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Most annuities bought to reduce investment risk: LIMRA

Posted on September 3, 2024 by Editorial Staff -

High interest rates and a sustained bull market in equities helped drive record sales for all types of retail annuities except traditional variable contracts in both the second quarter and first half of 2024, according to LIMRA’s U.S. Individual Annuity Sales Survey.

Industry wide, sales of U.S. annuities grew by 26% year-over-year to $109.9 billion in the 2^nd quarter of 2024 and by 20%, to a record $216.6 billion, in the first half of 2024, according to the survey, which covers 92% of the U.S. annuity market. All products but fixed immediate annuities grew by double-digits, compared with the same period in 2023.

“Annuity sales have experienced 15 consecutive quarters of strong growth and LIMRA is forecasting record sales in 2024,” said Bryan Hodgens, senior vice president and head of LIMRA research, in a release. “Favorable economic conditions, product innovation and the number of Americans turning 65 (PEAK65) have expanded financial professionals’ interest in talking about these products to their clients.”

LIMRA’s survey represents 92% of the total U.S. annuity market. LIMRA has been tracking insurance product sales since the 1980s.

Ironically, the LIMRA sales data shows that in the U.S. most annuities are purchased as protection from investment risk, not for longevity risk. Relatively low-selling SPIAs and DIAs are the only products here that are designed and purchased specifically for lifetime income.

“I would agree that most annuities are purchased as protection from investment risk, not for longevity risk,” Hodgens told RIJ in an email. “To further illustrate this, most fixed index and RILA contracts are being bought without a GLB (guaranteed living benefit). However, in recent quarters we have seen a slight uptick in consumers buying the GLB rider on FIAs and RILAs.”

Fixed-rate deferred
Total fixed-rate deferred annuity (FRD) sales were $40.7 billion in the second quarter, 33% higher than second quarter 2023 sales. YTD, FRD annuity sales totaled $83.7 billion, up 16% year over year. “FRD crediting rates, on average, continue to outperform CD rates, making them an attractive, short-term solution for risk-averse investors,” noted Hodgens.

“While a potential cut in interest rates may dampen the remarkable growth experienced over the past two years, there is a significant amount in FRD contracts coming out of surrender this year and LIMRA expects a portion of those assets to be reinvested in FRD products, driving total FRD sales to another strong year.”

Fixed indexed annuities
FIA sales totaled $30.7 billion, 21% higher than prior year and a record for a single quarter. Year-to-date (YTD), FIA sales were $59.3 billion, up 23% year over year.

“The equity markets have experienced quite a bit of volatility, and interest rates have remained high,” Hodgens said. “Investors have been interested in a solution that offers downside protection with upside growth potential, which FIAs offer.” Even if the Fed cuts interest rates this fall, he expects 2024 FIA sales to break the record set in 2023.

Registered index-linked annuities
For the fifth consecutive quarter, registered index-linked annuities (RILAs) saw record quarterly sales. In the second quarter of 2024, RILA sales were $16.3 billion, 43% higher than prior year. In the first half of 2024, RILA sales jumped 41% to $30.8 billion. Independent broker dealers, career agents and bank distribution logged double-digit growth, driving the record sales. LIMRA expects RILA sales to surpass $50 billion in 2024.

Traditional variable annuities
Strong equity markets drove the double-digit sales growth in the traditional variable annuity (VA) market. Traditional VA sales were $15.4 billion in the second quarter, up 16% year over year. YTD, traditional VA sales were $29.1 billion, an 11% gain year over year.

Income annuities
Single premium immediate annuity (SPIA) sales were $3.4 billion in the second quarter, level with prior year results. In the first six months of the year, SPIA sales improved 3% to $7 billion. SPIA sales are on track to meet or exceed the record sales set in 2023. Deferred income annuity (DIA) sales rose 21% to $1.3 billion in the second quarter. YTD, DIA sales jumped 30% to $2.5 billion.

Wink’s Annuity Sales & Market Report, 2Q2024

Posted on September 3, 2024 by Editorial Staff -

Total second quarter sales for all annuities were $109.6 billion; sales were up 3.7% when compared to the previous quarter, according to Wink’s Sales & Market Report for the second quarter of 2024.

The survey included 134 annuity providers and covered the multi-year guaranteed (MYG) annuity, traditional fixed annuity, indexed annuity, structured annuity, variable annuity, immediate income (SPIA), and deferred income annuity product lines.

Wink’s report identifies the top five overall sellers, the top five sellers in each annuity category, and the top-selling annuity contract in each category. Top overall, in order:

Athene USA (overall market share of 8.2%; 11.9% for non-variable deferred annuities)
MassMutual
Corebridge Financial
Equitable Financial
Nationwide

Massachusetts Mutual Life’s Stable Voyage 3-Year, a multi-year guaranteed rate annuity (MYGA), was the top-selling deferred annuity for the quarter, for all channels combined. MYGAs were the top-selling type of annuity for the quarter, at $41.0 billion (up 34.7% from the second quarter of 2023 but down 6.2% from the first quarter of 2024.

Total second quarter sales for all deferred annuities were $104.6 billion; sales were up 4.1% when compared to the previous quarter and up 31.2% when compared to the same period last year. Deferred annuities include the multi-year guaranteed annuity, traditional fixed, indexed annuity, structured annuity, and variable annuity product lines.

Total second quarter non-variable deferred annuity sales were $73.6 billion; sales were up 0.3% when compared to the previous quarter and up 31.2% when compared to the same period last year.

Total second quarter variable deferred annuity sales were $30.9 billion; sales were up 14.3% when compared to the previous quarter and up 31.2% when compared to the same period last year. Variable deferred annuities include structured annuity and variable annuity product lines in the Wink survey.

Data Connection

Posted on September 3, 2024 by No Author -

Honorable Mention

Posted on August 1, 2024 by Editorial Staff -

Milliman to offer Hueler Income Solutions to its recordkeeping clients

Milliman, Inc., the global consulting, actuarial, and benefits administration firm, has announced the introduction of a guaranteed lifetime income option for its 401(k) recordkeeping clients through Hueler Income Solutions’ Think Income program.

The new program enables Milliman’s defined contribution plan sponsors to provide their participants with seamless access to a lifetime income annuity marketplace. Participants can access educational tools and discover annuity options to fit their individual needs, then obtain real-time, competitive annuity quotes from top-rated insurance companies.

Hueler Income Solutions will answer participant questions and, if individuals choose to make an annuity purchase, provide assistance throughout the process. Milliman is a leading provider of consulting services, benefit administration, and employee communication. The firm has practices in healthcare, property and casualty insurance, life insurance and financial services, and employee benefits.

Hueler Investment Services, Inc. is the provider of the Hueler Income Solutions lifetime income platform that has been delivering lifetime income annuity products to the institutional marketplace since 2004.

The Income Solutions platform is made available directly to plan sponsor clients and other retirement plans through Hueler’s non-exclusive partnerships with leading financial services firms, fiduciary advisor platforms and non-profit member organizations.

Principal issues its second RILA

Principal Financial Group has launched Principal Strategic Income, a registered index-linked annuity (RILA) with a guaranteed lifetime withdrawal benefit rider, Secure Income Protector, the company announced in July. It is the second RILA that Principal has brought to market.

“For a lower cost than some traditional variable annuities with income riders,” a Principal release said, the Secure Income Protector rider offers two income options:

A level amount every year that never decreases
A tiered amount that provides higher income initially and then decreases if the account value reaches zero

Principal Strategic Income allows individuals to change their income option one time before they start taking income payments, providing flexibility should income needs change before their first withdrawal.

RILAs are structured securities that rely on the purchase of options on equity indexes to generate gains over specific time periods. The investor’s upside potential may be capped. Downside exposure is typically modified by a buffer (which eliminates losses up to but not beyond a certain percentage) or a floor (which eliminates losses beyond a certain percentage).

John Hurley joins Ibexis from Global Atlantic

Ibexis Life & Annuity Insurance Company has hired John Hurley as its Chief Distribution Officer and promoted Megan Easton to Vice President of Sales and Marketing, the fast-growing annuity issuer said in a release.

Hurley is responsible for retail sales and marketing efforts along with the management and development of distribution partnerships. He joins Ibexis from Global Atlantic, most recently serving as Global Atlantic’s vice president of National Account Management. Hurley started his career as an Internal Wholesaler and then Sales Manager at The Hartford.

Ibexis’ Financial Strength is rated A- (“Excellent”) by AM Best (4^th highest of 13) with a Stable Outlook, affirmed May 2024.

British regulators scrutinize ‘FundedRe’ in pension deals

Posted on August 1, 2024 by Kerry Pechter -

While US regulators and ratings agencies have shown little alarm about the financial reinsurance that private equity-led, US-domiciled insurers use to manage their capital requirements, the Bank of England’s Prudential Regulation Authority (PRA) is making noise about its use by British insurers.

The PRA, Britain’s principal financial regulator, told UK life insurers in late July that it has concerns about the “funded reinsurance” (FundedRe) that helps finance big pension risk transfer (PRT) deals—as swaps of defined benefit plans for private group annuities are commonly called. The PRA set an October 31, 2024 deadline for the boards of companies to report to the PRA on their firms’ FundedRe risk management efforts.

In a letter to the CEOs of UK life insurers, Gareth Truran, head of Insurance Supervision at the PRA, wrote, “PRA is concerned that the current growth in FundedRe transactions by UK life insurers could, if not properly controlled, lead to a rapid build-up of risks in the sector.

“This could arise through underestimation of the counterparty risks on UK insurers’ balance sheets, the capital requirements appropriate for these risks, or the risks of recapture of assets onto cedants’ balance sheets if a FundedRe counterparty were to default.”

A 23-page policy statement accompanied the letter. It said in part:

The PRA recognizes that reinsurance is an important part of risk management. However, in the context of funded reinsurance, the PRA’s concern is that counterparty risks may be underestimated as a result of the risk profile of the counterparties, the complexities of the arrangements, and the uncertainty around the effectiveness of management actions in stress.
The PRA recognizes that funded reinsurance arrangements can be used by firms as part of a diversified asset strategy. However the PRA considers that there are increased risks in connection with funded reinsurance, including from a systematic use of funded reinsurance as an integral part of a firm’s business model or from the use of more complex arrangements where it may be more difficult for firms to assess the full extent of risks involved.
Firms may identify some diversification benefits from their funded reinsurance portfolios which result in lower solvency capital requirements or make higher investment limits appropriate. These may include diversification between the cedant risk profile and the counterparty’s risk profile, diversification between the collateral portfolio and the counterparty’s asset portfolio, and diversification between the collateral portfolio and the cedant’s asset portfolio. Conversely these transactions may also generate material increased risks and a heightened level of uncertainty of risk in stress, for example by impacting the collateral quality, liability valuation, risk of contract recapture, and risk of multiple counterparty failure within a firm’s portfolio.
Without material improvements, the PRA is concerned that UK insurers may use FundedRe, in volume and complexity, in a way that is not consistent with prudent risk management.
If, in future, we consider that firms are not achieving our expectations on the risk management practices needed to mitigate the risks FundedRe poses to our objectives, we will consider whether it is appropriate to take further action such as exercising any of our powers under the Financial Services and Markets Act (FSMA) 2000 to address those risks, including supervisory powers under section 55M and rule-making powers. This could include, for example, consideration of explicit regulatory restrictions on the amount and structure of FundedRe, or measures to address any underestimation of risk, or regulatory arbitrage, inherent in these transactions.

Truran’s letter mapped out the PRA’s expectations of insurance company boards:

“We expect the boards of UK life insurers using, or considering using, FundedRe to consider the implications of SS5/24 and to provide their PRA supervisor, by 31 October 2024, with the following:

Self-assessment analysis: An assessment of your firm’s current risk management practices against all the expectations set out in SS5/24. This should include a justification if there are areas where your firm has not aligned fully with the expectations of the SS but where its implemented framework is considered to achieve the same outcome.
Limits: A summary table of your firm’s board approved FundedRe limits for individual counterparties, for correlated counterparties and your firm’s aggregate limit.
Remediation activities: A summary, including a timeline consistent with the implementation approach detailed in the previous section, of the activities that your firm has carried out and intends to carry out to meet the expectations set out in SS5/24.
Level of confidence in the modeling: An overview of the perceived level of confidence achieved in your internal model output, at a transaction level, and how this has been used to shape your FundedRe investment limits.
Risk appetite: An overview of what steps your board has taken to limit its risk appetite for the amount and complexity of FundedRe transactions over the coming months, where gaps exist against the expectations set out in SS5/24.

Private credit holdings of US life/annuity firms reach $1.7 trillion: AM Best

Posted on August 1, 2024 by Editorial Staff -

Private credit holdings of US life/annuity insurers grew at the rate of 5.7% in 2023 to nearly $1.7 trillion, after increasing around 10% annually from 2019-2022, according to a recent AM Best Special Report, “Asset Manager Relationships Lead Insurers’ Shift to Private Credit.”

Collateralized loan obligations (CLOs) and other non-mortgage-backed structured securities were the main driver of growth, the report said, noting that “This shift has also coincided with more insurers having private equity/asset managers (PE/AMs) that hold controlling interests along with investment manager subsidiaries.”

Private credit now accounts for 44% of the bonds held within the insurance industry, compared with about 27% in 2013, the report said. Over 41% of U.S. L/A insurers outsourced more than 10% of their invested assets in 2023, up from just under one-third of companies in 2016.

Bank regulations tightened after the Great Financial Crisis, and bank lending to high-risk companies dropped. PE/AMs have stepped into the lending vacuum. Many PE/AM firms now specialize in designing high-yield customized “leveraged loans” for high-risk borrowers.

Private equity firms continue to enter the L/A market through outright acquisitions of insurance companies or through minority investments in insurers, or by managing life insurer assets to generate fee income, the report said.

The investment firms use life insurers as platforms to obtain new assets to manage. This includes “permanent capital” (from the sale of long-dated deferred annuity contracts) and blocks of annuity or life insurance business (purchased from other insurers). PE/AMs also earn fee income from managing all or part of an insurance company’s investment portfolio.

Many PE/Ams practice what RIJ calls the “Bermuda Triangle” strategy. This business model involves transferring liabilities to offshore reinsurers through “modified coinsurance.” Such reinsurance can reduce the demand for new capital that typically follows rapid annuity sales growth.

RIJ asked AM Best to describe the purpose of this type of reinsurance, and how it plays into AM Best ratings reviews. “As part of AM Best’s analysis, we factor in a carrier’s reinsurance program, including its appropriateness, dependency and quality (i.e., counterparty credit),” AM Best managing director Ken Johnson said in an email.

“[Our] analysis attempts to factor in the entire consolidated balance sheet, including a stress of recapturing what may be considered riskier/less-liquid assets and ‘lower’ reserve levels. Additionally, reinsurance to unauthorized companies requires collateral to be posted, usually 105% of reserves, thereby limiting potential profitability.”

Johnson acknowledged the “capital efficiency” that PE/AM insurers obtain when using reinsurers in Bermuda or the Cayman Islands, where the accounting standards are more flexible than in the US.

“Many constituents believe that other non-US jurisdictions are somewhat less restrictive in the choice of asset allocation,” he wrote. “This is coupled with the potential to value liabilities somewhat less conservatively than in the United States. For example, by using a Best Estimate actuarial approach.

“One can debate whether the U.S. is too conservative and maybe a Best Estimate approach (lower reserves) is more in line with the actual exposure. But for now, the effect is a form of capital efficiency.”

Vacant buildings, overdue mortgages

In other news from AM Best, U.S. life/annuity (L/A) insurers continued to increase allocations to commercial mortgage loan portfolios in 2023, but problem loans, including those 90 days delinquent, again rose sharply.

According to Best’s Special Report, “Mortgages 90 Days Overdue Double,” L/A insurers expanded their allocations to mortgage loans last year by more than 6% to $734.2 billion, with mortgages now accounting for 13.5% of the segment’s investment portfolios.

New acquisitions were fueled largely by multi-unit (28%), residential (26%), and industrial property loans (18%), accounting for over 70% of new acquisitions in 2023.

“Although yields rose in 2023, so did the number of problem loans, which have been climbing steadily since 2020, and were up by nearly 44% in 2023,” said Jason Hopper, associate director, AM Best, in a release. “The total amount of mortgages 90 days delinquent doubled, while those in the process of foreclosure were 63% higher than in 2022.”

According to the report, office properties account for more than a quarter of overdue loans and those in foreclosure. Almost half of those that have been restructured but constitute just 17% of total mortgage portfolios. Office loans have recently faced headwinds due mainly to the impact of the pandemic and an increase in remote work.

The report also noted that the quality of mortgages in good standing continued to deteriorate in 2023, as economic conditions impacted debt service coverage and loan-to-value ratios. “This had resulted in a ‘fallen angels’ scenario that happens when loans migrate down the credit scale,” Hopper said. “This trend is likely to continue until the market becomes more stable as a result of interest rates and loan maturity.”

RIJ Launches the 401(k) Income Research Center

Posted on July 31, 2024 by Kerry Pechter -

Many sponsors of 401(k) plans now recognize that they should do more to help older participants prepare to turn their tax-deferred savings into retirement income. But sponsors face a potentially overwhelming number of possible ways to fulfill that responsibility.

To help educate employers and their advisors about retirement income solutions, Retirement Income Journal has created a “401(k) Income Research Center.” We envision a living library where plan sponsors, advisors, attorneys and others can learn about “decumulation” products and processes.

The library will eventually include links to (but not limited to):

White papers from fund companies and life/annuity companies
Relevant articles from Retirement Income Journal
Guidance and opinions from regulatory agencies
Court filings
Academic research
“Safe harbor” provisions in SECURE Acts
Income product fact sheets from life/annuity companies
Links to relevant training programs or professional certification
Respected books on retirement income planning
Tools for comparing-and-contrasting annuities
Links to vetted service providers

Annuities, which are not widely understood, will be a prominent topic here. Like retail annuities, institutional annuities vary significantly in character. There are “in-plan” that participants can contribute to while they are working. There are “out-of-plan” income annuities that participants can purchase after “rolling” their savings into IRAs. That’s just the beginning of their distinctions.

The differences in annuities are not superficial. My book for consumers, Annuities for Dummies (Wiley, 2023), maintains that retail annuities are best understood as different financial instruments with certain features in common, rather than as a single type of financial instrument with variations. This principle applies to institutional annuities as well.

Some savings-to-income tools don’t involve annuities. Instead, they help retirees make regular transfers (“systematic withdrawals”) of money from their plan accounts to their personal bank accounts. Too few plan recordkeepers currently provide this service. Even fewer provide it without the friction of fees.

It would be easier for plan sponsors and their advisers to re-tool 401(k) plans for retirement income payments if not for three subtle issues:

First, the 401(k) system is voluntary; employers are under no mandate or pressure to offer retirement plans (though some states now require most employers to offer Roth “auto-IRAs”), let alone outfit them with income-generation tools.
Second, 401(k) plan sponsors have “fiduciary” responsibilities that can (the SECURE Acts notwithstanding) make them accountable not only for the prudence and reasonableness, but even for the unforeseeable effects, of their decisions. That leaves them vulnerable to class-action lawsuits from the plaintiffs’ bar.
Third, fund companies and annuity issuers naturally offer income solutions that reflect their own needs and priorities. Regulators have not established, vetted, or blessed any particular solution as a “standard” that might guide the decisions that plan sponsors and their advisors will need to make. (In fact, they’ve been urged not to do so.)

We expect readers to come not only from the 401(k) plan advisor community but also from service providers that compete for plan advisors’ attention in this niche. If your company has a document to add to the library, we welcome it. Opportunities will be available on the site for service providers to display their logos and include links to their websites. Click here to enter the site.

Recurring Idea: Give the ‘Tax Expenditure’ to the Poor

Posted on July 31, 2024 by Kerry Pechter -

Economists at the Penn Wharton Budget Model recently measured the potential economic impact of a proposal to eliminate the income tax break for contributions to 401(k) and 403(b) plans and redirect the windfall into retirement savings accounts for low-income Americans.

Under such a plan, the government would contribute $2,000 to $2,500 to new retirement accounts for workers who qualify for the Earned Income Tax Credit (EITC). It would finance the new accounts by ending the estimated annual $180 billion cost of savings incentives awarded to participants in employer-sponsored plans.

Overall, such a program would be a fiscal wash, PBWM analysts found; it would cost and save the government about $1.25 trillion over 10 years. (Like the Congressional Budget Office and the Tax Policy Institute, the PWBM estimates the fiscal effects of new spending proposals.)

“We analyze a new illustrative policy to create automatic retirement savings accounts for more than 56 million low- income Americans by 2030,” the PWBM report said. “The program is fully financed by removing the gross income adjustment for traditional 401k and similar retirement accounts without any additional contribution from households or employers.”

A typical low-earner would accumulate about $125,000 (in current dollars) in one of the new accounts over 41 years, assuming a growth rate of 3%. Maximum accumulations might reach $150,000 to $200,000. The report didn’t specify how the money might be invested. To qualify for the EITC, a worker and head of household would need to earn less than about $64,000 per year.

Kent Smetters

“We are using risk-adjusted returns to project accumulations,” PWBM director Kent Smetters told RIJ in an e-mail. “For example, the government could just enroll people at the Federal Government’s Thrift Savings Plan that is externally administered.”

In PWBM’s hypothetical, account holders would have no access to the money until age 65, when they could spend it as they wish. Survivors of deceased savers would receive the current value of the account as a death benefit. “Private providers could even provide annuity options for these accounts,” Smetters added.

“To be clear, we are not advocating for the illustrative policy,” Smetters said. “We are only showing how it could be done in response to numerous requests from members [of Congress] about how to increase low-income household saving.”

Third-rail of private retirement

The retirement industry, represented by such trade groups as the American Retirement Association, the Insured Retirement Institute and the Investment Company Institute, would surely disagree with that sentiment.

If Social Security is the third-rail of American politics (“Touch it and you’ll die”), the tax incentives for individual contributions to hundreds of thousands of private, voluntary, employer-based retirement savings plans is an untouchable foundation of the financial industry that serves those plans and its participants.

For high-earners, the tax deduction is a potentially powerful savings magnet. The 401(k) contribution limit has grown to $23,000 for employee contributions and $69,000 for combined employee and employer contributions in 2024. Workers age 50 or older are eligible for an additional $7,500 in catch-up contributions, raising the employee contribution limit to $30,500. The IRS has further details.

No one denies that tens of millions of Baby Boomers and Gen-Xers have under-saved for retirement and are at risk of reaching retirement without sufficient sources of income to complement their Social Security benefits—which themselves could drop after about 2034.

But there’s wide disagreement on how to solve that problem. Federal approval of behavioral “nudges” such as auto-enrollment into employer-sponsored plans and auto-investment into target date funds have not moved the savings needle. Outcomes from state-mandated “auto-IRAs” in California, Oregon and other “blue” states have been uneven and faced resistance from the Trump administration.

“It is obvious that the PPA (Pension Protection Act of 2006, which allowed auto-enrollment) and the QDIA (Qualified Default Investment Alternatives, such as TDFs and managed accounts) have fallen short of expectations. So, policymakers are trying to figure out real solutions,” Smetters told RIJ.

Between 1989 and 2022, the PWBM report says, Americans in the lowest 80% of the income distribution “saw the average value of their retirement accounts grow slower than the value of the stock market itself.” Over the same period, those with below-median income fell farther behind the top half.

According to Smetters, redistributing the expenditure on tax incentives from the employer-sponsored system would not discourage high-earners from saving excess income and would not reduce their annual after-tax income by more than about 2%.

Other views

An article in NAPANet, an online publication of the American Retirement Association, criticized the PWBM study as “Another Call to Completely Up-End the Country’s Private Retirement System.” Another NAPANet article objected to the “Retirement Savings for Americans Act” sponsored by Sen. John Hickenlooper (D-CO), which also proposed to subsidize retirement savings accounts by directing tax expenditures away from 401(k)s.

Smetters is perplexed by the reaction. “I can’t see why the private sector would fret over this change,” he wrote in an e-mail. The higher accumulations of low-income workers would, in his opinion, offset any reduction in savings by high-income plan participants.

“Almost certainly, total retirement assets in the economy would increase since higher-income people losing the tax benefit will not reduce their retirement savings dollar-for-dollar,” he said. “It would be absurd to think that the savings by high-income workers would fall by the entire amount of the maximum tax deduction, that is, by $7,500. As such, total retirement savings summed across all income groups should increase since the $7,500 is being invested in low-income worker accounts.”

Other economists have urged the creation of universal savings accounts. In 2015, Teresa Ghilarducci of the New School and Hamilton “Tony” James, former chairman of Blackstone, proposed a universal Guaranteed Retirement Account that was endorsed by the Tax Policy Center.

“The idea of universal pensions has been discussed since the Carter administration and even earlier, reflecting a long-standing awareness of the need for a robust, inclusive retirement system. Given the maturity of the 401(k) system—now over 40 years old—it’s clear that while it was designed to enhance retirement savings, it has disproportionately benefited higher earners due to its voluntary and individual-directed nature,” Ghilarducci told RIJ in an email.

Inequality in the incomes and wealth accumulations of Americans is well-documented. Virtually all financial wealth is concentrated among the richest 10%. These inequities are mirrored by disparities in savings in retirement plans.

Vanguard’s annual report, “How America Saves,” perennially shows low median retirement plan savings (under $90,000) among participants ages 65 and older in plans Vanguard administers. Since employers are not mandated to offer retirement plans to their employees, only about half of American workers have retirement plans at work at any given time. Between 60% and 70% of US families have retirement accounts, according to the 2023 Federal Reserve’s Survey of Consumer Finance (SCF).

The median combined IRA and DC pension account balance for families with plans was about $87,000 in 2022; the average was $334,000, according to the SCF. Among families in the bottom 50% of the distribution, the average balance decreased between 2019 and 2022, to $54,700 from $66,600. The average was $226,700 for the upper-middle income group and $913,300 for the top 10%. The median and average net worth of households ages 65 to 74 in 2022 was $410,000 and $1.8 million, respectively.

Along with disparities in the quantities of accumulations by Americans of different income levels, sharp disparities exist in the quality of the retirement plans themselves. This is true even though all 401(k) plans share the same alphanumeric name and all are governed by the Employee Retirement Income Security Act of 1974.

Large corporations and institutions tend to match at least part of employee contributions. Some even make “discretionary” contributions and/or profit-sharing distributions to participants in addition to a match. Smaller employers, if they offer plans, may offer plans with relatively high-cost investments, little or no “match,” and no discretionary contribution.

High rates drive high interest in annuities: LIMRA

Posted on July 31, 2024 by Editorial Staff -

Total U.S. annuity sales were $215.2 billion in the first half of 2024, up 19% from prior year results, according to preliminary results from LIMRA’s U.S. Individual Annuity Sales Survey, which represents 92% of the total U.S. annuity market.

This figure signifies a new record for sales in the first six months of a year since LIMRA started tracking sales in the 1980s.

In the second quarter, total annuity sales increased 25% year over year to $108.5 billion. This is the second highest quarterly total ever recorded, just shy of the quarterly sales record set in fourth quarter 2023. Every product line except fixed immediate annuities posted double-digit gains.

“Annuities have benefited from the favorable economic conditions and the Federal Reserve not cutting interest rates this year. We also believe demographic trends and a growing awareness of unique value proposition annuities offer have shifted the U.S. annuity market post pandemic, resulting in 15 consecutive quarters of strong sales growth.” said Bryan Hodgens, senior vice president and head of LIMRA research, in a release.

Fixed Indexed Annuities (FIA)
FIA sales totaled $29.7 billion, 17% higher than prior year and a record for a single quarter. Year-to-date (YTD), FIA sales were $58.3 billion, up 20% year over year.

“Investor interest in products that offer downside protection with upside growth potential remains high. To put these results into perspective, just two years ago, FIA sales were $10 billion lower than the second quarter 2024 results,” noted Hodgens.

“Even with the prospect of possible rate hikes later this year, LIMRA expects FIA product sales to remain strong through 2024 and possibly eclipsing the record set in 2023.”

Registered Index-Linked Annuities (RILA)
For the fifth consecutive quarter, RILAs saw record quarterly sales. In the second quarter of 2024, RILA sales were $16.2 billion, 42% higher than prior year. In the first half of 2024, RILA sales jumped 41% to $30.7 billion.

“For the third consecutive quarter, RILA sales have outpaced traditional variable annuity sales. More than a half dozen carriers have launched or enhanced their RILA products in the first half of the year. LIMRA is forecasting RILA sales to surpass $50 billion in 2024,” Hodgens said.

Fixed-Rate Deferred (FRD)
Total FRD sales were $40 billion in the second quarter, 32% higher than second quarter 2023 sales but down 7% from first quarter 2024. YTD, FRD annuity sales totaled $83.1 billion, up 15% year over year.

“While many may think the surge in FRD sales is from replacement contracts, our data suggests two-thirds of sales are coming from new money. After years of ultra-low interest rates, LIMRA believes conservative investors, who were sitting on the sidelines reluctant to lock in low rates, have poured money into the market as rates rose over the past two years,” said Hodgens. “While the margin has shrunk, FRD crediting rates, on average, continue to outperform CD rates, making them still the most attractive, short-term solutions for risk-adverse investors.”

Traditional Variable Annuities (VA)
In response to the S&P market growing nearly 10%, traditional VA sales rose 18% in the second quarter to $15.6 billion. YTD, traditional VA sales were $29.3 billion, a 12% gain year over year.

Income Annuities
Despite the Treasury’s 10-year interest rate averaging above 4.4% in the second quarter, single premium immediate annuity (SPIA) sales fell 9% year over year to $3.1 billion in the second quarter. In the first six months of the year, SPIA sales dropped 2% to $6.7 billion.

Deferred income annuity (DIA) sales soared 62% to $1.7 billion in the second quarter. YTD, DIA sales jumped 53% to $2.9 billion.

Preliminary second quarter 2024 annuity industry estimates are based on monthly reporting. A summary of the results can be found in LIMRA’s Fact Tank.

The top 20 rankings of total, variable and fixed annuity writers for the first half of 2024 will be available in mid-August, following the last of the earnings calls for the participating carriers.

Should Participants Get Lifetime Income By ‘Default’?

Posted on July 31, 2024 by Kerry Pechter -

If you have a stake in the sale of annuities to 401(k) plan participants, then the testimony offered at the ERISA Advisory Council’s (EAC) July 10-12 meetings on “Lifetime Income and Qualified Default Investment Alternatives” (QDIAs) may interest you. I attended by Zoom.

QDIAs, as most RIJ readers will know, are the investments that, under pension law, retirement plan providers are allowed to direct the contributions of auto-enrolled participants into. The most popular QDIAs are target date funds (TDFs). TDF assets reportedly account for half of the $7.4 trillion in 401(k) plans.

One promising path to embedding annuities into 401(k)s is to graft income-producing sleeves onto the TDF root stock. Several TDF providers have partnered with annuity issuers to bring “hybrid” TDF-annuities to the 401(k) market.

These asset managers and insurers are betting on a future where participants who have been auto-enrolled into plans, and who auto-contribute to TDFs, will automatically begin funding their deferred annuity sleeves at about age 50. At age 65, they can choose to convert (or not convert) the sleeves into guaranteed income.

Doubts remain

The SECURE Act of 2019 appeared to indemnify plan sponsors from legal liability for choosing an annuity provider that unforeseeably goes bankrupt someday. But the law doesn’t make all plan sponsors feel safe from potential lawsuits, like those filed this year against AT&T, GE and Lockheed Martin for selling their pensions to Athene.

While a 2014 letter from the Department of Labor smiled on the grafting of deferred annuities onto existing QDIAs, some legal advisers to plan sponsors want the DOL to tweak its definition of QDIA to give sponsors more legal cover for adopting hybrid investment/income solutions that include annuities.

Hence the testimony on that topic in the July EAC meeting. The meeting was chaired by Jack Towarnicky, former president of the Plan Sponsor Council of America. The 15 members of the EAC come from a range of professional backgrounds, and represent many different perspectives on benefits-related issues.

In 2023, the council heard testimony on IB 95-1, a 30-year-old DOL bulletin that requires plan sponsors to choose the “safest available annuity” when replacing a defined benefit pension with a group annuity issued by a life insurer. The EAC subsequently advised the DOL not to change IB 95-1, and acting Secretary of Labor Julie Su sent that advice on to Congress last June.

Testimony at last month’s EAC meeting showed that many thorny conflicts will need to be resolved before deferred annuities become a common 401(k) investment menu item, let alone part of one of the QDIA investments that plan sponsors can “nudge” their participants into.

Here are selections from the testimony I heard on July 10, 11 and 12:

What employer/plan sponsors are saying privately. “Employers seem to want to improve retirement outcomes for their former employees. They’re not saying, ‘This is not our problem.’ But there are still an overwhelming majority of DC plan sponsors who are not taking action with respect to retirement income solutions. To be an early adopter is to make the plan look like an outlier and draw the attention of plaintiffs’ attorneys. The administrative complexity of annuities is another concern,” testified Gregory Fox, partner and head of Retirement Income Solutions at Aon Investments USA.

“Cost is a third concern. There’s the cost of selecting an annuity and monitoring the performance of the annuity. There’s the cost of formulating a governance process. That’s on top of the fee levels of the products themselves, which may not be transparent. How does a plan sponsor determine if a non-transparent cost is reasonable or not? [Regarding participants] there’s been limited adoption by participants in the plans that have adopted annuities. When the annuity requires an ‘opt-in’ by participants, we haven’t seen many participants take action. If the annuity requires engagement at the point of retirement, the jury is still out on whether we’ll see uptake by retirees.”

The multiple plans problem. “401(k)s are mid-career accumulation vehicles” that don’t naturally lend themselves to retirement income planning, said Brad Campbell, attorney at Faegre Drinker and former head of the DOL’s Employee Benefit Security Administration, or EBSA.

Changes in the QDIA regulation could help plan sponsors pick a drawdown mechanism that would pose the sponsors no legal jeopardy, but it wouldn’t help retired couples turn multiple qualified plan accounts into a suitable retirement income plan. My wife and I might have three plans, and we might be offered three entirely different distribution solutions, none of which makes sense as a cohesive or coherent whole.”

Let competition produce solutions. “There is a population of participants that would benefit from an in-plan income stream. The research bears that out. And the marketplace is developing new products and new middleware and is addressing the shortcomings and downside risk,” said Tom Clark of the Wagner Law Group, which advises plan sponsors on legal risks.
“If any (or all) are too expensive or not transparent enough or not portable enough, [plan sponsors] will push back and the marketplace will adjust and continue to evolve. And there are certainly approaches that can be taken in delegating to a 3(38) investment manager to lower the exposure for plan sponsors. Not eliminate it, but lower it.”

A menu of income-generation options. “Choosing a life insurer is a permanent decision,” Fox said. “Even if a plan sponsor replaces a life insurer, a participant’s benefits will still come from the old company. That’s a cause for concern. That’s why it will be important to diversify the types of distribution solutions. Not everyone will be drawn to a guaranteed solution. One solution won’t be the magic wand. Instead, it might be better to have three or four different income options in the same menu. That’s where we think this trend will go.”

Sponsors need more protection from litigation risk. A better safe harbor “would be look like the IB 95-1 set of criteria,” said Fox. “It would be more prescriptive of the plan sponsor’s process in formalizing its relationship with an annuity provider. That would give plan sponsors more comfort, and provide familiarity. In the absence of specific evaluation criteria—more than a one-pager—the SECURE Act doesn’t feel like really good protection from litigation risk. We need a more prescriptive process.”

‘Portability is big.’ “Plan sponsors don’t want to be the first or last [adopters of annuities],” said Mercer’s Preet Prashar. “They want to be in the middle, when programs have already been debugged and problems have been addressed. Then there’s the infrastructure matter. Portability is big. They don’t want to feel locked in with a certain recordkeeper. That would add another layer of comfort [to adopting annuities].”

Annuities aren’t the only way to generate retirement income. “All lifetime income is retirement income, but not all retirement income is lifetime income. Some solutions aren’t guaranteed,” said Fox. The current focus on annuities, he suggested, risks over-complicating the income distribution challenge. There are lots of simpler solutions, like making it cheaper and easier for retirees to take withdrawals from their plan accounts. “Participants need more withdrawal functionality from recordkeepers.

“If I’m retired and still invested in my plan’s TDF, how many different ways will I be able to pull money out? Can I set a fixed periodic withdrawal percentage, a fixed withdrawal amount, a rolling average of my account value, a method that smooths the volatility of my withdrawals? There is an infinite number of ways to produce income without adding a single new investment option. Those solutions have nothing to do with guarantees. There are more elegant ways for DC plan participants to think about their savings in terms of retirement income.”

Plan recordkeepers can’t absorb the cost of more withdrawal functionality. “A tension that we identified was that recordkeepers are struggling with a low margin business. So the majority—a modest majority—of recordkeepers charge fees for periodic withdrawals. So when we asked if they’re ready to cut withdrawal fees, they said no, they’re financially constrained from doing so. But they said that if it’s part of a long-range change [in plan design], then it may be possible to waive those fees,” said Lew Minsky, CEO of the Defined Contribution Institutional Investors Association, which recently surveyed plan recordkeepers regarding 401(k) income solutions.

“We’re putting a lot on plan sponsors,” Minsky said. “Waiting for them to focus on retirement income isn’t productive. And when you’re talking about sponsors, especially in terms of desire for retention of assets, it’s a tale of two markets: Large and ‘jumbo’ plans versus smaller plans.” The income challenge is complex, he said, and “complexity seems to be associated with inaction. Once you encounter complexity you raise the fear of litigation.” As a plan provider, you want to “make yourself as small a target [for litigation] as possible.”

The why-go-there perspective. “I don’t believe annuities should be included in plans and definitely not in a QDIA. ERISA doesn’t require plan sponsors to offer annuities, so why go there?” said James Watkins, an ERISA attorney who advises plan sponsors. Louisville attorney Christopher Tobe, another plan sponsor adviser and Watkins’ fellow contributor to Commonsense401kproject.com, was equally negative about annuities in 401(k)s. “Fees are already a major drag on balances. You don’t need to annuitize your 401k balance. Just say how much you want to take out a month. I’m perplexed why people would want to put an annuity in a QDIA.”

Keep the status quo? “When we look at its impact on the accumulation phase, the QDIA has been a success,” said Charles B. Wolf, an EAC member and retired Chicago attorney who advised employers on retirement plans. “Now we are all asking whether QDIA should be tweaked to address the retirement income gap. I’m hearing that currently, maybe we shouldn’t do anything new and should continue to treat the decumulation phase in the same manner as now.”

Can’t afford to ignore longevity risk. “If as a society we do nothing to proactively solve for this gap in the average person’s ability to spend down their savings and not outlive their savings, then we will have to reactively solve for it,” Aon’s Fox said. “Whether it’s a matter of changing the QDIA regulations or of protecting employers from litigation, the answer is not that we should do nothing right now.”

Data Connection

Posted on July 30, 2024 by No Author -

Bond Allocations of PE-Led and Non PE-Led Life Insurers

Posted on June 30, 2024 by No Author -

Offshore Regulatory Arbitrage by US Insurers Explained

Posted on June 29, 2024 by Editorial Staff -

“Regulatory arbitrage” has been cited by RIJ and others as a reason for the use of Bermuda reinsurance private equity-led U.S. life/annuity companies. But what does that jargonish expression mean in this context? Indeed, it would take an expert in international accounting rules to explain it accurately.

Moody’s does the necessary explaining in “Regulation contributes to material differences in private credit allocation,” one of the ratings agency’s Sector-in-Depth reports, published in May. The report is essential reading for anyone trying to understand the offshore leg of the “Bermuda Triangle” strategy.

“To highlight how variations in regulatory capital requirements and reserve calculations play a role in shaping life insurers’ investment choices,” Moody’s analysts compared and contrasted regulatory capital regimes in the U.S., Bermuda, Europe and Japan, as well as U.S. life insurers’ investment portfolio allocations in each jurisdiction.

Moody’s report clarifies the link between cross-border accounting maneuvers and life insurers’ investments in risky private assets. U.S. accounting rules, with their higher risk-related capital requirements, can make it uneconomical for private equity-led insurers to hold as much illiquid, opaque, customized, and high-yielding assets as they hope to. “whose regulatory treatment is unclear.”

“The development of new investment vehicles whose regulatory treatment is unclear, along with a release of capital under certain transactions as insurers transfer assets and liabilities among various jurisdictions, notably from the US to Bermuda, are pushing regulators to increase their scrutiny of reinsurance transactions and private credit assets,” the report said.

Moody’s notes that the accounting “regime in Bermuda tends to allow for a higher discount rate than other jurisdictions” and that this “directly impacts the level of liabilities and therefore an insurer’s level of available capital (the difference between the value of an insurer’s assets and the value of its liabilities). The more insurers can discount their liabilities, the stronger their solvency ratios are.” The unanswered question: Are they stronger in fact or only on paper?

“US life insurers have been increasing their allocation to private credit, an evolving asset class that includes private corporate lending, notably to middle-market companies owned by private equity. Private credit also includes various types of private financing, such as real estate and infrastructure projects, as well as private loans against a vast array of assets that can be grouped under the term asset-backed finance (ABF),” the report said.

“As of year-end 2022, U.S. life insurers held more than $4.5 trillion in total cash and invested assets in their general accounts, of which at least $1.5 trillion (35%) was invested in illiquid and private assets. These assets are concentrated in mortgages (17%) and securitized assets (16%), with noticeable growth in collateralized loan obligations (CLOs), which represent between 3%-4% of total cash and invested assets.”

On the one hand, regulatory arbitrage reduces capital requirements, giving life insurers “improved capital efficiency.” But in the process it can raise the degree of leverage in the insurance business, making it systemically more sensitive to a downturn in asset prices or a credit crunch. Moody’s report shows that both the NAIC in the US and the Bermuda Monetary Authority have written revised regulations that take effect this year. RIJ will report on those changes in future articles.

Moody’s defines private credit as:

“Non-bank lending to mostly private-equity owned, middle market companies that are not publicly traded or issued. This can be distressed or opportunistic and is typically below investment grade. For insurers, these asset classes form the minority of private fixed income investments.

“Our definition also includes significant exposure to classes such as real estate, including commercial mortgage loans, and infrastructure lending and private placements with corporate [bonds], which are typically investment grade and where most insurers invest, and other asset-based finance. Private credit offers incremental return, often referred to as ‘illiquidity premium,’ over equivalent publicly traded assets which have additional liquidity and market transparency.”

What Recordkeepers Think about 401(k) Annuities

Posted on June 28, 2024 by Kerry Pechter -

When we talk or write about embedding payout options in 401(k) plans—annuities, systematic withdrawal processes, etc.—the role of recordkeepers doesn’t always get as much attention as the roles of plan sponsors, plan advisers, life/annuity companies, asset managers or participants.

There are a couple of reasons for that. Plan recordkeeping is a back-office or middle-office service, ideally as invisible as America’s electrical grid or its interstate pipeline system. Some recordkeepers are also full-service plan providers; keeping track of data is only part of what they do.

But the savings-to-income revolution in the 401(k) industry that the SECURE Acts of 2019 and 2022 prodded forward, and for which many financial and fintech companies have geared up, depends in part on the ability of the recordkeepers to support it.

The Retirement Research Center of the Defined Contribution Institutional Investment Association (DCIIA), a Washington, DC-based trade group, recently conducted a survey of recordkeepers to measure their progress toward facilitating income options in 401(k) plans.

The results of the recently-published survey showed that:

61% of recordkeepers offer at least one annuity
33% offer only one type of annuity
28% offer two or more annuities
39% do not offer any annuities
GLWB (guaranteed lifetime withdrawal benefit) is the most frequently offered, especially among recordkeepers offering only one annuity option.

Regarding recordkeepers’ future plans to accommodate “in-plan guaranteed solutions” (i.e., annuities to which participants contribute while working), the survey showed that:

61% of recordkeepers are considering a process for offering a deferred annuity with a GLWB; of those, 80% expect to implement it within the next six to 18 months.
50% of recordkeepers are considering a process for offering income annuities (single premium immediate annuity, deferred income annuity or qualified lifetime annuity contract); of those, 89% expect to implement it in six to 18 months.
28% are considering a process for offering a fixed deferred annuity; of those, 64% expect to implement it in six to 18 months.

With respect to non-guaranteed income solutions, such as systematic or ad hoc withdrawal plans, the survey showed that:

94% of recordkeepers currently offer fixed-dollar withdrawals
76% currently offer fixed-percentage withdrawals
65% offer withdrawals based on life expectancy
18% offer withdrawals of interest and/or dividends
73% charge an additional fee for partial or ad hoc distributions

Calamos Structured ETFs: An alternative to FIAs

Posted on June 28, 2024 by Editorial Staff -

There are non-insurance alternatives to fixed indexed annuities (FIAs) as savings vehicles For cautious who want to eliminate all risk of investment loss on part of their portfolio but fear “missing-out” on a stock market rally, there’s a non-insurance solution.

So-called “structured ETFs” deliver “protected growth” through the purchase of a bracket of options on an equity index that’s stripped of its dividend yield, such as the S&P 500 Price Index. (The cost of options on price indexes is less than the cost of options on total return indexes).

The Calamos Structured Protection ETFs suite from Calamos Investments claims to do that. The one-year contract issued on May 1, 2024 provided 100% principal protection and a maximum credited interest of 9.81% at the end of the term, less a 0.69% expense ratio.

The options strategy of a structured ETF works a bit differently from the options strategy of an FIA. When building an FIA, a life/annuity insurance company invests most of a client’s principal in the company’s general account; it uses only about 4% of principal (depending on prevailing corporate bond rates and other factors) to buy options on an equity index.

With the Calamos structured ETF, most of the client’s principal goes to the purchase of options on the S&P 500 Price Index. The options strategy has three steps:

Purchasing a one-year near zero-strike (i.e., deep in-the-money) call on the S&P 500, at a pre-determined strike price. This achieves full exposure to the price return of the S&P 500. It costs about 98% of portfolio value.
Purchasing an at-the-money put option. This protects the principal against loss. It costs about 4% of portfolio value.
Selling an out-of-the-money (OTM) call that sets the cap rate and brings in enough added revenue to finance the purchase the deep-in-the-money call and the at-the-money put.

Calamos claims that saving with its Structured Protection ETFs is more tax-efficient than saving with FIAs. While FIA gains are subject to ordinary income tax (up to 37%) when withdrawn, gains on one-year structured ETFs are taxed at long-term capital gains tax rates (up to 20%).

ETFs are also more liquid than FIAs; are not subject to counterparty risk; have explicit, transparent pricing; have no investment minimums are price and are generally easier to trade and incorporate into a portfolio, according to Calamos.

MetLife and Micruity expand their DC savings-to-income IT partnership

Posted on June 28, 2024 by Editorial Staff -

Micruity, a Toronto-based fintech, said it has expanded its collaboration with MetLife, Inc., which offers the MetLife Guaranteed Income Program and MetLife Retirement Income Insurance QLAC to defined contribution retirement plan participants.

The two firms have already worked together on connecting MetLife’s retirement income services with Fidelity’s Guaranteed Income Direct and State Street Global Advisors IncomeWise platforms.

A provider of technology for data-sharing between asset managers, life insurance and retirement plan recordkeepers, Micruity will help MetLife develop its Universal Digital Retirement Platform. The platform is an education, planning, and annuity purchasing tool that connects to existing employment benefit, third party administrator (TPA) and recordkeeping systems.

The new tool will help plan sponsors offer “educational resources on a broad range of retirement income-related topics… and expand access to immediate income annuities, allowing plan sponsors to easily offer these solutions within their defined contribution (DC) plans,” a Micruity release said.

MetLife’s 2024 Qualifying Longevity Annuity Contract Poll found that 91% of plan sponsors are concerned that future retirees will run out of money in their retirement.

“The Micruity Advanced Routing System (MARS) facilitates frictionless data sharing between Life Insurers, Asset Managers, and Recordkeepers through a single point of service that significantly lowers the administrative burden for plan sponsors and enables them to turn retirement savings plans into retirement income plans at scale,” the release said.

Micruity also announced that it closed $5 million in funding to expand support for accumulation annuities and non-guaranteed income products on the Micruity platform.

The round includes new funding from strategic investors Prudential, State Street Global Advisors, and TIAA Ventures, as well as additional investments from current partners Pacific Life and Western & Southern Financial Group. In total Micruity has raised over $11M from strategic partners in the retirement industry.

“The new funding enables Micruity to rapidly build out infrastructure not just for retirees in the drawdown phase of their retirement journey but also provide critical support for younger Americans still saving for retirement,” said Trevor Gary, Founder and CEO of Micruity.

“Successive financial crises have eroded the retirement savings of many Americans who now face the prospect of outliving their savings. By building the infrastructure necessary to enhance the user experience of both guaranteed and non-guaranteed income products, Micruity, along with our partners, can help close this gap and deliver a safe and secure retirement,” added Gary.

A recent US Retirement Survey found that non-retired Americans aged 27 to 42 face an average shortfall of $403,626 in their retirement savings. For Americans aged 43 to 58, that gap grows to $451,170.

The Micruity platform connects Recordkeepers, Life Insurers, and Asset Managers through a single secure connection, reducing the administrative burden of managing multiple products across several plans while delivering targeted savings and income solutions.

DOL Lets Pension Risk Transfer Rules Stand – For Now

Posted on June 26, 2024 by Kerry Pechter -

The Department of Labor has decided not to shake up the regulatory foundation of the “pension risk transfer” (PRT) business—the replacement of defined benefit pensions by group annuities issued by life insurers—by amending its 30-year-old Interpretative Bulletin 95-1.

IB 95-1 requires retirement plan fiduciaries, among other guidelines, to choose the “safest available” annuity for plan participants. The life/annuity industry has changed enough since the bulletin was written, some observers claim, to warrant an update in its text.

The DOL’s Employee Benefit Security Administration (EBSA), said in a June 24 report to Congress, however, that it “is not prepared at this time to propose amendments to the Interpretive Bulletin to address [the] potential risk” posed by what RIJ has called “the Bermuda Triangle strategy.”

But the report conceded that “EBSA has not concluded that changes to the Interpretive Bulletin are unwarranted.” It explained why:

“Some stakeholders are very concerned about developments in the life insurance industry that may impact insurers’ claims-paying ability and creditworthiness. As set forth above, some stakeholders urged EBSA to update the Interpretive Bulletin to focus fiduciaries’ attention on issues such as insurers’ ownership structures; exposure to risky assets and non-traditional liabilities; and use of affiliated and offshore reinsurance.” [Emphasis added.]

The writers of the report referenced the growing ownership of life/annuity companies by holding companies controlled by “private equity” or “buyout” or “alternative asset managers,” the relatively heavy purchase of risky private assets and structured securities by those life/annuity companies, and use of reinsurance for the purpose of reducing surplus requirements. This the phenomenon identified by RIJ as the Bermuda Triangle.

For an RIJ story on an August 2023 meeting of the ERISA Advisory Council that helped inform the new DOL report, click here.

The new report happens to emerge amid class action lawsuits against AT&T and Lockheed Martin this spring for swapping their DB plans for a group annuities issued by Athene Annuity & Life, an affiliate of Apollo Global Management. The suit accuses AT&T and Lockheed Martin of failing to choose the “safest available annuity” for its DB plan participants when it chose Athene, as IB 95-1 requires.

The report does however give considerable space to the concerns expressed about private equity controlled life/annuity companies:

“Some stakeholders attributed concerning developments in these areas to private equity firms’ increased involvement in the industry. They said that private equity-affiliated insurers tend to engage in riskier practices than traditional insurers. Stakeholders were also concerned that private equity firms do not have a long track record of managing life insurance obligations and may lack a commitment to policyholder interests.

However, others say the concerning practices are employed on a more widespread basis in the industry. EBSA is not prepared at this time to propose amendments to the Interpretive Bulletin to address this area of potential risk. The issues raised by stakeholders are complex and there were few, if any, areas of consensus. As just one example of this, six ERISA Advisory Council members supported no changes to the Interpretive Bulletin, while the other nine members supported different positions on different issues.”

History is especially relevant here. As the June 24 DOL report points out, IB-95 was issued in response to the 1991 failure of First Executive Corporation, its Executive Life Insurance Company and a subsidiary, ELIC of New York. FEC and ELIC failed because in part because they were doing what the private equity-led life/annuity companies are doing now.

ELIC was selling fixed deferred annuities, buying large amounts of risky assets (Michael Milken’s junk bonds), and buying Bermuda reinsurance for “surplus relief.” ELIC was also in the PRT business—sometimes selling group annuities to companies that Milken had acquired through leveraged buyouts.

The interpretation evidently hasn’t prevented the recurrence of the same life insurer practices—holding high-risk assets, dealing with its own affiliates instead of third-parties, and buying reinsurance from an affiliate—that it was written to eliminate.

Moreover, the National Association of Insurance Commissioners (NAIC) itself created Risk-Based Capital rules in the 1990s after the ELIC bankruptcy, and those rules have not prevented the return of the strategy (Bermuda Triangle) that they were intended to eliminate.

The new report also reflects the fact that the DOL is caught between the NAIC and, on the other hand, the Senate Banking Committee, led by Sen. Sherrod Brown, and the Treasury Department’s Federal Insurance Office, a creation of the Dodd-Frank financial regulation.

In 2022, Brown’s committee and the FIO both sent letters to the NAIC expressing concern about potential misuses of insurance regulations and principles by private equity companies that have bought life/annuity companies in order to manage or control the assets backing their guarantees to policyholders. One of those misuses involves offshore affiliated reinsurance.

The DOL report acknowledged the concern about reinsurance:

“A number of stakeholders raised concerns that life insurers are using reinsurance to move liabilities to less regulated reinsurers. They mentioned less stringent reserving requirements and accounting arbitrage as reasons for their concern… The Department of the Treasury noted in its letter that the speed and scale of the growth of offshore and affiliated reinsurance ‘suggests the need for regulators and policymakers to better understand the role of offshore reinsurers and whether regulatory capital arbitrage opportunities, tax advantages, and other potential gaps that are not under the oversight of U.S. regulators are obscuring (or even amplifying) the level of risk stemming from these activities.’”

But the NAIC has not welcomed the attention of those federal entities, while doing little to slow down the expansion of the Bermuda Triangle strategy—even in the face of alarms sounded in the 2010s by academic economists, economists at the Federal Reserve, and in 2023tk by the International Monetary Fund.

Bermuda Shorts

Posted on June 26, 2024 by Editorial Staff -

Nassau Financial gets $200 million and advisory services from Golub Capital

Nassau Financial Group, a fixed annuity issuer and asset manager, will receive a $200 million non-voting minority equity investment from Golub Capital, a direct lender and credit asset manager, the two companies announced last month.

Nassau and Golub Capital also will enter into a long-term Investment Management Agreement that will provide Nassau’s insurance subsidiaries with access to Golub Capital’s middle market direct lending strategies, through tailored capital-efficient solutions. The transaction is expected to close in the second half of 2024.

Nassau was in the news in May after a former subsidiary, PHL Variable Life, was deemed insolvent and taken into “rehabilitation” by the Connecticut insurance commission. In a 2021 restructuring, ownership of PHL Variable was “deconsolidated” from Nassau to Nassau’s majority shareholder, Golden Gate Capital.

Nassau was founded in 2015 with start-up and subsequent capital provided by Golden Gate Capital, Nassau’s majority controlling equity holder. It has since grown to $24 billion in assets under management and $1.6 billion in total adjusted capital. It had about 379,000 policies and contracts as of March 31, 2024.

Golub Capital will be the largest minority equity holder in Nassau. Fortress Investment Group invested in Nassau in 2023 and Wilton Reassurance Company and Stone Point Credit invested in 2021.

On the Golub transaction, Goldman Sachs served as Nassau’s exclusive financial adviser and Sidley Austin LLP served as its legal adviser. Morgan Stanley & Co. LLC served as exclusive financial adviser and Kirkland & Ellis and Foley Hoag as legal advisers to Golub Capital.

Nassau Asset Management oversees the assets of Nassau’s insurance companies and offers its specialty investment strategies to third-party clients. These strategies include public and private debt, collateralized loan obligations (CLO) debt and equity, real estate debt and equity, and alternatives.

AM Best affirms ratings of Aspida Group, backed by Ares Mgt

AM Best has affirmed the Financial Strength Rating of A- (Excellent) and the Long-Term Issuer Credit Rating of “a-” (Excellent) of Aspida Life Insurance Company and Aspida Life Re Ltd. (Bermuda), collectively referred to as Aspida Group. The outlook of these Credit Ratings is stable.

The ratings reflect Aspida Group’s balance sheet strength, its adequate operating performance, neutral business profile and appropriate enterprise risk management, an AM Best release said. The stable outlooks reflect the expectation that Aspida Group will continue to receive capital infusions and financial resources of Ares Management Corp. and third-party investors.

Aspida Group is pursuing reinsurance growth through block acquisitions and flow reinsurance treaties and retail growth by expanding its distribution partners and its competitive annuity product suite. Ares Insurance Solutions (AIS), a unit of Ares dedicated to Aspida Group, has repositioned and deployed assets, focusing on structured credit in pursuit of wider interest rate spreads and higher yields.

AM Best said its outlooks also reflect the maintenance of an appropriate enterprise risk management framework. Operating trends are expected to remain positive over the near- to medium-term as management continues to focus on interest rate spread management.

The very strong balance sheet strength assessment considers Aspida Group’s risk-adjusted capitalization being at the strongest level, as measured by Best’s Capital Adequacy Ratio (BCAR), and AM Best’s expectation that Aspida Group will maintain similar levels of capital strength as the company executes its growth strategies.

Aspida Group had profitable adjusted operating income in 2023 and expects to continue to grow its operating income steadily driven by premium growth in both of its operating entities for the foreseeable future, the release said.

AM Best cautioned, however, that “Exposure to less liquid investments in Aspida Group’s general accounts are somewhat elevated compared with industry averages.” Aspida Group “does remain concentrated in interest-sensitive annuities, which currently account for all of its business… As with any newer organization, Aspida Group face execution risks, which are magnified by the increasingly competitive annuity market environment.”

In ~$2.5bn PRT deal, 3M swaps DB pension for MetLife group annuity

Metropolitan Tower Life Insurance Co. has entered into a pension risk transfer (PRT) agreement with the 3M Employee Retirement Income Plan, a defined benefits plan worth about $2.5 billion, parent MetLife Inc. reported. A Metropolitan Tower group annuity will provide benefits to about 23,000 3M retirees and beneficiaries.

The group annuity contract was purchased from Metropolitan Tower Life Insurance Co. in June 2024, the release said. The 3M corporation’s retirees, retirees’ spouses and beneficiaries won’t see a change in the amounts of their monthly pension benefits.

Total U.S. pension risk transfer more than doubled in the first quarter, compared with the same period a year earlier, driven by so-called jumbo deals, according to the industry group LIMRA. PRT premium of $14.6 billion in the first quarter was 130% above 2023 figures, the group said in its U.S. Annuity Risk Transfer Sales Survey.

Metropolitan Tower and other MetLife underwriting entities have Best’s Financial Strength Ratings of A+ (Superior). Shares of MetLife Inc. (NYSE: MET) traded at $68.91 on the morning of June 17, up 0.53% from the previous close.

Bermuda-based Apex Group raises $1.1 bn on sale of “PIK” notes to Carlyle and Goldman Sachs

Apex Group Ltd. has received a $1.1 billion investment infusion from Carlyle’s Global Credit business and Goldman Sachs Private Credit, raising Apex’s “assets on platform” to about $3.1 trillion, “serviced across custody, administration, depositary and under management,” the global financial services provider reported June 24.

Carlyle and Goldman Sachs have committed to Holdco PIK Notes of Apex to continue to support the company’s focus on “optimizing the current platform, strategy and combined investment in technology innovation.”

Goldman Sachs Private Credit and Carlyle Global Credit purchased an initial Preferred Equity Note from Apex in 2020 and a follow-on issuance in 2021. Financial terms of the new investment were not disclosed.

Apex Group Ltd., established in Bermuda in 2003, provides financial services in 50 jurisdictions to asset managers, financial institutions, private clients, and family offices. The services include fund-raising solutions, fund administration, digital onboarding and bank accounts, depositary, custody, Super ManCo, corporate services, and an “ESG ratings and advisory” solution.

Carlyle (NASDAQ: CG) manages $425 billion (as of March 31, 2024) in private capital across three business segments: Global Private Equity, Global Credit and Global Investment Solutions. Goldman Sachs (NYSE: GS) manages more than $450 billion worldwide in alternative investments, including private equity, growth equity, private credit, real estate, infrastructure, sustainability, and hedge funds.

The alternative investments platform is part of Goldman Sachs Asset Management, which supervises more than $2.8 trillion in assets under supervision globally as of March 31, 2024. Established in 1996, the Private Credit unit at Goldman Sachs Alternatives manages $130 billion in assets across direct lending, mezzanine debt, hybrid capital and asset-based lending strategies.

According to the Corporate Finance Institute, a payment-in-kind or PIK loan allows borrowers to make interest payments in forms other than cash. It relieves the borrower of the burden of a cash repayment of interest until the loan term is ended. PIK loans are commonly used in leveraged buyout (LBO) transactions. In short, companies fund their liabilities with new liabilities.

Payment-in-kind loans (PIK) are usually issued by companies in poor financial condition that lack the cash to pay interest. The loans are purchased by lenders that don’t depend on the routine cash flow of the borrower as the repayment source of their investments. The payment of interest may be made by issuing another debt or by the issuance of stock options. At maturity or the refinancing of the loans, the borrower repays the original loan plus the PIK debt.

Though investing in a PIK loan offers higher yield than other loans that are charged on a compound basis, the loans have drawbacks. They do not generate any cash flow before term, are subordinated to conventional debt and mezzanine debt, and are generally not backed by a pledge of assets. In addition, PIK loans are usually treated as unsecured credit. They tend to lead to large losses in the event of a default.

From a borrower’s perspective, PIK loans may be utilized as a tranche or part of a bigger funding package to finance acquisitions and leveraged buyouts in general. However, it must be noted that it is fraught with risk and very high interest rates.

PIK loans can provide a company with the cash needed to recover or simply increase its indebtedness and multiply the lenders’ risks. Borrowers must weigh the benefits of the investments vis-à-vis their cost.

Oceanview establishes reinsurer in Cayman Islands

Oceanview Holdings Ltd., a provider of annuities and reinsurance solutions, has announced the establishment of its new subsidiary, Oceanview Secure Reinsurance Ltd., in the Cayman Islands. This expansion “strengthens Oceanview’s ability to deliver innovative reinsurance solutions globally,” a company release said.

Oceanview Secure Reinsurance Ltd. has received a Class D Insurer’s license by the Cayman Islands Monetary Authority (CIMA). This license will “complement and enhance Oceanview’s ability to provide global clients with advanced reinsurance options and will facilitate a broader array of customized reinsurance products to meet a wide variety of client requirements,” the release said.

Oceanview Holdings Ltd., established in 2018, provides retail annuities and asset-intensive reinsurance solutions through its subsidiaries. Oceanview Life and Annuity Company, an Alabama-domiciled insurer licensed in 47 states, and Oceanview Reinsurance, Ltd., a Bermuda Class E insurer, are rated “A” (Excellent) by A.M. Best. On a consolidated basis, Oceanview had over $12 billion in assets as of year-end 2023.

Bermuda Triangle insurer receives ‘negative’ outlook

Investors Heritage Life’s (IHLIC) Long-Term Issuer Credit Rating (ICR) outlook has been down-graded to negative from stable by AM Best. The ratings agency affirmed the insurer’s Financial Strength Rating (FSR) of B++ (Good) and the Long-Term ICR of “bbb+” (Good). The FSR outlook is stable.

Given its ownership by Aquarian Holdings since 2018, its subsequent issuance of fixed indexed annuities, and its affiliation with Bermuda reinsurer Somerset Re, IHLIC fits RIJ’s definition of a “Bermuda Triangle” company. The company launched the Heritage Builder Multi-Year Guaranteed Annuity in 2018 and has since launched several fixed indexed annuity contracts.

The negative outlook for the Long-Term ICR reflects a decline in IHLIC’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), to weak from adequate as of year-end 2023, an AM Best release said.

“Surplus declined throughout the year driven by operating losses, changes in asset valuation reserve, and changes in non-admitted assets. These factors were offset partially by realized gains in the investment portfolio. Risk-adjusted capital continued to decline into the first quarter of 2024 and operating losses accelerated due to new business strain from the sale of its fixed-indexed annuity products.

“The company is considering reinsurance arrangements currently to reduce surplus strain, and AM Best expects the company to contribute capital to support its annuity product sales growth in the near term. The balance sheet assessment has been revised to reflect these factors,” the release said.

The Credit Ratings reflect the insurer’s balance sheet strength, which AM Best assesses as adequate, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management.

IHLIC’s business profile was revised to neutral from limited, which is supported by its product and geographic diversification. Its improvements in market position, product concentration, and geographic concentration combined with its innovation initiatives should make the company more resilient to shocks in the market, AM Best said.

The Bermuda Triangle’s 1980s Roots

Posted on June 26, 2024 by Kerry Pechter -

The resemblances between today’s Bermuda Triangle strategy and the business model that Executive Life used in the years leading up to its record-breaking bankruptcy in 1991 are too many and too striking to be chalked up to coincidence, confirmation bias, or hindsight.

When I’ve asked, What could go wrong with the Bermuda Triangle strategy?, annuity industry veterans referred me to Executive Life (ELIC), its parent, First Executive Corp., and its fellow insurer, ELIC-NY. While researching the rise and fall of those companies, I found a prototype of today’s Bermuda Triangle.

The many books, news articles, and academic papers about ELIC and its helmsmen show a clear through-line from the treasure map drawn by ELIC CEO Fred Carr and “junk bond king” Michael Milken in the 1980s to the three-part strategy—nicknamed the Bermuda Triangle by RIJ—that Athene/Apollo, Global Atlantic/KKR, F&G/Blackstone, and others practice today.

The fixed deferred annuities that Carr sold, the junk bonds that Milken fabricated at Drexel Burnham Lambert, and the “surplus relief” that actuary Al Jacob arranged for ELIC, map closely to the annuities that Bermuda Triangle insurers sell, the private debt that their alternative asset manager-owners issue, and the “financial reinsurance” that helps them shrink their capital requirements.

Privacy and opacity, relative to public markets, was essential to both sets of financiers. And, remarkably, some of the personnel from the 1980s are still very much with us. Three prime movers of the Bermuda Triangle strategy—Apollo co-founders Leon Black, Marc Rowan, and Josh Harris—were protégés of Milken at Drexel Burnham Lambert.

The annuity point of the triangle

The zig-zagging interest rates of the 1970s and 1980s had many consequences—good and bad, immediate and delayed, intended and otherwise—one of which was the opportunity for newer and nimbler life insurers to attract lots of money by selling high-yield but guaranteed single-premium deferred annuities (SPDAs).

ELIC’s SPDAs offered some of the highest yields, which made them easy for commissioned, insurance-licensed stockbrokers at the big brokerages to sell. “[SPDAs] are pure spread products, and in the 1980s, Executive Life had the spreads!” wrote former ELIC executive Gary Schulte in his book on Carr and ELIC, The Fall of First Executive (Harper Business, 1991). “The single pay segment of the company grew from nothing to about $13 billion companywide” [Schulte, p. 102].

To trick-out his contracts, Carr relied on the artistry of a versatile consulting actuary named Al Jacob. “A charming guy with an unusually creative spark,” as a fellow actuary described him to RIJ, Jacob designed catchy contracts like the “Ten-Strike” annuity, whose guaranteed rate increased by 10 basis points a year for 10 years. (Jacob is now deceased, but his family’s DataLife.com website survives.)

Today’s Bermuda Triangle life/annuity companies also sell SPDAs (now known as fixed-rate annuities or multi-year guaranteed rate annuities), albeit at much more modest guaranteed rates than in the 1980s. But their bread-and-butter product (until Fed “tightening” in 2022 turned simple fixed-rate annuities into hotcakes) has been the fixed indexed annuity, or FIA.

Built for the same mature, cautious savers, and with a similar no-loss guarantee, FIAs are actually quite different from SPDAs. FIAs offer a kind of floating rate that’s correlated with the performance of options on equity indexes. Their returns correlate mainly to stocks, which reduces their sensitivity to interest rate risk.

FIAs cost more to manufacture than SPDAs because there are more cooks in the soup. In their most recent iterations, FIAs use proprietary, custom-made indexes and volatility controls that help their issuers iron out the chance of suffering big, unanticipated claims. Providers of those indexes and controls have to be paid.

Distribution costs of FIAs (i.e., sales commissions) are higher than SPDAs’, but FIA contracts are “stickier”—that is, their contract terms (up to 10 years) are longer and their penalties for premature withdrawal are higher than SPDAs’. As long-dated liabilities, they match up well with the illiquid private loans originated by Bermuda Triangle investment companies with annuity-issuing subsidiaries: Apollo, Ares, Blackstone, Brookfield, Eldridge, Golden Gate, KKR, and others.

High-yield debt, a sine qua non of the Triangle

To get people to buy his SPDAs, Carr had to promise competition-crushing rates of return, and to do that he needed a steady, reliable source of IOUs that promised ELIC consistently high returns. Carr found that source when he took a meeting with fellow Los Angeleno Michael Milken.

Milken started out as a bottom-feeding bond trader, feasting on the bargains that rising rates indiscriminately created out of the debt of both weak and strong companies starting in the 1970s. Then he began creating his own high-yield paper—the famous below-investment-grade “junk bonds”— to finance leveraged loans, acquisitions, and buyouts.

Milken and Carr gave each other what they needed, and plenty of it. “The new breed of high-yield corporate bonds gave the kinds of spreads that would allow Carr to give the policyholder an interest rate unlike anything ever to come out of a life insurance company… Junk bonds gave Carr all he needed to dominate the single premium deferred annuity market with stockbrokers,” Schulte wrote [p. 35]. In A License to Steal, his 1992 book on Milken, Ben Stein wrote that ELIC was not the only life insurer shipping policyholder money to Milken. But it did so reliably, by the billions, and with little documented due diligence. “Carr just bought what Mike said to buy,” a junk bond buyer at another life insurer told Stein [p. 93].

Debt securitization, a financial magic trick that Lewis Ranieri of Salomon Brothers conjured up in the 1980s, helped Carr and Milken obscure ELIC’s concentration in low-grade bonds. According to Vic Modugno, an ELIC actuary in the 1980s and author of Broken Promises, a 1992 book about ELIC, they bundled Milken’s bonds into collateralized bond obligations, or CBOs, whose senior “tranches” were deemed sufficiently creditworthy for life insurers to buy.

Today, in the Bermuda Triangle, private credit, leveraged loans, and collateralized loan obligations are clearly descendants of Milken’s junk bonds and CBOs. The Economist’s Buttonwood columnist recently noted that junk bonds, private equity, and private credit each represent a different stage in “the history of leveraged finance.”

Financial reinsurance, aka “surplus relief”

On the strength of its SPDA sales, ELIC soared dangerously close to the blazing sun of insolvency. For new life/annuity companies, rapid growth is a mixed blessing. If a client buys a million-dollar deferred annuity, for example, the insurer might have to contribute perhaps $50,000 to $100,000 of its own money in support of its guarantees. The more extravagant the guarantees of the contract, as in ELIC’s case, the larger the requirement for capital in the form of “deficiency reserves.”

ELIC “guaranteed high interest for a significant period of time. Normally, that would create a lot of deficiency reserves. If you were guaranteeing 8%, 9%, 10%, 11% returns, that creates a tremendous deficiency. No one could live under such a situation. So they went to overseas insurers who didn’t require deficiency reserves,” a former actuarial colleague and friend of Al Jacob told RIJ.

For surplus relief—an expression that describes the elimination of demands for fresh capital—an insurance company can use reinsurance. Faced with growing pains, ELIC periodically obtained so-called financial reinsurance, which papered over its capital shortfalls rather than filling the holes with real money.

To obtain this form of reinsurance, Jacob “was forever going down to the Cayman Islands,” his former colleague told RIJ. “He had set up some insurance companies there. It was not uncommon to have deals where potentially they could get letters of credit from a Cayman reinsurer that were as good as cash, as opposed to having huge reserves. My suspicion is that if you did it in the US you’d have to have assets equal to the letters of credit backing you. But lax capital requirements in Grand Cayman in the 1980s may have made it feasible to use that as a jurisdiction.”

“Because of the capital intensity of life insurance products, particularly annuities, [Executive Life] experienced terrible surplus strain from our growth,” former ELIC executive and author Gary Schulte told RIJ. “To relieve it, Al Jacob created the Bermuda Triangle strategy. He got letters of credit and reinsurance deals.” As in the case of ELIC’s investments, these deals were executed by individuals acting in concert, not true counterparties. One of the offshore reinsurers Jacob used, First Stratford, was co-owned by Carr and Milken.

“The main reason for doing that was surplus relief,” Modugno told RIJ in an interview. “In statutory accounting, you have to set up reserves that are higher than the premium you’re taking in. To get rid of that obligation, you do funds-withheld reinsurance. You’re taking liabilities off the balance sheet, so it looks like they’re not there.”

Today’s use of reinsurance by Bermuda Triangle companies is much more sophisticated than that arranged by Jacob. It can involve the efforts of teams of attorneys and actuaries in newly built office towers in Bermuda or the Cayman Islands. But it continues to provide profit-enhancing surplus relief, and its success continues to rely on the coordinated efforts of affiliated asset managers, insurers, and reinsurers.

That was then, this is now

Aside from the similarities in their annuity products, general account investments, and use of financial reinsurance, the business models of Carr’s life insurers and the Bermuda Triangle conglomerates also shared a reliance on transactions in private, less-regulated parts of the financial system and on coordination of activities among closely related businesses and people.

Characteristically, the Bermuda Triangle involves asset managers, insurers, and reinsurers in the same holding company. Operating in areas that require less transparency, less reporting, and less regulation, they get into and out of deals with maximum speed and minimum friction.

As noted above, players from the 1980s appeared in the 2010s, and at least three key people participated in both the ELIC episode and the birth of the Bermuda Triangle. Leon Black, Josh Harris, and Marc Rowan worked for Milken at Drexel Burnham Lambert. Black, whose financial and legal dealings with now-deceased convicted sex trafficker Jeffrey Epstein cost him the CEO job at Apollo in 2021, was once Milken’s “right-hand man,” according to Time magazine.

Black, Harris, and Rowan started Apollo Global Management in 1990 with billions of dollars in assets that Black and Credit Lyonnais, the French bank, salvaged from the ELIC bankruptcy, contributing to the reduction of annuity benefits to policyholders. (See “The Collapse of Executive Life Insurance Co. and Its Impact on Policyholders,” U.S. G.P.O., 2003.)

After 2009, Apollo invested in the crisis-weakened life/annuity business. It started Athene Holding, converted Aviva USA to Athene Annuity and Life, became a leading issuer of FIAs, and became brought vast amounts of annuity liabilities under its own management. With the creation of Bermuda-based Athene Life Re, the Bermuda Triangle strategy was born, soon to be emulated by a horde of large and small “alternative” asset managers and their pop-up life/annuity companies and reinsurers.

An In-Plan Annuity with Three Life Insurers

Posted on June 4, 2024 by Kerry Pechter -

In 2012, then-United Technologies Corporation embarked on a grand retirement income experiment. The giant defense contractor closed its defined benefit pension and began offering participants in its 401(k) defined contribution plan a deferred variable annuity (VA) instead.

The new “in-plan” annuity was built for UTC (now RTX Corp.) by investment company AllianceBernstein (AB), which managed the participant savings. AB engaged three life insurers to share the risks and rewards of underwriting the VA’s pension-like retirement income feature.

AB calls the product, “Secure Income Portfolio” or SIP. Despite its complex internal machinery, it worked. In 2014, AB adopted SIP for its own 401(k) plan. In 2019, the Illinois State Universities Retirement System signed on. According to AB, there’s currently about $4 billion in the SIP variable annuity.

“This is the most flexible in-plan retirement income solution on the market today,” Kevin Hanney told RIJ. A former senior director of pension investments at UTC and now consultant at CapitalArts Global, Hanney helped onboard the first version of SIP and Lifetime Income Strategy (LIS), AB’s target date fund, at that company.

Now, AB and its life insurance partners—Jackson National, Lincoln National, and Nationwide—are pitching SIP and LIS to the wider plan sponsor market. Like other insurers and asset managers, they’re counting on the 2019 and 2022 SECURE Acts to encourage the integration of retirement income solutions into 401(k) plans.

Secure Income Portfolio

SIP works much like any deferred variable annuity with a guaranteed lifetime withdrawal benefit rider, except that the annuity gets funded incrementally instead of at one time. As participants of the same age gradually shift savings from other 401(k) funds to SIP, the life insurers periodically cover those discrete clusters of contributions with guarantees that entitle participants to a certain amount of future income.

SIP is a collective investment trust (CIT) rather than mutual fund. Its assets consist of 50% equities (33% US and 17% non-US) and 50% fixed income (30% core bonds and 20% US Treasury Inflation-Protected Securities). These asset allocations remain fixed, even after participants retire.

When participants retire, the SIP’s income rider kicks in. At 65, give or take a few years, retirees can start receiving an income stream—a percentage of the SIP’s highest value—that’s guaranteed to last as long as the owner is living. The owner may be a single person or couple.

For insurers, annuities with income riders are hard to price. Contract owners can drop the rider at any time. They can move money out of SIP, before or during retirement. SIP’s 120 to 129 basis-point fee pays for the management of SIP assets, the floor that the insurer put under the income-generating value of SIP assets, and the cost to the insurer of keeping the money liquid for the participant (as pension law requires).

AB gives plan sponsors two way to adopt SIP. Plans can use SIP as a component inside AB’s own Lifetime Income Strategy (LIS) target date fund (TDF) series (into which auto-enrolled participants can be directed). Alternately, plans can offer SIP as a stand-alone option in their investment menu. Plan sponsors can keep their current TDF and still add SIP to the menu.

“This solution is designed for flexible implementation, adapting to plans’ diverse needs and preferences—whether it’s alongside a plan’s existing target-date fund, as an allocation in a managed account or in a ‘do-it-yourself’ approach, with participants selecting AB’s Secure Income Portfolio from their plan’s core menu,” AB said in a release.

If SIP is inside the AB LIS TDF, money will start moving automatically to the SIP when the participant reaches age 50 or so. If SIP is outside a TDF, participants decide when and how much money to move into—or out of—SIP. Some participants will start contributing to the annuity at age 50. Others might wait until just before they retire.

The sooner participants start putting money in SIP, the sooner they start paying its fee. Lest plan sponsors worry that auto-enrolled participants might someday object to having paid 120 basis points in fees every year for 15 years for a benefit they’ll never use, AB gives them sponsors control over SIP start date.

“Plan sponsors can set the buy-in period,” said Andrew Stumacher, managing director, Custom DC Solutions at AB, in an email to RIJ. “The plan sponsor may only want participants to begin purchasing the guaranteed income component one year prior to retirement so that participants are much less likely to pay fees on an income benefit they did not want.”

Multiple annuity providers

The AB program’s key distinction is its use of several annuity providers (life insurers) at once. The multi-insurer approach means that plan sponsors aren’t putting all their eggs in one insurer’s basket. AB assumes “fiduciary” responsibility for vetting and selecting the specific annuity providers. Plan sponsors can remove or replace an insurer if they wish.

Participants, meanwhile, get the benefit of competition. Each quarter, when insurers enter bids on SIP assets, they are effectively offering future retirement income to cohorts of same-age participants for different prices. The bids are driven by current interest rates, market volatility, and the insurers’ own desire or capacity for the business.

In an illustration found in AB’s website, one hypothetical insurer offered to pay participants 3.9% of a specific tranche of savings for life starting at age 65. A second insurer bid 4.1%. A third bid 4.4%. The bids were added together to produce a weighted average payout at age 65 of 4.2% for a single quarter’s block of business.

In retirement, SIP contract owners would receive an annual payout calculated by multiplying the average of all the bids by the highest value of their SIP portfolios. If a participant decides to start receiving income later (or earlier) than age 65, their payout rates would be adjusted up (or down) according to their life expectancy.

Based on the insurers’ bids, an AB algorithm metes out a proportionate share of the business—and of the fees—to each participating insurer. In the hypothetical scenario above, the insurers who bid 3.9% were awarded 26% of the quarterly tranche, the bidder of 4.1% got 32%, and the bidder of 4.4% got 42%. The auctions occur every quarter.

A competitive, pre-retirement bidding process allows participants to “dollar-cost average” their way into an annuity. “They’re buying a little bit of income at a time over a multi-year period. They’re not waiting to make a single big purchase, which could happen at an inopportune time or right after a down market,” Stumacher said.

The bidding process also lets the life insurers manage their costs under the threat of unpredictable market conditions. If the insurers’ cost of writing SIP guarantees rises—because of interest rate changes or market volatility—the insurers can’t pass the cost along to the plans; SIP fees are fixed at 120 to 129 basis points. Within limits imposed by the competitive bidding process, the insurers can share the changes in their own costs with participants by raising or lowering their bids.

Milliman to offer Hueler Income Solutions to its recordkeeping clients

Principal issues its second RILA

John Hurley joins Ibexis from Global Atlantic

Vacant buildings, overdue mortgages

Third-rail of private retirement

Other views

Doubts remain

Nassau Financial gets $200 million and advisory services from Golub Capital

AM Best affirms ratings of Aspida Group, backed by Ares Mgt

In ~$2.5bn PRT deal, 3M swaps DB pension for MetLife group annuity

Bermuda-based Apex Group raises $1.1 bn on sale of “PIK” notes to Carlyle and Goldman Sachs

Oceanview establishes reinsurer in Cayman Islands

Bermuda Triangle insurer receives ‘negative’ outlook

The annuity point of the triangle

High-yield debt, a sine qua non of the Triangle

Financial reinsurance, aka “surplus relief”

That was then, this is now

Secure Income Portfolio

Multiple annuity providers

Data Connection

Lists*