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How The Elephant in the Room Evolved

Posted on July 22, 2021 by Kerry Pechter -

The economists Ralph Koijen of the University of Chicago Booth School of Business and Motohiro Yogo of Princeton University have been studying the finances of US life/annuity companies for the past decade, as the industry has adapted to low interest rates and tighter reserve requirements.

In a 2014 paper, “Shadow Insurance” (NBER Working Paper 19568), they documented the growing reliance of US life insurers on transferring capital-intensive liabilities to off-balance sheet affiliated offshore reinsurers to free up reserves and relieve pressure to raise prices on their products.

Ralph Koijen

One product class in particular—variable annuities (VA) with a guaranteed lifetime income benefit riders—has been both lucrative and problematic for life insurers. Collectively, life insurers—including Jackson National, MetLife and Prudential—currently earn annual fees on some $2 trillion in VA assets, according to Morningstar data.

But VA riders also carry market risks, longevity risks, and policy owner-behavior risks. These are expensive to hedge and require high reserves. Indeed, the costs of managing the liabilities associated with VAs has driven many life/annuity companies out of the VA business. Retail sales of VAs have declined steadily and outflows from VA contracts have risen in recent years, even as a rising stock market has driven up the total value of assets in in-force VA contracts.

Variable annuities are the subject of Koijen and Yogo’s latest paper, “The Evolution from Life Insurance to Financial Engineering” (NBER Working Paper 29030). They claim that managing “long-maturity put options” on the performance of the mutual fund assets in VAs has changed the life/annuity business in ways that demand new types of regulation.

“The minimum return guarantees change the primary function of life insurers from traditional insurance to financial engineering,” Yogo and Koijen write. “Life insurers are exposed to interest risk because they have not sufficiently increased the maturity of their bond portfolio or used derivatives to offset the negative duration and the negative convexity from variable annuities.

“Life insurers are also exposed to long-run volatility risk, which is difficult to hedge with traded options that are short term,” they add. “The presence of high leverage and risk mismatch makes life insurers similar to pension funds. However, the minimum return guarantees make life insurers different from pension funds because they are engineering complex payoffs over long horizons that are difficult to hedge with traded options.”

Motohiro Yogo

As a result, “The risk profile of life insurers has become increasingly complex and opaque over the last two decades because of variable annuities, derivatives, and reinsurance.”

To bring this conversation down from the stratosphere: The VA with a living benefit started out in the late 1990s as the perfect answer to the Boomer’s retirement income dilemma. They delivered guaranteed lifetime income without the illiquidity and low internal rates of return associated with traditional income annuities.

These products were particularly suitable for life/annuity companies that had demutualized and gone public. VAs gave them the high, transparent, predictable, fee-based revenues that pleased Wall Street analysts, not the low and slow corporate bond-based earnings of a mutual insurance company.

But the low interest rate regime and the tougher regulations that followed the Great Financial Crisis of 2008 blew up that seemingly perfect formula. The risks and costs associated with offering VAs shot up. Publicly held life insurers reacted in various ways—divestiture, reinsurance, new products, higher prices, and stingier guarantees.

The rest is history—written in part by Yogo and Koijen, who have migrated among various institutions over the last decade, including such capitals of financial research as the London Business School, the Minneapolis Federal Reserve, and New York University.

“In the early part of the sample before the 1980s, life insurance was larger than annuities,” their latest paper says. “Since the 1990s, variable annuities have grown rapidly and are now the largest liability. In 2017, variable annuities and traditional annuities together accounted for 4.9% of household net worth, which is about twice the size of 2.4% for life insurance. The label ‘life insurance companies’ was appropriate back in 1945, but they should perhaps be relabeled ‘annuity and life insurance companies’” in modern times.

Honorable Mention

Posted on July 22, 2021 by Editorial Staff -

Prudential sells its retirement plan business to Empower

The low-margin retirement plan recordkeeping business continues to consolidate. Reinsurance helped financed the latest multi-billion dollar divestiture.

Empower Retirement has agreed to buy Prudential’s full-service retirement plan recordkeeping and administration business, subject to regulatory approvals, for $3.55 billion, Prudential announced this week. The transaction is expected to close in the first quarter of 2022.

The business includes more than 4,300 workplace savings plans with about four million participants and $314 billion in savings. “[It] will be supported by $2.1 billion of capital through a combination of the balance sheet of the transferred business and Empower capital and surplus,” according to a Prudential release.

At closing, Empower will acquire Prudential’s defined contribution, defined benefit, non-qualified and rollover IRA business in addition to its stable value and separate account investment products and platforms. The deal will increase Empower’s participant base to 16.6 million and its retirement services recordkeeping assets to approximately $1.4 trillion administered in approximately 71,000 workplace savings plans. Empower will add a business also includes more than 1,800 employees who provide retirement recordkeeping and administration services to financial professionals, plan sponsors and participants.

“The acquisition will allow Empower to expand services to the broadening spectrum of workplace savings plans it now serves, which includes mega, large, mid-size and small corporate 401(k) plans; government plans ranging in scale from state-level plans to municipal agencies; not-for-profit 403(b) plans; and collectively bargained Taft-Hartley plans,” the release said.

Empower will finance the acquisition with both a share purchase and a reinsurance transaction. Great-West Life & Annuity Insurance Company will acquire the shares of Prudential Retirement Insurance and Annuity Company and business written by The Prudential Insurance Company of America will be reinsured by Great-West Life & Annuity Insurance Company and Great-West Life & Annuity Insurance Company of New York (for New York business).

Prudential will keep its Institutional Investment Products business, its Individual Annuities business and its global asset management firm, PGIM. Following the close of the transaction, Prudential’s remaining retirement business will consist of Pension Risk Transfer, International Reinsurance, Structured Settlements, and Institutional Stable Value wrap product lines.

Prudential expects to use the proceeds from the transaction for general corporate purposes, including share buy-backs. The Newark, NJ-based insurance giant now expects to return $11.0 billion to shareholders through 2023, up from the $10.5 billion announced in May 2021, and intends to reduce financial leverage.

Empower acquired Personal Capital, the digital financial device platform, in 2020, and will offer it to its new participants.

Eversheds Sutherland served as legal counsel and Goldman Sachs & Co. LLC and Rockefeller Capital Management served as financial advisors to Empower. Debevoise & Plimpton served as legal counsel and Lazard served as exclusive financial advisor to Prudential.

Headquartered in metro Denver, Empower Retirement administers approximately $1 trillion in assets for more than 12 million retirement plan participants as of March 31, 2021. Prudential has more than $1.5 trillion in assets under management as of March 31, 2021, with operations in the US, Asia, Europe, and Latin America.

A Monster First Half for Fund Flows: Morningstar

U.S. equity funds collected nearly $18 billion in June after two straight months of muted flows, according to Morningstar Research’s monthly fund flows report. Large-blend funds pulled in $10 billion, the most of any Morningstar Category in the group.

Large-value funds remained in favor, pulling in $6.8 billion. They’ve posted positive net flows in all six months of the year, including a record $20 billion in March. Their year-to-date intake of $50 billion led all U.S. equity categories. Small-value funds have enjoyed even greater success in 2021 in terms of organic growth. Their 7.1% tally for the first six months was easily the highest among the nine U.S. equity categories, with large-value’s 3.8% coming in second place.

While large-growth equity funds posted positive flows for just the eighth month over the past 36, small- and mid- growth funds saw outflows of $1.4 billion and $1.8 billion, respectively, Morningstar said. Through the first six months of the year, large-growth funds are the only U.S. equity category with negative flows and have the steepest outflows over the trailing 12 months.

Small- and mid-growth funds have managed to stay just above water over those same periods but have generally experienced outflows over the past three years as well. While equity investors may have been rebalancing away from growth stocks because of their strong performance in recent years, they haven’t changed their tune in 2021 despite value-oriented stocks posting stronger results. The Morningstar US Market Broad Value Index’s 16.9% return during 2021’s first half beat the Morningstar US Market Broad Growth’s 13.4%.

Bull market in stocks helps public pensions: Milliman

Milliman, Inc., the global consulting and actuarial firm, this week released the second quarter (Q2) 2021 results of its Public Pension Funding Index (PPFI), which consists of the nation’s 100 largest public defined benefit pension plans.

Propelled by a strong bull market, the funded ratio for these plans climbed above 80% for the first time since Milliman began tracking the PPFI in 2016, a Milliman release said. Q2 2021 marked the fifth consecutive quarter of high-water marks for both public pension assets and liabilities, with the estimated funded status of the PPFI plans growing from 79.0% at the end of March 2021 to 82.6% at the end of June.

An estimated investment performance of 4.26% for the quarter generated a $191 billion funded status improvement, while the deficit dropped below $1 trillion – to $975 billion – for the first time in the study’s history.

“This was a banner quarter for public pensions, though the individual plans in our study saw a range of investment returns – from an estimated 2.54% to 6.75%,” said Becky Sielman, author of Milliman’s Public Pension Funding Index.

“In the coming months, plan sponsors will begin to understand the extent to which the pandemic has affected liabilities, including higher death rates and the impact of furloughs on benefit accruals, pay levels, and contributions from active members.”

Looking forward, the strong market run-up, combined with the current low yields on fixed income, may also push defined benefit plan sponsors to continue to lower their interest rate assumptions, the release said.

TIAA Broker-Dealer Settles SEC Allegations for $96 Million

Posted on July 22, 2021 by Wagner Law Group -

In what the Wagner Law Group believes may be the first of many prosecutions to come, the Securities and Exchange Commission has fined a TIAA-CREF broker-dealer $96 million in a settlement over its rollover practices. This action also resolved a parallel action by the Office of the New York Attorney General.

TIAA-CREF Individual and Institutional Services, LLC, a subsidiary of Teachers Insurance and Annuity Association of America is alleged to have failed to adequately disclose conflicts of interest and to have misled customers.

Dually registered as a broker dealer and an investment adviser, TIAA Sub was charged with incenting or pressuring its advisors to recommend that participants in retirement plans record-kept by the parent company roll assets out of those employer-sponsored plans into TIAA Sub’s more expensive managed account program. Those incentives and pressures included paying more variable compensation than what was paid for alternative programs and punishments for failure to meet sales targets.

Pressure to sell the managed account program

Seeing the leakage from assets it held as plan participants retired, TIAA Sub created a new division to offer managed accounts. Rather than move assets to other providers, retiring participants could move their account to the managed program. They were encouraged to bring in new assets also. Fees ranged from 0.40% to 1.15% of assets per year (in addition to fund costs), compared to no additional fees for accounts held in the employer-sponsored plans. Advisors were trained to recognize the “pain points” for those clients and to convince them that the managed option was the right solution for them.

Advisors were paid significantly more for putting clients in managed accounts versus other products and an additional bonus could be earned. During regular meetings with advisors, supervisors praised those who gained rollovers into the managed accounts and placed advisors who failed to meet sales goals on performance improvement plans.

Misleading Statements, Failed Disclosures and Deficient Policies and Procedures

TIAA Sub’s practices, not surprisingly, led to a flood of new managed accounts. The SEC found that the advisors made misleading statements when they told clients they provide “objective” and “disinterested” advice that was in the clients’ “best interest” and that they acted as “fiduciaries.” It also found that the conflicts of interest were not adequately disclosed in the firm’s Form ADV Part brochure when it stated that the incentive compensation was proportionate to the effort required to recommend a product “designed to meet more complex needs” like a managed account.

Finally, the SEC found that TIAA Sub’s own policies and procedures were not properly implemented. The firm did have written manuals that incorporated components of FINRA Regulatory Notice 13-45, which requires broker dealers to present clients with four options for rollovers: (i) leaving the client’s assets in the employer-sponsored plan; (ii) rolling over the assets into a self-directed individual retirement account (“IRA”) or managed IRA such as a managed account; (iii) rolling over the assets to a new employer’s plan; and (iv) cashing out the account value/taking a lump sum distribution. It also required advisors to discuss other factors, including fees and expenses relating to the rollover options.

These policies were not enforced, however, when supervisors directed advisors not to follow them and some training materials encouraged advisors to avoid discussing fees and expenses with clients. Rollover recommendations regularly lacked any documentation confirming that fees and expenses about the managed program were discussed with a client or how they compared to expenses inside the employer-sponsored plans.

Observations

1. We believe that this action by the SEC is meant to be fair warning and that other advisors can expect the SEC to bring charges for their rollover practices.

2. Variable compensation is problematic. Industry practitioners have known this for some time but it is clear that paying different compensation for different advisory products brings conflicts of interest and so does paying more to roll assets outside of an employer-sponsored plan. Advisors will always be incentivized to sell what pays them more. The DOL now offers its new prohibited transaction exemption, PTE 2020-02, as guidance for how to adequately deal with compensation differentials. It remains to be seen, however, how the SEC will respond with attempts to mitigate these inherent conflicts.

3. Compliance manuals are not merely window dressing. It is critical that advisors maintain appropriate policies and procedures, monitor that the procedures are being followed, and keep adequate records of their findings. Firms must scour all their writings, including training manuals, firm meeting scripts and client communications, to ensure that they are consistent with their formal policies and procedures.

We encourage advisory firms to hire competent counsel and consultants to draft adequate policies and procedures, including forms that detail comparative costs and expenses.

4. Fiduciary advisors will be able to continue to rely on the DOL’s nonenforcement policy in FAB 2018-02. That release stated that the DOL will not pursue prohibited transaction claims against investment advice fiduciaries who work diligently and in good faith to comply with “Impartial Conduct Standards” for transactions that would have been exempted in the now invalidated 2016 exemptions. Similar to the SEC’s findings in this action, the DOL requires compliance with three components – a best interest standard, a reasonable compensation standard, and a bar on misleading statements to plan investors about investment transactions. We understand that the IRS will follow a similar non-enforcement policy.

None of this prevents actions by private parties, actions by federal regulators who believe there has not been a good faith effort to comply, DOL action taken as soon as the nonenforcement period expires, or further state enforcement action. We encourage all firms to prepare diligently by implementing appropriate policies and procedures and to train, train, train.

Allianz Life offers in-plan indexed annuity with living benefit

Posted on July 22, 2021 by Editorial Staff -

Allianz Life Insurance Company of North America (Allianz Life) has entered the defined contribution market with a guaranteed income option for participants in employer-sponsored plans, according to a release this week.

The offering, Allianz Lifetime Income+ Annuity, is a deferred fixed indexed annuity with a guaranteed lifetime withdrawal benefit (GLWB) that’s intended to give participants a “flexible and portable” income that can supplement Social Security income in retirement.

“The innovative design features growth potential, protection from market loss and guaranteed lifetime income that has the potential to increase annually for life to help address the effects of inflation,” the release said.

This new product adds to the in-plan annuity options that plan sponsors can consider offering to their participants. It differs from the first generation of in-plan income options, such as Prudential’s Income Flex, in that a living benefit is added to a fixed indexed annuity (FIA) rather than a variable annuity (VA). Relative to VAs, FIAs are less volatile and therefore less risky for life insurers to offer.

But FIA contracts and lifetime withdrawal benefits are each complex and could require substantial education so that participants can make sophisticated decisions about them. This part of the annuity market is new and relatively untested.

New hire Mike De Feo will lead Allianz Life’s new Defined Contribution Distribution team. Previously, he held similar positions at VOYA Investment Management and Nuveen Investments.

According to the client brochure:

The product’s specs include a minimum initial premium of $2,000 and an annual 0.50% product fee. If the participant dies, his or her spouse can continue it; otherwise, the account value goes to the designated beneficiary. Lifetime income payments can begin anytime after age 60.

There’s an annual 2% “Income Builder” credit to the “Lifetime Income Value” (the notional benefit base used to calculate monthly payments in retirement, not the account value) starting at age 50 when no other interest accrues.

There’s also an annual 150% “Income Accelerator” credit to the Lifetime Income Value on any fixed or indexed credit, less withdrawals. The two credits can continue to enhance income during retirement, after the income stream begins. Contract owners can apply the account value to the purchase of a life annuity if they wish.

A market value adjustment may be assessed on withdrawals under certain conditions.

Plan participants can allocate their contributions to the following options:

Fixed rate
Annual point-to-point or monthly sum with a cap on the S&P 500, Russell 2000 or Nasdaq 100 (price-only index; no dividends)
Annual point-to-point with a participation rate on the Bloomberg US Dynamic Balance Index ER II or PIMCO Tactical Balance Index ER (volatility-managed custom indices)

“The product is flexible,” Matt Gray, head of Employer Markets, Allianz Life, told RIJ in an email. “Each plan’s version of the product can have one or more allocations and one or more age bands for the payout percentages. Payout percentages are based on the economic environment over time.”

A recent Allianz Life survey showed this evidence of demand for its offering:

73% of participants would consider a lifetime income option if available in their plan.
64% of participants said market volatility caused by COVID-19 has increased their interest in such an option.
59% of participants would consider adding an annuity to their plan if available.
77% said such an option would demonstrate their employer’s interest in their retirement readiness and wellbeing
65% said this option would increase their loyalty to their employer.

Private Equity-Owned Insurers Own 2.5x as Much Structured Securities

Posted on July 22, 2021 by No Author -

Insurers remain prime targets for private equity: AM Best

Posted on July 1, 2021 by Editorial Staff -

The private equity industry has significantly increased its exposure in the life/annuity (L/A) insurance industry over the last decade, with private equity-owned or sponsored insurers’ admitted assets growing to $604.1 billion in 2020 from $67.4 billion in 2011, according to a new AM Best report.

A new Best’s Special Report, “Insurance Companies Remain Prime Targets for Private Equity,” notes that the annuity insurers’ business model is a prime target for the new private equity model, offering a reliable revenue stream of invested capital while also offering permanent capital that is stable and positioned for the long term. According to the report, annuity premium has accounted for more than 70% of direct premiums written at private equity-owned/sponsored companies since 2011.

Additionally, private equity firms also have infused considerable amounts of capital to spur rapid growth—a strategy that insurers do not typically execute well. In the first year of private equity ownership, 38% of companies reported increases of over 20% in capital and surplus, rising to 43% in year No. 2 and 50% in year No. 3. Overly competitive crediting rates for immediate growth can be severely detrimental over the long term, if higher investment returns are not realized, leading to operating losses and ultimately diminishing overall financial strength.

As stated in the report, nearly two thirds of private equity insurers also increased their use of reinsurance, as evidenced by a higher ceded/gross premium ratio, by the end of the first year of private equity ownership, compared with the year before they were acquired. Since 2015, approximately half the premium ceded by private equity insurers was ceded out of the United States, with Bermuda accounting for nearly all of it.

The increased number of private equity firms entering the insurance market is clear: The percentage of admitted assets owned by these insurers compared with the total L/A industry increased to nearly 7.5% at year-end 2020, from 1.2% in 2011. The investment strategies implemented by private equity owners and sponsors has led to higher yields for insurers. AM Best views the maintenance of proper asset-liability management guidelines and investment risk within tolerable levels as imperative.

However, the report also notes that over the past few years, private equity firms have gotten comfortable with managing insurance assets while adhering to the constraints imposed on their portfolios, such as regulatory and rating agency capital charges for asset risk, asset-liability matching requirements and liquidity concerns. As more insurance companies are acquired by private equity firms, the ramifications may become more pronounced for other insurers competing in the same markets.

Global Atlantic to reinsure Ameriprise annuities

Posted on July 1, 2021 by Editorial Staff -

Global Atlantic, the U.S.-focused annuity, life insurance and reinsurance company that is controlled by the buyout firm KKR, has agreed to an $8.0 billion annuity reinsurance transaction between two of its insurance subsidiaries and two insurance subsidiaries of Ameriprise Financial.

The Global Atlantic subsidiaries are Commonwealth Annuity and Life and First Allmerica Financial Life. The Ameriprise subsidiaries are RiverSource Life and RiverSource Life. Global Atlantic and Ameriprise announced their first reinsurance transaction in 2019.

In recent years, publicly held US life/annuity companies have engaged in a number of such transactions, which transfer the risks and capital requirements of blocks of annuity contracts that they sold in the past to reinsurers. These reinsurers are typically owned or affiliated with powerful asset managers like KKR, Apollo, and Blackstone, for whom annuity assets serve as a steady, predictable source of investment capital.

Under the agreement, Ameriprise’s subsidiaries will transfer $8 billion worth of annuity contracts—mainly fixed-rate deferred annuities and immediate income annuities, including the liabilities to contract owners and the assets backing those liabilities—to Global Atlantic’s subsidiaries. Global Atlantic will pay Ameriprise $700 million for the contracts.

The assumption in this type of deal is that Global Atlantic’s affiliated asset manager, primarily KKR, will use its skills in alternative asset investing, loan origination, and securitization to wring more yield from the assets backing the Ameriprise liabilities than Ameriprise could—without taking more investment risk than insurance regulators will allow.

RiverSource Life will retain account administration and servicing of the policies. “In addition, consistent with the company’s enterprise risk management objectives, the transaction agreements contain a trust,” the release said. Such a trust might contain additional collateral to support the guarantees implicit in the annuity contracts. The transaction with RiverSource Life is expected to close in July 2021. The transaction with RiverSource Life of New York includes the full block and will be subject to regulatory approval.

The transaction with Commonwealth Annuity, Global Atlantic’s “flagship reinsurance entity,” is expected to close in July 2021. The transaction with First Allmerica will be subject to regulatory approval.

The Ivy Co-Investment Vehicle LLC is also investing in this deal. In April 2020, Global Atlantic established Ivy to co-invest approximately $1 billion with Global Atlantic and its subsidiaries in “qualifying reinsurance opportunities” sourced by Global Atlantic’s institutional reinsurance business, including reinsurance of life and annuity blocks and reinsurance of pension risk transfer (PRT) transactions.

“Since Global Atlantic’s founding, we have reinsured approximately $60 billion of reserves spanning life & retirement blocks and PRT reinsurance,” said Manu Sareen, CEO of Global Atlantic Re Limited, in the release. Half of that $60 billion has come since April 2020.

Reinsurance transactions are entered into by Global Atlantic Re Limited, Global Atlantic Assurance Limited, Commonwealth Annuity and Life Insurance Company or one of their affiliates. Reinsurance is placed, where required by applicable law, by Global Atlantic Risk Advisors, L.P., a licensed reinsurance intermediary and subsidiary of Global Atlantic Financial Group Limited.

Frequency of Withdrawal Commencement from VA-GLWB Contracts

Posted on July 1, 2021 by Editorial Staff -

Principal Financial shrinks its exposure to retail annuities

Posted on July 1, 2021 by Editorial Staff -

Under pressure from a large shareholder to change its “business mix and capital management options” to become more profitable, Principal Financial Group this week announced that it would stop selling individual annuities, except for variable annuities, and focus on its institutional retirement plan business.

The news shocked many long-time annuity industry watchers, because Principal is an admired, highly rated life/annuity company that was mutually owned by its policyholders until October 2001. But it appears to have yielded to the same forces that compelled The Hartford, MetLife, Voya to leave the retail annuity business or sell the older contracts on their books. [This week, Ameriprise announced reinsurance deals.]

Low interest rates on investment-grade assets since 2008 have made it difficult for life/annuity companies to support older annuity contracts (“in-force blocks of business”) with relatively high rate guarantees or longevity-linked guarantees or to earn sufficient profits selling new contracts. Some have left the retail annuity business while others sold in-force blocks to reinsurers.

Principal will do both. The company said it “will fully exit US retail fixed annuities— discontinuing new sales of its deferred annuities, payout annuities, indexed annuities—and will pursue strategic alternatives, including divestiture, of the related in-force blocks, which have policy reserves of approximately $18 billion. Principal will continue selling its variable annuity offering, which plays an important role within its complete suite of retirement solutions.

“In US individual life insurance, Principal will fully exit the retail consumer market — discontinuing new sales of term life and universal life products to retail consumers. Building on its prior announcement to cease sales of universal life insurance with secondary guarantees (“ULSG”), Principal will pursue strategic alternatives, including divestiture, for the in-force ULSG block (approximately $7 billion of policy reserves)1 as well as other related in-force blocks.”

The proceeds of those sales typically help improve the companies’ capital positions and provide money to buy back shares or invest in new lines of business. In Principal’s case, “We’ve also announced a new $1.2 billion share repurchase authorization, which underscores our commitment to return excess capital to shareholders,” said Dan Houston, chairman, president, and CEO of Principal, in a release.

The Principal Board of Directors approved the changes “following a comprehensive review of the company’s business mix and capital management options that was undertaken as a part of a cooperation agreement with one of Principal’s largest investors, Elliott Investment Management, L.P.” The review began in February 2021.

This week’s release also said:

Principal will prioritize fee-based businesses and focus on three key areas: retirement in the US and select emerging markets, global asset management, and US specialty benefits and protection in the small-to-medium-sized business market. These businesses are poised for continued growth, are more capital-efficient, and leverage Principal’s leading position and other competitive advantages, including integrated and differentiated solutions, presence in high-growth markets and preferred customer access.

Principal is committed to actively returning excess capital to shareholders. Consistent with a targeted capital level of $800 million at the holding company, a risk-based capital ratio of 400%, a debt-to-capital ratio of 20% to 25%, and an annual common stock dividend with a targeted payout ratio of 40%, Principal’s Board of Directors has approved a new authorization for the repurchase of up to $1.2 billion of the company’s outstanding common stock. This new authorization is in addition to the approximately $675 million that remains under the company’s prior authorization as of March 31, 2021. Principal expects to repurchase between $1.3-$1.7 billion of common shares from March 31, 2021 through the end of 2022 by utilizing capital generated from operations and reducing excess capital to target levels while retiring $300 million of debt maturing in 2022. This repurchase amount does not include additional excess capital that might be generated from any transactions resulting from the strategic review announced today.

As these initiatives are implemented, Principal will become increasingly well positioned as a capital-efficient company, producing higher expected shareholder returns, and poised to lead in higher-growth markets. Further details will be discussed at the company’s June 29 investor day. To register, visit principal.com/investorday.

The Principal Board of Directors and Finance Committee were assisted in the strategic review by several independent and objective consultants with significant expertise. These advisors included Goldman Sachs & Co., LLC serving as financial advisor, a leading global consultancy serving as strategic advisor, Milliman serving as actuarial consultant, and Skadden, Arps, Slate, Meagher & Flom LLP serving as legal counsel.

The share repurchases mentioned above will be made in the open market or through privately negotiated transactions, from time to time and depending on market conditions. The stock repurchase program may be modified, extended, or terminated at any time by the Board of Directors.

‘Double Down or Get Out’

Posted on July 1, 2021 by Kerry Pechter -

This week, Principal Financial became the latest life/annuity company to announce that it would focus away from selling most individual annuities. Only a day later, Ameriprise announced that it would sell in-force life insurance and annuity blocks to Global Atlantic.

One by one, for over a decade, publicly traded US life insurance companies have been trying to slip the noose of low bond yields by either a) leaving rate-sensitive businesses, b) getting rate-sensitive business off their books through reinsurance deals, and/or c) focusing on safe, stable fee-generating businesses.

Almost every major public life/annuity company has used this process to get the millstones of rate-sensitive businesses off its neck. Pressure keeps coming from the low interest rate environment, but also from their shareholders and boards of directors.

The Hartford succumbed after the Great Financial Crisis. In 2011, Harbinger bought Old Mutual, setting a pattern for more buyout company acquisitions of life insurers or blocks of in-force contract. MetLife spun off its retail annuity businesses as Brighthouse Financial.

Lincoln Financial, Jackson National, Equitable, Great American, and Voya have all done reinsurance deals, divestitures, and/or product re-tooling. Allstate sold its annuity business. AIG announced last fall that it might spin off its life/annuity businesses as a separate company.

The exceptions are the big mutuals—MassMutual, New York Life, and Northwestern Mutual—which, while not unaffected by low rates, don’t have rebellious shareholders egging them to get out of annuities. Allianz Life, which is affiliated with Germany’s Allianz, is also in a separate category.

The trend has accelerated since last fall, when American Equity underwent a makeover last fall. Its new CEO, freshly arrived from Brighthouse Financial, helped it fend off suitors by investing in the asset manager Brookfield, which will manage its assets.

The cellphones of reinsurers and reinsurance brokers began to ring. “We are hearing and seeing this more and more,” said Mike Kaster of Willis Re, a reinsurance broker, in an interview with RIJ. “Companies are asking if they should be leveraging reinsurance. They’re realizing that they need to explore it.”

Asset managers like Blackstone have positioned themselves as “insurance solutions” providers who could help troubled life/annuity companies with an efficient bundle of reinsurance and investment services. Reinsurers like Fortitude Re, which is affiliated with the $222 billion Carlyle Group, are actively seeking this type of business.

While they may have staunched the bleeding from old business, one insider told me, all life insurers still have to decide what kind of business they want to be in the future. They can either double down on the annuity business—as MassMutual did by purchasing Great American, a robust fixed indexed annuity issuer—or they can find a fee-based business that grows with the stock market. In any case, there will be further industry concentration to achieve economies of scale.

Is this trend a good thing? One person says it reflects the benefits of specialization. Life insurers are good at selling annuities and servicing customers. Reinsurance specialists can back the liabilities more cheaply than US life insurers can. Massive asset managers like Blackstone, KKR, Carlyle or Apollo can originate and securitize high-yield loans. With higher returns, they can in theory offer policyholders better pricing. In any case, the alternative is to let life insurers take huge losses or even fail.

One other point that was impressed on me: The ‘Bermuda Triangle’ strategy has matured over the past decade. When Harbinger bought Old Mutual, and then Apollo created Athene, no one knew where the trend would lead. Would Wall Street ‘buccaneers’ force wounded life insurers into one-sided agreements? Today, I’m told, the business is civilized and life insurers know how to protect themselves and their policyholders.

So what could possibly go wrong? People outside of the deals are wary of them, especially if they can’t see exactly what assets are backing the liabilities.

Some observers note that the asset managers are taking too much risk by bundling dicey loans into CLOs (collateralized loan obligations) and selling the investment-grade senior tranches to life insurers or reinsurers. These observers are reminded of the CDOs of the Great Financial Crisis, and not in a good way.

Others worry that as in-force annuity contracts get sold, and perhaps resold, that there will be breakdowns in administration and customer service. (It has already happened, at least twice.) Companies who put the shareholder’s interest ahead of the policyholder’s by going public are now, if owned by private investors, putting the investors’ interests first.

Going forward, the public will have fewer sources of the kinds of pooled retirement income products that it arguably needs. Instead, people might be offered products tailored to the needs of the life insurer’s asset manager. If the industry consolidates, it might lead to greater economies of scale; but there’s no guarantee that policyholders will benefit from them.

An Insider’s Take on the ‘Bermuda Triangle’ Strategy

Posted on July 1, 2021 by Kerry Pechter -

The Fed’s low-interest rate policy over the past decade has pinched the oxygen supply of US life/annuity companies, especially publicly held firms. Low bond yields have squeezed their profit margins and forced them out of old lines of business and into new ones.

Several companies have employed what RIJ calls the “Bermuda Triangle” strategy. The points of the triangle are, characteristically, a life/annuity company with large in-force, “blocks” of (usually) fixed annuities with guaranteed returns; a Bermuda-based or other offshore reinsurer, and a major buyout firm or money manager.

Generally, the life/annuity company will “cede” the annuity contracts to the reinsurer. The reinsurer typically pays the life/annuity company a “ceding commission” for the assets. The money manager, often affiliated with the reinsurer, then earns fees for investing the assets.

One industry participant called this a natural process of “value chain optimization” that puts money to its most efficient use: The life insurer gets fresh capital while turning a potentially money-losing business over to a specialty reinsurer who can handle the risks and an asset manager who can handle the investments at lower cost or more profitably than the insurer. “Specialization is part of the ecosystem,” he told RIJ.

Such deals are only sketchily described in the trade press, leaving many outsiders with questions. They wonder how much risk the asset managers might take with the annuity assets, whether policyholders will suffer when contracts change hands, and that divestitures hurt the annuity industry’s already fragile image.

The view from Willis Re

To get more insight into these triangular transactions, and to find out why they’ve become so popular, we talked to Mike Kaster, executive vice president at Willis Re, a reinsurance broker that’s part of Willis Towers Watson. He helps life insurers find reinsurance partners and execute these types of deals.

RIJ: Hello, Mike. What role does Willis Re play in the transactions we’ve seen over the past 10 years in the annuity industry?

Mike Kaster

Kaster: We’re a reinsurance adviser. We work with direct-writing companies—life insurers that issue life and annuity contracts, as opposed to reinsurers—and advise them on potential reinsurance solutions. We do a vast amount of work with them. They rely on us to know the markets.

RIJ: OK. Now let’s get down in the weeds. When you say, ‘reinsurance,’ exactly what do you mean?

Kaster: When people hear ‘reinsurance,’ they think of risk reinsurance. The reinsurance of closed block transactions is more akin to a mergers and acquisition transaction. The life insurer is not buying the reinsurance to cover risk. It’s selling a block of business. A large majority of these deals happen because the life/annuity company wants to improve its capital position.

Take for example a block of annuity business with a high interest rate guarantee, written in the late 2000s. Those annuities carried a 3% to 4% interest-rate guarantee. In [today’s interest rate environment] that puts a strain on the issuing company. They have to back those liabilities not just with reserves but also with allocated capital.

There’s a cost to that capital. But if they can sell those liabilities to another party and get full reserve credit and full capital credit, they end up with a benefit. That high-cost capital can then be applied to other things.

RIJ: So the life insurer ‘cedes’ a potentially expensive liability, and gets cash back at the same time. Sounds sweet.

Kaster: Depending on differences in the buyer’s and seller’s views of those liabilities, there could be a payment either way. If the reinsurer sees future value in them, it will pay a ceding commission, which is the equivalent of a purchase price. That commission would result in a direct improvement in the selling company’s capital position.

RIJ: Why would anyone want to buy contracts that the life insurer wants to get rid of? I suppose it’s to get the assets that are backing the liabilities.

Kaster: The buyer might feel that it can invest those assets a bit better than the ceding company’s own investment department can. It might have access to CLOs [collateralized loan obligations] and other investment tranches that have enough strength and get a little higher yield, especially relative to the yields that a mid-sized, conservative life insurer might get. In other words, the reinsurer might be holding different assets. But the liability doesn’t go away. There still has to be money backing those liabilities.

RIJ: There’s another angle to this, right? The offshore angle.

Kaster: Then you bring in the whole Bermuda, Ireland, or Cayman Islands factor. The capital rules in those jurisdictions might be more favorable than the rules in the US. That’s another piece of this. The original life insurer could have taken advantage of [offshore reinsurance] itself. But the offshore capital rules might not be sufficiently advantageous to justify the cost of setting something up.

Several US companies did look to set up their own offshore reinsurance vehicles several years ago. But the BEAT (Base Erosion and Anti-Abuse Tax), which was part of the Tax Cuts and Jobs Act of 2017, took away part of the tax advantage of doing that. So the frictional cost of [do-it-yourself] offshore reinsurance went up. A Bermuda-based reinsurer however can leverage that advantage over and over with different clients.

RIJ: So, if I own one of those annuities that moved offshore, who’s looking after my interests?

Kaster: If for some reason the assets would fail altogether, the ceding company will still be liable to the consumer. They never relieve themselves fully of their liability. They get a credit, but they still hold the liability—the obligation to the customer—on their balance sheet. And they ultimately have to maintain their reputation with customers. That’s why we say that this type of reinsurance is like an M&A transaction. If it were an actual M&A transaction, the ceding company would fully remove itself from liability to the customer. With reinsurance, the ceding company can’t.

RIJ: What about the assets? I’ve heard from a forensic accountant that it’s impossible to see what assets the reinsurer is using to back the liabilities.

Kaster: There’s definitely some lack of transparency from the perspective of the outside world about how the reinsurer invests the assets. But when we’re advising our clients, we would make sure they had transparency into the investments.

The assets must be in compliance with the pre-agreement. Here’s where I and Willis Re get involved. We vet the reinsurance relationship. You have to set up pre-agreed-to [investment guidelines that are codified in the reinsurance agreement]. So that you [the ceding company] understand what the reinsurer will do.

RIJ: The forensic accountant also said that relatively weak assets—letters of credit, for instance—are sometimes used to back the contracts.

Kaster: For the reinsurance deals that we would work on, to be credible, letters of credit are not used. The parties may agree that additional capital will be put up as protection, and letters of credit or other facilities could be used to back the [primary] capital, but the liabilities are typically backed by real assets, like Treasury bonds, as opposed to letters of credit. Every adviser will have its own views and opinions on that issue. A lot of people have gotten comfortable with letters of credit. I’m not so sure I buy the model. The flexibility in the regulation is there for direct-writing companies to use them. But I’d rather see real assets held in a trust.

You can’t generally or blindly let the buyer invest, for example, 30% [of the assets backing the book of business] in equities. But you must give them flexibility to get a higher yield so that they can back the liabilities. That’s important. But, in all reinsurance transactions, the ceding company retains the consumer relationship. That doesn’t go away. We may talk about it as ‘ceding.’ But life/annuity companies don’t get rid of the ultimate obligation to the customer.

RIJ: Thanks, Mike.

One-Stop Shops for Notes and Annuities

Posted on June 24, 2021 by Kerry Pechter -

Web platforms like SIMON and Halo, which have traditionally supported the sale of customized structured notes by wealth managers to sophisticated high net worth investors, have begun supporting the sale of index-linked annuities too.

The moves seem a bit counterintuitive. Regulatory differences and differences in tax treatment, as well as differences in culture and tradition, have kept structured notes, which are securities, and index-linked annuities, which are insurance, on separate playing fields.

But the new alliances make sense. Both types of products use options—puts and calls— to make protected bets on risky assets. Both increasingly use hybrid or volatility-controlled indexes. Both offer opportunities for higher yields than investors can currently get from bonds.

Their target markets also overlap. Older investors who want to lower their financial risk exposure as they near retirement are open to both types of products. “They’re often in their late 50s or 60s , or retirees. So it’s the same demographic that buys annuities,” said Anna Pinedo, an attorney who helps big banks and big annuity issuers communicate.

The result is that SIMON, Halo, and now Luma Financial Technologies, the newest platform in this hybrid space, now try to make it as easy for registered reps at broker-dealers, wealth managers at wirehouses and advisers at RIA firms (registered investment advisors) to deal in annuities as they do in notes.

Navian spins off Luma

Based in Cincinnati, but with a new office in Switzerland and strategic partnerships in Latin America, Luma is led by Tim Bonacci. Once a managing director of the private client group at Fifth Third Bank, Bonacci started Navian Capital, a structured products wholesaler and distributor, in 2005. In 2011, he spun off Navian’s technology platform as an interface with advisers. Thus was Luma Financial Technologies born.

Jay Charles

This year, Luma added index-linked annuities. “Our clients said, ‘We need the same tools to evaluate annuities [that we use to evaluate other structured products].’ So we brought in a team of annuity experts,” Jay Charles, Luma’s director of Annuity Products, told RIJ recently.

Besides Charles, who had built fintech solutions for annuities at Prudential, Bonacci hired Rodney Branch, a former marketing and product development executive at Prudential, Athene and Nationwide, and, most recently, Keith Burger. Burger came from AIG to be Luma’s national sales director for annuities.

According to its website, Luma “is used by broker/dealer firms, RIA offices and private banks to automate and optimize the full process cycle for offering and transacting in market-linked investments. This includes education and certification; creation and pricing of custom structures; order entry; and post-trade actions. Luma is multi-issuer, multi-wholesaler and multi-product, thus providing teams with an extensive breadth of market-linked investments to best meet clients’ specific portfolio needs.”

Brady Beals, Luma’s director of sales and product origination director and a veteran of Navian Capital, told RIJ, “Our client focus has been across the banks, wirehouses, broker-dealers, and RIAs who are not dually registered for annuities. The IMOs don’t compete with us, but rather work with us. Unlike some of our competitors, we are simply a technology platform and not a seller.”

Acquaintance with hybrid indexes is part of Luma’s core competency. “We understand the indexes,” Charles told RIJ. “We know how they work. We have a high level of comfort with them. We’ve built proprietary analytics, based on an individual client’s scenario and advisers’ projections. Advisers can compare indices and see how they might perform.”

Tamiko Toland

“[Luma] provides end-to-end service, streamlining the sales process and helping financial professionals find the right product for their clients even when there are many products available,” said Tamiko Toland, the director of Retirement Markets at Cannex, which provides annuity product data to advisory firms.

“They are very similar to either Simon or Halo. This type of platform can support any distributor that is looking for a single solution to get from education (much of which is required in order to sell certain products) through sales and then in-force management,” she told RIJ.

“In [Luma’s] case, our relationship with a distributor basically funnels through the Luma platform. Cannex still has a relationship with the distribution clients; our data just appears in a different interface. Luma also illustrates elements of annuities that we do not offer. Many of our existing clients receive information from Cannex and integrate it into their own interfaces.”

Big banks involved

Anna Pinedo, the attorney who co-leads the Global Capital Markets practice at the law firm of Mayer Brown, understands the new notes-annuities business. She helps major banks communicate with annuity issuers.

Anna Pinedo

“A lot of structured products are purchased by private bank customers, who tend to be affluent. They’re often looking for the kind of return profile that annuities provide. Advisers have caught on to this. They said, ‘If there’s interest coming from the same client base, why don’t we offer them a structured product in the form of an annuity,’” she told RIJ.

“Participants in the structured products market tend to be associated with large banks. They’ve been a little more innovative and motivated to come up with new products and structures than some of the insurance companies have. This time, the life insurers may be pushed by the advisers.”

On its website, Luma lists three of those large banks—Morgan Stanley, UBS, and Bank of America—as direct investors in Luma. These banks manufacture the custom indexes that go into structured products and annuities. They also distribute structured products and annuities through their large wealth management platforms.

“The banks can get a nice stream of consistent revenue by licensing their indexes for use by annuity providers,” Pinedo told RIJ. “The indexes give annuity providers something new to offer. They may not have been proactive in this area. The big banks also have big private wealth platforms. They’ve heard first-hand from their advisers that there’s interest in annuities.”

Luma’s notes/annuities business model is distinct from that of annuity platforms like DPL Financial Partners or RetireOne, which specialize in helping RIAs buy insurance products and were not built for structured notes. (There is cross-fertilization, however; Halo partners with RetireOne to offer notes.) DPL and RetireOne are, in turn, distinct from older, pure insurance sales platforms like Hersh Stern’s immediateannuities.com and annuityfyi.com.

“We are differentiated in our focus on independent RIAs as well as in the distribution functionality we bring,” David Lau, CEO of DPL Financial Partners, told RIJ. “I describe us as a technology-enabled distribution company rather than a pure software company.

“We also provide annuities of all types—variable, fixed index, Multi-year guaranteed rate annuities, single-premium immediate and deferred income annuities—in addition to other insurance products like disability, life and long-term care.”

RetireOne brings a slightly different focus to a similar market. “We’re not direct competitors [with Luma],” said Mark Forman, RetireOne’s senior managing director, marketing and public relations. “One of the most difficult things for folks to understand about annuities is that how they are distributed and sold impacts the kinds of annuities that are made available to specific advisor audiences.

“To transact annuities via a SIMON or Luma, an RIA without an insurance license would still need to work with an insurance agency like ours to transact business, act as agent of record, provide required suitability to Best Interest standards, and nominate the RIA as a third-party advisor on the contract,” he told RIJ.

RetireOne is part of ARIA Retirement Solutions, which for years has worked with life insurers to create stand-alone living benefits (SALBs) that add lifetime income features to managed accounts without the purchase of a variable annuity.

Going global

The structured products business in the US, after a fast run-up in the early 2000s, has plateaued in recent years. Luma sees opportunities overseas, where structured products have traditionally been sold more widely than in the US. Luma recently opened a new office in Zurich, Switzerland. It has also announced partnerships with advisory firms in Latin America.

In September 2020, Luma announced that it will partner with StoneX Financial, a global provider of execution, risk management and advisory services, market intelligence, and clearing services. It is a unit of StoneX Group (NASDAQ: SNEX), a New York-based company that serves more than 30,000 commercial and institutional clients, and more than 125,000 retail clients, from more than 40 offices across five continents.

In February 2021, Luma said that Credicorp Capital, a financial firm with a strong presence in the US, Peru, Chile, and Colombia, had chosen the Luma platform to add structured products through its Asset Management business.

On the technology side, Luma uses Insurance Technologies’ FireLight platform’s embedded API capabilities to create a seamless annuity order entry system.

“In the past, advisers relied on a disparate collection of education materials from annuity wholesalers or the home office. They didn’t have a view of the entire range of products,” Charles told RIJ. “We built a seamless process from the disjointed or broken processes that advisers previously had to use.”

More Plan Sponsors Want to Keep Retiree Accounts: Cerulli

Posted on June 23, 2021 by Editorial Staff -

Many larger plan sponsors are interested in retaining the assets of retired participants and, in conversations with analysts at Cerulli Associates, plan providers say that some large-plan sponsor clients are working to make their plans more retiree-friendly.

According to a new Cerulli report, “US Retirement End-Investor: Solving for the Decumulation Phase, 84% of 401(k) plans sponsors with more than $500 million in assets prefer to keep participant assets in-plan during retirement.

The reason: Increased scale helps them negotiate better prices with asset managers and other providers. Another plus: Participants maintain access to institutionally priced investment products and services during their retirement years.

Cerulli suggests retiree-friendly DC plans could serve as attractive retirement destinations for retirees in the lower end of the mass-affluent market ($500,000 to $2,000,000 in investable assets), middle market ($100,000 to $500,000), and mass market (less than $100,000).

To make DC plans attractive retirement destinations, plan designs will need to change, Cerulli said. The changes will require coordinated efforts by plan sponsors, consultants, recordkeepers, asset managers, and other retirement providers.

“Retiree-friendly plan features should arm participants with the planning tools, personalized advisory services, investment products, and withdrawal options necessary to support participants through their retirement years,” said Shawn O’Brien, senior analyst, in a release.

For more than half (56%) of retirees across all age and wealth tiers, Cerulli found, the “ability to withdraw funds as needed” is a retirement account’s most important feature. “Plan fiduciaries should ensure their documents allow for flexible, inexpensive distributions and a recordkeeping platform that can smoothly facilitate monthly, quarterly, ad hoc, and partial withdrawals.”

Executing decumulation-focused plan design changes will require plan sponsors to work with their fiduciary partners, asset managers, and recordkeepers to ensure participants have an investment opportunity set necessary to construct an effective investment and drawdown strategy in retirement, Cerulli said.

A likely outcome is increased innovation in in-plan decumulation solutions, such as DC managed accounts. “Over time, we think the decumulation experience in retiree-friendly plans will begin to more closely resemble the out-of-plan, retail advisory experience for many retirement investors,” O’Brien said.

“As new plan design offerings materialize, asset managers and insurers should proactively communicate the value proposition of their income-oriented investment products and illustrate how these products can help retirees achieve superior financial outcomes in an in-plan setting.”

You’ve heard of RILAs, Now Meet FILAs

Posted on June 23, 2021 by Kerry Pechter -

High-end sneakers and fashionable sportswear—that’s what FILA means to pro soccer players and armies of amateur athletes. In the financial world, FILA now has a new meaning: a Fixed Index-Linked Annuity.

You can thank F&G, the life insurance subsidiary of FNF for coining a new acronym for a new product niche. A FILA is a bit like a registered index-linked annuity (RILA). But RILAs are registered securities, and FILAs are insurance products that insurance agents can sell.

The new contract, called Dynamic Accumulator, has just been issued by F&G (whose corporate DNA traces back to US Fidelity & Guaranty Life as well as Old Mutual. F&G’s CEO is Chris Blunt, a former group president at New York Life.)

The contract, which should help differentiate F&G in the crowded FIA marketplace, is built on a fixed indexed annuity chassis. But on any given contract anniversary, contract owners who have already booked gains can then switch to a RILA-type crediting strategy that offers more upside potential than the FIA crediting.

How can the contract owner put his whole account–principal and gains–at risk without risking any loss of principal? Because his losses are stopped at a floor that ensures that his losses in a given year will never exceed his previous gains. The floor of the account protects the principal. If a person loses all of his gains in a given year while using the crediting method with the floor, he has to go back to the FIA. He can’t go back to the negative floor method until he has gains again. This product, I’m told, is unprecedented, at least among annuities, if not structured products.

Since principal is never at risk, F&G can file the product as an FIA and insurance agents can sell it, said Ron Barrett, senior vice president at F&G, in an interview. So far Dynamic Accumulator offers only the S&P 500 Price Index (i.e., the S&P 500 Index without dividends) as its only indexing option.

Ron Barrett

“We are constantly soliciting feedback from distributors, and we asked them, What are investors’ unmet needs? That helped us formulate the FILA concept, which provides a unique blend of upside opportunity in the equity market and principal protection,” Barrett told RIJ.

“Having that principal protection makes the contract a safe place to be without the owner having to give up control or flexibility. The client and the adviser have the ability to adjust their risk exposure without completely jumping out of the product. What we heard was, ‘I want to be able to dial my risk up or down, depending on need at that time. That’s the unmet need.’”

Fidelity & Guaranty Life was listed as the fifth biggest seller of fixed indexed annuities in the US for 2020, with sales of $3.46 billion and a 6% market share. Athene led the field, followed by Allianz Life, AIG, and Sammons. Its FG AccumulatorPlus 10 contract ranked seventh in overall sales in 2020.

F&G is one of several index-linked annuity issuers with varying current or past connections with a major asset manager. Athene is tied to Apollo and Global Atlantic to KKR. Todd Boehly, former president of Guggenheim Partners, is CEO of Eldridge Industries, the holding company that owns Security Benefit. F&G has close ties to Blackstone; Blunt was CEO of Blackstone Insurance Solutions before he became CEO of F&G. (See RIJ story).

F&G has put out a product sheet describing exactly how the Dynamic Accumulator works. The less protection, the higher the cap or participation rate on the S&P 500. In F&G’s hypothetical example, there’s a 4% cap on the 0% floor, a 5.25% cap on the minus-2.5% floor, a 7.5% cap on the minus-5% floor and a 10% cap on the minus-10% floor. (Notice that this product can offer only floors, not downside “buffers,” because the contract owner can only afford to lose an amount equal or less than the gains he puts at risk. There’s a vesting schedule for gains, starting at 90% in the first contract year and reaching 100% in the seventh year.

Once you’ve tried a structured account (with a floor below 0%), lose your gains, and retreat to the FIA crediting method, you must wait until you have gains to return to a higher-yielding structured account. As long as you have gains, you can change the amount of gains you want to risk–zero, if you choose–at beginning of each new contract year.

“The client is allowed to allocate between the two structured account options annually (cap or participation strategy). Within the structured account strategies, the client can dial up or dial down their tracks based on the index gains available. Once the client chooses the fixed option, they lock in previous vested gains until the end of the contract to term,” Barrett told RIJ.

Note that this contract has one-year point to point crediting periods. The investor locks in index gains, if any, at contract anniversaries. The contract term is 10 years, which means the investor can take out only 10% of the account value (including vested gains) each year penalty-free.

The asset management partners of FIA issuers prize these long-dated liabilities, which give them enough time to invest the underlying funds in relatively illiquid, relatively high-yielding senior tranches of collateralized loan obligations (CLOs) and other alternative assets.

Insurers increase their private equity holdings: AM Best

Posted on June 23, 2021 by Editorial Staff -

Private equity holdings by the US insurance industry grew by 14.8% in 2020, with the life/annuity insurance industry seeing its highest value in five years, at $71.7 billion, according to a new AM Best report, “Private Equity Investments Still Attractive to US Insurers.”

US property/casualty insurers also increased the book-adjusted/carrying value of their holdings by 11.3% in 2020, to $18.7 billion, according to the report. Health insurers’ private equity investments declined slightly, but these insurers account for only 3% of the industry’s total holdings.

Overall, the total number of private equity investments among the overall US insurance industry grew for a seventh straight year, with insurers seeing the market value of those investments rising to a total of $93.3 billion, a 15% year-over-year increase.

“Given the high levels of unpredictability in public markets, private equity investments give investors the opportunity to achieve higher returns and diversify their portfolios,” the report said.

Leveraged buyout funds made up more than half of the industry’s holdings. Venture capital funds, which make up slightly over 25% of the industry’s exposure, increased in all three market segments, with mezzanine financing making up the remainder.

Although the private equity market performed favorably in 2020, it was not spared the challenges the year brought due to the pandemic.

“Fund managers likely struggled to accurately value companies because of instability in the market, especially in the second quarter when the pandemic first hit,” said Jason Hopper, associate director, industry research and analytics, AM Best. “Second-half 2020 results were more encouraging, but large investment deals were still influenced by the loss.”

The 20 insurers with the largest valuations in private equity investments—a majority of them life/annuity insurers—account for approximately 72% of the industry’s holdings. These 20 insurers increased their exposure by 15%, or $10 billion, in 2020 from the prior year. Private equity investment exposure to capital and surplus for these 20 insurers varies, but averaged 24% of capital and surplus.

Signs supporting continued growth in the private equity market over the long term are positive, owing to low interest rates, mild inflationary environments and the prospects for higher investment yields. However, AM Best notes that financial stress in the markets or severe public market corrections remain a risk.

Honorable Mention

Posted on June 23, 2021 by Editorial Staff -

Principal’s new pooled employer plan Is growing quickly

“Dozens of employers with retirement plans with $10 million to more than $300 million in assets under management” have joined or intend to join the pooled employer plan (PEP) recently launched by Principal Financial Group and Lockton Investment Advisors, according to a news release this week.

“This interest in a PEP from mid-to-large employers indicates the potential of more widespread uptake of these plans in addition to use by small businesses,” the release said. “[They] liked the PEP’s ease of use, the ability to outsource administrative and fiduciary work, and institutional investment cost savings.”

The new PEP, known as the (k)PraetorianRetirement Plan, provides access to investment management and transfers administrative and fiduciary burdens to specialized industry professionals. Principal research shows that only 16% of US businesses feel confident that their employees are saving enough for retirement.

Employers in the medical and pharmaceutical, technology, manufacturing, and financial services fields are joining the plan, the release said. In addition to (k)Praetorian’s tailored plan design, employers say they are switching to the plan because it removes much of the plan administration and fiduciary stress of ERISA compliance and liability, as well as providing education and services that help employees build a more secure retirement.

Lockton serves as independent 3(38) Investment Fiduciary for the PEP, designing and monitoring the investment lineup. They also provide financial wellness and plan design consulting. Duckett and Tom Clark, JD, co-founders of Lockton’s Outsourced Administrative Services practice, serve as strategic advisors to (k)Praetorian and will participate in the PEP’s continued evolution.

Principal serves as the pooled plan provider (PPP) that oversees the operation of the (k)Praetorian PEP as well as 3(16) Plan Fiduciary and recordkeeper. The plan also integrates the extensive administrative capabilities of National Benefit Services, LLC (NBS) to carry out plan administration and 3(16) services under the direction of Principal.

‘Personal Retirement Strategy’ will support Bank of America plan participants

Bank of America has launched a new digital investment advisory program, Personal Retirement Strategy. According to a release, “The program delivers personalized insights, guidance and tools, as well as access to digital investment management services seamlessly integrated into the 401(k) experience.”

Institutional and corporate retirement plan clients can offer this Merrill program designed to help plan participants establish and pursue their retirement income goals. Personal Retirement Strategy is the latest addition to Financial Life Benefits, a suite of workplace benefits and solutions. The new program is designed to help participants in institutions and corporate retirement plan clients.

Merrill will act as a 3(21) fiduciary for participants using Personal Retirement Strategy, and a 3(38) fiduciary with respect to the plan assets enrolled in Merrill Managed. Participants can elect to invest their 401(k) assets themselves, or have a portfolio created and managed on their behalf in Merrill Managed.

Personal Retirement Strategy provides all plan participants with a retirement plan and personalized investment strategy via mobile phone and online. Key features include:

Interactive Digital Experience: ability to determine how certain decisions could affect retirement with flexible tools and guidance that allow for customization of the user experience
Goals Based Planning: guidance in creating a retirement income strategy based on the employee’s holistic financial picture and a personalized, goals-based asset allocation recommendation
Actionable Insights: aids participants in understanding their available benefits, offers actionable steps they can take to prepare and help stay on track toward a financially secure retirement
Investment Management: a new discretionary managed account service, Merrill Managed, that offers personalized investment management for an additional fee, based on Merrill’s well-established wealth management planning solutions, and portfolio construction from the company’s Chief Investment Office

Bank of America’s Retirement & Personal Wealth Solutions organization serves more than 26,000 companies of all sizes and more than 5.7 million employees as of December 31, 2020. Bank of America offers institutional client employees a range of financial benefit programs and solutions.

Allianz Life survey reveals hot-button personal finance issues

COVID 19 increased Americans’ worries about money but it didn’t increase their inclination to discuss their personal finances with an adviser, according to the 2021 Retirement Risk Readiness Study from Allianz Life Insurance Company of North America (Allianz Life).

On the one hand, respondents to an Allianz Life survey reported increased worry in 2021 about healthcare costs in retirement (71% vs. 65% in 2020), the rising cost of living (67% vs. 59%), the impact of a market downturn on retirement savings (66% vs. 54%) and running out of money before they die (59% vs 56%).

About two out of three are not currently discussing these topics with an adviser, but would like to, the survey showed. The most pressing issues: running out of money before they die (66%), the impact of a market downturn’s on savings (64%) and being too conservative in investments and missing out on market gains (63%).

More than half said they would like to discuss their concerns about high healthcare costs (59%), the rising cost of living (58%) and lack of funds to do all they things they want to do in retirement (57%). Advisers might well raise these topics in their initial meetings with new clients.

The 2021 Retirement Risk Readiness Study surveyed pre-retirees (those 10 years or more from retirement); near-retirees (those within 10 years of retirement); and those who are already retired. The study found a clear opportunity for financial professionals to assist pre and near-retirees. Retired respondents reported less anxiety about various risks to their retirement.

A distinct difference exists between the recently retired (<10 years into retirement) and retirement veterans (10+ years in retirement) in their level of worry and willingness to get professional help.

Recent retirees were significantly more concerned about the majority of retirement risks than those who have spent more time in retirement, including healthcare costs being too high (64% vs. 40%), the rising cost of living (54% vs. 27%), the impact of a market downturn on retirement savings (61% vs, 39%) and running out of money before they die (46% vs. 24%).

Recent retirees are more willing to discuss these topics with their financial professional. For those that reported interest in discussing retirement risks, the most popular topics were the impact of a market downturn on retirement savings (54%), running out of money before they die (37%) and the rising cost of living (34%).

The survey showed “a clear preference for protection products.” When asked whether they would rather have financial products that have the potential for big gains, but also potential for big losses or products that protect from big losses, but come with smaller gains, nearly seven in 10 (68%) said they would prefer the protection product.

Allianz Life conducted an online survey, the 2021 Retirement Risk Readiness Study, in December 2020 with a nationally representative sample of 1,000 individuals age 25+ in the contiguous US with an annual household income of $50,000+ (single) / $75,000+ (married/partnered) or investable assets of $150.000.

Tom Smith will be DPL Financial Partners’ new Chief Growth Officer

DPL Financial Partners, a turnkey insurance platform for registered investment advisors (RIAs) announced the appointment of Tom Smith as the firm’s Chief Growth Officer. He will lead efforts to grow DPL through additional partnerships with insurance carriers, distribution platforms and national RIA firms.

Smith came from Principal Financial Group, where he was most recently Head of Global Firm Relations, with a focus on integrating retirement, asset management and insurance services.

Annuity Sales by Type of Contract (First Qtr 2021)

Posted on June 23, 2021 by No Author -

(Sheryl) Moore’s Law on Annuities in 2021

Posted on June 17, 2021 by Kerry Pechter -

A preliminary peek at Wink’s first-quarter 2021 Annuity Sales Report has just arrived here at Retirement Income Journal, as it does every June as part of a joint effort of RIJ and Wink to bring the annuity market into sharper focus for my readers and Wink’s clients.

We’ve been distilling the report’s 90 pages for insights. We’ve interviewed Sheryl Moore, the owner of Wink, Inc., to hear her takeaways from the report—a 3-D snapshot that assembles current and historical data about issuers, products and distributors in one place.

Traditional variable annuities (VAs) and multi-year guaranteed rate fixed annuities (MYGAs) still account for more than half of new sales ($21 billion and $13.3 billion, respectively), in the first quarter), with Jackson National dominating the VA category and New York Life MYGAs.

But the energy in annuity sales has shifted toward index-linked products. Fixed indexed annuities and registered index-linked annuities (RILAs, aka structured annuities) sold a combined $23.4 billion in the quarter ($14.4 billion and $9.1 billion, respectively.

The extended interest rate drought has driven that shift in a couple of ways. With safe bond yields chronically depressed, FIAs or RILAs try to offer competitive caps and participation rates by giving policyholders products that offer partial exposure to equities through the purchase of options on equity indices.

The shift to indexed products has also been driven by the entrance over the past ten years of new or under-new-management insurers like Athene, Fidelity & Guaranty Life, Global Atlantic and others. They are a source of illiquid assets to their asset-manager partners (Apollo, Blackstone, and KKR, respectively) who use them to buy high-yielding bundled securities.

Wink’s data showed that annuity purchasers range in age from 45 to 80, but most fall between the ages of 60 and 69. The average premium for policies ranges from about $100,000 to $200,000. As clients get older, they tend to buy more conservative annuities.

The average age for VA purchasers is 60, for structured annuities, 63, for indexed annuities, 65, and for MYGAs, age 69. Average premiums run in the opposite direction, with VAs attracting the most money ($224,700, on average) and MYGAs attracting the least ($128,800, on average).

Overall, annuity sales totaled $58 billion in 1Q2021, according to Wink. That was 3% more than the fourth quarter of 2020 and 10% more than the first quarter of 2020. According to the Investment Company Institute, life insurers manage or administer some $2.46 trillion in annuity reserves for Americans (out of about $35.4 trillion in retirement savings). Of that amount, about $2.1 trillion is in variable annuities, whose underlying assets are mutual funds, according to Morningstar.

The life of RILAs

RILAs have seen the greatest increases in sales in recent years ($9.05 billion in 1Q2021, 86% higher than 1Q2020). Just ten companies account for 99% of the sales in this category. The product has been a life-saver for big life insurers who needed an alternative to VAs with living benefits. The guarantees of those generous products were difficult to support at low interest rates.

Equitable (then AXA Equitable) introduced the structured annuity (a relative of a security called a structured note) in 2010. Equitable was the top issuer of RILAs in 1Q2021, with a nearly 20% market share, but Prudential’s FlexGuard contract, introduced in 2020, was the top-selling RILA for the quarter.

“The structured annuity is the golden child right now,” Moore told RIJ. “It’s relatively new, and everybody likes a bright shiny new object. Also, the current pricing is so difficult right now for fixed indexed annuities that structured annuities look much more attractive by comparison. The shift away from variable annuities with living benefits has also helped the RILAs.”

RILA sales haven’t caught up with sales of FIAs, which reached $14.4 billion in 1Q2021. The top issuer of FIAs for the quarter was Athene USA (11.6% market share), followed by AIG and Allianz Life. The top-selling contract was Allianz Life’s Allianz Benefit Control or “ABC” annuity.

Athene’s leading FIA contract is the Agility 10. “Athene has had very attractive products with attractive illustrations,” Moore said. “They distribute through multiple channels—especially banks and independent agents—and they have proprietary product offerings.” Their association with the alternative asset manager Apollo “has helped them, but it’s not the reason they’re number one. In my experience, they tend to have more attractive rates than their peers.”

Athene has benefited from its association with Annexus, the Scottsdale, Arizona company that does product development for life insurers and distributors. “Athene and Annexus are partnered together on the Athene BCA 2.0 and Velocity FIAs. In this relationship, Annexus has co-developed the product and cooperated on index selection. These FIAs are then distributed to the Annexus IDC partner firms,” Tom Haines, senior vice president, Capital Markets and Index Solutions at Annexus, in an interview.

RILAs and FIAs may look like cousins—their products extract yield from equity or hybrid indices via the purchase of options—but they are rarely found in the same place. Allianz Life is the only issuer that posts big sales in both spaces. FIAs are distributed primarily by independent insurance agents, while RILAs are SEC-registered products sold mainly by securities-licensed advisers at independent broker-dealers.

The two product-types also differ in the way they use options. RILAs offer access mainly to common equity indices like the S&P 500 for large-cap stocks, NASDAQ-100 for tech exposure, Russell 2000 for small-cap stocks, and MSCI-EAFE for international exposure. RILA investors can also lose money if the equity markets fall past a “buffer” of minus-10% or more.

By contrast, FIAs protect investors from any loss over the term of contract. The stiffer guarantee makes their options more expensive, which pushes down the generosity of the crediting rates they can offer. They increasingly solve this problem by offering access to hybrid indices. Many of these are dynamically reallocated, as often as daily, to stay within certain volatility limits. These indices, because of their built-in hedging mechanisms, allow FIA issuers to offer more generous-looking crediting methods.

The annuity world today seems divided into fans and skeptics of hybrid indices. Moore is one of the skeptics. “All fixed indexed annuities, regardless of index or indexing method, will return approximately 1% to 2% greater interest than [traditional] fixed annuities being issued on the same day,” she said. “I and others are educating people on the realities of the situation.”

RIAs and 401(k)s: Still elusive markets

Annuity issuers have been trying for years to convince Registered Investment Advisors (or their Investment Advisor Representatives) to sell annuities. But, even with the creation of platforms like DPL Financial Partners or SIMON, where RIAs and other fee-based advisers without insurance licenses can purchase no-commission annuities, the category cross-over hasn’t happened yet.

Wink’s 1Q2021 report showed that 5.85% of traditional VA sales involve fee-based, as opposed to commission-paying, contracts. But the report also showed that RIAs account for only 2% of sales traditional VAs and less than one percent of sales of MYGAs, RILAs, or FIAs.

“There had been an increase in fee-based sales but only by one or two percent,” Moore told RIJ. “We’re talking about building an entirely new distribution for annuities and we have to educate them and help them unlearn the negatives.

“Annuity is still a four-letter word for a lot of people in finance. The press still talks about seniors being taken advantage of by annuity salesmen, and about annuities not allowing them access to their money. RIAs are reading those stories and they are influenced by them.”

The discussion moved to the possibility that life insurers will soon be able to market annuities through 401(k) plans. Provisions in recent federal legislation, such as the SECURE Act of 2019 and the proposed “Secure 2.0,” have removed some of the obstacles to making annuities available to plan participants.

Moore believes that hurdles are still standing in the way. “I’m excited about the development” of a push to get annuities in 401(k)s. “When the SECURE Act came out, there was finally some positive press about annuities. But don’t hold your breath. There is so much administrative groundwork that have to be done just to put a product in a retirement plan, and companies that don’t currently have ERISA products will be at a disadvantage. How do you even get in front of an HR person, or how do you know if that’s the right person to see? There are a lot of unanswered questions.

“How does a life insurer get in front of participants or provide collateral that competes with all the other options that participants see? Will there be one or more annuity per plan? What is the marketing and the messaging going to look like. How will a company support their offering?” she said. “It’s exciting, but don’t expect immediate results.”

Feds block Aon’s bid for Willis Towers Watson

Posted on June 17, 2021 by Editorial Staff -

The US Department of Justice (DOJ) filed a civil antitrust lawsuit this week to block Aon’s $30 billion proposed acquisition of Willis Towers Watson, which would merge two of the three biggest global insurance brokers. “The merger threatens to eliminate competition, raise prices, and reduce innovation for American businesses, employers, and unions,” said a DOJ release.

According to the release:

“Aon and Willis Towers Watson… compete head to head to… ensure businesses obtain innovative, high-quality broking services to manage their risks and provide critical health and retirement benefits to their employees at a reasonable cost. The merger would eliminate this important competition in five markets, resulting in higher costs to companies, higher costs to consumers, and decreased quality and innovation.”

As alleged in the complaint, Aon and Wills Towers Watson operate “in an oligopoly” and “will have even more [leverage] when [the] Willis deal is closed.” If permitted to merge, Aon and Willis Towers Watson could use their increased leverage to raise prices and reduce the quality of products relied on by thousands of American businesses — and their customers, employees, and retirees.

Although Aon and Willis Towers Watson have agreed to certain divestitures in connection with investigations by various international competition agencies, the complaint alleges these proposed remedies are inadequate to protect consumers in the United States. The complaint also alleges the U.S.-focused divestitures in health benefits and commercial risk broking, in particular, are wholly insufficient to resolve the department’s significant concerns.

Aon plc is incorporated in Ireland and headquartered in London. It has approximately 50,000 employees and offices in approximately 120 countries, including over 100 offices in the United States. In 2020, Aon reported revenues of more than $11 billion.

Willis Towers Watson plc is incorporated in Ireland and headquartered in London. It has approximately 45,000 employees and offices in more than 80 countries, including over 80 offices in the United States. In 2020, Willis Towers Watson reported revenues of more than $9 billion.

Top-Selling Annuity Contracts, First Qtr 2021

Posted on June 17, 2021 by Editorial Staff -

The top-selling annuity contracts in their respective categories in the first quarter of 2021, according to Wink Intel, were the Jackson National Perspective II 7-year variable annuity, the Pruco Life Prudential FlexGuard Indexed VA (in the RILA category) and the Allianz Benefit Control Annuity, a fixed indexed annuity from Allianz Life. As for multi-year guaranteed rate annuities, New York Life was by far the biggest seller of MYGAs in the first quarter, but the big mutual insurer didn’t release product-level sales data.

Perspective II from Jackson National. This contract, issued by the top seller overall of traditional variable annuities for several year, has been the most popular variable annuity for many quarters. It gives contract owners 120 investment options to choose from, and doesn’t confine the owner to certain balanced or volatility-controlled investments when they pick one of the three lifetime income riders.

A Jackson National spokesman told RIJ, “While Jackson has offered investment freedom for the longest period of time with our Perspective II VA, we cannot claim to be the only carrier. Nationwide now offers two benefits that do not have investment restrictions and Delaware Life also has a benefit that does not require investment restrictions.” The three income options are bonus, step-up, and withdrawal rate.

Allianz Benefit Control Annuity from Allianz Life. The Minneapolis company, the US branch of Allianz of Germany, is trying to fend off the invasion of the FIA space, which it once ruled, by Athene, Fidelity & Guaranty Life, and Global Atlantic, three insurers with asset managers (Apollo, Blackstone and KKR) helping them squeeze more yield from their general account investments.

Its Benefit Control Annuity seems to be a winner. It’s also complex. The contract has bonuses, income riders, and volatility-controlled hybrid indices that are likely to make it challenging for advisers, let alone investors, to navigate. But advisers, despite their protests, have always seemed to prefer complexity over simplicity as long as it translates into flexibility.

The bonuses require especially close reading. Contract owners can get a bonus to their income base (the “Protected Income Value” or PIV) of 250% of their index gain each year or, if they prefer, a bonus to their account value of 50% of their gain. So if they gain 5% from index appreciation in a year, their PIV would get a 12.5% boost or the account value would get a 2.5% boost.

In addition, there’s a bonus option that adds 150% of the index gain to the PIV and 100% of the index gain to the account value. The account value, with bonuses, is available after 10 years (which is also the length of the surrender period). How does the issuer pay for all this? In part by charging 0.95% per year on and limiting the income payout rate at age 65 to 4% of the PIV for single owners and 3.5% for joint owners.

Pruco Life Prudential FlexGuard Indexed VA. Prudential came to the structured annuity market in early 2020, 10 years after the birth of this category. But its entry product has posted about $3.5 billion in sales in its first four-quarters. Prudential claims that the fastest start for any contract in the RILA category, which Equitable (then AXA Equitable) created in 2010. This week, Prudential brought out a version of the contract with a lifetime income benefit.

FlexGuard offers three crediting strategies: A point-to-point cap rate strategy that can work like a typical FIA; a “Tiered” Participation Rate strategy; and a Step Rate Plus strategy. Only two indices were available on the original contract: the S&P 500 Index or the MSCI EAFE, which holds shares in companies in 21 developed countries outside the US and Canada.

The investor can get the index return up to a cap over a crediting period of either one year, three years or six years. As for downside protection, the investor can choose a buffer that exposes them to any loss beyond the first 10% over a one-year or three-year term, or zero loss over one year (with the S&P 500 Index only). Those who choose a three-year term can elect a downside buffer of 10% or 20%. Those who choose a six-year term can elect a 20% buffer.

The Tiered Participation Rate strategy is for people willing to commit their money for the maximum six-year term. The investor earns 100% of the index return up to a cap (20%, for example) and 130% of any gain above the cap. If the index rose 80% in six years, the investor would get 20% plus 78% (1.3 x 60%) for a total of 98% over six years. The product has a 10% buffer. In the Step-Rate strategy, available only with a one-year term, the investor earns a “step” rate (6%, for instance) if the index gain is positive but equal to or less than the step rate. If the gain exceeds the step rate, 90% of the total gain accrues to the investor.

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Misleading Statements, Failed Disclosures and Deficient Policies and Procedures

The view from Willis Re

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Going global

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The life of RILAs

RIAs and 401(k)s: Still elusive markets

Data Connection

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