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De Santo to lead New York Life

Craig DeSanto has been named CEO-elect of New York Life, America’s largest mutual life insurer, the company announced this week. Currently the company’s president, DeSanto will succeed current CEO Ted Mathas when Mathas retires on April 15, 2022.   

DeSanto has been New York Life’s president since July 2020 and as a member of the company’s board since February 2021. He will remain president after becoming CEO. Mr. Mathas will remain board chairman in a non-executive capacity for a transition period.

DeSanto joined New York Life in 1997 as an actuarial summer intern and was promoted into roles of increasing responsibility across the company’s finance and business operations, which included leading the institutional and individual life insurance businesses.

In 2015, DeSanto took charge of the company’s strategic businesses, which complement the its core individual life insurance business and generate most of New York Life’s earnings, nearly 50% of dividends paid, and about half of the company’s life insurance sales.

In 2018, he assumed oversight for New York Life’s retail annuity business line. In 2019, he added oversight of New York Life Investment Management (NYLIM), a $450 billion multi-boutique third-party asset management business. In 2020, DeSanto led the acquisition of Cigna’s Group Life and Disability business, now known as New York Life Group Benefit Solutions. 

DeSanto earned a Bachelor of Science degree from Cornell University, is a Fellow of the Society of Actuaries, and a member of the American Academy of Actuaries.

New York Life Insurance Company (www.newyorklife.com), a Fortune 100 company founded in 1845, is the largest mutual life insurance company in the United States and one of the largest life insurers in the world. Headquartered in New York City, New York Life’s family of companies offers life insurance, retirement income, investments, and long-term care insurance. New York Life has the highest financial strength ratings currently awarded to any U.S. life insurer from all four of the major credit rating agencies.

© 2021 RIJ Publishing LLC. All rights reserved.

The Alt-Asset Teams that Reinvent Annuity Companies

The global private-asset titans who’ve disrupted the US life insurance business in recent years—and whose annuity-issuing subsidiaries now account for almost half of domestic fixed indexed annuity sales—have also formed tactical “Insurance Solutions” groups. 

KKR, Blackstone, Ares, Apollo and others have hung out shingles on the internet saying, in effect: ‘Small publicly traded life insurers: We can ramp up the sluggish yields on your off-the-rack investments by adding tailored alternative assets to your general accounts.’ 

The PE firms, evidently, don’t have to look very hard for this business. It comes to them. Stock life insurers feel pressure from their shareholders and analysts to invest in assets like real estate-backed securities and leveraged loans to get the yields that A-rated bonds aren’t delivering.

One of the latest asset managers to bet on this market is Bahrain-based Investcorp. Boutique-sized but ambitious, it recently financed the purchase of inactive Sunset Life for $6.5 million and set up Investcorp Insurance Solutions (IIS) with former Blackstone and RenaissanceRe executive Todd Fonner as its chief investment officer.

Fonner recently spoke with RIJ about the nature of insurance solutions units in general and about Investcorp Insurance Solutions in particular. Here’s an edited transcript of our conversation.

RIJ: Todd, who is Investcorp? That’s an entity my US readers might not be familiar with.

Fonner: Historically, Investcorp has been an alternative asset manager, primarily for high net worth investors and institutions in the Persian Gulf region. It helped them invest mainly outside the gulf, in assets such as US real estate equity and US and European private equity and a hedge-fund-of-funds platform. Until fairly recently, its size was modest, with only about $7 billion or $8 billion under management. But about five years ago, there was a succession in management and the new executive chairman [Mohammed Alardhi] undertook a strategy to broaden the strategies managed by Investcorp and also broaden its base of investors.

Assets-under-management has grown to $38B, the number of strategies has broadened beyond the initial focus and we now have larger relationships with investors in Europe and the US. The footprint of the business, in terms of office locations and personnel, is roughly one-quarter London, one-quarter US and one-third Bahrain with several other smaller offices in important markets. My role is as the chief investment officer of Investcorp Insurance Solutions and at this stage our sole client is Sunset Life. Sunset Life has hired Investcorp Insurance Solutions via an IMA [Investment Management Agreement] to manage all its invested assets, which is similar to other relationships between strategically aligned asset managers and life insurers, such as Blackstone and F&G and Apollo and Athene.

RIJ: Sunset Life seems to be a blank canvas. According to its website, it stopped writing new life or annuity business in the early 2000s. What changes do you plan to make there?

Fonner: Yes, it is a blank canvas and the company will be looking to grow the business organically.  Sunset Life will be primarily an annuity platform initially. There will be a new name. The management team is also working with AM Best to determine the ratings for the business. The insurer is onshore, it’s Missouri-domiciled. There’s also a holding company, Cordillera, that has 100% ownership of an intermediate holding company domiciled in Delaware, called Bona Holdings, which owns Sunset. It’s a pretty straight-forward vertical structure that supports the insurance carrier. Investcorp has provided the initial capital for the business, but does not control or manage any of the corporate entities.

RIJ: Like several other asset managers, Investcorp has set up an Insurance Solutions group. Exactly what does an ‘Insurance Solutions’ group do?

Fonner: In the current low yield environment, there’s been a real uptick in activity among asset managers trying to create higher yielding investments strategies for insurers that tap into alternatives. These business units are often called insurance solutions groups. For a lot of asset managers the focus is just that, selling the wares of an asset manager to insurance companies. But we, and folks like Apollo and KKR, are trying to do more than that.

RIJ: And what products or services does that entail?

Todd Fonner

Fonner: There are three activities here that are inter-related. There’s the activity of running an insurance company, which in this case is the business of selling annuities.  That’s separate from and independent of the Insurance Solutions business.  Then there’s the activity of allocating the insurance company’s investment portfolio, which we call the IMA or Investment Management Agreement.

Third, there’s the activity of running specific investment strategies that are well-suited for insurance companies, which we call the SMA [Separately Managed Accounts]. The IMA and SMA activities are what often fall under the umbrella of an Insurance Solutions business. In the SMA world, the asset manager might say to the insurer, ‘Here’s my product. You figure out how it fits your liability.’ In that case, the investment allocation activity happens inside the insurance company. Many insurers are working with asset managers this way, where the asset manager is just playing in that third bucket and providing SMAs but not involved with the allocation process or invested in the insurance business.

RIJ: Of these three activities, the relatively new piece is the IMA, right? Why does a life insurer need help ‘allocating’ its investment portfolio?

Fonner: I think that’s right.  Moving the IMA so that it sits inside the asset manager is new, and building that capability for the IMA can be tricky. But there are some real benefits. With annuities there’s a very direct interplay between pricing the product and choosing investments. The yield that you can achieve drives the pricing for the policy, but there’s also asset liability and cash flow matching between the assets and liabilities. When you move the allocation function to the asset manager, it creates a very direct line of communication between the team that evaluates the alternative-asset opportunities and the team that designs and prices the product. For Investcorp and Sunset Life as partners, it’s all about the allocation piece and bringing in a new level of collaboration.

RIJ: My understanding is that loan origination, private credit expertise, and alternative assets—like opportunities in the booming residential home rental business—are the main strengths that big asset managers bring to life/annuity companies to help them raise their investment yields. Is the ‘allocation’ function something else?

Fonner:  I think it is. The asset manager, in addition to designing and building the investment strategies, is also taking on the complexity of understanding the rated and regulated world of insurance. When the allocation function moves to the asset manager, so does some of the analysis of the required capital considerations and the liquidity and cash flow matching considerations. It’s critical to get these right when an insurer shifts from traditional assets to alternative asset classes.

RIJ: Is the asset manager building alternative assets for the life insurer, or is the life insurer buying investments from an asset manager’s shelf?

Fonner: Buy-versus-build is one of the dynamics that is emerging in this business. Traditionally, insurers mainly bought their portfolios; for alternative asset managers, many of their strategies are built.  The strategies don’t exist unless the manager negotiates and makes the investment with the counterparty. I call this ‘building an investment’. These ‘built’ opportunities are typically not broadly syndicated.  They are more bespoke.

With a lot of the SMAs that insurance solutions groups are offering, the strategies are built, not bought. In a traditional syndicated deal, a life insurance company might buy 2% of a deal that comes along. But with a ‘built’ deal, many of the deals will be private and narrowly syndicated. There might be only two or three investors. But this is the SMA process. The IMA relationship is different. The asset manager is allocating to different strategies and asking, ‘How do we use a combination of buy and build to create the best possible portfolio, while keeping cash flow constraints and RBC [risk-based capital] charges in mind?’

RIJ: Investcorp will own the renamed Sunset Life, through the Cordillera and Bona holding companies, right? Other big asset managers have been buying life insurers outright, setting up reinsurers to buy life insurers, or buying minority stakes in life insurers stakes. What’s the business logic of doing that? I can see the potential for both synergies and conflicts of interest.

Fonner: Investcorp has provided the initial capital for the purchase of Sunset, but Investcorp does not control or manage the business. It’s possible that other third-party investors will also contribute capital to the business.  But obviously, Investcorp will have an ownership interest in the insurance business. When there’s economic ownership, people are motivated to put investments into the insurer’s portfolio that they believe in. It means you’re eating your own cooking. And if you’re comfortable with your colleagues who are building the investments, you have more confidence in the investments and the portfolio. With this structure, we’re aligning the insurance company, the allocation function, and the SMAs for the ‘plus’ assets [i.e., the assets that provide alpha to the insurance company general account]. When the asset manager is also invested in the insurance company, that makes the alignment tighter.

RIJ: What’s so valuable about alignment?

Fonner: When you have that alignment, you will know, for instance, that four or five weeks from now a large private deal will become available that might fit the higher-yielding part of the insurer’s portfolio. You have a clear line of sight to the assets. You know what the opportunity set will look like six weeks from now.

RIJ: As I understand it, Insurance Solutions providers combine alternative asset management expertise with reinsurance transactions that reduce the levels of surplus capital that life insurers have to hold against their annuity liabilities. Is there a reinsurance component to Investcorp Insurance Solutions? According to your bio, you once managed the investment portfolio of RenaissanceRe Holdings Ltd. in Bermuda.

Fonner: We have the reinsurance expertise in our team. Nathan Gemmiti [the new CEO of Sunset Life; former Chief Operating Officer of Knighthead Life, and former chairman of Cayman International Reinsurance Companies Association] was a consultant to Apollo when it was setting up Athene. I was in property and casualty reinsurance business for a long time. If you look at Knighthead, they wrote direct business and did reinsurance. Blackstone, where I worked in 2019 and 2020, did both direct origination and reinsurance. But Sunset Life will focus initially on organic growth—selling annuities through the IMO channel [Insurance Marketing Organizations and their affiliated insurance agents].

RIJ: Doing reinsurance deals where you acquire billions of dollars of assets to manage all at once can be very attractive, right? Assuming the deals are priced correctly, is there any downside to that?

Fonner: Reinsurance deals that involve legacy blocks can be challenging. You’re trying to put large blocks [of assets] to work quickly, but that can be difficult because you’re working with a given set of liabilities and probably some investment guidelines from the cedant [the original issuer of the annuities in question] that constrain what you can do. You also might have some exposure to legacy product features, like minimum rate guarantees. From where we sit, it’s a very competitive reinsurance market right now. The pricing in the small to mid-sized block trade reinsurance business is pretty frothy. It doesn’t have the most compelling economics, and we think it’s a harder business to execute. But if it became very lucrative, we have the experience to do it.

RIJ: So you prefer the ‘organic growth’ path?

Fonner: With organic growth, the company can design the product the way it wants to. You’re not inheriting someone else’s annuities. Sunset Life thinks there’s a great opportunity in issuing annuities. It thinks it will match up well against the competition. The annuity market is growing. It’s shifting to fixed products. The offerings are attractive. If you look at the 10-year [fixed indexed annuity] products, the crediting rates are attractive. The product is a great product. Annuities are a great business to be in. Investcorp has a long-term vision for funding the future growth of an annuity carrier and for building a platform to manage insurance-related assets.

© RIJ Publishing LLC. All rights reserved.

One Life Insurer’s Pivot to Private Assets

American Equity Investment Life Holding Company, a top-ten seller of fixed indexed annuities (FIA), continues to execute its “AEL 2.0” strategy—a blueprint for survival in today’s low interest environment. Other small to mid-sized publicly traded annuity issuers will no doubt take notice.

The company has described AEL 2.0 as a roadmap that will turn AEL from a “spread-based business” into a less capital-intensive, more profitable “fee-based business” that it hopes will elicit more “buy” recommendations from Wall Street analysts. AEL 2.0 also includes a tilt in investment allocations toward private credit and equity.

The company’s makeover since the hiring of Anant Bhalla as CEO in early 2020 includes the adoption a new slogan—AEL wants to be known as a provider of “financial dignity” to retired Americans—and a plan to eventually to deploy “30% to 40%” of its general account to private assets, up from about 15% today.

AEL’s third-quarter 2021 annuity sales (by American Equity Life and Eagle Life) were $1.31 billion, up 128% from the third quarter 2020 sales level and 11% from the second quarter of 2021. In the first half of 2021, the company sold $2.03 billion worth of fixed-rate deferred annuities and $1.55 billion of FIAs, according to LIMRA. 

AEL seems especially interested in the booming residential home rental market. “Single-family homes built to rent are emerging as the hottest corner of the US property market, as investors respond to booming demand from home-seekers priced out of housing for sale,” the Wall Street Journal reported this week.

“The expected risk-adjusted annual return for built-to-rent investments in the private market is now about 8% on average… the highest of 18 property sectors tracked by the firm,” the article said. 

“Yes, I think there is a good ten-year (plus) run ahead of us in built-for-rent. I do think this segment has long-term potential,” Brad Hunter, president of Hunter Housing Economics told RIJ yesterday. “Investors in built-for-rent will see outsized risk-adjusted returns for at least the next six years, the way I see it. After that point, there will be more supply, so the gains won’t be quite so extreme. But the business will still be quite sound.”

Brave new world

If successful, AEL 2.0 may represent a new kind of business model for a more nimble, profitable and sustainable life insurer that can thrive even in low interest rate environments. That contrasts with the traditional life/annuity business model for much of the 20th century, which focused on buying safe corporate bonds and holding them to maturity, and to some extent offsetting the longevity risk of their annuities with the mortality risk of their life insurance products.

Squeezed between liabilities to policyholders and stingy yields on the traditional bonds in their general accounts, publicly traded life insurers have over the past decade responded by issuing more conservative products, reinsuring old blocks of business, and taking more risk with their investments.

On the retail product side, these insurers have focused on selling more indexed annuities, a type of structured product that exposes life insurers to much less market risk than traditional deferred variable annuities with lifetime income riders. The riskier general account investments include private credit and private equity. These are customized debt and securities not available in public financial markets.

Recent AEL private asset deals

Several pieces of the AEL 2.0 were announced this year. As RIJ reported, the company closed a $10 billion reinsurance and investment deal with Brookfield Re. This week, AEL invested $1 billion in “a technology lending platform,” created by Monroe Capital, that will originate customized, high-yield loans to middle market software and technology companies.

The majority of investment commitments made in the third quarter represent the continued expansion of American Equity’s allocation to residential and commercial real estate assets while the capital deployed in private assets was across middle market corporate loans, agriculture loans and real estate debt, an AEL release said.

Last week, AEL announced that it had provided financing and capital to help Pretium—a specialized asset manager with about $30 billion in assets—acquire Anchor Loans, a provider of financing to residential real estate investors and entrepreneurs.

“In supporting Pretium’s acquisition of Anchor Loans, we are also able to enhance our allocation to high quality residential real estate assets—a key pillar of our AEL 2.0 investment strategy,” said Pradip Ghosh, AEL’s head of Return on Assets. 

In late September, AEL announced that it had hired BlackRock and Conning to manage its bond portfolio, starting in 2022. Its in-house investment  managers “will focus on private assets, cash and derivative trading, unique asset allocation for insured client solutions and asset liability management.” 

“Over the next few years, we intend to further scale up [our] allocation to private assets, total assets earning fees or investment spread, and third party capital through reinsurance… improving shareholder returns by migration to the capital-light model we envisioned,” American Equity’s President and CEO, Anant Bhalla, said in a release. “AEL is re-imagining its target markets to be The Financial Dignity Company that delights customers as they realize financial dignity from our solutions well beyond their prime earnings years.”

Jim Hamalainen, Chief Investment Officer, said: “Year-to-date as of today, we have deployed approximately $2.5 billion in private assets. This exceeds our plans for 2021 and was supported by our acquisition of a residential loan portfolio from the Anchor Loan platform to help support its acquisition by our residential real estate partner, Pretium.”  American Equity is pursuing “differentiated asset management with a lower risk profile than other asset intensive insurance business models,” he noted.

© 2021 RIJ Publishing LLC. All rights reserved.

Breaking News

Proposal would tax billionaires’ unrealized gains

There are about 700 billionaires in the US, according to Americans for Tax Fairness, with Elon Musk and Jeff Bezos topping the list. If their wealth were a stack of $1 bills, it would roughly reach the moon. 

Their collective financial worth was about $4.56 trillion as of last spring, much of it presumably in the form of unrealized gains from appreciated shares of stock. Senator Ron Wyden (D-OR)  would like to tax some of those unrealized gains to help cover the cost of infrastructure renewal.

On October 27th, Wyden released draft legislation for a new “Billionaires Income Tax.” The Penn Wharton Budget Model, which assesses the economic impact of new legislation, said the proposal, if law, would generate about $500 billion in federal tax revenue over the next 10 years.

Here’s the PWBM’s summary of the bill, published this week:

Under Wyden’s proposed tax, for tax filers with a net worth of more than $1 billion, gains on publicly traded assets would be taxed on an annual basis regardless of realization, a process sometimes called “accrual” or “mark-to-market” taxation.

For non-publicly traded assets, the Wyden proposal would impose a deferral charge at the point of realization that effectively makes up for gains accrued prior to realization.

Under current law, taxes on capital gains are due upon “realization;” that is, when assets are sold. A capital gain is equal to the sales price less the original purchase price (or “cost basis”) of the asset. Investors owe tax on capital gains whenever they sell property that has appreciated in value.

Most other forms of income (such as wages and dividends) are taxed in the period in which they are earned, as the income involves a transaction where the recipient receives cash. By contrast, capital gains can accrue without a sale, thereby allowing the tax liability to be deferred.

The realization-based nature of capital gains taxation presents an opportunity for tax savings for two reasons. First, deferring realization produces larger after-tax returns over time since the tax is not part of annual compounding; the tax is only applied once at the end of the holding period.

Second, capital gains avoid taxation entirely when appreciated assets are held unrealized until death. The asset’s cost basis is “stepped up” to its market value at time of death. This “step-up basis at death” allows benefactors to pass larger after-tax estates to their heirs. Both factors can reduce effective tax rates for wealthy households, making deferral a key tax planning strategy.

The Wyden proposal also contains a one-time transition tax. For tradable assets, the one-time transition tax would be payable over a five-year period on the amount of outstanding unrealized gains. For non-tradeable assets, the transition tax would be owed upon realization.

Moreover, applicable taxpayers would no longer receive the benefit of stepped-up basis at death. All transfers of appreciated property other than charitable gifts would be treated as realization events for tax purposes.

The Wyden proposal differs from an annual tax on net worth previously proposed by Senator Elizabeth Warren (D-MA). The Wyden proposal would tax a change in asset values whereas the Warren proposal would tax the total value of wealth regardless of the change in its value.

Largest defined benefit pensions near 100% funding: Milliman

During October, corporate pensions saw a monthly investment gain of 2.10%, the second-largest monthly return of 2021, according to the latest Milliman 100 Pension Funding Index (PFI), which analyzes the 100 largest US corporate pension plans. The funded ratio climbed to 98.1% from 97.2% as of October 31.

The PFI market value of assets increased by $31 billion, but liabilities also increased due to a drop in the monthly discount rate, from 2.78% in September to 2.72% in October. As a result, the PFI funded status increased by $17 billion for the month and the deficit declined to $36 billion.

“The funded status deficit for these pensions is inching closer and closer to zero as strong investment markets continue to drive improvements,” said Zorast Wadia, author of the Milliman 100 PFI, in a release. “But with discount rates mired below 3.00% for the past 12 months it’s a marathon not a sprint to full funding.”

Under an optimistic forecast with rising interest rates (reaching 2.82% by the end of 2021 and 3.42% by the end of 2022) and asset gains (10.2% annual returns), the funded ratio would climb to 101% by the end of 2021 and 117% by the end of 2022.

Under a pessimistic forecast with similar interest rate and asset movements (2.62% discount rate at the end of 2021 and 2.02% by the end of 2022 and 2.2% annual returns), the funded ratio would decline to 97% by the end of 2021 and 88% by the end of 2022.

To view the complete Pension Funding Index, go to www.milliman.com/pfi. To see Milliman’s full range of annual Pension Funding Studies, go to https://www.milliman.com/en/retirement-and-benefits/pension-funding-studies. 

Know your ‘end-investor,’ Cerulli urges asset managers 

Gathering demographic data about the end-investor is essential for asset managers as they design “thematic funds, active investment strategies and new vehicle structures, ” according to a new report from Cerulli Associates, US Product Development 2021: Aligning Product Development and Client Objectives,

With the rise of multi-asset-class offerings such as target-date and allocation products, for instance, product developers need to know investors’ “risk objectives.”

“Model portfolios, which many product teams view as the future of asset management, rely on establishing suites of products that can accommodate the risk profile of any investor.” said Matt Apkarian, a Cerulli analyst.

“New and unique ideas that fit into a client’s portfolio are more likely to succeed when supported by demographic shifts in the industry. Alignment of third-party resource data and data from a firm’s true investor base will help product organizations understand whether they can break into niche product areas and share classes,” he added.

The end-investor attributes that matter to the highest percentages of asset managers are

  • Risk objective (70%)
  • Advice orientation (48%)
  • Wealth tier (43%).

The consideration of demographic information for both advisors and end-investors, especially as generational and gender wealth transfer occurs, is also critical. “Understanding how and when wealth is being transferred can protect firms from losing assets as they change hands,” Apkarian said.

The research suggests asset managers dedicate appropriate resources to understanding their end-investor and financial advisor client base. “Using various resources and methodologies to gather data and understand directional shifts in product use will give product organizations advantages when managing their existing and future product lines,” he said.

“Managers should consider the cost and value of data, considering the appropriate frequency of data needed and the accuracy of data collected,” he said. “Monitoring these trends can help asset managers find opportunities with enough lead time to bring products to market that will benefit from shifts.”

Envestnet Insurance Exchange will carry Equitable RILA

Equitable (NYSE: EQH) has expanded distribution of fee-based versions of its variable and index-linked annuity products through various technology-enabled platforms, most recently joining FIDx-powered Envestnet Insurance Exchange, the company announced this week. 

Equitable now offers its Structured Capital Strategies registered index-linked variable annuity (RILA) in a fee-based format, making it possible for Investment Advisor Representatives of Registered Investment Advisors (RIAs) to offer the product to their clients.

“RIAs and fee-only financial planners looking for financial protection offerings are a natural extension of this broad focus on distribution,” an Equitable release said. The company already distributes its products through about 4,500 affiliated Equitable Advisors financial professionals and through third-party advisers affiliated with wirehouses, broker-dealers and banks.

Equitable was among the first companies, in 1970, to enter the individual variable annuity market, the first company to provide variable annuities with living benefits in 1996, and the first company to bring to market a registered index-linked variable annuity product in 2010. 

The company said it recently added eight new options to Structured Capital Strategies PLUS (SCS PLUS), including ways for clients to capture some upside potential even when equity market benchmarks may decline.

© 2021 RIJ Publishing LLC. All rights reserved.

The Trust Gap between Advisers and Black Women

According to the inaugural “Black Women, Trust, and the Financial Services Industry Study” from The American College Center for Economic Empowerment and Equality (CEEE), three in five Black women have difficulty finding financial advisors they trust.

Most Black women apparently aren’t even looking for an adviser, either because they aren’t aware that advice is available, have difficulty “accessing wealth-building tools,” feel discriminated against, or for “lack of trust” in the financial services industry.

That’s “especially concerning given Black women play a prominent earning and financial decision-making role in Black households and communities,” said the study, which is based on a survey of 3,500 Black women.

Anyone familiar with recent books like “The Color of Money,” “The Sum of Us,” or “From Here to Equality” can cite reasons for this suspicion. Since the Civil War, in the North and South, African-Americans have been denied many economic opportunities that whites take for granted.

But 36% of black women now have college degrees, according to SPGlobal, and they represent an opportunity for financial services providers—hence the appearance of many new surveys of them as a potential untapped market. The CEEE’s research sought to understand Black women’s “unique financial, social, and emotional insights concerning their wealth journey, its linked impact on their families and communities, and what Black women want and need from the financial services industry to succeed financially.”

Intended to “reintroduce” advisers to Black women, the CEEE Trust Study “explores new thinking around better serving Black women, their households, and their communities concerning their wealth wants and needs” and tries to show advisers how “to build trust and better relationships with Black women.

The research underscored three cultural norms critical to Black women’s financial decision-making and relationships with the financial services industry. Among the emerging themes:

  • 60% of respondents expressed difficulty in finding financial professionals or advisers who they trust. ‘Lack of trust’ was the most common reason after ‘too expensive’ for not accessing financial services.
  • 62.5% of respondents in higher-income households stated it was important to build wealth for the community. They put community and family first, instead of focusing on “rugged individualism.”
  • 58% believe Black institutions can provide the tools to serve their needs
  • Value of interpersonal community and relationships
  • Black women trust financial services professionals to a greater degree (~10% more) than financial services organizations. 
  • Black women (58%) are more likely to report that racial identity, more than gender, affects how they are treated by financial services professionals.

Among other key takeaways from the research:

  • Emergency savings, retirement funds and credit scores are top priorities for Black women – as well as major sources of concern
  • Racial identity is significant for Black women in both their financial decision-making and their financial services institutions
  • Black women do trust financial services, but they are more trusting of Black-owned institutions

To learn more about the Trust Study and the Center for Economic Empowerment and Equality, go to TheAmericanCollege.edu.

To learn more about why African-Americans don’t trust financial institutions, go to the books mentioned above or to any of dozens of other books that document examples of financial discrimination against Black Americans from the end of the Civil War until the Civil Rights legislation of the 1960s and beyond it.

Examples include the failure of the Freedman’s Savings Bank in 1874, the exclusion of Black domestic and farm workers from the earliest version of Social Security, the “red-lining” of urban Black neighborhoods by lenders, and the racial covenants that kept Blacks from buying any of the tens of thousands of homes in the Levittowns built in Pennsylvania, New Jersey, and New York in the 1950s.

“Wokeness” refers in part to an awareness that some of the rungs on the metaphorical ladder to financial success—rungs that white Americans can take for granted—haven’t been available to many Black Americans. 

© 2021 RIJ Publishing LLC. All rights reserved.

Re-Think the Safe Retirement Spending Rate: Morningstar

A 4% starting withdrawal rate, with annual inflation adjustments to that initial dollar amount thereafter, is often cited as a “safe” withdrawal system for new retirees. Financial planner Bill Bengen first demonstrated in 1994 that such a system had succeeded over most 30-year periods in modern market history, and in the nearly 30-year time period since Bengen’s research, a 4% starting withdrawal rate would have been too modest.

But is such a withdrawal system safe today, given the confluence of low starting bond yields and equity valuations that are high relative to market history?

That’s what I explored with my colleagues John Rekenthaler and Jeffrey Ptak in “The State of Retirement Income: Safe Withdrawal Rates.” Using forward-looking estimates for investment performance and inflation, we estimate that the standard rule of thumb should be lowered to 3.3% from 4.0%, assuming a balanced portfolio, fixed real withdrawals over a 30-year time horizon, and a 90% probability of success (that is, a high likelihood of not running out of funds over the time horizon).

This should not be interpreted as recommending a withdrawal rate of 3.3%, however. That’s because the previously mentioned assumptions that underlie the withdrawal-rate calculations—a long time horizon, a fixed real withdrawal system, and high odds of success—are conservative.

Nevertheless, given current conditions, retirees will likely have to reconsider at least some aspects of how they define their “safe” withdrawal rate to make their assets last. Our research finds that retirees can take a higher starting withdrawal rate and higher lifetime withdrawals by being willing to adjust some of these variables–tolerating a lower success rate or forgoing complete inflation adjustments, for example.

Alternatively, retirees who employ variable withdrawal systems that are based on portfolio performance—taking less in down markets and more in good ones—can significantly enlarge their starting and lifetime withdrawals.

For instance, our research finds that some flexible withdrawal systems would support a nearly 5% starting withdrawal rate. But these variable strategies involve trade-offs—specifically, the year-to-year cash flow can be more volatile. This is evident in the chart below, which compares the starting real withdrawal rate of five different retirement spending methods with the volatility of their cash flows when analyzed across 1,000 simulated retirement spending scenarios. We’ll examine those variable withdrawal methods in more detail later in this piece. (To read on, click here.)

© 2021 Morningstar, Inc.

SRI Survey: Annuities fit middle-income and mass-affluent

More than a third of pre-retirees are “very worried” about running out of money in retirement, according to Secure Retirement Institute (SRI) research. While advisers believe that annuities address that problem, they don’t consider them necessary for all retirees or pre-retirees.  

New SRI research asked advisers which market segment was the best suited for annuities, among their typical retiree and pre-retiree clients. The research also looked at whether advisers have seen any changes in clients’ views about annuities.

Most advisers consider wealthier clients (with $1 million or more in household investable assets) to be a less appropriate segment for annuities than clients with lower wealth levels. Among advisers servicing middle- and mass-affluent market segment (under $500,000 in assets) retiree and pre-retiree clients, nearly half (48%) feel that annuities are most appropriate for these clients.

Are clients expressing interest in annuities? Not necessarily, according to SRI research. On average, the vast majority of recently retired and pre-retiree clients—79%—did not bring up the subject of annuities with their advisers over the past year.

Advisoers whose typical retiree and pre-retiree clients have less than $500,000 in household investable assets report that nearly one quarter raised the issue; only 14% of the clients of advisers catering to clients with $1 million or more in assets brought up annuities.

While they may not be bringing up annuities, advisers believe that retirees and pre-retirees have better perceptions of annuity products in recent years. About four in 10 advisers agree that their clients’ perceptions of annuities have improved over the past several years.

“The COVID-19 pandemic led to extreme market volatility and investor anxiety. It also may have led pre-retirees and recent retirees to consider how their portfolios are doing, seeking ways to protect their assets against loss,” says Matt Drinkwater, corporate vice president of Retirement Research, SRI.

Households with less than $500,000 in investable assets account for about 60% of annuity owners, other SRI research has shown. Households with $500,000 to $999,999 in investable assets and households with $1 million or more each represented 20% of owners.

Advisers generally recommend that retirees and pre-retirees contribute about one-third of their financial assets to an annuity, but the advisers’ annuity allocation recommendation level varied. Those serving clients with under $500,000 in household investable assets would recommend 37% of the portfolio be placed in annuities, on average. Advisers with wealthier clients say that their clients should only invest 27% of their assets in annuities.

© 2021 RIJ Publishing LLC. All rights reserved.

Investcorp buys Sunset Life, sets up Insurance Solutions unit

Another global alternative asset manager has acquired a US life insurance company and created an “insurance solutions” group to assist other life/annuity companies transition to more sophisticated investment policies.

Investcorp, with $36.7 billion in assets under management, has financed the purchase of Sunset Life Insurance Company of America from Kansas City Life, and has established Investcorp Insurance Solutions platform, to provide investment management services to insurers.

To lead these businesses, Investcorp recruited executives with experience at asset managers with similar profit centers. It hired Todd Fonner as Chief Investment Officer of Investcorp Insurance Solutions. Fonner served as senior managing director, CIO North America, Blackstone Insurance Solutions, until 2020. 

According to an Investcorp release, Fonner helped launch the Blackstone Insurance Solutions platform in late 2017. He also has held CIO, Treasurer and Chief Risk Officer roles at RenaissanceRe Holdings, where he spent nearly 15 years of his career. 

Nathan Gemmiti will serve as CEO of Sunset Life. He came from where he was co-founder, COO and General Counsel of Knighthead Annuity and Life Insurance Company. Previously, he was an operating partner at Apollo Global Management, where he helped launch Athene, the life insurance and reinsurance company.

Sunset will outsource its investment management to Investcorp Insurance Solutions. On December 31, 2020, Sunset Life reinsured all of its then existing insurance business to Kansas City Life, who will provide all ongoing administration for such business.

In a November 2 press release, Kansas City Life said it expected to record a net gain of about $5.5 million on the sale of Sunset Life, which was founded in 1937 and acquired by Kansas City Life in 1974.

Sunset Life ceased writing new life and annuity business in the early 2000s. Kansas City Life reinsured 100% of the outstanding business of Sunset Life on December 31, 2020, and will continue to service all business issued prior to November 1, 2021. 

Investcorp has a presence in the US, Europe, India, China, Singapore, and countries in the Gulf Cooperation Council. It purchased Sunset Life through Bona Holdings, a subsidiary of Cordillera Holdings LLP, a new insurance-focused investment platform.

© 2021 RIJ Publishing LLC. All rights reserved.

Consortium to promote income options in 401(k) plans is formed

Broadridge Fi360 Solutions, data provider Cannex, and Fiduciary Insurance Services, a consulting firm, have organized a not-for-profit group to “evangelize” for the need for annuities in qualified retirement plans, the group announced this week.  

Nationwide, an annuity provider, and Alliance Bernstein, an asset manager, have committed to joining the “Lifetime Income consortium,” and several other firms are interested, said John Faustino, head of Broadridge Fi360 Solutions, in a release this week.

“We expect to secure commitments by the end of the year and actively begin collaborative efforts in January,” the release added. The consortium foresees a four-phase rollout over the next two years.

The consortium will “provide an expertly substantiated framework and evangelism which enables plan fiduciaries to extend the scope of their advice and implementation capabilities beyond to-retirement solutions, into the through-retirement solutions,” the release said.

While their membership lists may overlap, the new Lifetime Income consortium is unrelated to the Alliance for Lifetime Income, the Washington, DC-based nonprofit 501(c)(6) organization that educates individuals about purchasing annuities to create retirement income. 

“While our missions are complementary, we’re more retirement plan-centric. We’ll use webinars to help plan sponsors and others gain familiarity with and trust new solution sets,” Faustino said. “Our consortium will be run by a for-profit, Broadridge, and focus on accelerating the adoption of retirement income through employer-based plans.”

The release also said, “Central to our perspective is that lifetime income must add real value to participants and be profitable for advisors and product providers for it to be successful.”

© 2021 RIJ Publishing LLC.

New RBC capital factors will affect insurer investment policy: AM Best

A new set of risk-based capital (RBC) factors taking effect in 2021 could temper allocations to lower-rated bonds by insurers looking to capture higher yields according to an AM Best report.

The National Association of Insurance Commissioners’ (NAIC) RBC factors will be changing for 2021 filings, and with the change to 20 designations from six, lower-rated bonds will now have much higher RBC factors compared with the prior factors.

A new Best’s Special Report, “Navigating the New NAIC Risk-Based Capital Factors,” states that insurance companies likely will see increased required capital for bonds. Life/health insurers would see an increase in gross required capital for bonds of approximately $7.2 billion, or an increase of more than 18%, compared with prior RBC factors.

The property/casualty industry’s required capital for bonds is expected to nearly double from the prior class-based structure as a result of the new factors. The health industry required capital for bonds is expected to increase almost two and a half times over prior levels.

According to the report, while the increased property/casualty and health RBC for bonds is much higher on a percentage basis than that of the life/health RBC, the impact on RBC ratios should be minimal since most property/casualty and health risks are concentrated on premium and reserve risks.

Additionally, for life/health and property/casualty companies, a modified diversification factor offsets the higher overall bond risk required capital. The new formulas lower the threshold for companies to receive diversification credit. These changes will help smaller companies, as well as larger companies, which will receive even greater diversification benefits.

The NAIC also has implemented a reduction of real estate factors for 2021 filings by life/health companies. With reduced RBC charges for real estate, in particular BA real estate, AM Best expects higher allocations to this asset category going forward.

Life/health insurers also will see new longevity risk factors applied to annuity reserves held for life contingent payments. This could slow activity in the pension risk transfer market, although the impact of the RBC change depends on the company’s balance of mortality risk and longevity risk.

© 2021 RIJ Publishing LLC. All rights reserved.

NAIC Eyes ‘Bermuda Triangle’ Strategy

The growing control of small and mid-sized publicly traded US life/annuity companies by giant global private equity (PE) companies has created “novel regulatory risks,” according to a document posted on the National Association of  Insurance Commissioners’ website last month.

Noting “broad concern” about the PE trend, the document described the NAIC staff’s recommendations for addressing those concerns. For instance, the staff suggested creating a special category for the 177 PE-affiliated life insurers in the US for regulatory purposes and to make certain of their operations more transparent. 

The document was used in a September 30, 2021 presentation at a regular meeting of the NAIC’s Financial Stability Task Force. The NAIC’s director of Structured Securities and Capital Markets, Eric Kolchinsky, delivered the presentation.

An NAIC spokesperson characterized the document as a “think piece” about “an issue that people have been monitoring.” NAIC staffers created it to inform the 56 state and territorial insurance commissioners they serve.

The document is notable for the policy changes that the staff suggests. Kolchinsky’s slides contained these suggestions to the insurance commissioners regarding regulation of PE owned life insurers:

  • Define PE owned life insurers as “financial entity owned (FEO) insurers” who are controlled by or have long-term investment management agreements with financial firms that are not insurers and charge fees on assets under management (AUM) or for private credit origination. 
  • Broaden the definition of regulated “affiliates” to include firms managed by an affiliate of an FEO insurer, including managers of collateralized loan obligations (CLOs) or loans to companies owned by a CLO in an insurer’s portfolio.
  • Strengthen affiliate reporting by demanding more transparent disclosure of fees paid to or accruing to affiliates. Also, require the disclosure of AUM of all affiliates, and identify the investments in the investment schedules where there are other relationships with affiliates.

The slides don’t mention reinsurance. That might surprise close followers of this trend, because the reinsurance of annuity liabilities in Bermuda or the Cayman Islands is an essential component of the PE insurance business model and an important new source of liquidity for a growing number of life insurers. 

By reinsuring tens of billions of dollars in certain jurisdictions, PE firms can use Generally Accepted Accounting Principles (GAAP) instead of Statutory Account Principles (SAP) to reduce the estimated cost of their long-term liabilities. All US life insurers must follow SAP, but certain jurisdictions allow the use of GAAP for reinsurance.

Doing so reduces the amount of capital that the insurer must hold in support of those liabilities. Reinsurance thus “releases” capital, in some cases making  hundreds of millions of dollars available to the life insurance company. Holding extra capital enlarges the buffer of safety against loss for policyholders but represents a drag on the profitability of a life insurance company.

The pursuit of this strategy has put hundreds of billions of dollars worth of assets in motion over the past years, providing the substance of dozens of acquisitions and reinsurance transactions, putting vast pools of savings under the management of PE firms, and making life insurers more like asset management firms.

NAIC observations

In the document, the NAIC staff pointed out that today’s regulations were created for a life/annuity industry made up of publicly traded and mutual insurers, with an eye toward ensuring that insurance companies remained solvent and that owners don’t extract too much in dividends or compensation.

PE companies got into the insurance business to gain access to large new pools of of assets, and they generate profits by charging fees to manage those assets and redirect them into sophisticated alternative assets. But today’s insurance regulations lack mechanisms for  observing and determining how those fees are generated or if they are reasonable.

In short, a new kind of life insurance company has been born and regulations have not kept up with it. The PE business model has transitioned over the years from restructuring companies for profit to fee generation,” the document said. “PE companies seek to generate fees at every level of their investment from the underlying corporate to CLOs to managing assets for insurers.”

Not all of those levels are visible to regulators, especially when they are internal to the PE firm, which may obscure their relationships to affiliated entities. “It is common for PE owned firms to report affiliated managed CLOs [consolidated loan obligations] and structured products as ‘unaffiliated’ …We found that for one large insurer group that approximately 70% of their CLOs hold some exposure to their portfolio companies.” A large PE firm may have thousands of subsidiaries.

Forensic accountant Tom Gober is one of those concerned about the impact of PE firm involvement on the life/annuity industry. Gober scrutinizes life insurance regulatory filings to see if insurers or reinsurers have enough high quality assets backing their liabilities.

“I was delighted to see the NAIC step up and begin tackling this issue of PE-owned life insurers. Everything they said is so important; but perhaps most important is their discussion of Affiliated Transactions,” Gober told RIJ after seeing the Kolchinsky slides.

“In my 35 years of experience, the substance of all troubles I’ve investigated spin out of unregulated affiliates—not within the insurer itself. Special purpose vehicles, off-balance sheet deals, and captives are all only truly understood when you analyze both ends.”

Historical perspective

For those unfamiliar with these issues, here’s some background:

Ever since the private equity firm Apollo established the life/annuity company Athene over a decade ago, a stream of other large PE firms—including KKR, Blackstone, Ares, the Carlyle Group, Brookfield—have followed suit. They’ve used their deep financial resources to buy or partner with publicly traded insurers and to establish reinsurers, hoping to manage a chunk of the trillions of dollars in annuity assets—that is, the retirement savings of millions of Baby Boomers—in existence today.

In a series of articles over the past 15 months, RIJ has called this business model the “Bermuda Triangle” strategy. The strategy typically involves a life/annuity company, a reinsurer and an asset manager. Through the use of regulatory arbitrage and sophisticated loan origination skills, the strategy can reduce the cost of operating a life insurance company and raise the yield on its investments. 

Blocks of fixed indexed annuity contracts are important to this strategy. Purchasers of FIAs often leave their money with an insurer for five, seven or even 10 years. Annuity issuers can turn that money over to asset managers to make loans to high-risk borrowers.

The PE firms typically bundle such “leveraged loans” into long-dated securities of varying risks and yields. They can sell those securities to institutions who want long-term investments that are as safe as high-quality bonds but have higher yields. This process turns the insurance business into an asset management business.

Such alchemy has, in a real sense, meant financial salvation for small and mid-sized publicly traded life insurers whose primary business is selling annuities. The Federal Reserve’s low interest rate environment has made it nigh impossible for these firms to generate enough profit via the old-fashioned way. That is, by investing policyholder premiums in high-grade corporate bonds to maturity and earning enough yield on them to cover claims, expenses, and profits for shareholders. 

With the Bermuda Triangle strategy, these life insurers can also move capital-intensive liabilities offshore, release hundreds of millions of dollars of surplus capital that they can use to buy back their own stock, raise executive compensation, price their annuities more competitively, and evolve into the kind of fee-generating businesses that Wall Street analysts and investors prefer.

But while Wall Street and affected life insurers applaud this transformation of their businesses, the Bermuda Triangle strategy has critics. As early as 2013, researchers Ralph Koijen and Motohiro Yogo, raised flags about the wide use of captive reinsurance by major life insurers to offset the costly increase in their capital requirements in the wake of the Great Financial Crisis.

In their paper, “Shadow Insurance” (NBER Working Paper 19568), Koijen and Yogo warned that “life insurers are using reinsurance to move liabilities from operating companies (i.e., regulated and rated companies that sell policies) to less regulated and unrated off-balance-sheet entities within the same insurance group.” 

More recently, a group of Federal Reserve economists published “Capturing the Illiquidity Premium.” The economists expressed concerns about the increasing use of life insurer money to finance the origination of private debt by their asset manager partners. This business model, they asserted, might be vulnerable to failure during a financial downturn. 

© 2021 RIJ Publishing LLC. All rights reserved.

Private equity/life insurer partnerships proceed

American Equity invests in residential real estate firm 

American Equity Investment Life Insurance Company said it will provide “financing and capital support” to help Pretium, a specialized investment management firm, buy Anchor Loans, a large provider of financing to residential real estate investors and entrepreneurs.

Pretium boasts assets under management of some $30 billion. “This transaction builds on AEL’s previously announced partnership with Pretium and enables Pretium to achieve its next phase of growth in its residential real estate platform,” an AEL release said.

After the Great Financial Crisis and the foreclosures of countless residential mortgages, private equity firms were able to finance the purchases of homes at favorable prices.

“Blackstone Group Inc., KKR & Co. and other private-equity firms are increasingly making new investments in single-family homes to rent out, betting that the hot housing market will generate solid returns as the U.S. emerges from the coronavirus pandemic,” Bloomberg recently reported.

American Equity’s recent long-term reinsurance deal with Brookfield Re was reported by RIJ on October 21. Pretium’s acquisition of Anchor Loans will increase AEL’s allocation to “high quality residential real estate assets, which remains a key pillar of our AEL 2.0 investment strategy.”

As described in RIJ, the AEL 2.0 strategy enables AEL to convert gradually from a business based on earning an uncertain spread between assets and liabilities to a model based on earning predictable asset-based fees while investing in high-yield alternative assets and reinsuring its annuity liabilities offshore.

It’s a strategy that several public traded life insurers have pursued, often in partnership with a large alternative asset manager. RIJ calls it the “Bermuda Triangle strategy” because it involves a US annuity issuer, a large asset manager and a reinsurer domiciled in a regulatory haven such as Bermuda, Arizona or the Cayman Islands.

AEL described itself in the release as a leading issuer of “general account annuities,” an uncommon term that may distinguish its fixed or fixed indexed annuities from variable deferred annuities or structured variable annuities, such as registered index-linked annuities (RILAs).

The transaction demonstrates AEL’s “ability to provide flexible capital solutions, be responsive to market opportunities and deploy capital at scale,” said Pradip Ghosh, senior managing director and head of ROA [return on assets] for American Equity. “

Founded in 1998, Anchor Loans was the first institutional lending platform built to finance professional residential real-estate investors. Over the last two decades, Anchor Loans has become “the nation’s leading capital provider to experienced residential real-estate sponsors through its bridge and construction products,” the release said.

“Pretium’s underwriting expertise, real estate operating platform ecosystem and ability to originate attractive investments have made them a valued partner for AEL,” said Anant Bhalla, CEO of American Equity.

“At Pretium’s core, we are committed to providing capital solutions to the residential housing industry, including offering attractive rental homes and mortgages to consumers and investors” said Ted Huffman, Pretium’s senior managing director of Strategic Development, in the AEL release.

Everlake Life is born, a child of Blackstone

The Allstate Corporation today announced that it has closed the sale of Allstate Life Insurance Company (ALIC) and certain subsidiaries to entities managed by Blackstone for $4 billion, which is inclusive of Blackstone’s approximately $2.8 billion purchase price, as well as increases in statutory surplus since March 31, 2020.

The ALIC business is being renamed Everlake Life Insurance under its new ownership by entities managed by Blackstone.

“Allstate’s strategy is to increase personal property-liability market share and expand protection offerings to customers. This sale redeploys capital into highly attractive property-liability and protection service businesses and reduces interest-rate exposure,” said Tom Wilson, chair, president and CEO of The Allstate Corporation, in a release.

Gilles Dellaert, global head of Blackstone Insurance Solutions, said: “We believe the investment outperformance we can deliver through our industry-leading private credit origination platforms – while maintaining strong policyholder protections – will play a vital role in helping meet long-term customer obligations, especially at a time of historically low interest rates.”

The sale of ALIC, along with the previously announced sale of Allstate Life Insurance Company of New York (ALNY) to Wilton Re, reduces Allstate assets by $34 billion, to $99 billion, and liabilities by approximately $33 billion, to $72 billion, as of June 30, 2021, and resulted in a GAAP book loss of approximately $3.8 billion in the first quarter of 2021.

Approximately $1.7 billion of deployable capital was generated by these transactions and was considered when authorizing the current $5 billion share repurchase program. Going forward, Allstate agents and exclusive financial specialists will offer life insurance and retirement solutions from third-party providers.

AIG and Blackstone close $50 billion deal

American International Group, Inc. (NYSE: AIG) and Blackstone (NYSE: BX) announced the completion of the previously disclosed transaction for Blackstone to acquire a 9.9% equity stake in AIG’s Life & Retirement business and for Blackstone to manage an initial $50 billion of Life & Retirement’s existing investment portfolio.

American International Group, Inc. (AIG) is a global insurance organization whose member companies provide property casualty insurance, life insurance, retirement solutions, and other financial services to customers around the world. AIG common stock is listed on the New York Stock Exchange.

Blackstone’s $731 billion in assets under management include investment vehicles focused on private equity, real estate, public debt and equity, life sciences, growth equity, opportunistic, non-investment grade credit, real assets and secondary funds, all on a global basis.

Sunset Life rating under review after acquisition 

AM Best has placed under review with developing implications the Financial Strength Rating of B++ (Good) and the Long-Term Issuer Credit Rating of “bbb+” (Good) of Sunset Life Insurance Company of America (Kansas City, MO).

Sunset Life Insurance Company of America’s ratings were placed under review with developing implications following the announcement that Cordillera Holdings has acquired the company. Cordillera Holdings, founded in 2020, is a holding company focused on investing in the insurance and reinsurance sectors. Under new CEO Nathan Gemmiti, Sunset Life Insurance Company of America will sell retirement-oriented fixed annuities. The acquisition was financed by Investcorp, a $36 billion alternative asset manager.

The developing implications reflect that AM Best is awaiting information concerning the financial position of Cordillera Holdings and the business plan and projections of Sunset Life Insurance Company of America under its new ownership.

© 2021 RIJ Publishing LLC. All rights reserved.

Charting the Bitcoin Universe (and other New Research)

Lifting the Lid on the ‘Crypt’: A Rare Peek into the Bitcoin Universe

Cold wallets, hashing power, Chinese miners, 51% attacks, Satoshi Nakamoto, Kaiko data, peeling chains, the Hydra Market, and eigenvector centrality. These are just a few examples of the exotic vocabulary of the world of cryptocurrencies, including Bitcoin, the one most heavily traded.

A new article from the National Bureau of Economic Research offers a rare academic peek into this opaque world. Blandly titled, Blockchain Analysis of the Bitcoin Market,” the article asserts that the Bitcoin universe is a noisy place, dominated by speculative and willfully redundant trading, with concentrated ownership of the coins. Money laundering and tax evasion represent a relatively small percentage of total trading volume, the researchers found. But it still represents a sizable sum of money. 

The irony of cryptocurrencies is that, while the blockchain—the ledger that records cryptocurrency transactions—is available for all to see. Bitcoin users find ways to make it opaque—by using fake names and generating a fog of “spurious” trades. 

“Many Bitcoin users adopt strategies designed to impede the tracing of Bitcoin flows by moving their funds over long chains of multiple addresses and splitting payments among them, resulting in a large amount of spurious volume,” write authors Igor Makarov of the London School of Economics and Antoinette Schoar of MIT.

The Bitcoin network, with clusters receiving >500,000 bitcoins from 2018 to end of 2020.

“Ninety-percent of transaction volume on the Bitcoin blockchain is not tied to economically meaningful activities,” they add. Instead, transaction volume is a byproduct of the Bitcoin protocol design, the participants yen for anonymity, and speculation in Bitcoin.   

Speculation accounts for most Bitcoin activity, the authors concluded. But they suggest that traders may be hurt more by the opacity of the Bitcoin exchanges. “In contrast to traditional, regulated equity markets, the cryptocurrency market lacks any provisions to ensure that investors receive the best price when executing trades,” they write.

The authors estimate that illegal activity represents only 3% of Bitcoin activity, but that’s still a lot of money. “We calculate that there are about $550 million flowing to addresses that have been identified as scams, about $16 million in identified ransom payments, and more than $1.6 billion for dark net payments and dark net services. In addition, there are about $1.7 billion flowing to addresses affiliated with gambling and another $1.4 billion in mixing services.”

Many people own a little Bitcoin, but a handful of players own a lot. “The balances held at intermediaries (Bitcoin exchanges, online “wallets”) have been steadily increasing… By the end of 2020 it is equal to 5.5 million bitcoins, roughly one-third of Bitcoin in circulation. Individual investors collectively control 8.5 million bitcoins by the end of 2020. The top 1000 investors control about 3 million Bitcoin and the top 10,000 investors own around 5 million Bitcoins.

“This inherent concentration makes Bitcoin susceptible to systemic risk and also implies that the majority of the gains from further adoption are likely to fall disproportionately to a small set of participants,” Makarov and Schoar said.

‘Participating Longevity-Linked Annuities’ versus Conventional Drawdown Methods

Participating Longevity-Linked Annuities (PLLAs) are products that European pension experts have been studying. These group annuity products call for the sharing of longevity risk and market risk between the life insurers who issue annuities and the retirees who buy the annuities as a way to increase initial payout rates.

The strategy relies on options. “The embedded longevity put (call) options give the annuity provider (annuitant) the right to periodically adjust the benefit payments downwards (upwards) if the observed survivorship rates are higher (lower) than those predicted at the contract initiation, transferring part of the longevity risk to the annuitant.”

In a recent research paper, “Drawing Down Retirement Financial Savings: A Welfare Analysis using French Data,” two European pension economists, Jorge M. Bravo and El Mekkaoui Najat, test the effectiveness of a PLLA contract against seven common retirement drawdown methods. They find that a PLLA competes well.

Their paper, published in the Journal of the Association of Computing Machinery, investigates the individual welfare generated from eight alternative drawdown strategies, including four investment based solutions and four solutions using annuities:

  • A self-managed fixed drawdown rule based on cohort life expectancy estimated at contract inception
  • A self-managed non-insurance fixed drawdown rule based on the life annuity factor computed at contract initiation 
  • A self-managed variable drawdown rule based on a dynamic assessment of the remaining cohort life expectancy 
  • The “4%” Safe Withdrawal Rule (SWR), where households consume each year 4% of the initial wealth adjusted for observed CPI inflation
  • Apply entire financial savings to purchase of a participating longevity-linked life annuity (PLLA)
  • Purchasing a fixed single premium nominal life annuity (SPLA) at retirement age;
  • A hybrid strategy allocating 70% of the retirement wealth to the “4%” SWR rule and the remaining 30% to an advanced life deferred annuity (ALDA) with a 15-year deferment period;
  • Purchasing an inflation-protected annuity (IPA) at retirement

“Among the full annuitization strategies, the highest nominal and inflation-adjusted average consumption (and welfare) values are generated by the PLLA contract, followed by the IPA structure,” the authors found. “The income and consumption volatility of PLLA benefits is naturally higher than that of fixed annuities with annuity payments variability bounded at 20% of the initial benefit, but consumption levels are higher.”

When Dividends are Higher than Bond Yields, Do This

In the ultra-low interest rate environment that has prevailed (except in 2017-2018) since the Great Financial Crisis, individuals, insurance companies and institutions have “reached for yield” in excess of what high-quality bonds are paying.

Writing in the Journal of Wealth Management this year, respected academic researcher David Blanchett (who recently left Morningstar for Prudential), makes the case for substituting stocks for bonds as a source of retirement income when dividend yields exceed bond yields.

“The current yield gap environment today is relatively unprecedented, with dividend yields significantly exceeding bond yields in effectively every developed market. This anomaly suggests existing research on optimal income portfolios may need to be revisited, especially the structural decision of whether (and how) income-focused investors should consider allocating to equities.”

Blanchett told RIJ that his dataset allowed him only to compare stocks to bonds, not dividend-paying stocks to bonds. “In theory, if you’re allocating to stocks, you could allocate to those with higher dividend yields to generate more yield. You could also tilt the bond portfolio towards higher yielding bonds as well (e.g., corporates, especially high yield). My analysis is focused on the broad asset class decision, versus more nuanced asset class weights,” he said.

Dividends are a time-honored source of income for affluent retirees who never intend to liquidate their blue chip stocks, regardless in fluctuations in value. They bequeath the shares, taking advantage of the step-up in basis at death. Middle-class retirees rarely own enough equities to rely on the dividends for a significant portion of income. Retirement guru Wade Pfau sees no overall gain from buying equities for income, because the distribution of dividends coincides with a drop in the share price.

But after analyzing a database of bond yields and dividend yields in 17 different countries between 1870 and 2015, Blanchett sees a case for equities over bonds when bond yields are lower than dividend yields. He concedes that re-allocation to equities will raise the risk of a retiree’s portfolio and doesn’t recommend going “all in” to equities, recommending “a more measured approach.” 

The Annuity Puzzle, Solved (More or Less)

Even though the “annuity puzzle” isn’t really so puzzling, academics continue to ask: Why don’t more Americans buy retail annuities. The most obvious answer is that they already contribute to and own annuities; it’s called Social Security. They fund it over a lifetime, which is the least painful way to pay for a pension or annuity.

Second, because life insurers so often ask people to fund their annuities with lump sums, life insurers limit the annuity audience to those who can afford single premium payments of hundreds of thousands of dollars at or near retirement. That leaves out a lot of people.

In a new research paper sponsored by the Alliance for Lifetime Income’s Retirement Income Institute, financial literacy expert Annamaria Lusardi and others at the Global Financial Literacy Excellence Center in Washington, DC, document the roles that “liquidity constraints,” including “debt obligations,” put annuities out of reach.

“We find that many people who are in the retirement planning phase of the life cycle (individuals ages 40–61) and those who are of retirement age (individuals ages 62 and over) face these barriers to annuity ownership: Lack of financial knowledge, leveraged assets, debt obligations, and liquidity constraints are all likely barriers to annuity ownership.”

The team of authors found that “annuity owners are more likely to be older and wealthy, to have greater access to liquidity, and to experience higher levels of satisfaction with their financial situation than non-owners. Results indicate that having access to liquidity and letting a professional choose investments are both positively associated with annuity ownership.”

“While we do not find any significant relationship between financial literacy and annuity ownership,” they add, “results do indicate that financial literacy may lead to increased take-up rates through improving individuals’ access to liquidity.”

© 2021 RIJ Publishing LLC. All rights reserved.

Survey focuses on rising use of alternative assets by insurers

Insurers’ continue their shift toward using non-traditional assets, external managers, and new technologies to provide transparency and reliable accounting data, among other findings, according to the findings of Clearwater Analytics’ 2021 Insurance Investment Survey Report.

Clearwater Analytics, a provider of SaaS-based investment accounting, reporting, and analytics solutions, has over $5.6 trillion in total assets on its SaaS platform, according to a release. It serves hundreds of insurers and asset managers as two of its key client market segments. 

“The search for yield amid low interest rates has driven insurers into non-traditional asset classes and away from traditional safe havens,” said Sandeep Sahai, CEO, Clearwater Analytics.

“This creates significant challenges because non-traditional asset class data is often extremely complex and deciphering it requires multiple systems and manual processes, which brings serious risk for misinterpretation or misguided action. This report demonstrates the urgency of working with trusted partners to ensure accurate and timely accounting.”

The survey polled insurance investment and accounting professionals as well as C-level executives at hundreds of insurers worldwide. The key takeaways and data revelations were

Insurers focus on non-traditional assets

Clearwater’s Insurance Investment Survey results show the growing use of non-traditional asset classes.

Top 4 non-traditional asset classes. Fifty-five percent or more of insurers indicate some level of allocation to private placements, private funds (LPs), mortgage loans, and ETFs. More than one-third of respondents said they will increase exposures with non-traditional assets.

Other emerging asset classes. There is a growing use of bank loans and other complex asset classes. Insurers also reported increased investment in derivatives.

Regulator concerns. Despite the rise of non-traditional assets, some insurers hesitate to use them due to investment guidelines, regulatory constraints or concerns, and lack of expertise.

Reliance on external managers’ expertise is here to stay

External asset manager usage. The vast majority of respondents use external managers, ranging from 20% to 80% or more of their total portfolio. Insurers whose external managers manage at least half of their portfolio expect to increase or maintain their dependence on external managers.

Insurers’ requirements for asset managers. External managers are most commonly rated performance (62%) and insurance client expertise (46%).

Insurers are ramping up tech stack and risk analysis

Non-traditional asset classes often create technology challenges for insurers. More than half of the survey respondents use multiple technologies for investment accounting.

Risk and related analysis such as benchmark comparison, exposure analysis, scenario testing, VaR, and ex-post risk are required. Half of surveyed insurers say that manual processes often slow down their monthly close process.

“Insurers who deploy an advanced cloud-based singular platform, designed to deliver on any asset class, no matter the complexity, will benefit from actionable intelligence and as a result their investments will outpace those failing without trusted visibility,” added Sahai.

The full 2021 Clearwater Insurance Investment Survey Report is accessible here. Additionally, Clearwater Analytics held a webinar to discuss the findings with its subject matter experts. The recording can be accessed here. 

For two months in 2021, Clearwater Analytics surveyed insurers worldwide as part of the 2021 Insurance Investment Survey Report. Respondents came from the Americas, EMEA, APAC, and offshore. More than 1,000 insurance professionals participated, comprising all types and sizes of insurers. Half of respondents identified as working in investment accounting, and the other half were split between operations and investment management. Respondents are anonymous.

© 2021 RIJ Publishing LLC.

Breaking News

DOL sets new schedule for enforcing fiduciary rules

The US Department of Labor’s Employee Benefits Security Administration has issued  Field Assistance Bulletin 2021-02, “Temporary Enforcement Policy on Prohibited Transaction Rules Applicable to Investment Advice Fiduciaries.”

FAB 2021-02 provides that from Dec. 21, 2021, through Jan. 31, 2022, the department will not pursue prohibited transaction claims against investment advice fiduciaries who are working diligently, and in good faith, to comply with the Impartial Conduct Standards (i.e., best interest, reasonable compensation and without misleading statements) for transactions exempted in PTE 2020-02.

In addition, the department will not treat such fiduciaries as if they were violating the applicable prohibited transaction rules. Finally, the department will not enforce the specific documentation and disclosure requirements for rollovers in PTE 2020-02 through June 30, 2022. However, all other requirements of the exemption will be subject to full enforcement on Feb. 1, 2022.

Annexus and Sammons roll out FIA with ESG index, multi-option rider

The Sammons Financial Group, which sold the fifth most fixed indexed annuities (FIAs) in the first half of 2021, has partnered with Annexus, a designer of FIA contracts, are partnering on the launch of two new FIA contracts.

The contracts, to be issued by North American Company for Life and Health Insurance, are the North American Secure Horizon and the North American Secure Horizon Plus. The Plus version includes a rider that can pay off in the event of death, disability, a drop in Social Security benefits, or extreme longevity.

Only one of the four benefits may be elected under the contract rider, however. Once a benefit is elected, no other benefits are available. The program can be sold by insurance agents, advisors or Investment Advisor Representatives of Registered Investment Advisors.

Contract owners can allocate premium to the BlackRock ESG US 5% Index ER, the Loomis Sayles Managed Futures Index, and the S&P 500 Low Volatility 5% ER Index. It also features an innovative first-to-market Performance Strategy Ladder that can provide “greater growth opportunities,” a Sammons release said.

The department continues to review issues of fact, law and policy related to the exemption, and more generally, its regulation of fiduciary investment advice.

RIAs can now access an Allianz RILA with income rider on DPL platform

The Allianz Index Advantage Income ADV Variable Annuity, from Allianz Life Insurance Company of North America (Allianz Life), which offers a lifetime income rider, is available now on the DPL Financial Partners web-based platform for registered investment advisors (RIA)s.

Investors in the annuity product and its income rider can select from several index crediting methods with varying levels of protection against market downturns. The income options include a flat payout or one with growth potential. The product enables advisors to bill directly from the annuity rather than needing to pull their fee from a separate account.

A 0.25% product fee and 0.70% Income Benefit rider fee are accrued daily and deducted on each quarterly contract anniversary, calculated as a percentage of the contract value. The Income Benefit rider is automatically included in the contract at issue and cannot be removed.

Investor demand for RILAs has been strong, with flows up 104% year over year in the first half of 2021 according to LIMRA. DPL Financial Partners is a turnkey insurance management platform that brings commission-free insurance solutions to RIA practices.

© 2021 RIJ Publishing.

Retirement-related tax breaks = $276 bn in 2019

In a new report, the Congressional Budget Office (CBO) estimates that major tax expenditures reached a combined $1.2 trillion in 2019, or 5.8% of gross domestic product, and accounted for roughly three-quarters of the total budgetary effects of all tax expenditures that year.

The exclusion and deferrals for the contributions and earnings associated with pensions and retirement savings accounts ($276 billion) and the exclusion for employment-based health insurance ($280 billion including the payroll tax expenditure) were the two largest. The smallest of the major tax expenditures was the state and local tax deduction ($22 billion).

Tax expenditures are exclusions, deductions, credits, and net preferential rates in the federal tax system that cause government revenues to be lower than they would otherwise be for any given structure of tax rates.

In the new report, the Congressional Budget Office showed how the benefits from major tax expenditures in the individual income tax and payroll tax systems were distributed among households in different income groups in 2019.

In 2019, the distribution of benefits from the tax expenditures analyzed in this report varied considerably among income groups:

Overall, about half of the total benefits from income tax expenditures accrued to households in the highest quintile (the top 20%) of the income distribution, whereas 9% of such benefits accrued to households in the lowest quintile. Payroll tax expenditures were more evenly distributed.

Households in the lowest quintile received benefits equal to 16% of their total income before transfers and taxes, whereas households in the highest quintile received benefits equal to 7% of such income.

Among the various tax expenditures, the distribution of benefits varied greatly. For example, about 95% of the benefits from the qualified business income deduction accrued to households in the two highest quintiles of the income distribution, whereas 82% of the benefits from the earned income tax credit accrued to households in the two lowest quintiles.

Provisions of the 2017 tax act (Public Law 115-97) reduced the total estimate of benefits from income tax expenditures by 9%. On net, those provisions made the distribution of tax expenditures more progressive because most of the benefits reduced by the tax act would have accrued to households in the highest quintile.

© 2021 RIJ Publishing LLC.

Retirement reforms cut from Build Back Better Act

Significant retirement-related provisions have been removed from the rapidly shrinking Build Back Better Act, according to NAPA Net, a publication of the American Retirement Association.

Dropped from the bill were provisions designed to close the so-called “back door” Roth IRA, impose contribution limits on higher-income individuals with large account balances, and prohibit IRA investments conditioned on the account holder’s status.  

“A backdoor Roth IRA is a way for people with high incomes to sidestep the Roth’s income limits,” according to nerdwallet.com. If you earn too much to qualify to use a Roth IRA, you can put money in a traditional IRA, convert your contributed funds into a Roth IRA. You simply have to pay any taxes due on the distribution from the traditional IRA.

Distributions from a Roth IRA in retirement are tax-free; contributions are after-tax and principal can be withdrawn penalty-free.

Until Wednesday night, several other retirement related provisions were under consideration:

  • A requirement that employers with more than 6 workers, operating for a couple of years, begin to automatically enroll their employees in IRAs or 401(k)-type plans
  • The establishment of a new type of Section 401(k) deferral-only arrangement
  • An increase in credit limitation for small employer pension plan startup costs, including for automatic contribution arrangements
  • A credit for certain small employer automatic retirement arrangements  
  • Modification of the Saver’s Credit by turning it into a government-based matching contribution and making it refundable
  • Clarifying the deadline to contribute to an IRA with a tax refund

© 2021 RIJ Publishing.