficiently or not at all. But without it, they’re just giving retired participants a reason to roll their money over to an (expensive) brokerage IRA. “The retirement income feature keeps people in the plan,” Smart’s US CEO Jodan Ledford told RIJ in an interview. “This optimizes their ability to preserve their base.”

The ‘grout in the mosaic’

Jodan Ledford, CEO of Smart USA

Ledford is responsible for growing Smart in the US. He already has a track record here. In his last job, he grew Legal & General’s US asset management business seven-fold, to $210 billion. Despite his British-sounding name, he’s an American. He tends to describe Smart’s services in metaphors.

“I like to use the term, mosaic,” he said in the interview. “In a pooled employer plan, for instance, the investment manager, the recordkeeper, and the plan administrator would be the pieces of the mosaic, and we could be the ‘grout.’ Or we could be the pooled plan provider that selects the other pieces.

“We will likely partner with recordkeepers to offer PEPs. Or we could be the 3(16) TPA (the third-party administrator, with fiduciary responsibilities). What we don’t provide is the 3(38) role (the asset manager with fiduciary responsibility for managing the investments in the plan).

“Say, for instance, that we approach a large registered investment advisor (RIA) or broker-dealer with financial advisers who serve small business plans. We say, ‘You can be the 3(38) fiduciary and select the funds.’ The RIA tells its advisers, ‘Here’s a new pooled employer plan. We have a system that lets you sign up the small business clients in less than hour.’ It lets the RIA or the broker-dealer do more business with small plans,” Ledford said.

“We could also partner with a recordkeeper, or with a large pension risk transfer company,” he added. “They could say to their corporate client, ‘If you liked our annuity for your defined benefit plan, why not use this retirement income system for your defined contribution plan?’”

Smart sees existing asset managers and recordkeepers held back by older technology systems that hinder them from providing what people now take for granted: fast, easy onboarding of new clients; personalized solutions; and scheduling of customized money transfers from any plan account to any bank.

The SECURE Act made it legally easier to aggregate many small plans into a single large plan (a PEP) that a large asset manager or recordkeeper could, in theory, administer for much lower expenses than individual small firms currently pay. But those large service providers don’t necessarily have the integration tools (e.g., the Application Programming Interface or API software) necessary to fill in the communication gaps between lots of unrelated clients and partners—like participants’ banks. Smart (and its competitors) aim to furnish some of those tools.

No annuity feature—yet

These tools will allow Smart to help retirees take systematic withdrawals from their 401(k) plans. Reilly, the Smart executive in charge of Retirement Solutions, told RIJ that Smart’s “decumulation platform” will give retirees “the flexible access of an IRA” while their money stays in the 401(k) plan.

Catherine Reilly, director of Retirement Solutions, Smart USA

“It’s a guided journey into retirement,” said Reilly, whose varied career has included stints as a McKinsey consultant in Helsinki, overseeing State Street Global Advisors’ $70 billion target date fund suite, and senior fellow at the Defined Contribution Institutional Investment Association. “You can set up a paycheck or move money around. It might be most closely related to a managed account.” [Under US labor law, managed accounts, along with target date funds, are Qualified Default Investment Alternatives into which the payroll deferrals of new, auto-enrolled participants can be automatically deposited.]

Smart uses a time-segmentation or bucketing approach, dividing income distribution into four periods:

A flexible spending account providing systematic withdrawals between age 65 and age 80
A rainy day fund for emergencies at any age
A “later-in-life” reserve fund for spending after age 80
A legacy fund, if needed, to provide bequests to children, charities, etc.

The current product doesn’t incorporate the option to purchase an annuity, but it may eventually allow for the purchase of a deferred income annuity (DIA) for guaranteed income in old age. Legal & General sells immediate annuities in the UK, but according to Reilly, won’t be marketing annuities through Smart. Instead, the Smart platform calculates a “sustainable income” for every year of retirement up to age 80.

“Monthly payments can be set up, and you can always change them or make flexible withdrawals,” Reilly said. The system suggests an asset allocation, but the payments, once set, won’t automatically adjust or rebalance in response to market volatility.

“In the US, the recordkeeping industry has struggled to issue paychecks. Sometimes the recordkeeper is the problem. Sometimes plans just weren’t designed for retirement income payments,” Ledford told RIJ.

Replicating UK success

How does Smart get paid? “If we provide recordkeeping services, it can be basis points, flat dollar, or mix of both. Flat dollar is popular now,” Ledford said. “In the PEP-only model, we’d charge basis points. Either way, we’re trying to provide the service at a cost point that’s not a barrier to entry. In the small market today, according to the benchmarking we see, a small plan pays about 260 basis points (2.6%) a year in fees. We want the cost to be under 100 bps (1.0%) all-in.”

In the US, Smart hopes to repeat its successes serving retirement plans in the UK, Ireland, and Dubai. In the UK, it’s a major provider of a defined contribution “master trust”—the UK equivalent of a pooled employer plan in the US—serving more than 80,000 employers in Britain and 900,000 participants whose plans have £2 billion ($2.74 billion) under management.

Smart’s recent acquisition of Stadion adds a ready-made chunk of US business. Stadion provides personalized managed account services to some 4,000 retirement plans with $2.3 billion in the US. Stadion serves as the fiduciary that chooses the funds and designs the glide paths for the managed accounts.

Smart’s partnership with Finhabits will give it access to the Latinx community in the US, where there are an estimated 4.65 million Hispanic-owned small businesses, many of them lacking retirement savings plans.

What obstacles might Smart face in the US? So far, it seems to bill itself as a retirement jack-of-all-trades, refusing “no job, big or small.” That’s a key that could unlock a lot of doors. One potential speed bump: Prospective clients in the US might wonder if they have to hire at least some of Smart’s partners—like JP Morgan, Stadion and Legal & General—in a bundled solution. But Reilly said, “By buying Smart you’re not committing to any of our partners.”

Another possible hitch: Smart could be misgauging the way retired Americans tend to use their 401(k) money. In fact, many of them tend not to start taking money out of their retirement plans until the government forces them to at age 72. Distributions are taxable, and so not to be taken lightly. Investment advisers often tell clients to spend tax-deferred money last.

In the managed account market, it will certainly face competition from providers like Morningstar and Edelman Financial Engines. But the managed account market is big. According to Cerulli Associates, “The top nine DC managed account providers comprised more than $400 billon in DC assets and the vast majority of DC recordkeepers now partner with at least one managed account provider.” Smart may end-run that traffic by specializing in helping big asset managers and recordkeepers address the burgeoning PEP market—the kind of market Smart appears to have mastered in the UK.

Why Asset Managers Keep Buying Annuity Issuers

Posted on January 13, 2022 by Kerry Pechter -

An article in yesterday’s Wall Street Journal helps explain why so many alternative (alt-) asset managers have been acquiring or establishing life insurers, reinsurers, and/or blocks of fixed annuities.

WSJ explains that big institutions, desperate for higher yield than they can get from bonds in the public markets, are bringing boatloads of cash to asset managers and asking for the custom private credit instruments–insurance-linked securities, leveraged loans, mortgage-backed securities, collateralized loan obligations–that those asset managers create.

These instruments often involve bespoke loans to below investment-grade borrowers; the asset managers use securitization and long maturities to immunize credit risk with an ‘illiquidity premium’ and ‘tranches’ of varied risk.

“Funds that make such loans now control about $1.2 trillion, nearly twice the capital they had five years ago,” the WSJ said. “‘We think this market dwarfs the alternatives market,’ Apollo CEO Marc Rowan said in the story, which added, “The figure could be as great as $40 trillion, he said. Apollo manages about $340 billion of credit investments, much of them private.”

One source of money that asset managers use to write these high-return loans are the proceeds of the sales of fixed annuities by life insurers to risk-averse American retirees and near-retirees. Apollo, through its parent, Athene Holding, was one of the first, if not the first, to see annuity assets (which many life insurers have been eager to unload due to stress from low interest rates on bonds) as raw material for risky loans.

We now have major asset managers like Apollo, Blackstone, and KKR owning or affiliated with large issuers of fixed annuities, including Athene, F&G, and Global Atlantic, respectively. They enhance margins by reinsuring the annuity liabilities in jurisdiction with easier capital requirements, like the Bahamas, Arizona or Vermont. They claim to be doing a good deed by infusing more capital into the annuity business; perhaps in the short run they are.

I have written about this phenomenon from the annuity end, calling it the ‘Bermuda Triangle strategy.’ The WSJ article explains it from the institutional investor end. When I talk to practitioners of this strategy, they claim to be solving the low-yield problem for clients in good faith. What is concerning are not so much the practices of pioneers of this business.

More concerning are the ‘me-too’ players–smaller johnny-come-lately asset managers who want some of those billions flowing from desperate institutional investors. They are hastily buying tiny life insurers, setting up offshore reinsurers, and reducing the transparency of their assets. I’m not the only one concerned; so is Moody’s. The NAIC is paying some attention to this, but not enough.

Less of this might be happening, IMHO, if much of the annuity industry had not already morphed into a quasi-investment industry. But that’s a longer story.

Inheritance, By Race and Age

Posted on January 13, 2022 by No Author -

Research Roundup

Posted on January 6, 2022 by Kerry Pechter -

The field of retirement finance can sometimes seem hyper-specialized and remote from everyday life. But almost every major popular issue in the US contains at least an element or theme related to retirement policy.

Today’s edition of Research Roundup is evidence of that. Overlaps between retirement and “machine learning,” human decision-making, monetary policy, and immigration are central to the five academic papers we feature this month.

Here are questions and issues that these papers answer or address:

How machine learning could lead to smarter target date funds
One way the rich get richer: they buy stocks. But why?
Putting the ‘Fed put’ in perspective
French lessons: How plan participants in France make investment decisions
Immigrants can help Americans grow old at home

How machine learning could lead to smarter target date funds

Machine learning (ML, aka artificial intelligence) involves chips and software that imitate human decision-making, only faster and at greater scale. The possible applications of ML in financial services are endless—but still largely unrealized.

A research team at two big universities has been exploring the use of ML technology to help investors build better portfolios, both during their careers and during retirement. ML could lead to mass-customization of portfolios, they believe, and to smarter target date funds (TDFs).

Jonathan Parker

The team, including Jonathan A. Parker and Aaron Goodman of MIT, along with Victor Duarte and Julia Fonseca of the University of Illinois at Urbana-Champaign, published its findings in a new paper, “Simple Allocation Rules and Optimal Portfolio Choice over the Lifecycle” (NBER Working Paper w29559).

The paper concludes that current TDF design leaves investors under-weighted in equities during retirement. A typical TDF in today’s market might call for an equity allocation of 50% or less at age 65 and after (and some people believe TDFs should hold zero equities at retirement). The authors’ ML analysis recommends 60% equities would provide more disposable spending in retirement. “The average optimal share in equity declines linearly to about 60% at retirement, after which it is roughly constant,” they write.

“We think TDFs do well in the first half of life, but are too conservative in the second half of life,” Parker told RIJ recently. According to the paper, “While TDFs may lead households to avoid worse mistakes, because they impose the same portfolio on everyone of the same age, there is scope for substantial improvement—2% to 3% of consumption—from more individualized financial advice or from more customized TDFs.”

The heart of the paper, however, is its exploration of ML’s applicability to fund design, financial advice, and robo-advisor platforms. The authors see ML enabling a mass-customization process where ML-driven software might annually tweak the asset allocations of smart TDFs in response to changes in client-specific variables, such as “non-traded labor income risk, home ownership and mortgages, health and mortality risks, pension income, family dynamics, liquidity needs, and taxes.”

“We’re building a ‘Game of Life,’ and asking an algorithm to play it,” Parker said. “It would be simple to encode this into a robo-advisor, with the goal of maximizing the average return and minimizing the variants.” Instead of a software “recipe” for successful investing, the investor gets a “trained apprentice” who thinks like a human advisor (more or less).

“You could develop a TDF that doesn’t condition on age, but instead on the state of the market,” Parker told RIJ. “This methodology, could be embedded in advisors’ desktops or online for people to play with.”

Parker stressed that the equity allocation of a retirement portfolio would be higher than for non-retirement accounts, because of differences in investment horizons. An appropriate equity allocation for young adults saving in taxable accounts for down payments on homes might be as low as 30%, but as high as 90% in a tax-deferred retirement savings account.

One way the rich get richer: they buy stocks. But why?

Reviewing data from some 70,000 401(k) plans for the 2009 to 2019 decade, a team of researchers at Harvard recently tried to find correlations between the average equity allocations in plans and the demographics of the plans.

Mark L. Egan and Alexander MacKay of Harvard Business School and Hanbin Yang from Harvard University published their findings in a December 2021 paper, “What Drives Variation in Investor Portfolios? Evidence from Retirement Plans” (NBER Working Paper 29604).

The team found that average equity allocations were higher in plans with relatively more wealthy and college-educated participants, and lower in plans with relatively more older and minority participants.

These differences were associated with different levels of risk aversion and different beliefs about the financial market. “Wealthier and more educated investors tend to have more optimistic expectations about the market,” the paper said. “Older investors, retirees, and minorities tend to have more pessimistic expectations about market returns.” Variation in beliefs and risk aversion explain 52% of the variation in equity exposure, the investigators concluded.

The differences in these attitudes varied by industry. “Investors who work in riskier sectors, as measured by the equity beta of their sector, tend to have more optimistic beliefs,” the paper said.

“Investors from the most optimistic sector, Real Estate, expect the market return to be 40% higher than investors from the least optimistic sector, Accommodation and Food Services.” Investor beliefs also appeared to depend on past market returns, and on the recent financial performance by their employers. They became “more optimistic about the stock market following strong financial performance from their employer.”

Optimism and low risk-aversion didn’t always go together. “Investors in the Information Sector have the highest equity allocations but are only in the 60th percentile in terms of investor expectations of market returns,” the paper said. The authors found no significant correlation between a plan’s demographics and the number of equity funds the plan offers.

Perhaps reflecting the so-called wisdom of crowds, the investment returns expected by the plan participants proved highly accurate. “The average expected return over our sample is 11.50%,” the authors noted. “The compound annual growth rate (CAGR) of the S&P 500 over the period 2009-2019 was 11.22%.”

Putting the ‘Fed put’ in perspective

Do low interest rates help or hurt the economy?

As the Federal Reserve contemplates a modest tightening in 2022—by tapering its bond purchases and raising interest rates perhaps three times—observers wonder if such inflation-fighting moves might trigger a stock market correction or a credit crisis. It has happened before.

In a new NBER paper, four European economists review past financial crises and ask: Should a central bank deviate from its objective of price stability to promote financial stability? The short answer is: Yes and no.

“The effect of monetary policy on financial stability is ambivalent,” write Frederic Boissay of the Bank of International Settlements, Fabrice Collard, of the Toulouse School of Economics, Jordi Gali, of Spain’s Centre de Recerca en Economia Internacional, and Cristina Manea of the Deutsche Bundesbank.

“On the one hand, loose monetary policy can help stave off financial crises. In response to the Covid–19 shock, for example, central banks swiftly lowered interest rates and acted as a backstop to the financial sector. These moves likely prevented a financial collapse that would otherwise have exacerbated the damage to the economy,” they write.

“[But] discretionary monetary policy actions, such as keeping policy rates too low for too long and then unexpectedly and abruptly raising them toward the end of an investment boom, can lead to a financial crisis.
“The financial sector is paradoxically more fragile when the central bank commits itself to backstopping the economy.” Why? Because such backstopping “eliminates the negative wealth effects associated with financial crises, raises the capital stock, which makes the credit market more vulnerable, and slows down the downward adjustment of capital that would be necessary to eliminate the existing imbalances,” the paper said.

“On the other hand, empirical evidence shows that, by keeping their policy rates too low for too long, central banks may entice the financial sector to search for yield and feed macro-financial imbalances.”

French lessons: How plan participants in France make investment decisions

A new study from researchers in the US and Brussels yields the behavioral-finance insight that participants are more likely to opt out of a plan when confronted with decisions they don’t like.

That was one of the findings in “Choice Overload? Participation and Asset Allocation in French Employer-Sponsored Savings Plans.” NBER Working Paper 29601), by James Poterba (MIT economist and president of the National Bureau of Economic Research) and two Belgian economists.

“French employers have wide discretion in structuring employee saving plans. All plans must offer medium-term investments, which cannot be accessed for five years. Employers may also offer long-term investments that cannot be accessed until retirement,” the paper said.

“When plans include a long-term option, participation is lower than when the plan offers only more liquid medium-term investments. The presence of a long-term saving option also reduces the take-up of the plan’s default investment allocation, which must include a long-term component,” it continued.

“One interpretation of the findings, consistent with the theory of choice overload, is that some employees are unwilling to forego the liquidity of the medium-term option but find it costly to make an active election when they opt out of the default, and therefore choose not to participate in the plan at all.”

The authors noted that, because French workers still get most of their retirement income from the national pay-as-you-go pension (similar to Social Security but more generous), they rely relatively less on their defined contribution plan savings (though most participate). “French firms have more discretion in setting match rates than their US counterparts,” the paper said, “in part because the stakes are lower and most retirement income is provided through a public pay-as-you-go pension system.”

Immigrants can help Americans grow old at home

In areas where more low-education immigrants have entered the US workforce, the chance that US-born elderly will be able to live in their own homes goes up, according to new research from Kristin F. Butcher of Wellesley College, Tara Watson of Williams College, and Kelsey Moran of MIT.

In the NBER working paper 29520, “Immigrant Labor and the Institutionalization of the US-Born Elderly,” the three academics report that immigration provides “an abundance of less‐educated labor that can substitute for the elderly individual’s (or their family’s) labor…, potentially shifting the choice of technology for elderly care‐giving away from institutions. Immigration affects the availability and cost of home services, including those provided by home health aides, gardeners and housekeepers, and other less-educated workers, reducing the cost of aging in the community.”

More specifically, “a 10 percentage point increase in the less-educated foreign-born labor force share in a local area reduces institutionalization among the elderly by 1.5 and 3.8 percentage points for those aged 65+ and 80+, a 26-29% effect relative to the mean,” they write.

“The estimates imply that a typical U.S-born individual over age 65 in the year 2000 was 0.5 percentage points (10%) less likely to be living in an institution than would have been the case if immigration had remained at 1980 levels.” But benefits for the elderly come at the expense of lower pay for certain workers.

“Commuting zones with high predicted levels of immigration have lower wages among the less‐educated workforce and increased employment of health and nursing aides. We see similar impacts for other less‐educated occupations that may support home‐based care, such as housekeepers and gardeners,” the paper said.

“Home health aides are especially likely to see positive employment effects, and nursing home aides also experience effects depending on the specific measure. Licensed practical nurses have wage reductions but do not have employment increases, suggesting a reduction in labor demand. Registered nurses command higher wages and have, if anything, lower employment levels when immigration is higher.”

Top 10 Owners of US National Debt

Posted on January 6, 2022 by No Author -

Inheritance (by Race and Age)

Posted on January 5, 2022 by No Author -

Are Concerns over Growing Federal Government Debt Misplaced?

Posted on January 4, 2022 by Randall Wray -

If the global financial crisis (GFC) of the mid-to-late 2000s and the COVID crisis of the past couple of years have taught us anything, it is that Uncle Sam cannot run out of money. During the GFC, the Federal Reserve lent and spent over $29 trillion to bail out the world’s financial system, and then trillions more in various rounds of “unconventional” monetary policy known as quantitative easing.

During the COVID crisis, the Treasury has (so far) cut checks totaling approximately $5 trillion, often dubbed stimulus. Since the Fed is the Treasury’s bank, all of these payments ran through it—with the Fed clearing the checks by crediting private bank reserves. (To see the original version of this article, go to levyinstitute.org.)

As former Chairman Ben Bernanke explained to Congress, the Fed uses computers and keystrokes that are limited only by Congress’s willingness to budget for Treasury spending, and the Fed’s willingness to buy assets or lend against them—perhaps to infinity and beyond. Let’s put both affordability and solvency concerns to rest: the question is never whether Uncle Sam can spend more, but should he spend more.

If the Treasury spends more than received in tax payments over the course of a year, we call that a deficit. Under current operating procedures adopted by the Fed and Treasury, new issues of Treasury debt over the course of the year will be more-or-less equal to the deficit.

Every year that the Treasury runs a deficit it adds to the outstanding debt; surpluses reduce the amount outstanding. Since the founding of the nation, the Treasury has ended most years with a deficit, so the outstanding stock has grown during just about 200 years (declining in the remainder). Indeed, it has grown faster than national output, so the debt-to-GDP ratio has grown at about 1.8% per year since the birth of the nation.

If something trends for over two centuries with barely a break, one might begin to consider it normal. And yet, strangely enough, the never-achieved balanced budget is considered to be normal, the exceedingly rare surplus is celebrated as a noteworthy achievement, and the all-too-common deficit is scorned as abnormal, unsustainable, and downright immoral.

First the good news. The government’s “deficit” is our “surplus”: since spending must equal income at the aggregate level, if the government spends more than its income (tax revenue), then by identity all of us in the nongovernment sector (households, businesses, and foreigners) must be spending less than our income. Furthermore, all the government debt that is outstanding must be held by the nongovernment sector—again, that is us. The government’s debt is our asset.

Since federal debt outstanding is growing both in nominal terms and as a percent of GDP, our wealth is increasing absolutely and relatively to national income. Thanks Uncle Sam!

But the dismal scientists (economists) warn that all this good news comes with a cost. Deficits cause inflation! Debt raises interest rates and crowds out private investment! Economic growth stagnates because government spending is inherently less efficient than private spending! All of this will cause foreigners to run out of the dollar, causing depreciation of the exchange rate!

With two centuries of experience, the evidence for all this is mixed at best. Deficits and growing debt ratios are the historical norm. Inflation comes and goes. President Obama’s big deficits during the GFC didn’t spark inflation—indeed, inflation ran below the Fed’s target year after year, even as the debt ratio climbed steadily from the late 1990s to 2019.

The initial COVID response—that would ultimately add trillions more to deficits and debt—did not spark inflation, either. (Yes, we’ve seen inflation increasing sharply this year—but as I noted, the evidence is mixed and many economists, including those at the Fed, believe these price hikes come mostly from supply-side problems.)

Interest rates have fallen and remained spectacularly low over the past two decades. Anyone looking only at those 20 years could rationally conclude that interest rates appear to be inversely correlated to deficits and debt.

While I do believe there is a theoretically plausible case to be made in support of that conclusion, the point I am making is that the evidence is mixed. And if you were to plot the growth rate of GDP against the deficit-to-GDP ratio for the postwar period, you would find a seemingly random scatterplot of points. Again, the evidence is mixed at best.

Finally, the dollar has remained strong—maybe too strong for some tastes—over the past 30 years in spite of the US propensity to run budget deficits, and even trade deficits for that matter. Both of these are anomalies from the conventional perspective.

So, while there are strongly held beliefs about the negative impacts of deficits and debt on inflation, interest rates, growth, and exchange rates, they do not hold up to the light of experience. When faced with the data, the usual defense is: Just wait, the day of reckoning will come! Two centuries, and counting.

Levy Institute Senior Scholar L. Randall Wray is a professor of economics at Bard College.

The ‘Catch-22’ of Social Security

Posted on January 4, 2022 by Kerry Pechter -

In another attempt to undermine faith in Social Security (‘Should You Count on Social Security?’), economist Andrew Biggs mixes up the value of social insurance and defined contribution retirement savings accounts.

What do I mean by that? In the 1970 dark comedy about WWII, ‘Catch-22,’ Jon Voigt as quartermaster of a B-25 bomber base near Italy reveals that he sold the flight crews’ parachutes to capitalize a company he’d created. He stuffed the empty parachute sacks with certificates of company stock.

Social Security is like the parachutes, and 401(k)s are like the stock. They serve different purposes. Insurance by definition pays off during insurable events; Social Security pays off in the event that you live past a certain age or are disabled. All US workers pay taxes for it, they get credit for it on a database, and the gov’t guarantees that they will get what they earned–in case of the insured event.

Jon Voigt (left) and Martin Balsam in the film ‘Catch-22’.

The cost of Social Security is low (relative to private annuities) because almost all American workers contribute, not everyone experiences the insurable event, and the government runs the program at cost. Armed with Social Security, Americans can afford to worry less about a market crash during the five-year “red zones” before and after they retire. They can also worry less about longevity risk, market risk, and inflation risk.

Importantly, workers can afford to risk more money on stocks because they know those other financial risks (which stocks don’t cover) will be covered by Social Security. Without Social Security, most people would need to invest more of their 401(k) contributions in bonds. I contest Biggs’ characterization of Social Security contributions as taxes (i.e., an expense), 401(k) contributions as savings (investments), and Social Security money as a transfer from strapped workers to pampered retirees. I believe this plays a shell game with the facts.

Payroll contributions to Social Security are savings, in effect, and the workers and retirees that Biggs pits against each other are the same people at different times of their lives. Biggs concedes that there won’t be a big fiscal crisis when the Social Security trust fund is empty, but still manages to compare the program unfavorably to DC plans (without mentioning the massive annual federal tax expenditure to incentivize retirement savings or market crashes or the cost of bailouts).

Sure, you might be able to invest for yourself ‘better than the government can.’ But you can’t insure yourself against market, sequence, interest rate, inflation and longevity risk more efficiently than Social Security can. And, by the way, Social Security’s critics often denigrate its “unfunded” nature; in fact, Boomer contributions to Social Security exceeded the program’s cost for decades. The Boomer burden has been pre-funded. (In 2034, when the Boomers’ decades of excess contributions may finally be exhausted, about half of them will already be dead.)

Biggs would have you believe that there’s a zero-sum game between workers and retirees, between taxes and investment, and between the public sector and the private sector. This supposed zero-sum game is not reality. In 2021, about a trillion dollars was deducted from paychecks for SS tax and a trillion ended up in the bank accounts of Social Security beneficiaries. The banking system saw no big change in reserves or lending capacity as a result. Consumption rose. The elderly lived independently. Don’t let the pundits confuse you. Don’t trade your retirement parachute for paper. We need Social Security and employer-sponsored retirement savings plans.

Fortitude Re, Midwest Holdings pursue ‘triangle’ strategies

Posted on January 4, 2022 by Editorial Staff -

Fortitude Re, a major practitioner of what RIJ has called the “Bermuda Triangle” strategy, is growing.

A $45 billion company built largely through acquisitions from AIG and backed by the Carlyle Group, which manages assets worth $276 billion worldwide, Fortitude Re has formed a Bermuda multi-line reinsurer and acquired a US life insurer, according to a release this week.

By Bermuda Triangle strategy, we mean the trend, which began after the global financial crisis and has accelerated, of asset managers entering the fixed annuity business, where their affiliated life insurers issue contracts, they redeploy a large portion of the assets into marketable private credit or asset-backed securities, and their affiliated reinsurers release surplus capital for the life insurers through regulatory arbitrage.

In a related move, Fortitude Reinsurance Company Ltd., Bermuda’s largest multi-line reinsurer, said it has obtained approval to operate as a Reciprocal Jurisdiction Reinsurer, the first such approval to be granted by the Texas Department of Insurance. Fortitude Re can now “transact through multiple entities and structures to help its clients achieve their objectives,” the release said.

Today’s announcement follows other recently announced transactions that added to Fortitude Re’s franchise, including the acquisition of two U.S.-domiciled third party administrators from American International Group, Inc. and the pending acquisition of Prudential Annuities Life Assurance Corporation and its in-force legacy variable annuity block from Prudential Financial, Inc.

Effective January 1, 2022, Fortitude International Reinsurance Ltd. (FIRL) commenced operations as a Class 4 and Class E reinsurer, licensed by the Bermuda Monetary Authority. FIRL will complement Fortitude Re’s other operating entities and focus on reinsurance solutions for insurers domiciled outside the US

In addition, on January 3, 2022, Fortitude Re completed its acquisition of Rx Life Insurance Company (to be renamed Fortitude US Reinsurance Company) (Fortitude Re US) from Heritage Life Insurance Company. Fortitude Re US, which will serve as a US reinsurance platform for Fortitude Re, is an Arizona domiciled life and annuity insurer widely licensed in the US. This acquisition will enable Fortitude Re to offer clients a US-domiciled reinsurance option.

With the aim of extending its reciprocal jurisdiction reinsurer status beyond Texas, FRL expects to seek similar status in other selected US jurisdictions in the near future, the release said.

FRL’s Reciprocal Jurisdiction Reinsurer status allows US ceding companies to take full statutory credit for reinsurance ceded to FRL without any regulatory prescribed collateral requirements, effectively treating FRL for these purposes as a US domiciled reinsurer. FRL is among the first reinsurers to obtain such status in the US.

“The transactions and regulatory approval represent an important step in the evolution and expansion of the capabilities Fortitude Re is able to offer to clients to solve their most complex challenges. With the establishment of FIRL, we expect to grow our international reinsurance business in Asia and the U.K. and European markets,” said James Bracken, Fortitude Re CEO, in the release.

Midwest Holding’s new indexed annuity uses an ESG benchmark

Midwest Holding Inc., a company designed to blend the issuance of fixed indexed annuities with reinsurance and asset management capabilities, announced this week that its life insurer, American Life & Security Corp, has launched the industry’s first fixed annuities based on the S&P 500 ESG Index. ESG stands for Environmental, Social, and Governance.

The S&P 500 ESG Index consists of a subset S&P 500 companies, designed for investors seeking socially responsible investments aligned with a mainstream index, a Midwest Holding release said.
Midwest Holding Inc. describes itself as a “technology-enabled life and annuity company,” according to its website. It uses its “technology platform and reinsurance-supported capabilities to develop and distribute insurance products through third-party independent marketing organizations (IMOs).” The four coordinated businesses of Midwest Holdings are:

m.pas. Midwest’s cloud-based Policy Administration Solution. As a licensed TPA, it provides straight-through innovation and custom end-to-end policy administration infrastructure for fast product launches.
1505 Capital. An SEC-registered investment advisor. We are building unparalleled risk-management technology designed to implement innovative asset liability management solutions for ourselves and our clients.
American Life & Security Corp. A Nebraska-based insurer founded in 1960 and reimagined in 2018, American Life leverages m.pas and 1505 Capital to provide life and annuity products. American Life & Security Corp. sells, underwrites, and markets annuities in 20 states and the District of Columbia.
Seneca Re. A Vermont sponsored captive reinsurance company which, with its 1505 Capital, brings capital markets-oriented capacity to the US insurance market.

The company was founded in 2003 and booked $12 million in revenue for the 12 months ended September 30, 2020. It listed on the Nasdaq under the symbol MDWT in December 2020. Piper Sandler was the sole bookrunner on the deal.

Its stock price peaked on November 10, 2021 at more than $41, but the price fell sharply starting then and has traded below $20 since then. In November, the company’s founder and co-chief executive, Michael Salem, left the company.

Breaking News

Posted on January 4, 2022 by Editorial Staff -

I-bonds now offer 7.12% return

Individuals can now get the equivalent of a 7.12% annual return by investing in Series I savings bonds, which they can purchased direct from the US Treasury from now through April 2022.

It’s the second highest yield ever offered by the inflation-sensitive I-bonds, which are distinct from Treasury Inflation-Protected Securities, Bloomberg.com reported this week.

“The US Treasury is committed to unlimited supply until it decides to change the policy. After 23 years, the total amount of I-bonds outstanding is still a tiny fraction of the national debt, so perhaps the US Treasury will continue supplying them under today’s terms without limit,” said Zvi Bodie, retired Boston University pension expert.

In September, Bodie, David Enna, Mel Lindauer, and Michael Ashton published an “I-Bond Manifesto” in support of I-bonds, which were introduced by the US Treasury in 1998. It describes how I-bonds work and how investors can buy them.

Rising inflation is responsible for the high rate. The interest rate on the Series I bond is set twice a year based on recent changes to the consumer price index for all urban consumers. November’s pricing is based on the change from the previous March to September.

The rapid surge in inflation means investors can now get double the six-months-ago offer of 3.54%. With interest rates still at crisis-era levels, I-bonds are one of the few places individuals looking for inflation protection can go without getting into higher risk investments.

The maximum investment is $15,000 per calendar year, they can’t be traded, and purchases are limited to US citizens, residents and employees. The interest rate is guaranteed for the first six months and after that will rise or fall depending on inflation. You have to keep your investment for at least a year. If you exit before five years, you’ll lose three months of interest.

A great year for life insurer stocks: WSJ

“The flood of private-equity money into the industry has also enabled insurers to shift some of their risks onto others, and these moves were broadly rewarded in share prices.”

So said a news article in the January 5 edition of the Wall Street Journal.

The impact of COVID notwithstanding, life insurance company stocks in the US enjoyed a strong year in 2021, the Journal reported. The sector kept up with financials overall and rose about a third. According to Autonomous Research analyst Erik Bass, their variable-income portfolios—in asset classes such as equities and alternatives—delivered a roughly 10% to 20% bump in earnings over what was anticipated.

Life-and-health insurance stocks in the S&P 500 did quite well in December, rising over 6% or about twice the gain of the broader financial sector. Overall, they gained 32% last year. So now, the forward price-to-earnings ratio for S&P 500 life & health insurers is about nine times—about where the sector averaged in the five years preceding 2020. The sector’s multiple reached 11 times in 2017, when interest rates were rising.

AllianzIM issues new iteration of its buffered outcome ETF

Allianz Investment Management LLC (AllianzIM), a unit of Allianz Life Insurance Company of North America, today launched a new buffered outcome ETF with a six-month outcome period: the AllianzIM US Large Cap 6 Month Buffer10 Jan/Jul ETF (NYSE: SIXJ).

The initial cap on January 1 was 5.30% (4.93% after fees); investors who purchase today face different effective caps depending on the performance of the fund.

Using FLEX Options, AllianzIM’s new ETF seeks to match the returns of the S&P 500 Price Return Index up to a stated cap, while providing downside risk mitigation through a Buffer against the first 10% of S&P 500 Price Return Index losses for SIXJ over a six-month outcome period.

The initial 6-month outcome period starts January 1, 2022, and ends June 30, 2022, with subsequent 6-month outcome periods from July 1 through December 31 or January 1 to June 30.

“Amid record-low interest rates and volatile equity markets, SIXJ offers investors another option to help mitigate risk in their portfolios.” said Johan Grahn, Vice President and Head of ETFs at AllianzIM, in a release.

With an expense ratio of 0.74%, SIXJ is one of the lowest-cost buffered outcome ETFs on the market. With two outcome periods per year, SIXJ resets the cap and the buffer every six months and the ETF may serve as an alternative to short-term, low-yielding investment options and provide tactical applications within an investment portfolio.

AllianzIM debuted its six-month outcome period Buffered Outcome ETFs in October 2021 with the launch of the AllianzIM US Large Cap 6 Month Buffer10 Apr/Oct ETF (NYSE: SIXO). SIXJ and SIXO are the latest evolution in AllianzIM’s suite of buffered outcome ETFs. Between the two ETFs, investors can now benefit from defined outcome periods with an opportunity to invest in such a way that caps and buffers reset every three months.

Additionally, the AllianzIM US Large Cap Buffer10 Jan ETF (NYSE: AZAJ) and the AllianzIM US Large Cap Buffer20 Jan ETF (NYSE: AZBJ) today begin a new one-year outcome period with new upside caps.

Funding levels of large pensions rose with markets in 2021: Mercer

The estimated aggregate funding level of pension plans sponsored by S&P 1500 companies increased to 97% as of December 31, 2021, from 84% as of December 31, 2020, according to a release from Mercer, a consulting business owned by Marsh McLennan.

“Over the course of 2021, increases in interest rates used to calculate corporate pension plan liabilities and increases in equity and fixed income markets supported the increase in funded status. The estimated aggregate deficit of $64 billion as of December 31, 2021 is far smaller than the $407 billion deficit at the end of 2020,” the release said.

The estimated aggregate value of pension plan assets of the S&P 1500 companies as of December 31, 2020 was $2.19T. Estimated aggregate liabilities were $2.6T. At the end of 2021, the estimated aggregate assets were $2.33T compared with the liabilities of $2.39T.

The S&P 500 index increased 26.89% during 2021 and the MSCI EAFE index increased 8.78%. Typical discount rates for pension plans as measured by the Mercer Yield Curve increased to 2.76% from 2.32% during 2021.

Matt McDaniel, a partner in Mercer’s Wealth Business said in a statement:

“Funded status rose three percent in December and was up 13% year over year. Over the course of 2021, we saw equity markets surge forward, frequently reaching fresh all-time highs, while rates rose propelling funded status to levels not seen since 2008.

“Nearly 40% of plan sponsors in the S&P 1500 are now over 100% funded. With many of those plans frozen, it begs the question of how many will look to actively de-risk or even fully terminate their plans. We have seen a marked increase of sponsors asking ‘how close’ to full termination they are, so we believe termination activity may be on the rise.

“For those plans still running deficits, the funding relief passed earlier this year is expected to reduce required contributions for several years so some may be leaning on investment performance to drive improvements in funded status. But this could be a risky strategy with equity markets at all-time highs, even as the Fed continues to taper and potentially increase rates this year.”

Vanguard reduces fees on bond ETFs and other funds

Vanguard has lowered expense ratios for 17 fund shares, including nine fixed income ETFs. Vanguard’s US bond ETF lineup has attracted $75.7 billion in cash flows through October 31, helped to drive economies of scale and lower expense ratios. (See tables below.)

As of October 31, 2021, Vanguard managed $8.4 trillion in global assets. The firm, headquartered in Valley Forge, Pennsylvania, offers 418 funds to its more than 30 million investors worldwide.

Vanguard operates under a unique, investor-owned structure in which US fund shareholders own the Vanguard funds, which in turn own Vanguard. This structure enables the firm to return value to shareholders through lower costs and reinvesting to improve capabilities, technology, and client experience.

AM Best upgrades Guggenheim Life and Annuity

Guggenheim Life and Annuity’s financial strength rating (FSR) has been upgraded by ratings firm AM Best to A- (Excellent). Guggenheim (GLAC) is no longer “under review with developing implications,” AM Best said in a release.

Guggenheim’s FSR was upgraded from B++ (Good). Its Long-Term Issuer Credit Rating was upgraded to “a-” (Excellent) from “bbb+” (Good). The outlook assigned to these Credit Ratings (ratings) is stable.

“The ratings reflect GLAC’s balance sheet strength, which AM Best assesses as strong, as well as its strong operating performance, neutral business profile and appropriate enterprise risk management,” the release said.

The removal of the ratings from under review and subsequent upgrades are due to GLAC being acquired by Group 1001 Insurance Holdings LLC, the parent company of the lead rating unit, Group 1001 Life & Annuity Group (formerly known as Delaware Life Insurance Group), for which GLAC will now become a group member in accordance with AM Best methodology. The acquisition closed Nov. 12, 2021.

The grouping of GLAC with Group 1001 Life & Annuity Group is due to the consistent executive management, shared services, its material contribution to the group’s premiums and earnings along with the significant level of financial support already shown to GLAC through a $400 million capital contribution post closure.

Venerable appoints new chief actuary, Parul Bhatia

Parul Bhatia has been promoted to Senior Vice President and Chief Actuary at Venerable, a manager of legacy variable annuity business acquired from other entities. Venerable was created by an investor group led by affiliates of Apollo Global Management, LLC, Crestview Partners, Reverence Capital Partners, and Athene Holdings, Ltd.

Previously Head of Valuation at Venerable, Bhatia led valuation of statutory, tax, and US GAAP reserves and capital metrics primarily for variable annuities and payout annuities. In her new position, she will also lead the organization’s valuation, inforce management and strategy, and capital management and modeling teams.

Prior to Venerable, Bhatia was a consultant at Willis Towers Watson. She holds a Bachelor of Science in Commerce from the University of Delhi, is a member of the American Academy of Actuaries, and a fellow of the Institute and Faculty of Actuaries, UK, and the Institute of Actuaries of India.
Venerable is privately held, with operations in West Chester, PA, and Des Moines, Iowa.

SmartAsset launches TV ad campaign

SmartAsset, the consumer financial education and lead-generation site for advisors, has launched a national TV campaign this week produced by TV agency Marketing Architects.

SmartAsset describes itself as an online destination for consumer-focused financial information and advice that powers SmartAdvisor, a national marketplace connecting consumers to financial advisors. It reaches ~75 million people each month (as of Sept. 2021).

Founded in 2012, SmartAsset offers free data-driven content, personalized calculators and educational tools to an estimated 75 million visitors per month. Additionally, SmartAsset operates SmartAdvisor, the leading independent client acquisition platform for financial advisors in America.

Marketing Architects worked with SmartAsset to pretest a variety of creative strategies. They landed on two spots, “Where Frank Used to Sit” and “Learning from Mistakes.” The commercials highlight how SmartAsset can help viewers prepare for retirement.

Ranked on the Inc. 5000 and Deloitte Technology Fast 500 lists of fastest growing companies in 2021, SmartAsset recently closed a $110 million Series D round, valuing the company at over $1 billion. SmartAsset was also named to Y Combinator’s list of Top 100 Companies of all time and Forbes’ list of America’s Best Startup Employers in 2020.

‘Retirement Bonds’ could increase income, lower risk: EDHEC

Posted on December 16, 2021 by Kerry Pechter -

One comment in particular caught my ear during an online presentation last week by Lionel Martellini and Shahyar Safaee, the director and research director, respectively, of the EDHEC Risk Institute in France.

EDHEC, a business school and financial research institute, is probably the most important hotbed of decumulation studies that that you haven’t heard of.

Shahyar Safaee

In his presentation, Safaee clicked to a slide showing a graph with the familiar rainbow of the “efficient frontier” of investing, with which we are all familiar. But on this particular slide the graph showed a double-arc rainbow: one arc composed of orange dots and the other of blue dots. (See below.)

The chart showed that at any given equity allocation, hypothetical retirees could get more income (on average, over a finite, 20-year window) with less risk if they put the balance of their assets into the “Retirement Bond” (more on that in a moment) that Safaee and Martellini were proposing—as opposed to investing in a standard fixed-income product assumed to be benchmarked by/represented by the US aggregate bond index.

“If you’re at 30% equity allocation in retirement, that would bear the same level of retirement income risk as a 39% equity allocation, leaving an extra 9% of equity allocation available,” Safaee said in a live Zoom meeting from his office in Nice, on the French Riviera.

“Using the Retirement Bond as the fixed income allows for more equity allocation for the same level of retirement income risk… and leads to a lower probability of a negative final cash balance,” the slides showed.

Note: This chart shows that using EDHEC’s Retirement Bonds for income during the first 20 years of retirement allow a higher equity allocation and higher final cash balance than using the bonds in the US aggregate bond index.

During my years in annuity marketing at Vanguard, we often promoted the idea that the addition of an income annuity to a retirement portfolio enabled retirees to take more risk with the remainder of their assets. This EDHEC research gives academic support to that idea. Martellini and Safaee’s slides also show the importance of knowing the yield of the zero-risk asset (the value of the y-axis at zero on the x-axis) in interpreting an efficient-frontier (EF) chart. When the risk-free yield increases (in this case Retirement Bonds are assumed to return more than the US aggregate bond index), the EF arc shifts upward. Zvi Bodie first pointed out to me the importance of the risk-free yield; it shows that the risk of portfolio failure associated with a given equity allocation is lower when the yield of the bond allocation is higher.

Lionel Martellini

So what exactly is this Retirement Bond that would make up the rest of a retiree’s portfolio for the first 20 years of retirement? Martellini said it would resemble the SeLFIES bonds that Robert Merton and Arun Muralidhar have proposed.

SeLFIES, as RIJ reported earlier this year, are risk-free, consumption-indexed government bonds for sale to individuals or plan participants before retirement. SeLFIES resemble ladders of zero-coupon TIPS. Each one might pay out $5 a year for 20 years, starting at retirement. The price of each bond would depend on the number of years until retirement and on interest rates at the time of purchase. To eliminate longevity risk, SeLFIES could be combined with a deferred income annuity with payments starting, for instance, at age 85.

EDHEC’s Retirement Bonds would correct a shortcoming of diversified bond funds as the “safe asset” in a retirement income strategy. The average duration of the fixed income component in target date funds, Martellini said, is too short for long-term investors; they would earn higher yields by investing in bonds with longer maturities. To make the bonds risk-free, they’d have to be issued by a government.

He defined EDHEC’s Retirement Bond as a “fixed income security paying constant (or cost-of-living-adjusted) cash-flows for the first 20 years of retirement; it is the true risk-free asset for the first two decades of retirement.” It could be created by building a ladder of risk-free bonds whose durations span the maturities of the Retirement Bond cash flows.

Asked if a 20-year period-certain annuity could replicate the income from his Retirement Bonds, albeit without the liquidity that Retirement Bonds would allow, Martellini said, “A period certain annuity has pretty much the same payoff as a retirement bond, without the flexibility offered by market traded instruments.”

He suggested that asset managers are missing an opportunity to meet retirees’ needs for safe income during the first two decades of retirement.

“It actually seems highly inefficient for the investment industry to stay away from addressing the needs of their clients once they reach retirement,” he said. “Insurance companies are critically useful to provide longevity risk protection via late life deferred annuities, but simpler and cheaper asset management solutions should be made available for the first 20 years in retirement.”

Global Debt (in trillions of US$ and as % of GDP

Posted on December 15, 2021 by No Author -

Breaking News

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.

DPL and Security Benefit add ‘total return’ index option to FIA

Americans expect market volatility in 2022: Allianz Life

Lincoln redesigns participant-facing website

How machine learning could lead to smarter target date funds

One way the rich get richer: they buy stocks. But why?

Putting the ‘Fed put’ in perspective

French lessons: How plan participants in France make investment decisions

Immigrants can help Americans grow old at home

Midwest Holding’s new indexed annuity uses an ESG benchmark

I-bonds now offer 7.12% return

A great year for life insurer stocks: WSJ

AllianzIM issues new iteration of its buffered outcome ETF

Funding levels of large pensions rose with markets in 2021: Mercer

Vanguard reduces fees on bond ETFs and other funds

AM Best upgrades Guggenheim Life and Annuity

Venerable appoints new chief actuary, Parul Bhatia

SmartAsset launches TV ad campaign

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

Data Connection

Lists*