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Briefs from the ‘Bermuda Triangle’

Posted on September 29, 2024 by -

US insurers hold more private equity, but income on PE drops

U.S. insurers experienced a second straight year of declining income on their private equity investments, which dropped to $7.7 billion in 2023, down from $10.2 billion in 2022, according to ratings agency AM Best.

A new Best’s Special Report notes that U.S. insurers’ private equity holdings rose 10.8% to $146.2 billion, up from $132 billion in 2022; this followed growth of 3.3% in 2022 and 37% in 2021.

That increase in 2023 was driven by $7.4 billion from new investment acquisitions or additional investments in current holdings, with the book value of current holdings increasing by approximately $6.8 billion.

Nearly all of that growth was generated by life-annuity (L/A) insurers, which account for over three quarters of the insurance industry’s private equity investments.

Investments in private equity remain concentrated in a few large insurers, according to the report. Fifteen companies, almost entirely L/A carriers, account for just over 60% of private equity holdings, with allocations averaging only 5% of invested assets. “The ratio of these holdings to capital can be a better guide for determining potential exposure,” said David Lopes, senior industry analyst, AM Best.

The report notes that the average exposure for capital & surplus (C&S) among the top 15 holders of private equity investments is 40.2%. However, more than half of AM Best’s rated companies with private equity investments have exposures amounting to less than 10% of their C&S.

Demand for private equity investments had slowed in 2022 compared with 2021, due to a rise in interest rates and concerns about a potential recession, but private equity investments again rose in 2023, as insurers sought higher yields with alternative options.

“Understanding the performance and risks of the private equity firms that investors choose to invest in requires comprehensive due diligence,” Lopes said. “Most insurers investing in private equity have larger sophisticated in-house investment management teams. Also, most insurers prefer experienced money managers with a solid history.”

Insurers use private equity to diversify investments and achieve higher yields versus other asset classes, but the small percentage allocations of invested assets point to generally more conservative investment strategies and lower levels of risk tolerance, according to the report. Insurers are also wary of the effects of private equity investments on capital models. Investments in common equity vehicles such as limited partnerships are subject to higher capital charges than rated debt or preferred equity.

State Street sued again for recommending Athene in PRT deals

Two new federal class action lawsuits were filed in September against State Street Global Advisors Trust Co., as a pension adviser, and against pension plan sponsors who followed SSgA’s recommendations to replace their defined benefit pensions with group annuities underwritten by Athene Annuity & Life.

In recommending Athene, both lawsuits claim, SSgA failed in its fiduciary duty to recommend only the “best available annuity,” as required by the Employee Retirement Income Security Act of 1974 (ERISA). Athene is not, however, named as a defendant in either case. Similar suits, filed on behalf of pension plan beneficiaries, were filed earlier in 2024.

The first of the latest two cases, filed September 3 in U.S. District Court, Southern District of New York, involved the 2019 transfer of more than $2 billion in pension plan assets of pharmaceutical giant Bristol-Myers Squibb to Athene. The second case, filed September 4 in U.S. District Court, District of Colorado, involved the 2021 transfer of $1.4 billion in pension plan assets of Lumen Technologies to Athene.

The lead attorney in the Bristol-Myers Squibb case is Edward Stone of New York. The lead law firm in the Lumen case is Schlichter Bogard LLP of St. Louis. Both firms have filed similar lawsuits in the past alleging violations of U.S. pension law in pension risk transfer deals involving SSgA and Athene. Schlichter filed suits in March and May of this year, regarding SSgA’s advice for plan sponsors AT&T and Lockheed-Martin.

The Bristol-Myers Squibb suit alleges that:

“Bristol-Myers, The [pension] Committee, and State Street breached their duty of prudence by selecting an unsuitable annuity provider and breached their duty of loyalty by favoring their own corporate interests over the participants’ interests in a secure retirement. Bristol-Myers’ and The Committee’s goal was to save Bristol-Myers money and State Street’s goal was to further its line of business that recommends Athene as an annuity provider. Consequently, their search and selection of Athene was biased in favor of the lower-cost provider and neither objective nor sufficiently thorough or analytical, thereby breaching their duty of prudence.”

According to the Lumen suit:

“Defendants did not select the safest possible annuity available to ensure the continued, long-term financial security of Lumen retirees and their beneficiaries. Instead, Defendants selected Athene, whose annuity products are substantially riskier than those of numerous other traditional annuity providers. Athene structures its annuities to generate higher expected returns and profits for itself and its affiliates by investing in lower-quality, higher-risk assets rather than in quality assets that would better support its future benefit obligations. In transferring Plaintiffs’ pension benefits to Athene, Defendants put Lumen retirees’ and their beneficiaries’ future retirement benefits at substantial risk of default without appropriate compensation. Because the market devalues annuities when accounting for such risk, it is also likely that Lumen saved a substantial amount of money by selecting a group annuity contract (or group annuity contracts) from Athene instead of the actual safest annuity available.”

Both suits make reference to Athene, a life insurer created by private equity firm Apollo Global Management in 2009 for the purpose of selling annuities to older Americans, reducing the capital requirements that come with those sales through offshore “financial reinsurance,” and investing a portion of the annuity premium in loans originated by Apollo. Retirement Income Journal has tagged such a business model, since copied by many other U.S. life insurers, as the “Bermuda Triangle strategy.”

State Street and Apollo to partner on distribution of private assets

State Street Global Advisors (SSgA), the wealth management firm, and Apollo Global Management, Inc., manager of alternative assets and issuer of Athene fixed deferred annuities, has announced a partnership to bring private assets to a wider audience of investors.

“This relationship of a market-leading, global asset manager and a market leading originator of private assets is designed to open the door to investing in private markets and expand access to a wider investor base,” the two firms said in a September release.

As of June 30, Apollo reported more than $145 billion of asset origination in the prior twelve months, through its credit business and “origination ecosystem spanning 16 standalone platforms.”

At the end of 2023, SSgA was the world’s fourth-largest asset manager with assets under management of $4.37 trillion, according to the Pensions and Investments Research center. That figure includes (as of June 30, 2024), $1.394 trillion in its proprietary SPDR exchange-traded funds, of which $69.35 billion was in gold assets.

Oceanview launches ‘Topsider’ fixed indexed annuity

Oceanview Life and Annuity, a fixed deferred annuity issuer affiliated with Bayview Asset Management, and Simplicity Group, a financial products distributor, have brought a new fixed indexed annuity to market: Topsider FIA.

The Topsider FIA’s “Gain Control Option” allows clients to potentially increase their participation in market gains by applying a portion of their annual index credits towards a higher participation rate for the following year. “This feature aims to capitalize on market recovery cycles,” an Oceanview release said.

Oceanview Holdings Ltd. provides retail annuities and asset-intensive reinsurance solutions through its subsidiaries. On a consolidated basis, Oceanview had over $12 billion in assets as of year-end 2023. It holds an A (Excellent) strength rating from AM Best.

The Topsider FIA’s features include (beside the standard FIA features of tax deferral and protection from market loss):

Allows clients to increase participation rates using a portion of their annual index credits.

Includes crediting strategies tied to the S&P 500 Daily Risk Control 10% Excess Return Index.

Allows clients to modify their Gain Control Option percentage each contract anniversary.

Is available exclusively through Simplicity Group’s distribution network.

Oceanview has the structure of companies that use what RIJ has called the “Bermuda Triangle” strategy. This structure includes an alternative asset management firm, a U.S. issuer of fixed-rate or fixed indexed annuities, and reinsurers in Bermuda or the Cayman Islands—all of which are under the same corporate umbrella.

In 2018, Bayview Asset Management, led by David Ertel, funded Oceanview Holdings Ltd with $1 billion raised from institutional investors, according to AnnuityAdvantage.com. Oceanview Holdings then purchased Alabama-domiciled Longevity Insurance and renamed it Oceanview Life and Annuity Company.

Oceanview Asset Management LLC, a wholly-owned subsidiary of Bayview Asset Management, LLC, is Oceanview Life and Annuity’s investment manager.

In April 2018, Oceanview Holdings established Oceanview Reinsurance in Bermuda. In 2021, Oceanview Bermuda Reinsurance was formed, with 75% ownership by Oceanview Reinsurance and 25% ownership by Overview Holdings. In June 2024, Oceanview Holdings Ltd. announced the establishment of Oceanview Secure Reinsurance Ltd., in the Cayman Islands.

Munich Re wants to take longevity risk out of life insurers’ PRT deals

Munich Re North America Life is now offering “longevity reinsurance” to help clients “accumulate assets while transferring biometric risk,” a release said. This “pension risk transfer” (PRT) product will allow clients to “convert uncertain future pension or annuity payments to a fixed cash flow stream.”

“Likely clients are insurance companies involved the PRT deals and also asset reinsurers which are often private equity companies buying blocks from insurance companies in order to reinvest assets,” said Munich Re Second Vice President and Actuary, Longevity Reinsurance, Ben Blakeslee.

“There was ~$45b of PRT transactions in the U.S. in 2023 across 21 insurers, and these figure have been rapidly growing over the past 10 years,” he added, citing data from Aon, the consulting firm. “Despite this, longevity reinsurance has been rarely used, so these insurers are retaining substantial longevity risk. We expect reinsurance capacity will become increasingly valuable to support this quickly growing market.”

“We believe there is significant, untapped demand for longevity reinsurance in the US and Canada markets,” said Mary Forrest, President and CEO of Munich Re North America Life, in a statement.

Clients will be able to lock in mortality assumptions and a fee at inception, according to the statement. “With the increased reserve and capital requirements for longevity risks, and further changes coming in the US, insurers and asset reinsurers can leverage Munich Re’s strong balance sheet and deep mortality expertise,” the release said.

The pension risk transfer market has grown alongside elevated interest rates in recent years. Meanwhile, insurers are seeking to balance mortality and longevity risks. Under these conditions, longevity reinsurance “can complement a variety of risk management strategies,” Munich Re said.

Munich Re North America Life includes Munich Re Life US and Munich Re, Canada (Life), which have served the U.S., Canada, Bermuda and Caribbean markets for 65 years.

Munich Re Life US, a subsidiary of Munich Re Group, is a leading US reinsurer. Munich Re Life US also offers “tailored financial reinsurance solutions to help life and disability insurance carriers manage organic growth and capital efficiency as well as M&A support to help achieve transaction success.”

LeMay and Bickler to co-lead Individual Markets at Global Atlantic

Global Atlantic Financial Group, a life/annuity subsidiary of asset manager KKR, has appointed Emily LeMay, its chief operations officer and Jason Bickler, its chief distribution officer, as co-heads, Individual Markets, effective immediately. LeMay and Bickler will report to Rob Arena, co-president of Global Atlantic.

LeMay joined Global Atlantic seven years ago. She began her career at MetLife, rising to Operations and Customer Experience Strategy for the U.S. and Latin America. She currently serves as vice-chair of the Insured Retirement Institute’s (IRI’s) Digital First Initiative.

Bickler has been with Global Atlantic for 10 years. He began his career as an actuary at Allstate, assuming roles of increasing leadership responsibility including product design, relationship management, direct sales and sales leadership.

© 2024 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on September 4, 2024 by -

GAO investigators go ‘undercover’ to study conflicts of interest

Over the course of several months, 102 financial professionals in the U.S. received phone calls from General Accounting Office researchers posing as a fictitious 60-year-old who wanted advice about what to do with about $600,000 in IRA and 401(k) accounts.

Acting more as mystery shoppers than as sting operators, the GAO investigators documented 75 completed encounters in which the “financial professionals described their role and the nature of the relationship with the client and discussed the client’s financial profile.”

Here’s how the GAO, in a report published in July and released last week, described what its researchers did:

We steered the conversations toward subjects that would help us learn about potential conflicts of interest that might exist in the relationship. We brought up subjects conversationally, without using uniform language. In most cases, we explicitly asked about conflicts of interest, because regulators suggest doing so.

In most cases, we discussed the term fiduciary, because it helped establish the nature of the relationship, facilitated a discussion of the investor protection standards that would be applicable, and because the definition of a fiduciary was the subject of DOL’s 2016 rule regarding conflicts of interest…

We discussed variable compensation to financial professionals, because earning more from recommending one product, service, or company over another can be a source of conflicts of interest… We analyzed call transcripts for information obtained about conflicts of interest, including responses to questions about conflicts of interest, fiduciary protections, and variable compensation.

GAO’s undercover calls revealed that when investors ask professionals about conflicts of interest, their questions “may not always produce helpful information.” While “firms’ disclosures of conflicts are available to investors… investors may not review or understand these documents.” In other discoveries:

  • “In 18 of our undercover conversations, financial professionals described ways that other financial professionals are compensated, such as through sales and fees that can lead to conflicts of interest. Twelve financial professionals recommended ways retirement investors can protect themselves from conflicts of interest or made statements about general products or firm types to avoid.
  • “Four of those discussed product types to pay attention to with regards to conflicts of interest. For example, financial professionals discussed avoiding certain investment products because of the compensation a financial professional would receive for selling them, including annuities, load mutual funds, and proprietary products.95 Six of the 12 financial professionals discussed compensation models a retirement investor should pay attention to for conflicts of interest.”
  • “Fifteen financial professionals told us that recommending insurance products, such as annuities, would constitute fiduciary advice, and three financial professionals told us that recommending insurance products would not constitute fiduciary advice. One financial professional explained that with the purchase of an annuity, our 60-year-old retirement investor would not be exiting the fiduciary relationship but would potentially be exiting a fee-based relationship. Another financial professional said he could not act as a fiduciary when recommending an annuity because he could earn commission from that product.
  • As of September 2023, 83% of non-wealthy RIA clients were with firms that were registered as or affiliated with a type of broker-dealer and 63% were clients of investment advisers who were also doing business as an insurance broker or agent or affiliated with an insurance company or agency. Financial professionals may provide one recommendation as an RIA and another as a broker-dealer or insurance agent, which may not be apparent or meaningful to a retirement investor.
  • Our undercover investigation found that financial professionals often used the term “best interest” when describing “fiduciary” duties. Of the 70 financial professionals who we talked to about the term “fiduciary,” 41 said it meant acting in the client’s “best interest.” One financial professional was reportedly a fiduciary under FINRA.84 Another said a financial professional has a fiduciary responsibility to make sure he is selling the right products.

The GAO concluded:

Whether a fiduciary standard applies can vary based on context. As a result, it may not always be apparent whether a financial professional has a fiduciary obligation to the retirement investor or not. Financial professionals can have multiple roles, such as registered representative of a broker-dealer of securities and insurance agent, and retirement investors may not fully understand the conflicts associated with each role.85 Most financial professionals we spoke to (49 of 75) were both. registered representatives of broker-dealers and investment adviser representatives, which meant they could act in either capacity.

Based on our disclosure review and our undercover phone calls, conflicts can be numerous, complex, and dynamic, which can make it challenging to completely convey them all, and their implications, through a real time conversation with a retirement investor. Retirement investors have a stake in understanding conflicts of interest in their relationships with their firm and financial professional because conflicts of interest may be associated with lower investment returns.

Conflicts of interest are a common part of many financial transactions involving products recommended to retirement investors. The mechanisms in place to help identify or explain conflicts of interest, such as required disclosures and discussions with financial professionals, may not fully explain the risk and challenges posed by conflicts of interests. Despite obligations to mitigate and eliminate certain conflicts, conflicts of interest persist and can negatively impact retirement investors.

SEC charges six major ratings agencies with record-keeping lapses

The Securities and Exchange Commission has charged six nationally recognized statistical rating organizations, or NRSROs, for significant failures by the firms and their personnel to maintain and preserve electronic communications.

The firms admitted the facts set forth in their respective SEC orders, an SEC release said. They “acknowledged that their conduct violated recordkeeping provisions of the federal securities laws; agreed to pay combined civil penalties of more than $49 million, as detailed below; and have begun implementing improvements to their compliance policies and procedures to address these violations.”

  • Moody’s Investors Service, Inc. agreed to pay a $20 million civil penalty;
  • S&P Global Ratings agreed to pay a $20 million civil penalty;
  • Fitch Ratings, Inc. agreed to pay an $8 million civil penalty;
  • HR Ratings de México, S.A. de C.V. agreed to pay a $250,000 civil penalty;
  • A.M. Best Rating Services, Inc. agreed to pay a $1 million civil penalty; and
  • Demotech, Inc. agreed to pay a $100,000 civil penalty.

Each of the credit rating agencies, with the exception of A.M. Best and Demotech, is also required to retain a compliance consultant.

A.M. Best and Demotech engaged in significant efforts to comply with the recordkeeping requirements relatively early as registered credit rating agencies and otherwise cooperated with the SEC’s investigations, and, as a result, they will not be required to retain a compliance consultant under the terms of their settlements.

“We have seen repeatedly that failures to maintain and preserve required records can hinder the staff’s ability to ensure that firms are complying with their obligations and the Commission’s ability to hold accountable those that fall short of those obligations, often at the expense of investors,” said Sanjay Wadhwa, Deputy Director of the SEC’s Division of Enforcement. “In today’s actions, the Commission once again makes clear that there are tangible benefits to firms that make significant efforts to comply and otherwise cooperate with the staff’s investigations.”

Each of the six firms was charged with violating Section 17(a)(1) of the Securities Exchange Act of 1934 and Rule 17g-2(b)(7) thereunder. In addition to significant financial penalties, each credit rating agency was ordered to cease and desist from future violations of these provisions and was censured.

The four firms ordered to retain compliance consultants have agreed to, among other things, conduct comprehensive reviews of their policies and procedures relating to the retention of electronic communications found on their personnel’s personal devices and their respective frameworks for addressing non-compliance by their personnel with those policies and procedures.

How the commercial real estate bust could affect US life insurers

Recognizing U.S. life insurers’ “significant exposure” to commercial real estate (CRE), and “pressure on commercial property values” from “lower demand for office space as well as higher interest rates,” at the Chicago Fed recently analyzed “life insurers’ CRE exposures and their implications for financial stability.”

The Fed’s researchers published their findings in Economic Perspectives, No. 5, August 2024. They reported that:

  • At $600 billion (as of 2022:Q4), commercial mortgages were the third-largest asset calls in life insurers’ portfolios, accounting for about 16% of the insurers’ total investments and about 14% of general account assets.
  • Life insurers are also exposed to CRE through their $170 billion CMBS holdings. About 80% of life insurers’ CMBS holdings are senior (AAA-rated) tranches; life insurers rarely invest in below investment-grade CMBS tranches.
  • Given their significant CRE exposures, life insurers could potentially experience significant losses if CRE prices deteriorate.
  • Despite investing in highly rated CMBS tranches, life insurers could potentially incur losses from their CMBS holdings.
  • Current and at-origination loan-to-value (LTV) ratios are low for CRE mortgages compared to those for residential mortgages.
  • Life insurers would suffer a $10 billion loss from their commercial mortgage portfolios. The average loss is about 1.1% of capital, with more than one quarter of life insurers experiencing no losses. With few exceptions, insurers’ losses are less than 10% of their capital.
  • We do not find evidence that exposure to CRE affected life insurers’ stock returns in two periods of heightened concerns about CRE.
  • In a severe shock, five large insurers—insurers with $10 billion assets or more—could experience losses of more than 20% of their adjusted capital, and several insurers may face heightened regulatory scrutiny and have to raise capital.
  • Most insurers with large estimated losses have only a small share of runnable liabilities, mitigating concerns about potential runs triggered by CRE-related losses.
  • The life insurance sector as a whole could face combined losses of about $36.3 billion from direct and indirect exposures to CRE.
  • Some individual large life insurers face significant losses of up to 34% of their capital. However, the largest losses are concentrated in life insurers with limited run risk.
  • Stocks of publicly traded life insurers with large CRE exposure did not exhibit abnormal negative returns after the failure of SVB or the earnings announcement of NYCB, suggesting that market participants did not anticipate life insurers experiencing outsized losses related to CRE.

Prudential expands its reinsurance strategy

Prudential Financial, Inc., has agreed to reinsure a portion of its guaranteed universal life block with Wilton Re, resulting in approximately $350 million of expected proceeds, post-closing, according to a release last month.

Wilton Re will reinsure ~$11 billions of reserves backing guaranteed universal life policies issued by Pruco Life Insurance Company Arizona (PLAZ) and Pruco Life Insurance Company of New Jersey (PLNJ). The deal covers policies written through 2019 and represents ~40% of Prudential’s remaining guaranteed universal life statutory reserves.

In March 2024, Prudential reinsured a $12.5 billion guaranteed universal life block with Somerset Re. Upon closing, Prudential will have achieved an approximately 60% reduction in its exposure to guaranteed universal life.

PGIM Portfolio Advisory, PGIM’s multi-asset solutions affiliate, will manage all the assets supporting the block and will also receive additional assets to manage from Wilton Re. After two years, Prismic, the Bermuda-based reinsurance company created by Prudential and Warburg Pincus, will have an option to reinsure 30% of the block from Wilton Re on substantially similar terms.

Prismic (not to be confused with the web development software company) was created by Prudential and Warburg Pincus last September, with an additional group of investors agreeing to make equity investments in it. At that time, Prudential expected to reinsure to Prismic a block of structured settlement annuity contracts with reserves of ~$10 billion. Prudential’s obligations to the holders of these annuities will remain unchanged following the reinsurance arrangement and Prudential will continue to administer the contracts.

Prudential aims for Prismic to be a strategic reinsurance partner with the ambition to grow their reinsurance relationship materially in years to come. PGIM and Warburg Pincus will provide asset management services to Prismic. Through expanded reinsurance capacity, Prudential expects Prismic will allow the company to provide more people with access to its life and annuity products.

The group of global investors that has agreed to make equity investments in Prismic, alongside Prudential and Warburg Pincus, will give Prismic a combined initial equity investment of $1 billion from Prudential, Warburg Pincus and a group of global investors.

Prudential and Warburg Pincus will initially own 20% and 15% of the equity in Prismic, respectively. Prismic’s board will include two independent directors. Prudential, Warburg Pincus, and the group of investors will each nominate one director.

  • Prismic will leverage PGIM’s and Warburg Pincus’ global investment management capabilities across public and private markets, including public fixed income, private credit, private real estate, and private equity. Prismic will become a client of PGIM Portfolio Advisory, a newly established affiliate within PGIM that combines asset-liability management expertise with portfolio strategy and asset allocation to deliver integrated solutions across public and private asset classes.The Wilton Re reinsurance transaction is structured on an “indemnity coinsurance basis” and contains significant structural protections, including over-collateralization and investment guidelines, the release said.

    Prismic is led by Amy Kessler, a 30-year financial services industry veteran, who will serve as CEO. Kessler was the founding leader of Prudential’s international reinsurance business.

    Upon closing of the Wilton Re deal, Prudential anticipates a decrease in total after-tax annual adjusted operating income of ~$35 million. The earnings impact will be finalized at closing. Prudential expects to incur one-time transaction expenses of ~$25 million in the quarter of closing, primarily due to the extinguishment of certain financing facilities and other closing costs.

Nassau issues new FIA with 18% bonus

Nassau Financial Group has introduced Nassau Bonus Annuity Plus, a bonus fixed indexed annuity designed to give people confidence that they can reach their retirement goals.

Issued by Nassau Life and Annuity Company, Nassau Bonus Annuity Plus is a single premium accumulation-focused fixed indexed annuity that helps increase retirement savings with an up-front premium bonus as well as total accumulation potential from powerful growth options and enhanced control over contract value.

Nassau Bonus Annuity Plus includes several enhanced features, including Nassau’s highest premium bonus of up to 18%, a free withdrawal rollover feature, and an early return of premium surrender benefit. These features are made possible by an enhanced benefit fee applied during the surrender charge period, which is 10 contract years in most states.

The enhanced premium bonus of up to 18% creates a larger base to help contract holders grow their retirement savings and increase accumulation potential over the long term.1

Contract holders also receive enhanced liquidity features, with the ability to withdraw up to 5% penalty-free annually or roll over the withdrawal option for up to five contract years to receive up to 25%2. Also, with the early return of premium surrender benefit, after the fifth contract year contract holders can receive a cash surrender value of at least their single premium less prior gross withdrawals and enhanced benefit fees.

Nassau Bonus Annuity Plus provides powerful, tax-deferred growth potential to help contract holders catch up or get a head start on their nest eggs, all while protecting the principal from market downturns3. It offers indexed accounts linked to indices like the S&P 500® and Nasdaq-100®.

1Bonus is not available for immediate withdrawal and the bonus amount and associated earnings are subject to a vesting schedule. The bonus amount may vary by age and state and is not intended to meet short-term financial goals.

2Withdrawals of any kind (including Required Minimum Distributions) will cause the free withdrawal amount to revert back to 5% on the next contract anniversary. Withdrawals exceeding the free withdrawal amount may be subject to surrender charges, recovery of non-vested premium bonus amounts, Market Value Adjustment, and pro-rated fees. See the Product Summary and Product Disclosure for more information.

3The principal is protected against market losses and guaranteed under the base contract. Applicable fees will be deducted from the contract value, and this could potentially result in a loss of principal if the contract has had interest credits less than the fees.

Nassau was founded in 2015 and has grown to $24.3 billion in assets under management, $1.5 billion in total adjusted capital, and about 374,000 policies and contracts as of June 30, 2024.

Voya tops $100bn across multiple employer solutions

Voya Financial, Inc., announced today a milestone growth advancement as the firm surpassed $100 billion across various multiple employer solutions. Further highlighting Voya’s experience and commitment to Multiple Employer Plans (MEPs), Pooled Employer Plans (PEPs), Employer Aggregation Programs and other customized solutions, the firm continues to drive growth in this important market segment, with total assets increasing 15% since the same time period last year.

To support its growth and commitment to the multiple employer plan space, Voya recently announced the addition of newly created positions to support sales growth in this important market segment. These roles, which have been focused on driving growth and engagement with both advisors and plan sponsors, are dedicated to helping facilitate the creation of new solutions and adding adopting employers into existing solutions.

Voya’s growth across the abundance of multiple employer arrangements has been driven by flexible programs designed to provide optimal support for clients of all sizes. As a result, Voya has experienced significant growth specifically within its Wealth Solutions business, with 34% of total employer-sponsored DC plans participating in a multiple employer plan solution.

Last year, Voya also announced it is serving as the recordkeeper for first 403(b) Pooled Employer Plan following the SECURE Act 2.0 legislation. The PEP is designed to provide a pooled plan option for 501(c)(3) nonprofit organizations and health care related entities, expanding retirement plan access for employees in these industries.

American Life & Security launches new FIA

American Life & Security Corp., a six-year-old, Nebraska-based insurer (B++ by AM Best), has launched the American Life MaxGrowth 10 Fixed Indexed Annuity (FIA). MaxGrowth has a contract term of 10 years with annual point-to-point, monthly sum, and “performance-triggered” options. The annuity allows for additional premium contributions within the first 6 months and offers a 5×5 Annuitization option for accessing the full Contract Value over 5 years after 5 years.*

The contract offers these crediting strategies:

  • The S&P Market Agility 10 Index (S&P Market Agility 10 TCA 0.5% Decrement Index): The S&P Market Agility 10 Index is an equity-bond index that measures the performance of equity and fixed income component indices that each take long or short positions based on momentum and volatility indicators in response to changing market conditions. RBC Capital Markets is the hedging partner for the index.
  • The Schroders Global Compass Index: The Schroders Global Compass Index is a global multi-asset index that uses a dynamic allocation to seek positive return opportunities amid changing market conditions. The Index uses a rules-based approach to allocate across multiple asset classes, including global equities, government bonds, and energy commodities.

MaxGrowth is Distributed through American Life’s IMO partners, MaxGrowth is currently available in  Arizona, Colorado, Florida, Georgia, Illinois, Iowa, Kansas, Kentucky, Michigan, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, South Dakota, Utah, and the District of Columbia.

*5×5 Annuitization is only available if no withdrawals other than RMDs have previously been taken. Additionally, MaxGrowth includes a Nursing Home Benefit rider for those who may need nursing home care.

© 2024 RIJ Publishing LLC.

US life/annuity insurers cede $1.74 trillion to reinsurers, 2016-23

Posted on September 4, 2024 by -

Fueled by strong annuity growth on higher interest rates, U.S. life/annuity (L/A) insurers have doubled their ceded reserves to $1.74 trillion between 2016 and 2023, with an increasingly larger portion headed offshore, according to a new AM Best report.The Best’s Market Segment Report, “Strong Annuity Growth Continues Shift to Bermuda Reinsurers,” is part of AM Best’s look at the global reinsurance industry ahead of the Rendez-Vous de Septembre in Monte Carlo.

According to this report, nearly 47% of ceded L/A reserves were transferred offshore in 2023, after climbing steadily from the 26% level in 2016. AM Best believes this growth is likely to continue, as more companies may look to reinsurance to manage growth and capital levels. “With new company formations, partnerships, and private capital entering the market, the reinsurance market remains competitive and a larger share of business is being ceded to affiliates,” said Jason Hopper, associate director, AM Best.

The report notes that the vast majority of $103.2 billion in ceded reserves stemming from the 10 largest transactions of 2023 involved offshore transactions. Bermuda accounted for over a third of all in-force business, as well as 60% of new business, in 2023. Many private equity-owned insurers have started creating offshore reinsurance entities in recent years; approximately two-thirds of reserves ceded offshore go to affiliates. Companies with asset manager/private equity sponsors account for almost 44% of reserves ceded to offshore affiliates.

Bermuda and the Cayman Islands have gained in popularity due to their stable political and economic environments and regulatory landscapes, as well as access to talent (mainly legal and financial professionals). They also have flexible accounting regimes and can choose which system works best, whether that involves IFRS 17, GAAP, modified GAAP, or even a statutory approach.

Life/annuity reinsurance companies have benefited from higher interest rates and favorable mortality trends, an earlier AM Best report says. But firms backed by alt-asset managers or large private equity firms have intensified the level of competition in that niche.

The Best’s Market Segment Report, “Life/Annuity Reinsurers Face Growing Competition as Conditions Improve,” is part of AM Best’s look at the global reinsurance industry ahead of the Rendez-Vous de Septembre in Monte Carlo.

Other reports, including AM Best’s ranking of top global reinsurance groups and in-depth looks at the insurance-linked securities, Lloyd’s, health and regional reinsurance markets, will be available during August and September.

New capital continues to flow into the reinsurance segment, primarily via reinsurers owned by investment managers focused on annuity business, AM Best analysts write. These newer entrants have sought to coinsure assets that can be rolled into high-yielding positions, mainly in public, private or alternative fixed income products.

“These reinsurers also can offer attractive ceding commissions based on higher anticipated investment returns once the transferred assets are rolled into a wider set of investment opportunities,” AM Best said.

Overall, L/A reinsurers are well-capitalized and their risk-adjusted capitalization is expected to remain healthy through 2025, despite risks that remain in investment portfolios and elevated mortality for some. Reinsurers owned by asset managers benefit from their parent companies’ expertise in structured products, mortgages, private credit, and other alternatives.

“How newer entrants will alter their strategies over the long term depending on macroeconomic trends, availability of deals and regulatory changes remains to be seen. But by all indications, this ‘new capital’ is here to stay, with billions more committed but on the sidelines waiting for the next opportunity,” said Ed Kohlberg, director, AM Best.

Historically, the U.S. life reinsurance market had been pressured as primary insurers transferred less risk to third-party reinsurers, which led to a long decline in cession rates. More recently, rising interest rates led to robust annuity sales, which has motivated some primary carriers to reinsure incremental business.

While annuities are a very capital-intensive product, asset managers have thus far supported rapid growth by providing the needed capital and not constraining growth with material dividends.

Bermuda, and to a lesser extent, the Cayman Islands, have gained popularity based on the stable economic environment and regulatory landscape, as well as political stability and access to legal and financial talent. They also have flexible accounting regimes and can choose which accounting system works best.

“The notable annuity growth is likely to continue, and more companies may look to reinsurers to manage growth and capital levels. With new company formations, partnerships and private capital entering the market, the reinsurance market remains competitive with a larger share of business ceded to affiliates and third-party reinsurers,” said Stratos Laskarides, senior financial analyst, AM Best.

© 2024 RIJ Publishing LLC. All rights reserved.

Why 401(k) Plan Sponsors Remain Wary of Annuities

Posted on September 4, 2024 by -

The SECURE Act’s safe harbor for 401(k) annuities was presumably well-intended. But it may be a case of too little, too soon. Let me explain.

Asset managers and life/annuity companies, of course, are more than ready to pitch income-generating products to the $7.4 trillion 401(k) plan market. They’ve been ready since IncomeFlex (Prudential) and SponsorMatch (MetLife and Barclays Global Investors) were born almost 20 years ago.

But, based on what I hear and read, most plan sponsors and their advisers still aren’t ready to agree to have so-called “in-plan” annuities embedded in their plans as Qualified Default Investment Alternatives. They have a lot of questions that the SECURE Acts don’t answer.

After talking to 401(k) industry veterans, including executives and business owners, I’ve created a list of issues whose lack of resolution makes even large-plan sponsors, those with the best advisers and consultants, cautious about contracting in-plan annuity fever. It’s a long list.

Softness of the SECURE Act. Safe harbors, in the literal sense, are typically walled in by granite and limestone jetties. The legal “safe harbor” for annuities in the SECURE Act of 2019 offered nothing so reassuring.

Written to admit the widest range of options, it doesn’t give plan sponsors much guidance in sifting through the many types of annuities and their often-complex product designs. With minimal direction from lawmakers, plan sponsors can only proceed slowly and with caution.

“The safe harbor provision basically requires that the insurer must have complied with state financial reporting and solvency requirements for the last seven years,” the American Academy of Actuaries wrote in 2020. “Some would view this safe harbor definition as being too low a bar by sweeping in all insurers who are eligible to operate within the state. The safe harbor does not include any criteria to distinguish financially strong insurers from those that aren’t as strong but are still in compliance with the safe harbor.”

Tablecloth too small for table. Policymakers should have addressed the retirement plan coverage shortfall long before passing the SECURE Act. At any given moment, about half of Americans lack access to a retirement plan at work. Some states have mandated auto-enrolled Roth IRAs, but that doesn’t solve the job turnover/leakage problem. (See below.) Data showing the average or median number of years that Americans spend participating in a retirement plan before they reach retirement would be useful. Yes, SECURE 2.0 increased incentives for small and mid-sized employers to sponsor new 401(k) plans; perhaps that’s beginning to move the needle on coverage.

Can’t win for losing. At age 65, the median savings (50th percentile) for a Vanguard participant, according to Vanguard’s annual “How America Saves” survey, is about $90,000. The average savings (representing the 75th percentile) is about $275,000. “Nudges” won’t increase the savings capacity for low-income workers at small plans, and employers have no incentive to contribute to the accounts of high-turnover workers. Assuming that many people will need to keep at least half their DC savings more or less liquid in retirement, there won’t be enough left to buy a meaningful guaranteed income stream.

Not all 401(k) plans are equal. No one talks about this. Great companies have great DC plans (i.e., low expenses, employer matches and, if you’re lucky, discretionary employer contributions). Small company plans often have none of that. Retirement security often depends on working for a great company, getting paid well, and participating in a generous plan for many years. But it’s hard to get a secure job in a great company.

Not all 401(k) income products are equal. Too much is being asked of plan sponsors. The SECURE Act “does not specify which annuity products could be offered within a defined contribution plan; consequently, there is a full spectrum of possible products,” according to the American Academy of Actuaries whitepaper. “If the goal of plan sponsors is to provide their employees with options for lifetime income, they need to know that some of the options they add to their plans may meet this goal better than others. [Emphasis added.] Annuities that have additional investment-based guarantees attached or that mix investments with insurance add complexity to the education process and may be less effective in providing lifetime income than simpler products.”

The friction of liquidity. In the retail annuity market, a portion of a deferred income annuity’s yield comes from its illiquidity; its issuer holds bonds to maturity and avoids the inefficiency of holding short-term liquid instruments. If liquidity reduced yield by 100 basis points per year (an actuary’s estimate), from a net 5% to a net 4%, on $100,000, starting at age 50 with a $5,000 annual contribution, the accumulation by age 65 would be ~$284,000 instead of ~$321,000. That’s a $37,000 cost of liquidity.

“Most people don’t use the liquidity when it exists. At least not during their working lives. They may want to use it at retirement. So if you an amass an extra 10% of assets, even if the surrender fee is 2.5%, you are still way better off using the less liquid version. These folks end up paying thousands of dollars for an unused feature!” a long-time industry actuary told RIJ.

Loss due to leakage.  “Leakage” from tax-deferred savings during job changes reduces lifetime accumulations dramatically. The median job tenure for Americans is only 4.1 years. One industry veteran told me that 75% of 401(k) plan participants won’t be in their current plan when they reach retirement age.

Gender offender. Despite the fact that women on average live a couple of years longer than men, all else being equal, lifetime payout rates for 401(k) annuities must be gender neutral—i.e., the same for both. This could incentivize men to look for an annuity outside the plan. It could also create a communication challenge for plan sponsors.

The burden of providing education. Unless plan sponsors, plan advisers and plan providers invest money and effort in educating participants about retirement income planning, a lot of participants who have been defaulted into annuities will opt-out of them at retirement or before. It’s not even clear how to educate participants. If the best way to use a living benefit is to switch on the income payments immediately, but the annuity issuer would prefer that contract owners delay payouts, who will be candid with participants?

Possible blowback from benefits paid for but not received. “We have ongoing conversations with plan sponsor clients and other fiduciaries, about what is referred to as the potential for ‘unrealized benefits,” said Kelli Hueler, whose online platform, Hueler Income Solutions, enables participants nearing, at, or in retirement to shop for and buy low-cost income annuities. She’s referring to benefits that auto-enrolled participants may have paid for during the accumulation period but that—either because they change jobs or opt out of the annuity at retirement—they never receive. “It’s a serious issue that’s being discussed by astute plan sponsors and their consultants. They’d like to see lifetime income product designs that prevent this from happening.”

Soft assumptions. “Some of the recent TDF in-plan income products appear to rely on positive cash flow assumptions into the investment fund in order to provide guaranteed par value withdrawals into the future for retirees” Hueler told RIJ. “Importantly, it’s an assumption that hasn’t yet been tested.” Given that the products are designed for older participants who will take withdrawals relatively soon, the assumption seems questionable to her and some plan fiduciaries. For many years, Hueler also ran a company that collected data on stable value funds, including historical cash flow statistics, for fund evaluation and reporting to plan sponsors and other fiduciaries. Morningstar purchased that business in 2020.

Conflicts of interest. It strikes me as inherently challenging for plan fiduciaries, whose loyalty to plan participants is supposed to be undivided, to act in the participants’ best interests when choosing products that are designed, simultaneously, to serve the interests of a providers’ shareholders. The incentives and responsibilities are mismatched. Such conflicts of interests have consistently proven to create situations of “asymmetrical information” that disadvantage the clients. Clients typically don’t read, heed or understand verbal or written disclosures.

Paradox of QDIA annuities, Part I. Providers of in-plan 401(k) annuities need to be able to auto-enroll participants into qualified default investment alternatives (QDIAs such as TDFs, managed accounts or stable value funds) because they don’t believe that many participants will actively choose to invest in an annuity. Yet they seem to expect inertia or a newfound respect for annuities to propel these participants into actively choosing the annuity at retirement. I don’t understand this.

Paradox of QDIA annuities, Part II. Because retirement income planning involves long-term and sometimes-painful trade-offs, and because it requires discussions of both death and taxes, it requires substantial engagement on the part of a future retiree. But auto-enrolled participants are often the least-engaged participants. When, how and why will they engage?

Paradox of QDIA annuities, Part III. The smartest, best-paid participants, who are the ones most likely likeliest to reach retirement with the largest accumulations, are also the ones most likely to select their own investments. To the extent that that’s true, QDIA annuities will miss the largest, juiciest fruit on the 401(k) tree.

Portability issues still unsolved. The last time I checked, the folks at Retirement ClearingHouse were still making progress on its auto-portability initiative, which would forward the 401(k) assets of job-changers from their old plan to their new plan. I’m still trying to understand portability issues. It’s complicated. But it’s still a work in progress.

Patchwork regulation. The ongoing legal battle over the DOL’s “best interest” rule suggested to me that every player entering the defined contribution game would prefer to use their own playbook. They aren’t in the same book, let alone on the same page. Asset managers want to play by SEC rules, insurers want to play by state regulatory rules, employees rely on the Labor Department’s protections—and the judicial system appears vulnerable to gaming. Meanwhile, plaintiffs’ attorneys are waiting for plan sponsors to mess up. I’m not optimistic.

The ‘black box’ of insurance. Once insurers lock themselves into a guarantee, they must leave themselves some wiggle-room in which to manage their risks. At times, as I understand it, that can mean adjusting the costs or the benefits of a product in order to avoid a loss. Plan sponsors and participants may not be able to see into the “black boxes” where these adjustments are made. Yet fee transparency has to be a sine qua non for adoption by plan sponsors; they’re terrified of lawsuits.

Participants need more choices. Given the uniqueness of each retiree’s household balance sheet, and each one’s future income needs, it seems odd that a plan’s participants would not have several income-generating options at retirement. These might include non-guaranteed systematic withdrawal plans, for instance, as well as annuities.

“Any one in-plan income solution would be a mistake,” a DC plan veteran told me recently. “No one in-plan solution can accommodate that diversity of needs and goals. And, any two or more in-plan income solutions would add complexity far beyond what plan sponsors want to deal with, or everyday workers can use—without an advisor.”

Underwhelming demand from plan sponsors and participants. Despite what their proprietary surveys say, the sell-side of the 401(k) annuity market is still more interested in bringing this trend to fruition than the buy-side—i.e., the plan sponsors and participants. That’s to be expected, since the benefits to the sell-side are immediate and tangible, while the benefits to the buy-side are more remote and incalculable.

The takeaway

The push for 401(k) annuities may very well serve the business goals of DCIO (defined contribution investment-only) TDF providers. They partner with insurers to preserve assets-under-management levels in 401(k) plans and slow down the rollover-driven hemorrhage of TDF balances at retirement. But it’s not fair or efficient to use sponsors and participants as guinea pigs, or expect that, after a long shakeout period, the market’s invisible hand will deliver an optimal solution.

If the past is any guide, a few large asset managers and life insurers will try to impose a regime that serves their needs but not the public’s. That’s OK for hula-hoops or even computer operating systems, but this is a national program that participants finance and taxpayers subsidize. Too little has been done to address fundamental issues, leaving most plan sponsors not ready to commit.

© 2024 RIJ Publishing LLC. All rights reserved.

‘If you’re not talking about it, you’re not winning’

Posted on September 4, 2024 by -

Mark Fortier is an actuary who worked on AllianceBernstein’s pioneering 401(k)/annuity at United Technologies [now RTX] over a decade ago. He sees JPMAM’s initiative in the context of the DCIO (defined contribution investment-only) market, where it competes against other asset managers that distribute products (funds, TDFs, ETFs, CITs, etc.) through 401(k)s but don’t own their own proprietary retirement plan businesses.

With its DCIO/TDF competitors chasing the 401(k) income trend, J.P. Morgan can’t ignore it. “Retirement income has always been a popular topic of discussion for plan sponsors, advisors, and consultants,” said Mark Fortier. The theory is that if you are not talking about it, you’re not winning. So the topic of retirement income is a relevant discussion for them to have, even if it doesn’t turn out to be a big asset gatherer for them.”

Among the leading TDF issuers, JPMAM has a couple of competitive disadvantages. Having sold its retirement plan business to Empower in 2014, it doesn’t have the kind of captive pool of 401(k) participants that, for instance, Vanguard and Fidelity have.

Its TDFs also contain actively managed funds, which means that the fees are higher than those of the all-passive TDF providers. “Target date funds fees have fallen each year, driven by fee litigation and a shift to passive. The pure passive providers such as Vanguard, Blackrock, and State Street Global Advisors have been the winners of this trend,” Fortier told RIJ.

The TDF sector’s flattening growth curve is likely to be a challenge for all TDF issuers. “The growth of the TDF market has always been organic,” he said. “It was based on the fact that contributions exceeded distributions because ‘savers’ outnumbered ‘spenders.’ But ‘money out’ is starting to equal ‘money in,’ so the days of double-digit organic growth are ending.”

“As a DCIO player in the 401(k) business, J.P. Morgan fears irrelevance,” Fortier said. His personal assessment is that the 401(k) income opportunity has remained frustratingly out of the grasp of TDF manufacturers. “They’re doing a lot of work just to bet on the chance that participants will voluntarily convert their savings to an annuity,” he said. “But so far that has been a losing bet.”

Another executive, who has tried to market income products to plan sponsors for many years, told RIJ, “I’m skeptical. “Most employers and plan sponsors scratch their heads. No one is clamoring for it. Industry insiders are still cautious about the uptake so far.

“The hype is there, but I haven’t seen anything to justify it. Think of the things people could be pushing for, like the best way to claim Social Security or how to choose between Medigap and MedicareAdvantage plans. We’re all being told it’s the next big thing. But I don’t think the momentum is there.”

© 2024 RIJ Publishing LLC. All rights reserved.

 

J.P. Morgan Asset Mgt Joins the 401(k) Annuity Race

Posted on September 4, 2024 by -

J.P. Morgan Asset Management (JPMAM) has followed its target-date fund (TDF) competitors into the newborn 401(k) “in-plan” annuity market, partnering with A-list life insurers Equitable and Prudential on a new TDF/annuity product line called SmartRetirement Lifetime Income.

The new series, announced August 15, is based on the $2.9 trillion asset manager’s existing SmartRetirement TDF series. It will compete for plan sponsor clients against similar TDF/annuity hybrids from BlackRock, State Street Global Advisors and AllianceBernstein.

For those new to this phenomenon: The SECURE Act of 2019 encouraged 401(k) plan sponsors to offer annuities, issued by life insurers, to their participants, either as savings vehicles during their working years and/or to be purchased for immediate income at retirement.

Several large asset managers and insurers have since grafted annuities onto TDFs which, with $3.5 trillion in assets industry-wide, are the most common 401(k) savings vehicle. TDFs, like managed accounts, are admitted as qualified default investment alternatives (QDIAs) in 401(k) plans by the Department of Labor.

Participants who don’t choose their own investments can therefore be defaulted into a TDF.  Once invested in a TDF/annuity hybrid that can generate lifelong income throughout retirement, participants are likelier to leave their savings in the plan instead of rolling them over to an IRA.

“By offering in-plan lifetime income, the product design aims to mitigate the need for rollovers by giving participants access to institutional-quality products and pricing and helping the plan sponsor, recordkeeper, and J.P. Morgan retain in-plan assets,” JPMAM head of retirement Steve Rubino told RIJ in an email.

“We’re focusing on the larger plan universe of U.S. defined contribution plans eligible to invest in collective investment trusts (CITs), initially targeting large and mega plans as their QDIA [qualified default investment alternative],” Rubino wrote. (CITs are an increasingly popular vehicle for TDFs; they entail less paperwork and lower costs than mutual funds.)

The income guarantee

One of investment sleeves inside the SmartRetirement Lifetime Income TDF will be a stable value fund (SVF), a type of low-volatility bond fund often used in 401(k) plans for capital preservation, and in which about $870 billion in defined contribution plan assets are currently held.

Ten years prior to a participant’s target retirement date, some his or her savings will begin migrating to the SmartRetirement Lifetime Retirement Income Fund, which “ will invest in group annuity contracts issued by unaffiliated insurers to finance the optional lifetime income feature during the participant’s retirement spending phase.”

“In the accumulation phase, the TDF will make purchases of a stable value fund as part of the participant’s fixed income allocation,” Keith Namiot, head of institutional markets at Equitable, told RIJ in an interview. “That is, a portion of what would have been in bonds will be in stable value.

“The target allocation at retirement is 25% of the account value,” he added. “A ‘synthetic GIC’ (guaranteed investment contract) provided by us and by Prudential will wrap around the SVF during the accumulation period. Participants can elect guaranteed income for life at retirement,” he added. Participants will be able to move money out of the SmartRetirement Lifetime Income TDF if they wish—pension law requires that 401(k) assets be liquid for the participant.

Pulling the trigger

Though defaulted into the TDF, participants cannot be defaulted into the annuity. They must actively choose it. “At retirement the participants can choose to buy a guaranteed withdrawal benefit for life and make withdrawals that are linked to the life expectancy of the policyholder and possibly the spouse. Participants must actively choose to trigger the lifetime income benefit; they can’t be defaulted into it. They can increase their payment by delaying the commencement of benefits.

The TDF/annuity concept is still too new for anyone to know what percentage of participants who reach retirement will pull that trigger. A lot will depend on how well that decision is supported by the plan sponsor and product providers. “When there’s education at moment of retirement, there’s a noticeable difference in the take-up rate,” said Equitable’s Namiot.

To educate participants, JPMAM said, “We are designing an intuitive digital experience, ‘My Retirement Income Planner.’ It is intended to provide education that plan participants can use in their decision-making, including whether to opt into the lifetime income feature. There will not be any additional fees—for plan sponsors or participants—for accessing this digital education.”

Given the participant’s account value, years of life expectancy when income starts, and the anticipated growth rate of the SVF, the insurer will be able to calculate not only the monthly payments during retirement, but also project the date when the account will be depleted.

“Usually, in a variable annuity with a GWB, the payment is a percentage of the guaranteed income base, Namiot said. “Due to market volatility, it is not possible to know what year the account will be depleted. For this product, the guaranteed payment is based on mortality and the payments are designed to deplete the account value at a specific date in the future.  We adjust the payment each year based on the net-of-fees performance of the account.”

If retirees die before reaching that date, their beneficiaries will receive what’s left in the account. If retirees outlive their life expectancies, one of the life insurers will continue paying them by purchasing a life-contingent, single premium immediate annuity (SPIA). “At a certain date in the future that is known to us and to the participant, if still living, Equitable will begin making guaranteed payments to the policyholders in amounts equal to their last monthly payout check,” he told RIJ.

The SPIA is financed by the annual insurance fees that the participants start paying as soon as they opt into the program at retirement. Retirees will continue to pay investment fees on the 75% of their savings that remains in the 401(k) plan, under JPMAM management. Specifics about these fees were not available to RIJ at deadline. The current fee for the JPMAM SmartRetirement Income Fund, the most final fund in its TDF series, is 69 basis points (or 88 bps without the current waiver).

The annuity features known as “guaranteed withdrawal benefits” have been around for more than 25 years, initially as riders on deferred variable annuities and later on other types of deferred fixed, fixed indexed, and registered index-linked annuities. The value proposition sounds like a win–win: the monthly payout can’t be less than a certain minimum, and retirees can always take out more than that for unplanned or unforeseen expenses.

But that type of “withdrawal benefit” has always presented a trap of sorts for retirees, no matter which insurer offers it. The minimum withdrawal rate is, in effect, also a maximum withdrawal rate. If retirees over-withdraw from their accounts, they could, depending on how much they withdraw, forfeit past fees and receive proportionately smaller monthly payments until they die. Since their “excess withdrawal” would reduce the providers’ asset-based fees, that makes sense.

At retirement, participants in the SmartRetirement program also have an opportunity to choose a non-guaranteed distribution service, JPMAM’s “Flexible Retirement Income Fund. JPMAM’s website describes it as “a balanced portfolio of stocks and bonds that offers higher growth potential and supports a flexible withdrawal strategy.”

© 2024 RIJ Publishing LLC. All rights reserved.

Most annuities bought to reduce investment risk: LIMRA

Posted on September 3, 2024 by -

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 2nd 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 -

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.

© 2024 RIJ Publishing LLC.

Honorable Mention

Posted on August 1, 2024 by -

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 (4th highest of 13) with a Stable Outlook, affirmed May 2024.

© 2024 RIJ Publishing LLC. All rights reserved.

British regulators scrutinize ‘FundedRe’ in pension deals

Posted on August 1, 2024 by -

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.

© 2024 RIJ Publishing LLC. All rights reserved.

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

Posted on August 1, 2024 by -

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.”

© 2024 RIJ Publishing LLC.

RIJ Launches the 401(k) Income Research Center

Posted on July 31, 2024 by -

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.

© 2024 RIJ Publishing LLC. All rights reserved.

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

Posted on July 31, 2024 by -

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.

© RIJ Publishing LLC. All rights reserved.

High rates drive high interest in annuities: LIMRA

Posted on July 31, 2024 by -

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.

© 2024 LIMRA. Used by permission.

Should Participants Get Lifetime Income By ‘Default’?

Posted on July 31, 2024 by -

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.”

© 2024 RIJ Publishing LLC. All rights reserved.

Offshore Regulatory Arbitrage by US Insurers Explained

Posted on June 29, 2024 by -

“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.”

© 2024 RIJ Publishing LLC. All rights reserved.