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Social Security Needs Our Attention

Posted on September 2, 2021 by Kerry Pechter -

The 2021 Social Security Trustees report has just been published. One flashing red number from the new report: $19.8 trillion. That’s the present value of the unfunded obligations of the OASDI—Social Security and Disability Insurance—between 2021 and 2096. That number went up by $3 trillion in the past year.

I thought the $19.8 trillion figure might mean that Social Security would be able to pay all its benefits for the next 75 years if it received an instant infusion of almost $20 trillion. Wrong, according to Andrew Eschtruth of the Center for Retirement Research (CRR) at Boston College.

“The 19.8 trillion is not an investment-oriented concept, so it’s not intended to provide the answer to the question you are asking, which is ‘How much would the government need in hand today to fully fund all benefits for the next 75 years,’ he said in an email.

“The 19.8 trillion does not take interest earnings into account at all. It simply provides the present value of the aggregate cash flow shortfalls over the period. So it subtracts income (tax revenue) from costs in each year and provides the present discounted value of the amounts over the 75-year period.”

If Social Security were an advance-funded pension plan, or if the public voted to transition it to a fully funded pension plan, the transition might cost something like $20 trillion. But that would not reflect the $500 billion to $1 trillion per year that a $20 trillion pension fund might generate in interest.

Confused about the health of Social Security, and whether it will “be there” in the future? I am.

Eschtruth sent me to a supplement to the main 2021 trustees report for further explanation. The supplement said that $19.8 trillion was the unfunded obligation of Social Security for the next 75 years. But it went on to say that the present value of Social Security’s unfunded obligation for the infinite future is currently $59.8 trillion, up $6.8 trillion from a year ago.

Of course, projections for the infinite future are highly uncertain. We don’t know what the US population will be in the 22nd century, or if the earth will even be able to sustain life as we know it at that time.

A better way to grasp the cost of Social Security’s looming shortfall is to estimate the tax hike that would be necessary to ensure that the program’s tax revenues will equal its benefit obligations in the future.

“To illustrate the magnitude of the 75-year actuarial deficit, consider that for the combined OASI and DI Trust Funds to remain fully solvent throughout the 75-year projection period:

Revenue would have to increase by an amount equivalent to an immediate and permanent payroll tax rate increase of 3.36 percentage points to 15.76%;
Scheduled benefits would have to be reduced by an amount equivalent to an immediate and permanent reduction of about 21% applied to all current and future beneficiaries, or about 25% if the reductions were applied only to those who become initially eligible for benefits in 2021 or later; or
Some combination of these approaches would have to be adopted.

The trustees pointed out that the longer we wait to raise payroll taxes (if we want to maintain promised benefits), the higher we will have to raise them. If we don’t deal with it before 2034, there will need to be a permanent 4.20 percentage-point payroll tax rate increase to 16.60% starting at that time, a permanent 26% percent reduction in all benefits or some combination of these approaches.

Of course, these are not the only options open to us. Various advocacy groups and policy groups like the CRR, AARP and the Bipartisan Policy Center have proposed various combinations of tax rates, increases in the “FICA limit” (the level of income subject to payroll taxes ($137,700 in 2020), cuts in benefits, or a change in the growth rate of benefits, that would bring Social Security revenues in line with expenditures. Raising the retirement age for full benefits may be proposed but it won’t be popular.

The fatal flaw in Social Security—the hole in the bucket—seems to be the rising “dependency ratio.” Birth rates have fallen and life expectancies have risen, so there are fewer workers per beneficiary. In 1955, a year after Social Security was expanded to cover 10 million more workers, 68 million workers paid in (4% tax withheld on up to $4,200 income) and 7.64 million people received benefits. There were almost nine contributors for every dependent.

By 1990, the dependency ratio had worsened substantially. About 133 million people contributed to OASDI and 39.8 million received benefits, for a ratio of about 3.4 contributors to one dependent. The tax rate reached 12.4% for the first time that year, on up to $51,000 income. In 2020, 175 million contributed and 65 million received benefits for a ratio of about 2.6 workers per beneficiary. The tax rate was 12.4% on up to $137,000 in income.

These are harsh numbers, reflecting a basic unfairness for some observers. “Crudely, the first generation gets $3 for each $1 paid, the second generation pays more but then gets $2 for each $1 paid, the next generation $1 for each $1 paid, and eventually some generation gets 80 cents for each $1 paid,” Gene Steurele of the Urban Institute told me yesterday.

“Or, again, in simplified form, remember that one generation has four workers per retiree, the next three workers per retiree, the next two workers per retiree, etc. Suppose the birth rate falls to zero and everybody is over 65 at some point. How is that last generation going to come out ahead? It’s the denial of these facts that makes reform so hard.”

Steurele’s argument made me wonder where I stood on the ladder of descent into higher taxes and lower benefits. My first job paid $6,500. My Social Security benefit at age 70 will be about $36,000. Am I getting a worse deal than my parents, and a better deal than my children? Given the complexity of the Social Security crediting formula, I can’t tell.

I feel like I’ve paid my share, or part of it. Starting with the Social Security reforms of 1983, I and other workers started pre-funding our own benefits. With our help, Social Security revenues exceeded outflows, creating a trust fund. The trust fund’s principal will decline by $1.5 trillion, from $2.9 trillion today, over the next 10 years, and will be exhausted by 2033, based on current projections.

Since the US Treasury buys back trust fund bonds from Social Security, an increasing amount of current benefits are now coming out of the nation’s general account to supplement payroll taxes. There was no crisis when those flows started; the public barely noticed. But, unless Congress changes the law, benefits will automatically drop by about 20% in 2033, to the level funded purely by payroll taxes. Higher immigration might help, but that’s a touchy subject.

I’m not especially worried about the future of Social Security. As one long-time retirement policy wonk assured me last week, Social Security is still the “third rail” of American politics. Phones on Capitol Hill will be ringing with calls from angry Gray Panthers who vote, he said, if Congress ever threatens it.

Boomers will bequeath $51 trillion over next two decades: Cerulli

Posted on September 2, 2021 by Editorial Staff -

US households are expected to transfer close to $70 trillion to their heirs and charities by 2042. Baby Boomers are expected to pass on upward of 73% of this amount (a total of $51 trillion), according to the latest issue of Cerulli Edge—US Advisor Edition.

Tax efficiency will become increasingly important, given most of the wealth is held by older, high-net-worth (HNW) investors (those with greater than $5 million in investable assets) and will likely be subject to more expansive taxes in the coming decade, a Cerulli release said.

For advisors serving older HNW clients who prioritize tax minimization, emphasizing the importance of pre-emptive and adaptive planning is critical, particularly in the current political climate. Federal tax changes recently proposed by the current administration would greatly hike the top-line capital gains tax rate, applying to earnings exceeding $1 million.

Though this is only expected to apply to roughly 0.3% of the population, that still means close to one million of the wealthiest households would be significantly affected by this change.

“Advisors planning for clients who have significant capital gains exposure beyond the million-dollar threshold should consider stringently managing taxable income by realizing gains up to certain levels, if possible, and plan a strategic gifting and/or donation plan,” said Chayce Horton, analyst, in the release.

With the rates being posed by policymakers, advisors are quickly realizing that resorting to deferrals of gains and income, which has been a major facet of tax planning for years, may no longer be an effective base-case plan for clients. Though nothing is promised yet, advisors serving HNW households will likely need to put a greater emphasis on sequencing taxable income events both as part of regular ongoing tax management, in addition to advanced pre-emptive estate planning.

Yet, estate planning is only half of the equation. With the increasing need for intergenerational planning and engagement, conversations must be had at all levels of the family. According to Cerulli, more than 70% of heirs are likely to fire or change financial advisors after inheriting their parents’ wealth. This disconnect can become a significant wrench in any estate, let alone for an advisor’s business continuity. Advisory practices that have not already done so will need to shift their mindset and strategically engage their clients’ spouses and children on a more regular basis.

“The looming wealth transfer presents a significant opportunity for advisory firms that can adapt to a shifting landscape and evolving wealth demographic,” said Horton. “It remains critical for wealth management firms to have thorough discussions with clients and ensure they have well-designed and adaptable intergenerational plans in place.”

‘The Island is Calling Life Insurers’

Posted on September 2, 2021 by No Author -

US life insurers, faced with the impact of continuing low interest rates on product performance, are increasingly wrestling with the question: Should we send business to Bermuda?

The answer is, like so many questions in life: It depends.

Bermuda is a well-known and well-respected global hub for reinsurance capacity. Historically, it has been dominated mostly by the property and casualty (P&C) line of business, but given recent regulatory developments, the number of life and annuity reinsurers on the island has increased as well.

And there’s no denying that Bermuda has a lot going for life insurers — beyond its weather and beaches. Around $900 billion of assets under management, of which about 50% is life business, is testament to that. More than 1,200 companies and captives, of which about 30% are life-focused, are active on the island.

Deciding factors

A big plus is the regulatory environment, overseen by the Bermuda Monetary Authority (BMA). As well as having Solvency II equivalence, it is also a National Association of Insurance Commissioners reciprocal jurisdiction. The risk-based capital requirements that capture the economics of an insurance business typically make it a capital-efficient regime compared with the more formulaic capital calculation approaches prevalent in the U.S., and one where the economic regulatory view reflects insurers’ risks. Bermuda is also a center for insurance-linked securities (ILS), which is playing an increasingly important role in the life segment. While less mature than the larger P&C segment, ILS is becoming an important provider of capital for life insurers and is set to grow further in the coming years.

Throw in the BMA’s straightforward and streamlined licensing process, and its track record of support for start-up insurance businesses, and you have a seemingly rich cocktail of factors working in life insurers’ favor.

But that doesn’t mean it’s a shoo-in decision for all blocks of business. Bermuda is not a magic place where unprofitable business turns profitable.

As a general rule, a Bermudan base is most advantageous for new vintages of business that reflect the recent economic environment in their pricing — that is, they’ve priced in low interest rates. For back books, that were priced on and included guarantees based on historically higher interest rates, the case tends to be weaker. More often than not, the current profitability of the business is the deciding factor.

How it works

So if a US life insurer has a block of business that it thinks may look and perform better in Bermuda, how does it work?

ILS market-excepted, legacy transactions are the main vehicles although there has been a recent surge in flow reinsurance transactions as onshore cedants and regulators are becoming comfortable with Bermuda. The latter involve a quota share reinsurance contract where the U.S. entity cedes a proportion of the business block to a Bermudan reinsurer. This works on the basis that the broader asset strategy options available and the more accessible economic capital regime can make its product offerings more competitive.

In the process, it can benefit from Bermuda’s capital-efficient economic balance sheet framework and discount reserves using real-world valuation scenarios, all the while continuing to use US GAAP for Bermuda statutory reporting.

Nick Komissarov is senior director, North American Life M&A Leader, Willis Towers Watson. Faisal Haddad is director at Willis Towers Watson Bermuda.

Five Ways to Generate Retirement Income

Posted on September 2, 2021 by Kerry Pechter -

Bill Sharpe, the Nobel Prize-winning economist, once described retirement income planning as the most complicated financial problem he’s ever faced. There are “up to 100, 200 parameters that you’ve got to nail down before you can find an optimum strategy,” he said in a 2014 interview.

At Retirement Income Journal, we report on many of the different strategies that advisers can use to tackle this Rubik-ian challenge. We’re receptive to any approach, but we favor techniques that blend guaranteed sources of income and risky investments in the same retirement portfolio.

For today’s issue of RIJ, we’ve retrieved several of the best income-planning articles from our archives. (Synopses and links can be found below.) In each case, the adviser goes beyond the “safe withdrawal” method to design a customized, outcome-driven solution for the client.

Income plan for two well-funded therapists

“Andrew” and “Laura,” married psychotherapists in their early 60s with a combined annual income of $300,000, hoped to retire in a few years with an income of about $140,000, consisting of their Social Security benefits, Laura’s pension, and about $77,000 a year in withdrawals from their $1.24 million portfolio.

Their adviser, Bill Lonier of Osprey, FL, believed that such a high drawdown rate (6.2%) could exhaust their savings in only 18 years. He recommended that they build a 30-year ladder of Treasury Inflation Protected Securities for essential income and re-characterize $30,000 of their spending needs as “discretionary” (contingent on favorable markets) instead of “essential.”

To reduce Andrew and Laura’s “longevity risk,” Lonier advised them to buy a joint-life qualified longevity annuity contract (QLAC) with 10% of their investable assets. To give them an alternative source of cash during future market downturns, he also advised them to open (but not tap) a home equity line-of-credit.

Jim Otar’s Advice for ‘Andrew’ and ‘Laura’

When assessing new clients, Jim Otar, the creator of the Retirement Optimizer, categorizes them either as “green zone,” “yellow zone,” or “red zone” retirees. Green-zone retirees have enough assets to cover their expenses throughout retirement, come good markets or bad. Red-zone retirees will most likely run out of money unless they purchase income-generating annuities. Yellow-zone retirees require creativity on the part of their advisers if they hope to realize their goals and avoid misfortune.

Otar quickly identified Andrew and Laura as Green zoners, so he recommended no annuities or bond ladders for them. Instead, he took note of the fact that they owned two homes worth a combined $1.8 million (bringing their current net worth to more than $3 million). He suggested that they cover their expenses by spending $50,000 a year from their $1.24 million investment portfolio and their combined $72,000 in Social Security benefits (at age 70).

If equity markets performed badly and the couple appeared likely to live into their 90s, Otar, a Canadian who is now retired, suggested that they make up any shortage of liquidity by, for instance, selling one of their homes and moving into the other. In the meantime, he suggested that they put 58% of their investable assets into equities, 39% into bonds and 3% into cash.

Income plan for a couple with $750,000

Jerry Golden, CEO of Golden Retirement, a Manhattan-based advisory firm, was asked to create an income plan for the “M.T. Knestors,” a couple with $755,000 in savings. At 66, the husband intended to work for four more years and then claim Social Security benefits of $3,000 a month. His spouse, 60, was already retired.

In the first rough draft of a plan for the Knestors, Golden suggested that they receive retirement income from a combination of dividend stocks, annuities and systematic withdrawals from investments. He used $132,500 (the sum of 25% of each spouse’s IRA savings) to buy a QLAC that would provide income when each reaches age 85.

In addition, he recommended investing about $400,000 in a 50% stocks/50% bond portfolio to provide systematic withdrawal income for 15 years, until the QLAC income starts. For additional monthly income, he recommended putting about $170,000 of after-tax savings in dividend-bearing stocks. He allocated the remaining $56,000 in after-tax savings to an inflation-adjusted, joint-life, single premium immediate annuity (SPIA).

Safety First or Safety Last?

Are guaranteed monthly checks more important to retirees at the beginning of retirement, when systematic withdrawals and market volatility can combine to raise a client’s “sequence of returns” risk (the risk that a retiree will need to liquidate depressed assets for income)?

Or is guaranteed income more important at the end of retirement, when a history of good health habits can make a client vulnerable to longevity risk (the risk of outliving assets)?

In this hypothetical case, the clients, a 65-year-old married couple with $1 million in savings, only want to commit 25% of their savings to an income annuity. They’d also like to receive the income either early in retirement, when they plan to travel, or late in retirement, as a hedge against the risk of living longer than expected.

Their adviser points out that they could fund the first decade of retirement a 10-year bond ladder (or a 10-year period-certain SPIA) costing $250,000 and paying out about $28,000 a year, while spending up to $30,000 a year from their remaining savings of $750,000. Or they could use $250,000 to buy a deferred income annuity that pays $40,000 a year starting when they reach age 80, while taking withdrawals from their $750,000 in savings over the intervening 15 years.

In a presentation at the Investments & Wealth Institute Conference for retirement income specialists in 2018, advisers Dana Anspach, of Sensible Money, and Asset Dedication’s Brent Burns and Stephen Huxley, recommended using a bond ladder for essential income in the first 10 years of retirement and investing other money in an asset class with a history of benefiting from a 10-year time horizon, such as small-cap value funds. The choice of strategy might depend most on the client, and which gives him or her more peace of mind: protection from investment risk or protection from longevity risk.

Bill Sharpe’s ‘Lockbox Strategy’

In his ‘Lockbox’ software, Nobel laureate Bill Sharpe divides retirement into two periods. During the first period, starting at the retirement date, a retired couple takes withdrawals from an investment portfolio. In one of his examples, the first period lasts 19 years and consumes 64% of savings. In the second period, if the retirees are still living, they buy an income annuity with the remaining 36%. Each year of the systematic withdrawal period is represented by a “lockbox.”

Each lockbox contains a certain portion of Treasury Inflation-Protected Securities (TIPS) and a share in an investment portfolio consisting of ultra-low-cost total market stock and bond index funds.

“The idea is to provide the discipline to say to yourself, ‘I will only cash the number of shares in this year’s lockbox,’ he said in an interview. “Obviously, the lockboxes aren’t really locked. If you have an emergency, you can take money out. You still have the key.” The asset allocation depends on the client’s appetite or capacity for risk.

“For implementation, you’d buy a certain number of TIPS, and a certain number of mutual fund shares,” Sharpe told RIJ. “You build a spreadsheet with one column for the initial amount in TIPS and another column for the amount in a risky portfolio. Then you would multiply the number of TIPS and shares for each lockbox by their current values and figure out what they’re worth in each period. Once a year, you would sell off that year’s portions of the two at their current price. It’s an accounting/spreadsheet task.”

In the 20th year of retirement—i.e., at age 85, which roughly corresponds to the average life expectancy of an affluent 65-year-old American—the couple, if living, buys a joint-and-survivor fixed life annuity. For the sake of liquidity, flexibility, and cost-reduction, they might prefer to make the annuity purchase an option, rather than buying an immediate or deferred annuity at retirement.

Research Roundup

Posted on August 26, 2021 by Kerry Pechter -

In this month’s edition of Research Roundup, we summarize four academic papers touching on topics ranging from behavioral finance to macroeconomics, and from an informed prediction about the future path of interest rates to speculation about the introduction of a Federal Reserve-sponsored digital currency.

If you believe that wealthy buy less insurance because they can live without it, that financial crisis are brought on by “black swans,” that governments can’t issue digital currency, or that Boomer decumulation will soften the economy, you may find surprises here. These studies aim to put conventional wisdom—or perhaps just straw men, depending on your views—to the test.

Why the wealthy buy more insurance than expected

In theory, wealthier people should buy less insurance, because they can afford to set aside enough savings to “self-insure” against all kinds of risks, large and small, and thereby cut out the costs of the middleman—the life insurance or property/casualty insurance company. Those risk might include a fender bender, a roof crushed by a storm-felled tree, a “root canal” procedure or—in the case of annuities—outliving their savings. The rich can also afford a high deductible on their insurance policies, thereby keeping their premiums lower.

But research by a team at the University of North Carolina-Chapel Hill shows that “the wealthier have better life and property insurance coverage… This puzzling correlation persists in individual fixed-effects models estimated using 2,500,000 person-month observations,” write Camelia M. Kuhnen, a professor of finance, and Michael J. Gropper, a doctoral candidate in finance, in “Wealth and Insurance Choices: Evidence from US Households” (NBER Working Paper 29069, July 2021).

“Whether we measure wealth by the value of financial assets, or by the value of the homes individuals own, we find that life insurance coverage as well as property insurance coverage increase with wealth, controlling for the value of the insured asset. We estimate that a $1 increase in financial wealth leads to an increase of 68 cents in a person’s term life insurance coverage limit, and to an increase of $2.25 in the coverage limit of their homeowners insurance policy.”

In their study, the two looked at possible causes and effects of this phenomenon. It’s not because the wealthy are pessimistic or risk-averse; optimism about longevity is correlated with higher wealth and higher ownership of term life insurance. “It is possible that the less wealthy do not trust financial products or institutions as much as their better-off counterparts, and thus do not purchase products like insurance. It is also possible that insurance products are being advertised more to those who are wealthier.”

It may simply be that the wealthy have more risk exposures, more wealth to protect, or are better able to afford the expense of insurance.

‘Black swans’ are the shadows cast by excessive credit

Financial crises do not appear randomly without warning, regardless of what the “black swan” theories say. “Irrational exuberance” and “animal spirits” don’t explain them either. Instead, new research shows that they typically follow the over-creation of private-sector debt—not public debt.

“Crises are predictable with growth in credit and elevated asset prices playing an especially important role,” write Amir Sufi of the University of Chicago and Alan M. Taylor of the University of California-Davis in “Financial Crises: A Survey” (NBER Working Paper 29155, August 2021). “An understanding of financial crises requires an investigation into the booms that precede them.”

“The unconditional probability of a crisis is 2.5% (one in 40 years)… However, when the credit growth variable rises one standard deviation (s.d.) above its mean, the expected crisis probability almost doubles to 5% (one in 20 years), and at two s.d. above the mean the expected crisis probability is near 10% (one in 10 years).”

Causes of excessive lending cited in the paper:

Deregulation. Financial “liberalization, by opening a gate, enables other fundamental economic forces in the local or global economy to play out, creating the possibility of new or more elastic financial flows (intermediate claims, or leverage) relative to existing investment opportunities.”

Income inequality. “The rise in top income shares since the 1980s has been associated with a saving glut of the rich. Furthermore, this saving glut of the rich has financed a large rise in household and government debt.”

Low interest rates. “The credit booms that predict financial crises are associated with a low cost of debt, and a low cost of risky debt in particular… Crises are preceded by unusually low and falling credit spreads between higher and lower grade bonds. Riskier firms are able to finance themselves at a relatively lower cost during the credit booms that precede financial crises.”

The bottom line is that we should be able to see financial crises coming. “The empirical evidence rejects the view that financial crises should be viewed as random events. Instead, they are predictable,” Sufi and Taylor write. “Credit growth and asset price growth are key factors that predict financial crises, and these two factors have significant forecasting power.”

‘Central Bank Digital Currency’ could be coming our way

Central Bank Digital Currencies (CBDCs) are digital or electronic versions of the liabilities (aka IOUs or money) issued by central banks. In most countries, CBDCs are still hypothetical. But China already has a “digital renminbi” and the Bahamas have a “Bahamian Sand Dollar.”

In a speech last March, Fed chairman Jay Powell said, “Experiments with central bank digital currencies (CBDCs) are being conducted at the Board of Governors, as well as complementary efforts by the Federal Reserve Bank of Boston in collaboration with researchers at MIT.”

CBDCs would allow ordinary Americans to have accounts at the Federal Reserve, as commercial banks do. By eliminating, or partly eliminating the middleman (banks) in the daily settlement of transfers between banks at the Fed, CBDC could make the payments process instant and cheaper for Americans. Banks may view it as a threat.

In a new paper, economic historian Michael Bordo of Rutgers University argues in favor of the development of CDBCs in the US. He calls the digitalization of money as momentous a turning point as the appearance of central banks in the 17th century, the shift from gold and silver coins to paper money in the 18th and 19th centuries, and the emergence of central bank monopolies over money in the 19th and 20th centuries.

In “Central Bank Digital Currency in Historical Perspective: Another Crossroad in Monetary History” (NBER Working Paper 29171, August 2021), Bordo claims a CBDC in the US would improve the efficiency of the monetary/financial system; neutralize competition from other virtual currencies that could threaten US monetary sovereignty; allow the Fed to set monetary policy by adjusting the interest paid on CBDC accounts, and “revolutionize international payments in the way that the first Atlantic cable did for capital flows and international payments in 1866.”

On the other hand, Federal Reserve board of governors member Christopher Waller said on August 5 that he is “skeptical” of the need for a CBDC in the US. His comments at a meeting of the American Enterprise Institute have been posted at the Federal Reserve’s website.

“Government interventions into the economy should come only to address significant market failures,” Waller wrote. “The competition of a Fed CBDC could disintermediate commercial banks and threaten a division of labor in the financial system that works well. And, as cybersecurity concerns mount, a CBDC could become a new target for those threats.”

Boomer decumulation won’t push interest rates higher

Demographic change, including the aging of populations in many countries, is expected to affect global financial conditions in the future. Economists have posed the question: If retirement saving by the Baby Boom generation led to historically low interest rates, will interest rates rise as Baby Boomers spend down their savings?

In “Demographics, Wealth, and Global Imbalances in the Twenty-First Century” (NBER Working Paper 29161, August 2021) four economists argue that it will not. “Our model predicts that population aging will increase wealth-to-GDP ratios, lower asset returns, and widen global imbalances through the twenty-first century. These conclusions extend to a richer model in which bequests, individual savings, and the tax-and-transfer system all respond to demographic change,” wrote Adrien Auclert and Frederic Martenet of Stanford, Hannes Malmberg of the University of Minnesota and Matthew Rognlie of Northwestern University.

“There will be no great demographic reversal: through the 21st century, population aging will continue to push down global rates of return, with our central estimate being -123 basis points, and push up global wealth-to-GDP, with our central estimate being a 10% increase, or 47 percentage points in levels.”

The study focused on expected changes in the wealth-to-GDP level in 25 countries. In the US, for instance, the total accumulated wealth of the population (including the current market value of financial assets) is about $126 trillion, or about five times the annual Gross Domestic Product ($22.7 trillion in mid-2021, annualized). Rich countries have high wealth-to-GDP ratios; poor countries have low ones. Hong Kong boasts the world’s highest wealth-to-GDP ratio, at 8.4.

Observers have predicted “that aging will raise interest rates, decrease standards of living by impairing capital accumulation, or exert inflationary pressure as the number of consumers increases relative to the number of producers. These predictions are not borne out in our analysis,” the authors said.

Honorable Mention

Posted on August 26, 2021 by Editorial Staff -

Button succeeds Morris as Pacific Life CEO

Pacific Life Insurance Company has named Darryl Button its CEO-Elect. He will become president and CEO of Pacific Life when Jim Morris, the current Chairman, President and CEO, retires on April 1, 2022.

Darryl Button

Button, currently the company’s chief financial officer, will be Pacific Life’s 15th chief executive in 154 years. The directors of Pacific Mutual Holding Company, Pacific Life’s ultimate parent, also named Mariann Byerwalter as its non-executive board chair beginning April 1, 2022.

Button joined Pacific Life in March 2017. He has been responsible for the company’s finance, risk management and corporate development functions, as well as the performance of the $119 billion in assets in Pacific Life’s general account. He oversaw the creation of a new business division in 2020 focused on serving institutional clients with pension risk transfer and 401(k) plan investment solutions.

Prior to joining Pacific Life, Button served for 17 years at Aegon where his last role was chief financial officer and a member of the Executive Board of Aegon N.V. He began his career at Mutual Life Insurance Co. of Canada and is a fellow of the Society of Actuaries (FSA), a fellow of the Canadian Institute of Actuaries (FCIA), and a member of the American Academy of Actuaries (MAAA). He holds a B.S. in mathematics, actuarial science and statistics from the University of Waterloo in Ontario, Canada.

Following his planned retirement in April 2022, current Chairman, President and CEO Jim Morris will continue to serve as a director on the board of Pacific Mutual Holding Company through the conclusion of his elected term in May 2023. He began his almost 40-year career at Pacific Life following his graduation from the University of California, Los Angeles and held a series of management positions in the Life Insurance and Corporate Divisions before his election as CEO on April 2, 2007. During his 15-year tenure as CEO, assets of the company have almost doubled from $101 billion to $198 billion. The endowment of the Pacific Life Foundation has also more than doubled from $63 million to $130 million during this same time period.

As part of this transition, the board of directors will create the role of non-executive board chair. Mariann Byerwalter has served on the Pacific Mutual Holding Company board of directors since 2005 and has been its lead director since 2019.

Net income up, total income down for life/annuity industry in 1H2021

Net income for US life/annuity (L/A) insurance industry rose to $18 billion in the first half of 2021 from $1 billion in the first half of 2020, thanks to reduced expenses, a new AM Best Special Report said.

Total income declined 5.9% in the first half of this year however, as increases in commissions and expense allowances, along with net investment income, were countered by declines in premiums and annuity considerations and other income, according to the report.

But total expenses for the industry fell 14.4%, due mainly to a 48.3% decline in other incurred benefits that was driven by significant swings in aggregate reserves for life and accident and health insurance contracts. A $6.1 billion increase in Tax obligations rose $6.1 billion and net realized capital gains fell $12.9 billion, contributing to the industry’s overall net income gain.

The report, “First Look: Six-Month 2021 Life/Annuity Financial Results,” is based on data from companies’ six-month 2021 interim statutory statements. The data is as of Aug. 19, 2021, and represents about 93% of the total L/A industry’s net premiums written.

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=311945.

Athene Holding acquires £3 billion UK mortgage loan originator

Athene Holding, the top retailer of fixed indexed annuities in the US, said it will acquire Foundation Home Loans (FHL), a specialist UK mortgage lender, from funds managed by affiliates of Fortress Investment Group, subject to the satisfaction of customary conditions, including consent by the Financial Conduct Authority.

The investment in FHL will be managed by the team at Apollo Global Management, Athene’s strategic asset management partner. “FHL originates high-quality residential mortgage loans, providing Athene with attractive investment opportunities in high-quality yield assets,” an Athene release said. As of June 2021, FHL had a £3 billion ($4.12 billion) portfolio of specialist buy-to-let and owner-occupied mortgages on its balance sheet.

“This transaction continues our longstanding strategy of working with Apollo to identify and invest in attractive businesses which add direct origination asset sourcing capabilities to our alpha-generating investment portfolio. We believe our investment will help FHL achieve its full potential, while being a complementary addition to our expanding asset sourcing capabilities,” Athene chairman and CEO Jim Belardi said in a release.

Athene’s residential mortgage portfolio of loans and structured securities exceeded $13 billion of net invested assets as of March 31, 2021 and “exhibits a strong yield profile that is indicative of the alpha generation the asset class can offer,” the release said.

Lincoln adds untested vol-controlled BlackRock index to its OptiBlend FIAs

Posted on August 26, 2021 by Editorial Staff -

Lincoln OptiBlend, Lincoln Financial Group’s flagship fixed indexed annuity (FIA), has added the BlackRock Dynamic Allocation Index, a daily volatility-controlled index with global asset allocation, to its index options. The index was created by BlackRock on July 20, 2021, so it has only a one-month track record.

Contract owners can choose either a one-year or two-year term when allocating premium to the BlackRock Dynamic Allocation Index, according to a release and statement from Tad Fifer, VP and Head of Fixed Annuity Sales, Lincoln Financial Distributors. The minimum OptiBlend purchase premium is $10,000.

The OptiBlend FIA comes in a 5-year, 7-year or 10-year surrender charge schedule, as state regulations allow. Surrenders in excess of 10% of the FIA account value are subject to a surrender penalty. When contract owners surrender their contracts before the end of the surrender period, surrender fees typically reimburse the life insurer for the commission it paid to the insurance agent at the time of the initial sale.

The index gives contract owners exposure to the performance of 10 BlackRock iShares ETFs (exchange-traded funds). The OptiBlend FIA also offers exposure to the One-Year Fidelity AIM Dividend Participation Index, One-Year S&P 500 5% Daily Risk Control Spread Index, One-Year S&P 500 with a cap on upside returns, and a One-Year Year S&P 500 with a participation rate. FIA caps and participation rates are subject to change, depending on prevailing interest rates and other factors.

On August 24, 2021, the index contained about 50% exposure to Treasury securities of varying maturities (with 2% to investment grade corporates), 20% exposure to large-cap stocks (the S&P 500 Index), about 20% exposure to global stocks in developed and emerging markets (MSCI-EAFE and Emerging Markets), and just under 9% to a real estate ETF.

So the index offers risk protection in several ways. First, every FIA has a guarantee not to lose principal if held to term. Second, the index is half-invested in safe government or corporate securities. Third, the volatility of the index is controlled through daily monitoring.

According to information from BlackRock, “To the extent that the forecast volatility of the Multi-Asset Class Basket differs from the 5% Target Volatility, the Index will allocate a portion of the index weight to the Multi-Asset Class Basket, with the remaining weight allocated to the Cash Basket,” which consists of short-term Treasuries and TIPS (Treasury Inflation-Protected Securities).

When individuals purchase an FIA, a small percentage of their premiums are typically used to purchase a set of options on a price index (an index whose returns don’t include dividends). The options give the contract owners a range of the index returns over a given crediting period (typically one or two years).

Returns range from a low of zero (excluding fees) to a positive return up to a cap or up to a certain percentage of the total index gain between the beginning and end of the crediting period. Volatility-controlled indexes like the BlackRock Dynamic Allocation Index may offer relatively high caps and participation rates than more conventional indexes, but their risk controls are designed to restrain them from wide swings in index performance.

According to Lincoln’s website, “The level of the BlackRock Dynamic Allocation Index is calculated on an excess return basis (net of a notional financing cost) and reflects the daily deduction of a fee of 0.50% per annum. The fee is not related to the annuity.”

Not All Annuity Issuers Are Alike

Posted on August 26, 2021 by Kerry Pechter -

When fee-based advisers who’ve dealt only with investments decide to become “ambidextrous,” they can be forgiven for not instantly knowing every nuance about insurance products and life insurance companies.

“Ambidextrous” is RIJ’s adjective for advisers who use investments and annuities to maximize clients’ income and peace of mind in retirement.

The other day I was talking to a investment-centric adviser and differences in the ownership structure of life/annuity companies. She didn’t know there were differences. So we began talking about the business models that life insurers use: Mutual, publicly traded (stock), private equity-controlled, foreign-owned, and fraternal, for instance.

Ownership and business model should matter to advisers and clients. They help determine the culture of the company, its strength and credit ratings, the types of products it manufacturers and sells, its pricing and distributing channels, its compensation for intermediaries, the level of profits that its owners seek, the regulators it reports to, how it reinsures its liabilities, the content of its communications to policyholders and sometimes the quality of its customer service.

These characteristics can matter as much as or more than price.

Mutual companies (New York Life, Guardian, Thrivent, MassMutual and Northwestern Mutual) are owned by their policyholders, who typically receive dividends. Stock companies (Prudential, Brighthouse Financial, AIG, Equitable, Principal, Lincoln Financial) are owned by their shareholders, who hold stock in them.

Private equity-affiliated (PE) life/annuity companies (F&GL, Athene, Global Atlantic) are a more recent phenomenon. They may be public or not, but they tend to partner strategically or be affiliated with a big PE or buyout firm (Apollo, KKR, Blackstone). This model has focused on fixed indexed annuities in the past five to eight years. A recent McKinsey report described their business model (see below).

Foreign-owned companies (Allianz Life, Symetra, Protective; Jackson National until recently) are subsidiaries of overseas life insurers. Some foreign insurers—ING, AXA—withdrew from the US market after the Great Financial Crisis.

In addition, there are a few companies that have gone from mutual to public or from public to private (Nationwide). Some public companies are global; others are controlled by a single family. There are “fraternal” insurers, which tend to be smaller and whose customers tend to be affiliated with each other in some way.

These differences may be familiar to some RIJ readers, but they’re not sufficiently well-known, in my opinion. The lines between ownership style can be blurred; business models overlap. Any life insurer might offer all types of annuities or only one. The low interest rate (and bull equity market) environment has driven all life insurers more or less toward index-linked annuities, whose gains are derived mainly from stock market gains.

You could write a long and dry book on this topic. I’ll pick up the pace until we get to the private equity-affiliate life/annuity companies.

Mutual companies are the “quiet” companies. The Wall Street Journal rarely covers them because they aren’t listed on stock exchanges. If true to type, they focus on plain-vanilla fixed deferred and fixed single premium immediate annuities, selling them through “career agents.” Their customers are their primary clients; they return some of their profits to certain policyholders as dividends.

Stock companies are listed on stock exchanges, owned by their shareholders. They’re honor-bound to put their shareholders’ interests first. They strive for higher earnings and higher stock prices. “If you’re an equity company you have to deliver equity returns,” a product chief once said privately. In a low rate environment, that means selling high-fee products indirectly tied to the equity markets, like variable annuities and index-linked fixed or structured annuities.

That brings us to the private equity-led life/annuity companies. After the 2008-09 financial crisis, the big asset management firms started talking to life insurers. Capital-rich asset management firms were looking for assets to manage. Several public life insurers wanted to sell themselves or their blocks of in-force annuities (i.e., hundreds of billions of dollars; the more or less guaranteed savings of conservative Americans).

On Wall Street, the PE firms were seen as saviors for life insurers with depressed stock prices. They would use their storied “smartest-guys-in-the-room” investment, “loan-origination,” and securitization skills to “redeploy” annuity assets for solid returns than traditional life insurance investment departments could. They could then use those higher returns to offer (mainly) fixed indexed annuities with higher yields for savers and higher agent commissions. The PE firms also knew how to reduce drag and “release” life insurer capital by reinsuring blocks of in-force annuities in on-shore or offshore regulatory havens.

First Harbinger bought Old Mutual, then Athene Holding (majority-owned by Apollo, the giant asset manager) bought Aviva plc’s US life and annuity businesses in 2012. Goldman Sachs was in and out of the business, buying Hartford’s annuity business and selling it. Former Guggenheim Partners executives are involved. Today, five giant asset managers or holding companies—Apollo, Ares, Blackstone, Carlyle and KKR—have invested in the life/annuity business. They now account for almost half of fixed indexed annuity sales.

So, what does this ownership structure imply for advisers, agents and retirement savers who want guaranteed savings products or income? According to reports from the CFA Institute blog and McKinsey, the big buyout firms got into the insurance business to give themselves a source of “permanent capital.”

To the extent that their insurance subsidiaries can acquire retirement savings in the form of long-dated annuities, they get money that they don’t have to return to clients for five, seven or even 10 years. They can capture an “illiquidity premium” from buying Collateralized Loan Obligations, or bundles of loans to high-risk companies. Their asset management arms have a steady source of fee-generating money to manage.

“Annuities providers represent a bedrock of capital that can be used as security or lending facility to fund deals. Last year, KKR took a similar view with its acquisition of retirement and life insurance company Global Atlantic, adding $70 billion to its asset base,” wrote a blogger at CFAInstitute.org last June, in an article about the quest for permanent capital by PE firms.

Here’s an excerpt from an article that McKinsey published online yesterday:

With recent moves to take insurers private, sophisticated PE investors are buying blocks of policies and assuming those risks—and billions in assets often come with that risk. In the United States in 2020, entities affiliated with general partners (GPs) acquired more than $100 billion in general account liabilities from traditional insurers’ balance sheets. If the current low-interest-rate environment persists, growing pressure could make acquisition candidates of another $2 trillion in liabilities, further accelerating growth in GP insurance capital.

As insurers are under pressure to divest assets and liabilities that were underwritten at much higher rates, GPs have both the investment capabilities to manage the assets and the culture and skills to build the operational capabilities to handle the policies.

Specifically, investors that combine operating capabilities with skill in managing investments and maximizing returns have a clear value proposition, making management teams more comfortable in taking over their blocks and customers.

Meanwhile, PE investors see significant value in long-term capital with a life cycle beyond that of a typical fund, reducing the fundraising burden on GPs and increasing through-cycle investment flexibility. Purchasing divested blocks also provides income diversification and a predictable, captive stream of fee income. For example, after a long track record in insurance vehicles, one investment management firm reported that nearly half of its assets under management were in insurance, amounting to half of all management fees earned.

My takeaways from this are still evolving. I think it means that public life/annuity companies will increasingly promote index-linked annuities, which appear to pose little risk to insurers, which means they require minimal reserves, which frees up capital. RIJ’s “Bermuda Triangle” series focuses on PE-led life/annuity companies.

Generally, the life/annuity business appears in danger of becoming a subsidiary of the investment industry. The “life” in life insurance companies refers to their expertise in using time and the law of large numbers to extract value from pooling mortality and longevity risk. Only life insurers can issue annuities. Annuities enjoy the privilege of tax deferral because they’re supposed to serve a public service.

Annuities and investments are both similar and different. When people invest, they take varying amounts of risk. They expect to pay for advice, but not for risk. When people buy insurance, they transfer risk to the insurer and expect to pay a price for that service. When investment and insurance overlap, as they do in annuities, unsophisticated people don’t necessarily understand exactly which they’re buying or what they’re paying for. They need to.

After reading the McKinsey excerpt yesterday, a retirement income expert told me, “I’m having a ‘this won’t end well’ moment.”

SEC hires Barbara Roper, aggressive consumer advocate

Posted on August 25, 2021 by Editorial Staff -

In case you hadn’t noticed the flood of announcements of investigations and enforcement actions from the Securities and Exchange Commission this summer, here’s a confirmation of the SEC’s emphasis on consumer protection, relative to the previous administration’s.

The Securities and Exchange Commission yesterday announced the appointment of Barbara Roper, currently the Director of Investor Protection for the non-profit Consumer Federation of America (CFA), as senior advisor to the chair, Gary Gensler.

Roper will focus on issues relating to retail investor protection, including matters relating to policy, broker-dealer oversight, investment adviser oversight, and examinations, an SEC release said.

Roper “will provide invaluable counsel on behalf of the American public,” Gensler said in the release. “I worked closely with her on the Sarbanes-Oxley Act and the critical market reforms of the Dodd-Frank Act.”

“I’ve dedicated my career to ensuring that our capital markets work for the average investor,” Roper said. “I’ll bring the same focus to my work for the SEC.” She has served on numerous advisory committees at the SEC, Financial Industry Regulatory Authority, and other entities. She is a graduate of Princeton University.

During 35 years at the CFA, Roper has conducted studies of the financial planning industry, state oversight of investment advisers, and state and federal financial planning regulation. She has also conducted studies on the need for audit reform in the wake of the Enron scandal, the need for mutual fund reform in the wake of trading and sales abuse scandals, the information preferences of mutual fund shareholders, the potential of the Internet to improve disclosure, and securities law weaknesses as a cause of the financial crisis.

Top Ten Countries by Total Wealth

Posted on August 25, 2021 by No Author -

Honorable Mention

Posted on August 19, 2021 by Editorial Staff -

Two senior promotions at AIG Life & Retirement

Bryan Pinsky has been named President, Individual Retirement and Tim Heslin has been named President, US Life Insurance, of AIG Life & Retirement, a division that American International Group, Inc., has said it plans to eventually spin off through an initial public offering.

Pinsky and Heslin assumed their new roles this week, both continuing to report directly to Todd Solash, CEO, Individual Retirement and Life Insurance, AIG Life & Retirement. Pinsky is based in Woodland Hills, California, where AIG’s Individual Retirement business is headquartered.

Pinsky joined AIG in 2014 and most recently was senior vice president of Individual Retirement Pricing and Product Development. He joined AIG from Prudential where he led the annuity product team and, before that, held various life and annuity product development positions with Allstate. He is a Chartered Financial Analyst and Fellow of the Society of Actuaries.

Heslin joined AIG in 1999 and most recently was Chief Life Product, Pricing and Underwriting Officer for AIG Life US. Previously, he headed Risk Selection for AIG’s Global Life Businesses, including Life, Health and Disability for Europe, the Middle East and Africa. He is a Fellow of the Society of Actuaries and a Member of the American Academy of Actuaries. He works out of Houston, where the US Life Insurance business is headquartered, and Nashville, Tennessee.

Allianz Life annuity to be offered in Morningstar 401(k) managed account

Allianz Life Insurance Company of North America and Morningstar Investment Management LLC are partnering to “help individuals allocate their retirement savings to its annuity products through the Morningstar Retirement Manager service,” Allianz Life announced this week.

The Allianz Lifetime Income+ Annuity with the Lifetime Income Benefit will be the first Allianz Life product to be added as Allianz Life enters the defined contribution market.

“Through Morningstar Retirement Manager, individuals receive recommendations to help ensure that they are allocating the right amount of their investable assets to guaranteed income at the right time for what could likely be a lengthy retirement,” the release said.

Allianz Lifetime Income+ is a fixed index annuity (FIAs) with a guaranteed lifetime withdrawal benefit (GLWB). FIAs provide account growth potential through the purchase of options on an equity index. A July 22 RIJ article described the product.

GLWBs offer a combination of liquidity and protection from longevity risk—the risk of running out of income from savings. Lifetime Income+ also offers the potential for the monthly income benefit to grow annually and keep up with inflation.

Morningstar Retirement Manager is a managed accounts and advice service for retirement plan participants. Its algorithms can help participants decide how much to save, how to invest, and when to take Social Security.

Only individuals whose retirement plans offers both Morningstar Retirement Manager and the Allianz Life annuity will have access to this service offering.

Multiemployer plan funding reaches highest level since 2007: Milliman

The aggregate funded percentage of all multiemployer plans (MEPs) in the US reached 92% on June 30, 2021, up from 88% at the end of 2020, according to the 2021 mid-year results of Milliman’s Multiemployer Pension Funding Study (MPFS), released this week.

That’s the highest aggregate funding level recorded for MEPs since December 31, 2007, before the Great Recession, the global actuarial consulting firm reported. These MEPs, often union-sponsored, are pensions, and shouldn’t be confused with “multiple employer plans,” which are 401(k) defined contribution plans.

“Strong investment returns in the first half of 2021, estimated at 6.9% for our simplified portfolio, helped improve pension funding,” a Milliman release said.

Some plans continue to struggle, however. “This is consistent with prior periods and reflects lower funding percentages coupled with negative cash flow for these plans,” MIlliman said.

The MPFS results don’t incorporate the impact of the American Rescue Plan (ARP), effective last March, or the impact of the COVID-19 pandemic on multiemployer pensions (MEPs) plans and their membership, the full scope of which remains unknown at this time.

“The American Rescue Plan established a special financial assistance program for the most financially distressed multiemployer plans, which will improve their funding in the near-term,” said Nina Lantz, a principal at Milliman and co-author of the study. “But it remains to be seen whether this assistance can sustain these plans in the long-term,” she added. “Furthermore, the effects of the COVID-19 pandemic are still emerging, and future contribution levels for most plans will depend on the resiliency of various industries to restore and/or maintain their employment levels.”

To view the complete study, go to www.milliman.com/mpfs.

Large US life/annuity insurers continue to de-leverage: AM Best

Posted on August 19, 2021 by Editorial Staff -

The prolonged low interest rate environment has allowed publicly traded life/annuity (L/A) insurers to replace higher-cost debt with often much less expensive alternatives and thereby strengthen their balance sheets, according to a new AM Best special report.

Aggregate unadjusted total debt-to-capital ratio for the 16 publicly traded L/A insurers followed for the report has declined since 2011, to 24.1% at year-end 2020, according to the Best’s Special Report, titled, “Publicly Traded L/A Insurers Reduced Leverage, Improved Liquidity in 2020.”

Given the current interest rate environment and some uncertain views of the US economy, many of the larger companies continue to de-leverage (the primary reason for the decline in debt).

Total debt outstanding decreased by approximately $8 billion (or 8.1%) to $91.4 billion at year-end 2020. Prudential Financial reduced its total debt obligations by $6.3 billion in 2020, the largest dollar decrease of all the companies.

In 2020, the financial leverage of a significant portion of the publicly traded companies declined to its lowest unadjusted level of the last 10 years. The overall decline in debt-to-capital ratios can be attributed to the industry’s record-high capitalization, which enhances the ability to use earnings for debt servicing as well as regular dividend payments.

Amid the COVID-19 pandemic, many insurers turned to the Federal Home Loan Bank (FHLB) to tap into funds to bolster liquidity to prepare for a worst-case scenario, the report said. Aggregate borrowing for the L/A insurers grew year over year by approximately 18% in 2020, to $97.3 billion. Aggregate borrowing has increased steadily since 2014, but it has been outpaced by collateral pledged. As a result, the borrow-to-collateral percentage declined over the period.

Management’s track record of share repurchases and shareholder dividends is also considered in AM Best’s evaluation of operating leverage and expected coverage ratios. Given the uncertainty caused by COVID-19 in 2020, many companies paused their share repurchase programs and cut back on dividends to prepare financially for the worst. For the publicly traded companies, the aggregate capital returned to shareholders declined by 41% to $11.7 billion.

New Jackson VA’s living benefit has one payout option: 4% at 65

Posted on August 19, 2021 by Editorial Staff -

Jackson National Life, the largest issuer of variable annuities (VAs) in the US, has issued a new no-commission VA contract for clients of independent registered investment advisors (IRIAs) who want tax-deferred growth potential and protection against running out of money in retirement.

The new contract, called the Jackson Retirement Investment Annuity (JRIA), has these features:

A core contract charge of 0.40% ($4 per $1,000) per year, with optional add-on living and death benefits for an additional charge.
No surrender charges.
Annual gross subaccount fees ranging from 20 basis points to 1.81%.
Tax-deferred growth until withdrawals begin.
An optional lifetime income benefit rider (+ProtectS) for an additional charge of 0.30% during the deferral period and 0.75% during the withdrawal period (adjustable to a maximum of 1.50%).
110 investment options from many fund providers, including Vanguard, American Funds, BlackRock, Dimensional Fund Advisors and many others.
A return of premium death benefit for an additional 20 basis points per year. Otherwise, there’s a return of account value death benefit.
No restrictions on investment choice for those who use the income rider.
The literature doesn’t appear to offer an optional joint-and-survivor living benefit.
Minimum premium, $50,000.
Potential step-ups in the benefit base (and in fees) on every fifth contract anniverary.

In the past, VAs with guaranteed minimum withdrawal benefit riders typically allowed contract owners to turn on income whenever they want (between ages 55 and 85, for instance). The owners know that the longer they delay income the higher their withdrawal amount will be (as a percentage of their “benefit base,” which can’t be below their initial account value, regardless of market volatility, and may be augmented by “deferral bonuses” that reward waiting).

In this contract, Jackson appears to offer contract owners one age for starting income (65) and one annual guaranteed withdrawal rate (4.0% per year)—which coincidentally is no greater than the withdrawal rate that advisers consider to be “safe” (i.e., not hitting zero before the retiree’s death) over a 30-year retirement. There are no bonuses to entice contract owners to delay the income start date.

By structuring the contract this way, Jackson reduces or eliminates the expense associated with uncertainty over how the clients will use their income benefit. When clients have the flexibility to turn on income at will, they could all decide to do so in a prolonged market crash, when their account values are depressed. That could create large losses for the carrier.

People are Talking about “OIDs”

Posted on August 19, 2021 by Kerry Pechter -

Outsourced insurance distributor (OID) is an expression (and an acronym) that I never heard before last Monday, though I’ve written several articles about them.

These are online annuity distribution platforms like RetireOne and DPL Financial Partners. Registered Investment Advisors (and their Investment Advisor Representatives, or IARs) without insurance licenses can use OIDs to learn about the no-commission annuities that life/annuity companies have created for the RIA market. Licensed OID agents can broker the sale of an annuity to the IAR’s client.

Now, thanks to a case in California, questions have arisen: Who should bear responsibility for the suitability of an annuity sale on an OID? Should it be the platform’s agents, the insurance carrier who issued the annuity, or the RIA adviser who recommended the annuity to his client? This issue was the subject of a spirited discussion on LinkedIn this week.

Three weeks ago, on July 29, the Insurance Commissioner of California announced the settlement of a complaint against Jefferson National Life Insurance, the direct provider of low-cost, investment-only variable annuities to RIAs. Nationwide bought Jefferson National in 2017.

An IAR, on behalf of an 86-year-old client, had exchanged (using the customary “1035 exchange” process) three existing variable annuities, involving some $636,000, for Jefferson National Life Monument variable annuities between 2015 and 2017.

Some of the exchanged annuities were evidently still within the so-called surrender period (the initial post-sale years during which a carrier typically recaptures the commission it paid to the agent or broker in the original sale). So the elderly client had to pay about $16,682 in surrender charges.

The client’s bank, noticing large checks to Jefferson National, alerted the client in 2017. The client complained to the California Insurance Commission. She said she didn’t understand what had been going on.

‘Know your customer’

That led to an investigation and to the recent settlement. Without acknowledging guilt or innocence, Jefferson National agreed to refund $14,342 in surrender fees to the client and to pay California a fine of $150,000. The settlement was signed by Craig A. Hawley, Nationwide’s head of annuity distribution and the president of Jefferson National.

The regulator said that Jefferson National’s “sales process did not include an adequate independent review of the recommendations of [its] annuities by the non-insurance licensed investment adviser [or] …an independent analysis of Consumer’s insurance needs and of the financial objectives of the Consumer at the time of the transactions recited herein, as required by California Insurance Code §10509.910.”

The RIA in the case was not cited for any misconduct—perhaps because state insurance commissioners don’t regulate RIAs. But some believe the case should raise issues for RIAs.

Michelle Richter, founder of Fiduciary Insurance Services LLC, which advises companies on hybrid insurance-annuity businesses, claimed that the “Know Your Customer” (KYC) rule established by FINRA (Financial Industry Regulatory Authority) looms over this case.

The KYC rule says: “Every [FINRA] member shall use reasonable diligence, in regard to the opening and maintenance of every account, to know (and retain) the essential facts concerning every customer and concerning the authority of each person acting on behalf of such customer.” FINRA doesn’t regulate RIAs, but RIAs may have broker-dealers that FINRA regulates.

The extent of the RIA’s responsibility for following the KYC rule needs more “clarity,” Richter commented on LinkedIn. “The clarity over who is responsible for annuity know-your-customer (KYC) in the event of placement by an insurance-licensed individual who isn’t the regular adviser is not there,” she wrote.

“When FINRA weighs in on this case, I think we will see a push from distribution overseers for answers to two questions: Do RIAs need to have insurance consultants’ licenses to charge fees on AUM that includes insurance? And, do OIDs/direct-placing-insurers need to expressly speak with an RIA’s client when an annuity is being placed?” she added.

Richter invoked the principle that if RIAs are charging advisory fees on the account value of an annuity in their clients’ portfolios—a relatively new practice for fee-based advisors—then they need to be accountable for an annuity sale that they recommend and seek.

But that could threaten the viability of the OID business. RIAs are not likely to get their insurance licenses just to help a few clients acquire an occasional annuity, or merely to execute a few 1035 exchanges for new clients. RIAs remain a tiny market for annuities.

David Stone, the founder of RetireOne (and of ARIA, a pioneer in the field of lifetime income riders for investment portfolios) told RIJ in an email that OIDs are providing adequate oversight over transactions involving RIAs, insurance-licensed OID agents, and insurance carriers.

“It is the OID rep/agent that determines if a transaction is in the client’s best interest and not the RIA,” Stone wrote. “Every transaction goes through a full suitability/best interest assessment. All OID reps/agents are subject-matter experts in the solutions offered and are typically salaried employees of the OID and whose compensation is not tied to the sales of any particular solution or carrier.”

He added: “Our model is similar to the old Vanguard model with the big difference being the open architecture. We offer access to multiple carriers and solutions.”

(He’s referring to the period when Vanguard had an annuity phone desk where consumers could buy white-label annuities direct from salaried, insurance-licensed Vanguard employees. I worked in annuities at Vanguard when this was still the case. Vanguard has never owned a life insurer, or issued annuities, and has since discontinued distributing them.)

David Lau, founder of DPL Financial Partners (and a co-founder of Jefferson National), told RIJ in an email that the OID model—which was not under scrutiny in the California case, in which the RIA dealt directly with an agent of the annuity issuer, Jefferson National—is working.

The IARs, he said, based on their knowledge of the client, merely refer clients to the OID, which is accountable for the suitability of the annuity sale.

“The general model for insurance professionals working with RIAs has been in place for a long time and is the same whether you are providing commission-free annuities or commissioned ones: the RIA is a referral source for clients. RIAs are not unique in being referral sources to insurance professionals,” Lau wrote.

“As the licensed agent, once working on a recommendation for a client, it is incumbent [on the OID] to be compliant with the regulations regardless of how the client came to you. At DPL, we hold ourselves to a fiduciary standard in regard to our recommendations,” he added.

“The OID model also trains non-insurance licensed RIA’s about the do’s and don’ts of how to engage with insurance. The bottom line is if [RIAs] are not licensed, they cannot solicit, negotiate, or transact insurance. So they work with the OID through a referral process.”

To me, this whole case sounds more like a misunderstanding than a legal or ethic violation. It is muddied by the fact that Jefferson National was both the issuer of the new annuity and the agent-of-record, as well as by the client’s advanced age—an age when many people become inattentive to the details of their finances.

Given the available evidence, which doesn’t include the fees the 86-year-old client had been paying on her existing annuities, the IAR appears to have done what you would expect an IAR to do when acquiring a new client who already owns variable annuities.

She was probably trying to reduce the client’s VA expenses by exchanging the client’s presumably high-fee existing VAs for a single $20-per-month Jefferson National contract. With $636,000 in VAs, the client could have been paying $20,000 or more in annual fees. Therefore it might have made sense for her to pay $16,000 in surrender fees to eliminate almost all current and future VA contract fees.

Unfortunately, we don’t know if the client stood to lose any valuable living benefits—like guaranteed income for life—by exchanging her previous contracts. Given the age of the client and the fact that the contracts were still in their surrender periods, that was probably not the case.

Richter, nonetheless, believes that regulatory bodies need to catch up with new circumstances in the retirement industry, such as the development of fee-based annuities, of in-plan 401(k) annuities, and of retirement portfolios that contain both investments and insurance products. These hybrid solutions have the potential to test jurisdictional boundaries.

“I feel that RIAs advising on assets including insurance should need insurance consultants’ licenses in the future,” she wrote. “But I have seen no guidance suggesting that this is required, and if it were, how it would be policed, since insurance is regulated state-by-state and not federally as securities are.”

Top Providers of Direct Index Separately Managed Accounts (by AUM)

Posted on August 19, 2021 by No Author -

Wade Pfau’s Income Expert Success Tools

Posted on August 19, 2021 by Kerry Pechter -

If you’ve taken the famous Myers-Briggs personality inventory test, you may remember that it measured whether you were relatively extroverted or introverted, sensory or intuitive, thinking or feeling, and judging or perceiving—traits identified a century ago by psychoanalyst Carl Jung.

Wade Pfau, who heads the doctoral program in retirement income at The American College of Financial Services, takes a similarly scientific approach to his field. He and colleague Alex Murguia have developed questionnaires to help advisers to understand the personalities of older clients.

These questionnaires, in theory, can reveal clients’ attitudes toward the value of financial advice itself, and their tolerance for risk in retirement. The results, Pfau believes, can help advisers deliver the appropriate kind of advice in the appropriate way to each client.

Alex Murguia, Ph.D.

Pfau describes this approach in rigorous detail in two academic papers that he and colleague Murguia published earlier this year. Murguia is a Ph.D. and CEO at RetirementResearcher.com, the web platform that Pfau established for blogging and entrepreneurial ventures.

This work is grounded in their beliefs—which RIJ shares but which may not be universal—that income planning differs significantly from accumulation-stage planning, that no two retirees are alike, and that retirees’ preferences, not advisers’ preferences, should determine their income-generation strategy.

Tailoring a client-specific strategy

In the paper titled, “A Model Approach to Selecting a Personalized Retirement Income Strategy,” Pfau and Murguia describe a four-quadrant chart that they call the “Retirement Income Style Awareness Matrix.” It’s a kind of Morningstar style-box for matching clients with income strategies.

Within this framework, the authors assume that retirees have four basic financial concerns, whose weight varies by client: Longevity (outliving savings), Lifestyle (maintaining a desired standard of living), Liquidity (having cash for emergencies), and Legacy (leaving a bequest).

The next step in developing an accurate style box is to determine the client’s Retirement Income Style, using a proprietary questionnaire. The clients’ answers reveal their mindsets on six different (and somewhat self-explanatory) scales:

Probability-Based vs. Safety First
Optionality vs. Commitment
Time-Based vs. Perpetuity Income Floors
Accumulation vs. Distribution
Front-Loading vs. Back-Loading
True vs. Technical Liquidity

Since a few of these 12 factors are closely correlated, Pfau and Murguia reduce the list to four preferred orientations (Safety First, Optionality, Commitment, and Probability-Based) leading to four styles: Safety-First & Optionality, Probability-Based & Optionality, Safety First & Commitment, and Probability-Based & Commitment,

Finally, the authors map these four styles to four income strategies (boiled down from 36 valid strategies that Pfau identified in past research): Systematic withdrawals from a total return portfolio; time-segmentation (bucketing); partial annuitization; or “risk wrap” (the use of deferred annuities with lifetime income benefit riders).

Here’s what the Retirement Income Style Awareness Matrix looks like:

Choosing the right pitch

Pfau and Murguia apply a similar method to the creation of a “Financial Implementation Matrix,” which they describe in a paper titled, “Retirement Income Beliefs and Financial Advice Seeking Behaviors.” This matrix assigns clients to one of four groups based on their answers to questions designed to elicit their attitudes toward financial advisers and the value of advice.

A questionnaire leads to scores on six characteristics:

Self-efficacy (the ability to complete tasks)
Financial biases (susceptibility to classic behavioral traps)
Numeracy (financial literacy)
Numeracy Self-Awareness (perception of financial competence)
Inertia (the opposite of self-efficacy)

Based on his or her score, each client can be categorized as a Delegator, Collaborator, Validator, or Self-Directed. Delegators and Collaborators both see advisers as useful, but Collaborators score higher on Self-Efficacy. Validators and Self-Directed are skeptical of the value of working with an adviser, but the Self-Directed have higher Self-Efficacy.

Here’s what the Financial Implementation Matrix looks like:

The better advisers understand the client, the better they can fine-tune their approach. “A delegator and a collaborator need a different cadence with their advisor for the relationship to be productive. In addition, a validator and self-directed investor may need different options that do not require an ongoing professional relationship,” the authors wrote.

Wade Pfau

This fine-tuning leads to more effective advice, and more success for everyone involved. “For a financial professional, the ability to present advice in a manner that resonates with an individual is paramount to a successful relationship. More importantly, it will help them follow through with their retirement income plan,” the paper said.

Not for everybody

These two papers, and the trademarked intellectual property (RISA and FI) they describe, are not ready-to-implement tools. Rather they are descriptions of the research that Pfau and Murguia used to validate that property, which they have already begun to turn into a business and to market to advisers through webinars. “We are in the process of creating a business for this. We are doing a build-out for it now,” Pfau told RIJ in an email this week.

In addition to drawing on the relevant academic literature, their original research consisted of the surveying some 1,500 subjects, drawn largely from the subscribers to Pfau’s blog at RetirementResearcher.com. More than half of these subjects ranged from 59 to 70 years old and half had investable assets of between $1 million and $3 million. The results of those surveys enabled them to build the matrices or style charts.

Pfau and Murguia’s approach will probably appeal most to independent advisers who are what RIJ has called “ambidextrous.” That is, advisers who know how to lever the complementary benefits of investments and annuities, and who aren’t confined by their business models to a certain set of retirement income strategies.

Advisers won’t be surprised to hear that effective advice demands listening to clients as much as leading them. “Forcing the ‘wrong’ strategy on someone is not appropriate,” the authors write. “There are dangers to initially filtering strategies based on a financial professional or an investment media pundit’s world view rather than seeking to better understand what strategies resonate with an individual’s retirement income style.”

RIJ Talks ‘Bermuda Triangle’ on Chuck Jaffe’s Money Life Show

Posted on August 12, 2021 by Kerry Pechter -

Click, below, to hear the replay of the interview.

The ‘Bermuda Triangle’ strategy is a business model that several publicly held life/annuity companies in the US have used in recent years, and on which RIJ has been reporting over the past 12 months.

The three corners of the triangle are a life insurer, a reinsurer (possibly “captive”; typically in a regulatory haven like Bermuda, Vermont or Arizona), and an asset manager with experience originating specialized loans.

The reinsurance helps life insurers move stressed annuity liabilities off of their balance sheets, which releases capital for use in new businesses or for share repurchases. The asset manager’s skills deliver higher returns on at least part of the assets backing the reinsured annuities.

Some observers, including regulators, worry about the quantity and quality of the assets held by the reinsurers. They even worry that risk is growing in the annuity space, possibly leading to a solvency crisis in the future.

In this audio, broadcast August 10 on Chuck Jaffe’s Money Life Show, RIJ editor and publisher Kerry Pechter speaks with Jaffe about the Bermuda Triangle strategy and its implications.

Six major life insurers report second quarter financials

Posted on August 12, 2021 by Editorial Staff -

A half-dozen life/annuity insurance companies—AIG, American Equity, Brighthouse Financial, Equitable, Lincoln Financial, MetLife released their second quarter 2021 earnings reports this week.

The reports reflect a variety of ongoing trends: Year-over-year increases in individual annuity sales, continuing stock repurchase plans, a shift toward higher-yielding investments in private or alternative assets, alliances with asset managers that source those investments, and new capital management strategies.

AIG

On July 14, 2021 AIG entered into a strategic partnership whereby Blackstone agreed to purchase a 9.9% equity stake in AIG’s Life and Retirement Business for $2.2 billion in cash, manage specified Life and Retirement assets in the future, and separately purchase affordable housing assets for $5.1 billion in cash
Life and Retirement adjusted pre-tax income (APTI) was $1.1 billion reflecting strong net investment income and improved market conditions; Life and Retirement return on adjusted segment common equity for the second quarter was 16.4%, on an annualized basis.
Net income attributable to AIG common shareholders was $91 million, or $0.11 per diluted common share, compared to a net loss of $7.9 billion, or $9.15 per common share, in the prior year quarter, which included the loss on sale of Fortitude Group Holdings LLC (Fortitude). The primary difference between GAAP and adjusted after-tax income is the accounting treatment of Fortitude net investment income and certain realized gains/losses.
AIG Board of Directors increased the share repurchase authorization to $6.0 billion, including approximately $0.9 billion that remained under the prior authorization
General Insurance net premiums written grew 24% with Commercial Lines and Personal Insurance growth of 16% and 45%, respectively, from the prior year quarter
Net income per diluted share of $0.11 compared to a loss of $9.15 in the prior year quarter and adjusted after-tax income attributable to AIG common shareholders* (AATI) per diluted share of $1.52 increased from $0.64 in the prior year quarter

Lincoln Financial

Lincoln Financial Group (NYSE: LNC) reported net income for the second quarter of 2021 of $642 million, or $3.34 per diluted share available to common stockholders, compared to a net loss in the second quarter of 2020 of $(94) million, or $(0.49) per diluted share available to common stockholders.

Operating revenues increased in all four business segments. Second quarter adjusted income from operations was $608 million, or $3.17 per diluted share available to common stockholders, compared to adjusted income from operations of $187 million, or $0.97 per diluted share available to common stockholders, in the second quarter of 2020.

Annuities sales of $3.2 billion, up 28%

Annuities reported income from operations of $323 million, up 36% compared to the prior-year quarter. The increase was driven by higher account values from strong equity market performance and favorable returns within the company’s alternative investment portfolio.

Total annuity deposits of $3.2 billion were up 28% from the prior-year quarter. Total variable annuity sales of $3.0 billion were up 37% versus the prior-year quarter as strong growth in variable annuity sales without guaranteed living benefits more than offset declines in variable annuity sales with living benefits and fixed annuities.

Net outflows were $297 million in the quarter. Average account values for the quarter of $166 billion were up 24% over the prior-year quarter, with 48% of total annuities account values without guaranteed living benefits, up 2 percentage points over the prior-year period.

Retirement plan services

Retirement Plan Services reported income from operations of $62 million, up 107% compared to the prior-year quarter. Total deposits for the quarter of $2.8 billion were up 21% compared to the prior-year quarter driven by double-digit growth in both first-year sales and recurring deposits.

Net flows totaled $517 million for the quarter and $1.6 billion over the trailing twelve months. Average account values for the quarter of $94 billion were up 28% over the prior-year quarter.

Retirement Plan Services deposits of $2.8 billion, up 21% including double-digit growth in both first-year sales and recurring deposits

American Equity

American Equity Investment Life Holding Company (NYSE: AEL), a specialist in fixed index annuities (FIAs) today reported second quarter 2021 non-GAAP operating income1 available to common stockholders of $93.8 million, or $0.98 per diluted common share, compared to non-GAAP operating income1 available to common stockholders of $93.1 million, or $1.01 per diluted common share, for second quarter 2020.

The year-over-year increase in quarterly non-GAAP operating income1 available to common stockholders primarily reflected a decrease in the change in the liability for future policy benefits to be paid for lifetime income benefit riders (LIBR) offset by a decrease in investment spread and an increase in other operating costs and expenses.

Year-over-year, the change in liability for future policy benefits to be paid for LIBR decreased by $61 million. The positive difference between actual versus modeled expectations in the second quarter of 2021, primarily reflecting the level of equity index credits, reduced the increase in the liability for future policy benefits to be paid for LIBR by $29 million. By comparison, in the second quarter of 2020, actual versus modeled expectations increased the change in liability for future policy benefits to be paid for LIBR by $43 million.

Compared to the second quarter of 2020, amortization of deferred policy acquisition and sales inducement costs decreased $1 million. Actual versus modeled expectations in the second quarter of 2021, primarily reflecting the level of equity index credits, reduced amortization by $31 million. Amortization of deferred sales inducements and policy acquisition costs benefited by $28 million in the second quarter of 2020 from actual versus modeled expectations.

American Equity’s investment spread was 1.95% for the second quarter of 2021 compared to 2.00% for the first quarter of 2021 and 2.39% for the second quarter of 2020. On a sequential basis, the average yield on invested assets decreased by 7 basis points while the cost of money fell by 2 basis points. Adjusted investment spread excluding non-trendable items declined to 1.81% in the second quarter of 2021 from 1.87% in the first quarter of 2021.

Average yield on invested assets was 3.51% in the second quarter of 2021 compared to 3.58% in the first quarter of 2021. The decrease in investment yield was primarily driven by an increase in the average level of liquidity in the investment portfolios of the life insurance companies. The average adjusted yield on invested assets excluding non-trendable items was 3.41% in the second quarter of 2021 compared to 3.47% in the first quarter of 2021.

The aggregate cost of money for annuity liabilities of 1.56% in the second quarter of 2021 was down two basis points from 1.58% in the first quarter of 2021. The cost of money in the second quarter of 2021 was positively affected by 4 basis points of over-hedging of index-linked credits compared to 2 basis point of hedge gain in the first quarter of 2021.

Compared to the first quarter of 2021, gross sales of fixed index annuities at American Equity Life increased 36% while Eagle Life sales rose 24%.

Commenting on sales, Anant Bhalla, CEO of American Equity, said in a release: “Our strategy of growing fixed index annuity sales is working in both the American Equity and Eagle Life channels. As previously shared in our first quarter earnings call, our plan to pivot from multi-year fixed rate annuities for the remainder of the year to our refreshed line-up of fixed index annuities is bearing results. Based on preliminary industry estimates, this is the third quarter in a row that our fixed index annuity market share has increased, reflecting the upgrades we have made to our Go-to-Market franchise over the past year.”

In July, American Equity completed the repurchase of 9.1 million shares that began in November of last year to fully offset the impact of dilution from shares issued to Brookfield Asset Management Inc. The total buyback included repurchase of 3 million shares in the second quarter for a total of $95.1 million. Remaining share repurchase authorization is $236 million.

Brighthouse Financial

Brighthouse Financial, Inc. (Nasdaq: BHF) announced today its financial results for the second quarter ended June 30, 2021.

The company reported net income available to shareholders of $10 million in the second quarter of 2021, or $0.11 per diluted share, compared with a net loss available to shareholders of $1,998 million in the second quarter of 2020.

During the quarter, as a result of market performance, the value of our hedges decreased, as expected. Due to being accounted for as insurance liabilities as required under US GAAP, certain corresponding liabilities are less sensitive to market movements and, therefore, did not fully offset the decrease in the value of our hedges.

The company ended the second quarter of 2021 with common stockholders’ equity (“book value”) of $14.8 billion, or $175.19 per common share, and book value, excluding accumulated other comprehensive income (“AOCI”) of $10.2 billion, or $120.62 per common share.

For the second quarter of 2021, the company reported adjusted earnings of $435 million, or $5.05 per diluted share, compared with adjusted earnings of $11 million, or $0.11 per diluted share, in the second quarter of 2020.

Annuity sales increased 25% quarter-over-quarter and 8% sequentially, driven by record sales of Shield Level annuities and variable annuities with FlexChoice Access. Life sales increased 117% quarter-over-quarter and 13% sequentially, driven by sales of SmartCare.

During the second quarter of 2021, the company repurchased $125 million of its common stock, with an additional $53 million of its common stock repurchased, on a trade date basis, through August 4, 2021. Since the announcement of its first stock repurchase authorization in August 2018, the company has repurchased $1,266 million of its common stock, on a trade date basis, through August 4, 2021.

The company also announced today a new repurchase authorization of up to $1 billion of its common stock. This stock repurchase authorization is in addition to the $200 million stock repurchase authorization the company announced in February 2021, under which $34 million remains as of August 4, 2021.

“Brighthouse Financial delivered another quarter of strong results,” said Eric Steigerwalt, president and CEO, Brighthouse Financial. “Our new stock repurchase program… positions us to achieve our goal of returning $1.5 billion to our shareholders by the end of this year and supports our ongoing commitment to return capital to our shareholders.”

Adjusted earnings for the quarter reflected a $23 million after tax unfavorable notable item, or $0.27 per diluted share, for establishment costs related to planned technology and other expenses associated with the company’s separation from its former parent company. Corporate expenses in the second quarter of 2021 were $218 million, up from $203 million in the first quarter of 2021, both on a pre-tax basis.

Commenting on investment activities, Anant Bhalla, Chief Executive Officer, said: “For the first time in our company’s history, in the second quarter, we started leveraging our asset management partnerships to invest in single-family rental homes and middle market loans consistent with ramping towards the AEL 2.0 asset allocation strategy.

“Year-to-date, we have purchased over $800 million of privately-sourced alpha-generating assets — solid initial steps towards our plan of adding between $1 billion to $2 billion in private assets this year growing to a pace of 5% or greater of the portfolio in each subsequent year to evolve into our new asset allocation of 30% or greater in private assets. In the second quarter, we purchased $1.7 billion of new assets at an expected return of approximately 4.15%, net of third-party investment expenses. This included $569 million in private assets added in the quarter.”

Equitable

Equitable Holdings, Inc., (NYSE: EQH) today announced financial results for the second quarter ended June 30, 2021. The company reported non-GAAP operating earnings of $1.71 per share, a 74% increase year-over-year and 27% over the first quarter, AUM of $869 billion, up 22% year-over-year and 6% over the first quarter of 2021.

“We achieved the successful closing of our landmark VA reinsurance transaction with Venerable during the quarter, which significantly de-risks our balance sheet and unlocks $1 billion of economic value. We are targeting an additional $180 million in incremental investment income from our General Account by leveraging synergies with our subsidiary, AllianceBernstein. We are also announcing a new expense savings target of $80 million by 2023.” said Mark Pearson, President and Chief Executive Officer.

The net income attributable to Holdings for the second quarter of 2021 was $123 million compared to net loss of $4,019 million in the second quarter of 2020 driven primarily by non-economic market impacts from hedging and non-performance risk under US GAAP accounting.

Non-GAAP operating earnings in the second quarter of 2021 improved to $758 million from $451 million in the second quarter of 2020. Excluding notable items of $100 million, second quarter 2021 non-GAAP operating earnings were $658 million or $1.48 per share.

As of June 30, 2021, book value per common share, including accumulated other comprehensive income (“AOCI”), was $24.20. Book value per common share, excluding AOCI, was $19.48.

Business segment highlights:

Structured Capital Strategies (“SCS”) buffered annuity product saw record sales of $1.9 billion in the second quarter. Group Retirement generated second quarter net flows of $68 million, up $119 million sequentially, with gross premiums returning to pre-pandemic levels in the second quarter. Investment Management and Research (AllianceBernstein or “AB”)3 reported net inflows of $6.2 billion in the quarter, with positive net flows across all distribution channels. Protection Solutions reported gross written premiums up 8% year-over-year, with continued momentum in its Employee Benefits business.

Capital management program:

As part of the Company’s 2021 capital management program, it returned $355 million to shareholders in the second quarter, including $76 million of quarterly cash dividends and $279 million of share repurchases.

The Company reaffirms its commitment to delivering on its 50-60% payout ratio target, with an incremental $500 million of share repurchases in progress following the close of its legacy variable annuity reinsurance transaction with Venerable.

As part of its efforts to leverage synergies, the Company is committing $10 billion of General Account assets to help build out AllianceBernstein‘s higher multiple businesses.

The Company also announced an expense savings target of $80 million by 2023, with $17 million achieved year-to-date, driven by disciplined expense management, shifting towards an agile working model and leveraging technology-enabled capabilities.

As of June 30, 2021, the combined RBC ratio was approximately 450%, above our minumum combined RBC target of 375-400%. The Company reported cash and liquid assets of $2.5 billion at Holdings, which remains above the $500 million minimum liquidity target.

The Company announced a GA rebalance target of $180 million of incremental income by 2023, working with AB to capture illiquidity premium and optimize risk-adjusted returns for the investment portfolio. Of the target, $58 million has been realized to date.

MetLife

MetLife reported net income of $3.4 billion, or $3.83 per share, compared to net income of $68 million, or $0.07 per share, in the second quarter of 2020. Adjusted earnings of $2.1 billion, or $2.37 per share, compared to adjusted earnings of $758 million, or $0.83 per share, in the second quarter of 2020. In other highlights:

Book value of $75.86 per share, down 4 percent from $78.65 per share at June 30, 2020.
Book value, excluding accumulated other comprehensive income (AOCI) other than foreign currency translation adjustments (FCTA), of $56.38 per share, up 8 percent from $52.27 per share at June 30, 2020.
Return on equity (ROE) of 21.2 percent.
Adjusted ROE, excluding AOCI other than FCTA, of 17.5%.
Holding company cash and liquid assets of $6.5 billion at June 30, 2021, which is well above the target cash buffer of $3.0 to $4.0 billion.

Look to China for investment growth: Cerulli

Posted on August 12, 2021 by Editorial Staff -

China represents a significant opportunity for asset managers, according to Cerulli Associates’ latest report, Global Markets 2021: Continued Growth in Uncertain Times. Assets under management in China grew 34.0% in 2020 and net inflows increased 21.8% year-on-year, the report said.

The Chinese fund market had an impressive 2020, with net revenues rising 37% year-on-year, Cerulli’s research shows. This growth was supported by strong local equities—the MSCI China recorded a 29.7% return last year, exceeding its 23.7% return in 2019.

The COVID-19 pandemic has not dampened investors’ enthusiasm for the Chinese mutual fund industry. Chinese regulators are pushing for the development of funds investing in equities, including fast-track approval for equity-related fund applications submitted by fund management companies that score higher under the scorecard method introduced in late 2019.

“We expect investors to show continued interest in Chinese equities in 2021 and beyond, based on the country’s earlier recovery from the pandemic and its growth prospects relative to other markets,” said André Schnurrenberger, managing director, Europe at Cerulli Associates. “As for bonds, investors are set to favor Asian fixed income because it currently offers better yields than bonds in developed markets.”

Cerulli expects Asia ex-Japan retirement funds to continue to lead in terms of growth, rising at a compound annual growth rate (CAGR) of 11.9% between 2020 and 2025. Although all markets in the Asia-Pacific region will likely exceed the global CAGR, China and Korea stand out, with their CAGRs expected to reach double digits.

At least 1,300 funds were launched in China in 2020, amassing RMB3.1 trillion (US$475 billion) in assets from their initial public offerings. In India, the second wave of the pandemic, which hit the country in March 2021, could see cautious investors favoring safe and liquid assets; other investors may use market corrections as opportunities to allocate to mutual funds. COVID-19 may also encourage increased saving.

In non-Asian developed markets, pension funds are looking to opportunities in Asia. Canadian pension funds, including the Canada Pension Plan Investment Board and Ontario Municipal Employees’ Retirement System, have been growing their Asia-focused teams to match their expanding investments in the region. In addition, the Nationwide Pension Fund in the UK and the Iowa Public Employees’ Retirement System in the US have indicated their interest in including more Asian private debt in their portfolios.

“Investors around the world believe that emerging markets, particularly in Asia, are making better progress in their economic recovery from COVID-19. As a result, they are keen to increase their exposure to such markets,” Schnurrenberger said.

Honorable Mention

Posted on August 12, 2021 by Kerry Pechter -

Ruark reports on VA/living benefit policyholder behavior

Ruark Consulting, the actuarial firm that has tracks the impact of policyholder behavior on the value of the liabilities in the living benefits of variable annuities issued by US life/annuity companies, has just published a white paper assessing the predictions it made regarding that behavior a year ago.

In the white paper, Ruark concluded:

When we assessed the effects of the capital market environment on annuity policyholder behavior toward the end of 2020-Q1, markets had just suffered a major blow. The S&P 500 had fallen over 35%, as had commodity prices. The VIX, a measure of implied volatility on short-dated options, had spiked, and US interest rates had fallen to record lows.

Today, equity markets have rebounded and volatility has fallen. But a hangover effect of COVID-19 remains, as supply and labor shortages drive and inflation concerns, while interest rates have not materially recovered.

Notwithstanding a rebound in 2021-Q2 annuity sales, these hangover effects continue to pose challenges for annuity writers, as does continued uncertainty regarding government policy and the management of variant virus strains. Annuity writers may wish to defer decisions regarding how to best reflect 2020 experience in assumption-setting—but as the effects of the virus push into 2021, such decisions cannot be put off indefinitely.

In the case of VA and FIA products, which are not subject to individual underwriting, mortality has exhibited strong anti-selection effects. Historically, mortality has been lower among policyholders with a living benefit than among those without, for example. This would suggest potentially higher susceptibility to a health shock among policyholders with only a GMDB than among living benefit contracts.

One last question annuity writers need to consider is mortality improvement in 2021 and beyond. Was COVID-19 a once-in-a-century pandemic, or will ongoing variants and pandemic-related mortality spikes become a feature of the landscape? Were 2020 mortality increases on top of the long-term trend, or did they merely accelerate deaths among vulnerable populations? Answers these questions will continue to be speculative, but 2020 experience will surely inform them. We look forward to seeing the evidence upon completion of Ruark’s 2021 VA mortality study this fall.

DPL and SS&C partner on new distribution platform

DPL Financial Partners (DPL), the turnkey insurance platform for registered investment advisors (RIAs), and SS&C Technologies Holdings, Inc. (Nasdaq: SSNC) have co-launched a new platform, called the “SS&C Advent Insurance Marketplace Powered by DPL.”

RIAs can use this fintech solution to access and manage fee-only products through the Black Diamond Wealth Platform and DPL’s proprietary Product Discovery Tools. Products include

annuities, life insurance, long-term personal care, and disability insurance. DPL’s insurance consultants will provide product support.

DPL’s partner insurance carriers with products on the new platform include who are making their products available through the Marketplace, including Allianz Life Insurance Company of North America, Great American Life, Security Benefit Life, and Midland National Life.

SIMON Markets doubles revenue, raises $100 million

SIMON Markets LLC, a platform where advisors can find structured products, annuities, and other alternative investments, reported year-over-year increases in revenue of +103%, volume of +137%, and usage of +74% in Q2 2021, as compared to Q2 2020.

“In Q2, we expanded our insurance platform to include variable annuities, formalized new partnerships with industry leaders Nationwide and FIG, created a portfolio analytics tool for structured investments, and announced our entry into the digital asset space,” said Jason Broder, CEO of SIMON, in a release.

SIMON was spun out of Goldman Sachs in December 2018. Recent growth highlights include:

Through WestCap, raising $100 million in Series B funding to fuel growth of digital wealth management platform
SIMON now offers variable annuities, one of the most flexible and widely used annuity types, in its Marketplace, delivering powerful analytics for asset allocation and income solutions (Press
Financial Independence Group (FIG) joins SIMON to access structured Investments and insurance products
Nationwide joins the SIMON platform to provide annuities

SIMON’s platform now provides “on-demand education, an intuitive marketplace, real-time analytics, and lifecycle management” to more than 100,000 financial professionals managing some $5 trillion in client assets, the release said.

Principal completes integration of Wells Fargo’s retirement business

Principal Financial Group, the retirement plan services and investment management company, recently completed the integration of the Wells Fargo Institutional Retirement business. Principal acquired the business in July 2019 to enhance its retirement and income capabilities, achieve greater scale and balance, and drive business growth.

Through the acquisition and new business wins, Principal currently serves over 10 million eligible participants and individual account holders representing more than $537 billion in total account value.1 Principal also added to and upgraded its retirement service offerings, furthering its market leadership positions in the full spectrum of retirement plans with Principal® Total Retirement Solutions and including top-tier investment, income and financial wellness offerings.

As a result of the acquisition Principal added 4.3 million eligible participants, approximately $150 billion dollars in account value and welcomed 1,500 new employees. The company onboarded clients in a series of structured waves through the end of June 2021, resulting in the successful integration of thousands of plan sponsors.

The integration of the Wells Fargo Institutional Retirement and Trust business along with strategic investment and initiatives has enhanced and expanded the retirement offerings Principal provides to both participants and plan sponsors.

In October of 2020 Principal started welcoming participants through Principal Real Start, a simplified and highly personalized onboarding experience available in both English and Spanish. This platform has helped increase savings rates for participants to an average of about 9 percent, and nearly 40 percent of participants are deferring 10 percent or more.2

Participants are also benefitting from a more robust financial wellness experience through award-winning online tools3 and resources backed by specialized teams of education professionals and contact center licensed financial professionals.4

For plan sponsors, enhancements include more robust plan sponsor reporting and participant engagement dashboards.

Sponsors also have access to new managed and self-directed brokerage account capabilities.

The retirement business expanded Principal® Total Retirement Solutions, which provides unmatched breadth, depth, and expertise for plan sponsors of all sizes and needs. These solutions include defined contribution plans, defined benefit plans, nonqualified deferred compensation plans, and stock plans including the recently added Principal® Equity Compensation Solutions.

Today, Principal Total Retirement Solutions helps thousands of employers manage multiple retirement plans.

After moving to Principal, customers now have access to top-tier, differentiated asset allocation and managed account alternatives from Principal, both in plans and for individual participants. Principal offers extensive choice across investment strategies and managers, including a full suite of actively managed and hybrid target-date funds that help meet customers’ unique investment and retirement needs.

Principal continues to integrate the Wells Fargo Trust & Custody business from the acquisition, which will enhance and add new capabilities to Principal® Custody Solutions and increases assets under custody to over $1 trillion. The company plans for completion of the integration by March 2022.

New training available for retirement plan fiduciaries

The Center for Board Certified Fiduciaries (CBCF) introduces Fiduciary Oversight of Responsibilities and Tasks (FORT), “a new tool for professional and lay fiduciaries that clearly delineates the fiduciary responsibilities and tasks of a plan sponsor,” according to a release this week.

There are 17.5 million lay fiduciaries in the US, men and women who have the legal responsibility for managing the assets of pension plans, foundations, endowments, health and welfare plans, and personal trusts. Three million lay fiduciaries manage $20 trillion dollars in retirement plans.

“These critical decision-makers generally come from outside the financial services industry; are often surprised to learn they are serving in a fiduciary capacity; and, have little, if any, training on what the law requires,” the release said.

“Lay fiduciaries don’t have to manage these assets by themselves – they can prudently select experts and delegate certain responsibilities. But often, there’s no bright-line between the fiduciary responsibilities lay fiduciaries retain, and the responsibilities that are contractually assumed by experts.”

The Board Certified Fiduciary (BCF) is a professional mark awarded by the Center for Board Certified Fiduciaries, (CBCF). The CBCF is a Public Benefit Corporation founded and funded by fiduciary advocates. The CBCF will be affiliating with a leading university to provide a graduate-level certificate in fiduciary leadership, stewardship, and governance. Over time, CBCF will develop the curricula for the first Master’s with a concentration in fiduciary responsibility.

Income plan for two well-funded therapists

Jim Otar’s Advice for ‘Andrew’ and ‘Laura’

Income plan for a couple with $750,000

Safety First or Safety Last?

Bill Sharpe’s ‘Lockbox Strategy’

Why the wealthy buy more insurance than expected

‘Black swans’ are the shadows cast by excessive credit

‘Central Bank Digital Currency’ could be coming our way

Boomer decumulation won’t push interest rates higher

Button succeeds Morris as Pacific Life CEO

Net income up, total income down for life/annuity industry in 1H2021

Athene Holding acquires £3 billion UK mortgage loan originator

Two senior promotions at AIG Life & Retirement

Allianz Life annuity to be offered in Morningstar 401(k) managed account

Multiemployer plan funding reaches highest level since 2007: Milliman

‘Know your customer’

Tailoring a client-specific strategy

Choosing the right pitch

Not for everybody

AIG

Lincoln Financial

American Equity

Brighthouse Financial

Equitable

MetLife

Ruark reports on VA/living benefit policyholder behavior

DPL and SS&C partner on new distribution platform

SIMON Markets doubles revenue, raises $100 million

Principal completes integration of Wells Fargo’s retirement business

New training available for retirement plan fiduciaries

Data Connection

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