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Australia’s ‘Super’ DC program faces decumulation problem

Posted on March 20, 2025 by John Mitchem -

Australia’s superannuation system is at a critical juncture in 2025. While the scheduled increase of the super guarantee to 12% marks a significant milestone, the system confronts a suite of complex challenges around advice and retirement income.

Australia’s Super system has grown to US $2 trillion in assets under management, rising to US$10 trillion over the next 25 years. The system is renowned for its quality asset allocation investing some 40% of AUM globally, with the US as a primary target of both public and private investment.

But while Super, like the US 401(k) system proved wildly successful in accumulation over the past generation the system is ill-equipped for the de-cumulation challenge before it. With the population aging, and robust debate over the fast-rising cost of housing, healthcare and education in Australia, the transition seems fraught with difficulties.

One of the most pressing issues is the persistent advice shortage. As Australians approach retirement, the need for personalized financial guidance intensifies. However, the regulatory landscape, coupled with the rising costs of providing advice, and a collapse in the number of financial advisors in the country from 26,000 in 2019 to 15,000 in 2025 has created a serious policy crunch. Just as the baby boomer Aussies slide across into retirement many feel at a loss to navigate the complexities of retirement planning without professional assistance.

The lack of adequate lifetime income options further exacerbates this problem. While superannuation funds have excelled at accumulating wealth, they have struggled to provide products that deliver reliable income streams throughout retirement. This shortfall leaves retirees vulnerable to longevity risk, the possibility of outliving their savings. Australia has not created a default path to retirement income products, such as variable annuities and other pooled longevity risk solutions.

A significant portion of Australian retirees take their superannuation as a lump sum. While that may be a correct choice for wealthy retirees accustomed to high-fee financial advice, most Australians are not equipped to handle the complexities of managing large sums of money.

Key trends for Superannuation in 2025:

Super Guarantee Increase: The planned increase of the super guarantee to 12% in 2025 is a measurable step towards bolstering retirement savings. However, the effectiveness of this measure will depend on addressing the aforementioned challenges.
Regulatory Pressures: The superannuation sector is subject to intense regulatory scrutiny, which, while necessary, can create compliance burdens and stifle innovation. Finding the right balance between regulation and innovation is essential.
Technological Disruption: Technological advancements, such as digital advice platforms and data analytics, offer potential solutions to the advice shortage and the need for personalized retirement planning. But it remains to be seen whether the Australian retirement market has the necessary scale to fund a generation of fintech solutions.

Australia’s superannuation system in 2025 is a system in transition. It has achieved remarkable success in accumulating retirement savings, but it must now adapt to the challenges of decumulation. Addressing the advice shortage, developing robust lifetime income options, and harnessing the potential of technology are critical to ensuring that all Australians can enjoy a secure and comfortable retirement.

John Mitchem is a strategic consultant to financial stakeholders worldwide.

Participant Sentiment a ‘Hurdle’ to 401(k) Annuity Uptake: Cerulli

Posted on March 20, 2025 by Editorial Staff -

Despite the benefits annuities offer, retirement plan participant sentiment remains a considerable hurdle. Asset managers and recordkeepers should consider marketing guaranteed income products as part of a diversified retirement income strategy rather than as a complete solution, according to the latest Cerulli Edge—U.S. Retirement Edition.

As of 2024, 91% of asset managers believe annuity products carry a negative stigma (19% strongly agree, 72% agree), compared to 79% in 2019 (24% strongly agree, 55% agree). Although the percentage of those that “strongly agree” declined slightly, overall agreement has increased, indicating that more asset managers now recognize the persistence of this stigma.

“Annuities continue to face perception issues due to high fees, complexity, lack of transparency, and concerns about insurer solvency, all of which deter plan participants,” says Idin Eftekhari, senior analyst. “The tradeoff between liquidity and a guaranteed income stream is unappealing for many participants. While annuities provide predictable payments, they do so at the cost of limiting a participant’s access to capital,’’ he adds.

At the same time, there is growing uncertainty or divergence in opinions regarding the necessity of guaranteed income in retirement solutions among asset managers. In 2019, 42% of asset managers believed an effective in-plan retirement income solution must include a guaranteed component; however, by 2024, this declined to 37%. Meanwhile, neutrality has increased (from 18% to 25%), while general disagreement remains consistent (39% in 2019 versus 38% in 2024).

“While some participants prioritize liquidity and growth potential, others place more value on the peace of mind provided by a guaranteed income stream,” says Eftekhari. “These individuals are comfortable with dedicating a portion of their retirement assets to an annuity, ensuring a predictable cash flow to cover essential expenses. The tradeoff between liquidity and security is acceptable for this population, as the guaranteed payments help reduce anxiety about market fluctuations and longevity risk.”

Recognizing varying preferences will be crucial in designing effective defined contribution (DC) plan structures. DC plans can offer structured drawdown strategies that provide flexibility while mitigating longevity risk rather than incorporating a strict guaranteed income component. Target-date funds, managed payout funds, and dynamic withdrawal frameworks represent viable alternatives to annuitization. These approaches allow participants to maintain growth exposure while implementing systematic withdrawal methodologies tailored to their spending needs.

“While the allure of guaranteed income is understandable—offering retirees a predictable stream of payments—it may not necessarily be an imperative,” says Eftekhari. “Asset managers committed to distributing guaranteed income products must collaborate with recordkeepers to enhance participant education, servicing, and support,” he concludes.

Open Letters Call Out Tepid Insurance Regulation

Posted on March 1, 2025 by Kerry Pechter -

Two RIJ subscribers have written separate, open letters to the National Association of Insurance Commissioners (NAIC), calling for a faster, more energetic regulatory response to ongoing life/annuity industry practices—especially the use of offshore reinsurance for capital-reduction reasons—that they believe will harm the interests of insurance policyholders and annuity contract owners.

As a publication, RIJ has also been critical of offshore reinsurance, which we consider part of the deceptive “Bermuda Triangle” strategy that private equity firms have introduced to the life/annuity industry since 2009. We share the concerns expressed in these letters and thank the authors for letting us publish them here.

In his letter to NAIC actuary Scott O’Neal, Larry Rybka, chairman of Valmark Financial Group, Akron, Ohio, writes in part, “In both my professional role and personally, as a policyholder of several life insurance and annuity policies myself, I share the concerns expressed by state insurance regulators, rating agencies, and consumer advocates surrounding the risk that domestic life insurers may currently enter into reinsurance transactions that materially lower the amount of reserves and thereby facilitate the release of reserves that prejudice the long-term interests of their policyholders. Further, I support the state insurance regulators in their stated goal of seeking to better understand the amount and quality of reserves and type of assets supporting long duration insurance business that relies substantially on asset returns.”

In his letter to the NAIC’s Life Actuarial Task Force, annuity owner Peter Gould of Bloomington, IN, says in part, “As a consumer, I’m opposed to any ceding of risk transaction (whether to a reinsurer, other third party or any related party, including parent) that decreases an insurer’s reserves or capital supporting contractual promises to policy owners or that reduces the insurer’s claims-paying ability. Any such transaction should be subject to mandatory cash flow testing—regardless of the identity of the counterparty.”

While these two letters address specific projects undertaken by the NAIC to address specific concerns about “asset adequacy testing” and offshore reinsurance, they should be seen in the context of wider, longstanding concerns about the sluggish and fragmented way that many individual states regulate life/annuity companies and their products in the U.S. But that’s a topic for another day.

Open Letter to NAIC’s Life Actuarial Task Force

Posted on March 1, 2025 by Peter Gould -

February 28, 2025

From: Peter Gould, P.O. Box 8815, Bloomington, IN 47407-8815

To: Life Actuarial (A) Task Force NAIC

Re: Reinsurance Asset Adequacy Testing

Dear Members of the LATF:

I am a retiree and am writing to comment as a consumer and annuity contract owner with “skin in the game.” My wife and I depend on variable annuities for a considerable portion of our retirement income. We purchased our annuities as a source of retirement income we would not outlive—not as speculative investments.

First, I want to request that the scope of the Asset Adequacy Testing (AAT) project be expanded to cover all counterparty risk. By limiting the application of AAT solely to reinsurance, you encourage and abet the whack-a-mole behavior of insurers that regulators have tolerated in the industry—to the detriment of consumers.

One example of this behavior is the exponential increase in offshoring counterparty risk to sidestep the GAAP rules for long-duration contracts contained in FASB ASU2018-12. Even more egregious is the behavior tolerated by regulators in connection with the AG49 rules for Indexed Universal Life illustrations. AG-49 had to be reissued twice and still doesn’t protect consumers from misleading illustrations!

Second, great deference has been given to the companies you regulate by constricting the AAT project to disclosure-only and disclosure-only-very-lite for the 2025 reporting year. While I understand that regulators are still trying to understand the magnitude and effect of the mushrooming growth of reinsurance, in the Background section of the exposure draft, it states:

“The purpose of this referral is to propose enhancements to reserve adequacy requirements for life insurance companies by requiring that asset adequacy testing (AAT) use a cash flow testing methodology that evaluates ceded reinsurance as an integral component of asset-intensive business.”

Rather than being an “educational exercise,” as an industry lobbyist suggested, the AAT project should anticipate the development of guardrails that will protect consumers. To that end, I propose adding Item 10 to the text, as follows:

Following the collection and analysis of data pursuant to this Guideline for the 12/31/2025 and 12/31/2026 Annual Statements, guidelines will be developed for the 12/31/2027 year to establish protections for policy owners, specifically to set guardrails for asset adequacy.

Third, in comments and discussions, reference has been made to the restrictions on U.S. regulators’ ability to regulate companies under the Covered Agreement (2017 Bilateral Agreement Between the United States of America and the European Union On Prudential Measures Regarding Insurance and Reinsurance).

While your hands may be tied in terms of regulating, they are not tied in terms of disclosure to stakeholders. Supreme Court Justice Louis Brandeis stated, “Sunlight is said to be the best of disinfectants.” I propose that upon the collection and analysis of the 2025 Annual Statements, an Asset Adequacy grading system be developed for the benefit of all stakeholders—including, but not limited to: Policy owners (the most important stakeholders), insurance practitioners, researchers, academics, regulators and journalists. To achieve this, I propose adding Item 11 to the text, as follows:

Following the collection and analysis of data pursuant to this Guideline for the 12/31/2025 Annual Statements, a grading system will be developed to categorize asset adequacy for all insurers. Grading categories would be banded in 20% increments:

100-80% would be “best” (color code green)
80-60% would be above average (color code blue)
60-40% would be average (color code white)
40-20% would be below average (color code yellow)
20%-0% would be worst (color code red)
If a company was not subject to AAT, that would be clearly noted. The results of the grading will be published and updated annually on the NAIC website as part of the Consumer Information Search Financial Overview Report.

Fourth, the exposure draft should be tested with data from some current events to see if the proposed rules are effective and predictive: Plug in the numbers for PHL Variable Life, Columbian Mutual, ACAP companies, etc. Would these troubled companies be scoped out or fly under the radar undetected?

Now, here are my comments/suggestions for other provisions of the exposure draft – my changes in red:

(1) For year-end 2025, a complete listing of Asset Intensive Reinsurance Transactions ceded to entities, regardless of treaty establishment date, in a format similar to Schedule S of the Annual Statement. For 2025, significant reinsurance collectability risk is determined according to the judgment of the ceding company’s Appointed Actuary and the listing will indicate which transactions, if any, have significant reinsurance collectability risk.
Deficient Block – When a block of business shows negative present value of ending surplus in cash-flow testing scenarios using reasonable assumptions under moderately adverse conditions such that additional reserves would be needed in the absence of aggregation. A listing of all Deficient Blocks and the additional reserves needed in the absence of aggregation shall be included in the Annual Statement.
I. Primary Security – [As defined in Section 4.D. of Actuarial Guideline 48] {or replace with another term to describe a stable asset supporting reserves}. An XOL shall not be considered a primary security. [Editor’s note: XOL stands for “excess of loss” insurance.]
K. Similar Memorandum – A regulator may (but is not required to) accept an actuarial report that is not a VM-30 submission to a state that contains at least the following elements:
B. For year-end 2025, the Appointed Actuary should consider the analysis required to be performed by this Actuarial Guideline, along with other relevant information and analysis in forming their opinion regarding the potential need for additional reserves. In the event that the Appointed Actuary believes that additional reserves are required (based on their application of appropriate actuarial judgment), then the Appointed Actuary should reflect that in their Actuarial Opinion, including the reason for additional reserves, the amount of additional reserves needed and the effect of not depositing additional reserves.

This Guideline does not include prescriptive guidance as to whether additional reserves should or should not be held. The domestic regulator will continue to have the authority to require additional reserves as deemed necessary.

G. A Similar Memorandum submitted to the cedant’s domestic regulator may be an appropriate alternative to cash-flow testing following VM-30 standards in some instances, if the Similar Memorandum is easily readable for review of the risks and analysis related to the scope of this Guideline, and based on the Similar Memorandum the cedant’s domestic regulator finds that they are able to determine whether the assets are adequate to support the liabilities, with the assistance of the Valuation Analysis (E) Working Group. The U.S. regulator reserves the right to accept or reject such Similar Memorandum in lieu of cash-flow testing.

As a consumer, I’m opposed to any ceding of risk transaction (whether to a reinsurer, other third party or any related party, including parent) that decreases an insurer’s reserves or capital supporting contractual promises to policy owners or that reduces the insurer’s claims-paying ability. Any such transaction should be subject to mandatory cash flow testing—regardless of the identity of the counterparty. In evaluating assets, the same asset should not be double-counted for purposes of reserves and capital. I don’t want to be left holding the (empty) bag, like the 92,000 PHL Variable Life policy owners.

Thank you for your consideration of my comments and for the work that you do to protect consumers.

Yours truly,

Peter Gould

Honorable Mention

Posted on February 26, 2025 by Editorial Staff -

In sales, deferred annuities finish ‘up’ year with a ‘down’ quarter: WinkIntel

“It was a mixed bag for the annuity business this quarter. That said, overall annuity sales were down more than 13% from last quarter,” writes Sheryl J. Moore in the release of her 4Q2024 Wink’s Sales & Market Report on Annuities. Her report says:

Deferred annuity sales were down nearly 13% from the prior quarter, and they declined close to 7% over 4Q24 as well. Declining credited rates/caps/participation rates and increasing spreads hurt deferred annuity sales when compared to last quarter. That aside, deferred annuity sales were up nearly 19% over last year. Ninety percent of the top ten sellers of deferred annuities experienced increased sales over the period, and half of these experienced double-digit gains.

Non-variable deferred annuities experienced a nearly 23% decline over last quarter, and this time, last year. It just isn’t easy to top the historically two best quarters for sales. Sixty percent of the top 10 participants offering non-variable deferred annuities experienced double-digit declines from last quarter, as well as this time last year. Again, declining rates negatively-influenced multi-year guaranteed (MYG), fixed, and indexed annuity sales results. However, non-variable deferred annuities were up nearly 14% over last year, with indexed annuities providing the bailout. While interest rates challenged the product line, the potential for gains was still considerable when assessing rates of certificates of deposit (CDs), as well as those on fixed annuities.

While fixed types of annuities suffered 4Q25, variable deferred annuity types shined. When reviewing the combined sales of structured annuities and variable annuities, there was more than a 12% increase over last quarter, and more than a 45% increase over the same period, last year. The market’s continued upward-trajectory had a considerable impact on these sales. When reviewing 2024 sales, as compared to the year prior, variable deferred annuities brought in more than 32% than last year. The S&P 500 gained about 100 points from the beginning of fourth quarter, to the end of 2024- and it resulted in stellar sales for “risk money products.”

This is the fourth quarter that Wink has reported on immediate income (SPIA) and deferred income annuities’ sales (and therefore all annuity sales). Total income annuity sales declined more than 17% this quarter. It showed. Nearly 70% of participants selling income annuities had double-digit losses for the quarter.

Multi-year guaranteed annuities have been on a downward trend, since making records the fourth quarter of 2022 (when rates popped-up). As such, MYGA sales were down nearly 32% since last quarter, and had losses of nearly 45% when compared to the same quarter, one year ago. Nearly 68% of participants experienced double-digit sales declines over that period. When comparing this year’s sales to 2023’s- MYGAs were able to earn a big “W” (winner) with an increase of less than 2%.

Fixed annuities have a rate that is guaranteed for only one year. And- there are less than 30 participants in our survey, who sell this type of annuity. Sales have been unremarkable for at least a decade, thus far. This quarter was no exception. Sixty percent of the top five best-selling fixed annuity carriers experienced sales declines over 3Q24. Many insurance companies offering one-year rate guarantees dropped their rates for the last quarter of the year; this resulted in a nearly 33% decline in sales for the product line.

Indexed annuities were the golden child of the non-variable annuity product lines this quarter. The products could not clock a victory, when comparing 4Q24 sales to the prior record-setting quarter. That said, the product line experienced growth in sales of nearly 23% when looking at this quarter, last year. And not to be outdone, sales for all of 2024 were up more than one-third. Attractive rates (and therefore attractive illustrations), helped with the momentum in sales. Indexed annuity sales set a record for the year.

While indexed annuities were the favorite of the non-variable deferred product lines, structured annuities (often referred to as “RILAs”) were the big winner in the variable deferred segment. Sales were up all around- for the quarter, against the same quarter a year prior, and for the year. Thanks to a rising market and attractive rates, structured annuities gained more than 7% momentum over last quarter’s sales and a nearly 40% gain when compared to the final quarter of last year. Not to be outdone, 2024’s sales were nearly 40% higher than the prior year. Structured annuities had both a record quarter, and a record year.

No other product line is as dependent on the market’s movement, than variable annuities (VAs). Like structured annuities, VA sales were up all around. Sales for the quarter and this quarter last year, were up 18% and nearly 53%, respectively. Variable annuities haven’t fared as well since pre-2022, but the sales for 2024 were up more than 25%.

Both immediate income annuity and deferred income annuity sales slumped, with immediate income annuities losing nearly 15% of last quarter’s sales and deferred income annuities bringing-in nearly 24% less than last quarter. Additional commentary will follow, once sales of these product lines have been collected for at least a year.

AM Best upgrades Lincoln’s credit outlook

Fresh from the Super Bowl victory of the football team that plays in its eponymous Philadelphia stadium, Lincoln Financial has received credit outlook upgrades from AM Best—tempered however by concern about Lincoln’s use of offshore reinsurance.

The ratings agency revised the outlooks of the Long-Term Issuer Credit Ratings (Long-Term ICR) to stable from negative and affirmed the Financial Strength Rating (FSR) of A (Excellent) and the Long-Term ICRs of “a+” (Excellent) for two Lincoln subsidiaries.

They are Lincoln National Life Insurance Company and its wholly owned subsidiary, Lincoln Life & Annuity Company of New York (Syracuse, NY), which are part of Lincoln National Corporation of Radnor, PA. The outlook of the FSR is stable.

AM Best also revised the outlooks to stable from negative and affirmed the FSR of A (Excellent) and the Long-Term ICR of “a” (Excellent) of First Penn-Pacific Life Insurance Company (FPP), a wholly owned non-core subsidiary of LNC in run-off. The ratings of FPP also reflect implicit support from the greater organization.

In addition, AM Best has revised the outlooks to stable from negative and affirmed the Long-Term ICR of “bbb+” (Good) and the Long- and Short-Term Issue Credit Ratings (Long-Term IR; Short-Term IR) of securities issued by LNC, the ultimate holding company.

All companies are domiciled in Fort Wayne, IN, unless otherwise specified.

AM Best assessed Lincoln’s balance sheet, operating performance, business profile and enterprise risk management (ERM) as strong, favorable and appropriate, respectively.

Concerns about reinsurance

Partially offsetting the positive rating factors, is Lincoln’s concentration in certain reinsurers and incremental reinsurance leverage, which somewhat diminishes its quality of capital and places pressure on the group’s overall balance sheet strength assessment.

In 2023, Lincoln reinsured approximately $28 billion of in-force fixed annuity, hybrid long-term care (MoneyGuard), and ULSG reserves to Fortitude Reinsurance Company Ltd (Bermuda), and sold its wealth management business to Osaic.

In 2024, Lincoln also began reinsuring various in-force and new policies to a new affiliate it called Lincoln Pinehurst Reinsurance Company (Bermuda) Limited. which the group is expected to continue utilizing in addition to the existing cessions to its onshore captive reinsurers and another offshore affiliate, Lincoln National Reinsurance Company (Barbados) Limited.

Reinsurer counterparty credit risk analysis during Lincoln’s financial planning, monitoring and stress testing processes under its ERM framework has gained even more importance, and AM Best will also monitor Lincoln’s periodic credit reviews of its reinsurers.

Statutory earnings have been volatile in the last two years partly due to the material amount of in-force liabilities and assets transferred through the aforementioned outbound coinsurance treaties. A portion of the change in assets supporting registered index-linked annuities reserves was not included in statutory earnings.

However, AM Best expects statutory earnings and capitalization to further stabilize and remain above Lincoln’s 420% risk-based capital ratio target (company action level) over the next five years for its onshore operations. The stable outlooks reflect AM Best’s expectation that Lincoln maintains strong overall balance sheet strength and operating performance metrics, supported by a well-diversified mix of business.

Lincoln reported a material GAAP reserve charge of approximately $2.0 billion in third-quarter 2022, primarily due to unlocking policyholder lapse assumptions in its universal life with secondary guarantee (ULSG) insurance block of business.

Since then, the group has executed several strategic initiatives that have reduced product risk and have started to stabilize and rebuild risk-adjusted capitalization to historical levels.

Axonic and Hexure collaborate on Waypoint MYGA

Axonic Insurance Services has implemented Hexure’s FireLight “sales and regulatory automation solutions” to help launch its new annuity product, according to a release. The technology is intended to help AIS’s distribution partners to submit applications for the AIS Waypoint multi-year guaranteed annuity.

AIS, a new entrant in the U.S. individual insurance market, chose FireLight to deliver a digital and accessible annuity sales process to its distribution partners, to effectively deliver annuity products to U.S.-based consumers. With FireLight’s established distribution network and large financial professional base already familiar with the platform, AIS saw an opportunity to accelerate market entry while offering a fast, intuitive e-application experience.

Axonic Insurance Services designs, distributes, and services annuity and investment plans for consumers worldwide. Founded in 1995, Hexure provides digital sales solutions to the insurance, financial services, and wealth management industries across various lines of life insurance, annuities, retirement, and wealth management products.

Invst launches pooled employer plan

Invst, an Indianapolis, Indiana based registered investment advisor (RIA)has acquired NS Capital, a Stamford, Connecticut based registered investment advisor, and created the Invst Unity Pooled Employer Plan.

The PEP allows employers in unrelated sectors to join a single retirement plan, while reducing liability and costs associated with 401k plans, the companies said in a release. A PEP “simplifies the process for companies but also alleviates them from the risks associated with independently sponsoring a retirement plan,” the release said.

NS Capital launched the Unity 401(k) Pooled Employer Plan in January 2021. Invst formed the MyInvst401K PEP in 2021 as well. The new Invst Unity PEP will be offered in tandem with the Invst IQ Financial Wellness Platform/app.

Ratings of Nassau companies are upgraded

The ratings agency AM Best said it has upgraded the credit ratings and strength ratings of the insurers in the Nassau Insurance Group, including Nassau Life, Nassau Life and Annuity, and Nassau Life of Kansas.

AM Best upgraded the insurers’ Long-Term Issuer Credit Ratings (Long-Term ICR) to “bbb+” (Good) from “bbb” (Good), and affirmed their Financial Strength Rating (FSR) of B++ (Good).

The upgrading of Nassau’s Long-Term ICRs is “due to the group’s improved operating performance metrics over the past several years. Operating performance results have been bolstered more recently by a significant improvement in alternative investment income and driven by insurance and asset management results with effective prudent expense management.

“There also has been continued earnings diversification between the insurance and fee-based businesses. Nassau has experienced strong premium growth in recent years following prior declines due to a strategic decision to manage new growth while developing a suite of new product offerings, as well as the continued runoff of legacy blocks of business.

“In addition, there is a concentration of new sales in interest-sensitive annuity products, albeit with good geographic diversification on a national basis,” AM Best said in a release.

The three insurers, Nassau Life and Annuity Company, Nassau Life Insurance Company, Nassau Life Insurance Company of Kansas, as well as Nassau Re (Cayman) Ltd, are also indirect subsidiaries of Nassau Financial Group, L.P., which is controlled by Golden Gate Capital

“They are separate entities and each is responsible for its own financial condition and contractual obligations,” according to Nassau Financial Group’s website. The insurers manage a combined $24.8 billion in assets, have $1.6 billion in total adjusted capital and 370,000 policies and contracts.

To tax or not tax Social Security benefits

Posted on February 26, 2025 by Editorial Staff -

Eliminating taxes on Social Security benefits would reward high-income households nearing or in retirement but punish households under age 30 and all future generations across the entire income distribution, according to an analysis by the Penn Wharton Budget Model.

President Donald Trump’s 2024 campaign trial-balloon statement “reduces incentives to save and work while increasing federal debt,” the analysis found. “Wages and GDP [would also] fall over time.”

Some high-income households would gain more than $100,000 in remaining lifetime welfare from the policy change, but those under age 30 would be worse off, with newborn households losing about $10,000 in lifetime welfare.

The research showed that:

· Eliminating income taxes on Social Security benefits would reduce revenues by $1.5 trillion over 10 years and increase federal debt by seven percent by 2054.

· The projected depletion date of the Social Security Trust Fund would accelerate from December 2034 to December 2032.

· Incentives to save and work are reduced along with rising federal debt.

· Relative to the baseline, the capital stock falls by one percent in 2034 and 4.2% in 2054.

· Average wages fall by 0.4 percent in 10 years and by 1.8% by 2054. GDP falls by 0.5 percent in 10 years and by 2.1% by 2054.

The analysis assumed, in the absence of any details about the potential policy change, that it would entail “a full removal of benefits taxation starting in 2025 (retroactively applied) and permanent.”

Effects of 1983 and 1993 law

Social Security benefits have been taxed for about 40 years. The Social Security Amendments of 1983 introduced the taxation of Social Security benefits for the first time. The Omnibus Budget Reconciliation Act of 1993 introduced a second tier of taxation.

An individual’s combined income determines the share of an individual’s Social Security benefits that are subject to income taxation. The legislative changes were primarily aimed at improving the financial stability of Social Security.

Tax brackets in detail:

Beneficiaries with combined income below $25,000 ($32,000 for joint filers) pay no taxes on their benefits.
Those with combined income between $25,000 and $34,000 ($32,000 to $44,000 for joint filers) are taxed on up to 50 percent of their benefits.
Individuals with combined income above $34,000 ($44,000 for joint filers) are taxed on up to 85 percent of their benefits.

These income limits are not indexed for inflation. As incomes rise due to inflation, more people may find their Social Security benefits subject to taxation.

‘Rated Note Feeders’ Attract NAIC Attention

Posted on February 25, 2025 by Kerry Pechter -

The National Association of Insurance Commissioners (NAIC) has formed a Risk-Based Capital Model Governance Task Force to reassess and modernize capital requirements for insurance companies, according to the NAIC. The action is expected to focus in part on the use of “rated feeder funds,” which are controversial investment gimmicks.

A February 9, 2025, NAIC Memorandum from the task force acknowledges the now-established trend toward life/annuity companies’ investments in private credit. Private credit assets under management, economy-wide, more than tripled since 2010, to $1.6 trillion, and are projected to accelerate to $2.5 trillion by 2029, according to Fitch Ratings.

The three-page NAIC memorandum states:

The prolonged low-interest rate environment that has existed since the Global Financial Crisis (GFC) of 2007–2009 created an industry trend to search for yield in investment portfolios and a material shift in the complexity of insurers’ investment strategies, resulting in more market and credit risk than historically normal. Traditional banks have also retreated from providing credit due to stricter post-GFC regulations and there has been a notable increase in private capital. These factors have contributed to insurers now serving as a growing source of real economy financing.

Risk-based Capital (RBC) is a tool used by regulators to identify weakly capitalized insurance companies. In doing so, RBC quantifies the risks taken by insurance companies by establishing minimum levels of required capital necessary to absorb those risks. Failure to hold certain prescribed levels of capital results in regulatory action in accordance with the level of capital shortfall. Capital requirements are generally calibrated to a targeted level of statistical safety, established to cover losses associated with a given risk within a desired level of confidence.

The RBC Model Governance (EX) Task Force will be tasked with developing guiding principles for updating the RBC formulas to address current investment trends with a focus on more RBC precision in the area of asset risk and to ensure that insurance capital requirements maintain their current strength and continue to appropriately balance solvency with the availability of products to meet consumer needs.

The NAIC has been under pressure to scrutinize life insurer’s investment in private credit. (See today’s open letter from Larry Rybka to NAIC actuary Scott O’Neal and Peter Gould’s open letter to the NAIC’s Life Actuarial Task Force.) The opacity, uniqueness, and complexity of private asset deals make that difficult.

Complex finance structures

In a commentary on the NAIC’s memorandum, attorneys at the MayerBrown law firm point to three kinds of deals in the “fund finance market” that could be affected by the task force’s future recommendations: These are subscription credit facilities, NAV (net asset value) loans, and rated note feeders. Here’s some background on those structures:

Rated note feeders

These are structured financial vehicles used by investment funds to attract institutional investors, like insurance companies. The “rated” part means that a credit rating agency (like Moody’s or S&P) assigns a risk rating to the notes. Insurers prefer or, in some cases, are required to invest in assets with credit ratings.

Since private assets are typically unrated and seen as high-risk, rated note feeders provide a way for these investors to participate in private assets while complying with regulations. Holding a rated note (instead of an unrated private equity fund) can reduce the capital they need to reserve.

Here’s what Bloomberg said about rated note feeders last November:

Rated feeders are part of a broader push by private credit firms to convince the U.S. insurance industry, which controls trillions in long-term capital, to pour money into the asset class. In fact, for many of private lending’s biggest players, insurers have become so critical to their growth efforts that they’ve built out or bought large insurance units of their own.

The transactions aren’t public and therefore hard to track, but virtually every private credit manager has begun taking advantage of the structure, market watchers say. Ares used one as part of its record-breaking capital raise earlier this year. Blackstone, Carlyle, and KKR have also utilized them, according to documents seen by Bloomberg and people familiar with the deals. Kroll Bond Rating Agency has graded over $20 billion of the products since the start of 2021, and says this year is on pace to be the busiest yet.

Subscription credit facilities

These are short-term loans given to investment funds (like private equity funds) based on commitments from their investors. These loans allow investment funds to make quick investments without waiting for investors to send their money. The loans are backed by the investors’ promises to contribute capital.

NAV loans

These are loans secured by the value of a fund’s assets rather than investor commitments. Investment funds use NAV loans when they are later in their lifecycle and have already invested most of their capital. Lenders look at the value of the fund’s investments to determine loan amounts and terms.

‘Regulators are actively looking at this space’

The MayerBrown memo on the new task force said in part:

“The implications of this initiative are broad. Lenders relying on insurance company participation in fund finance should prepare for potential changes in insurers’ approach to underwriting and pricing. Subscription credit facility lenders may find that RBC refinements reinforce the low-risk profile of their loans, supporting continued insurance company investment. NAV lenders, however, face an open question. A more sophisticated treatment of NAV lending could result in a capital framework that recognizes the nuances of these facilities, but it could also introduce new regulatory considerations. Market participants should watch closely as the task force clarifies its approach. Fund sponsors, particularly those utilizing rated note feeder structures, should also monitor developments, as changes in capital treatment could impact the economics of these investment vehicles.

“The fund finance industry should remain engaged as the task force’s work progresses. The NAIC’s focus on insurers’ involvement in alternative assets and structured products signals a broader regulatory shift that could reshape how insurance companies participate in fund finance markets. Given the task force’s mandate and its placement under the NAIC Executive Committee, the fund finance industry should expect substantive developments with potential long-term implications. Close monitoring, proactive engagement, and early assessment of potential regulatory impacts will be critical as the framework evolves.”

Commenting on rated note feeders, an attorney at Ropes & Gray said they are “a fairly new product and the insurance company regulators are actively looking at this space, so while these products currently address the regulatory capital needs of insurance companies, sponsors should think about adding flexibility to revise the terms or collapse the structure if the regulatory landscape changes in the future.”

According to a December 9, 2024 report from the law firm of Willkie, Farr and Gallagher:

“…Rated feeder fund” interests [are] a way to attract insurance company capital to invest in private credit strategies. The interest in the industry has been driven by the confluence of a challenged fundraising environment for traditional private capital managers as well as increased appetite from insurance companies to better match the regulatory capital treatment of investments in these funds with the regulatory capital treatment of the funds’ underlying credit investments.

“In these structures, the insurance company investor obtains a debt commitment in or purchases notes from a feeder vehicle. In order for the insurance company investor to obtain favorable NAIC Designation treatment, the investment manager facilitates these notes by obtaining a private letter credit rating, which letter would typically include a rationale report (a “Rationale Report”), from nationally recognized statistical rating organizations (“Rating Agencies”). When a private letter credit rating is obtained, the notes are considered “privately rated securities” for insurance regulatory capital purposes.”

On February 10, a FitchRatings report on growth and regulation of private credit said:

“Insurance companies’ allocations to private asset classes continue to increase, reflecting growth in private credit markets, and the incremental yield from illiquidity and complexity premia. The increase has also been driven by increased affiliations with alternative IMs [investment managers], which have been neutral to ratings to-date, but could lead to conflicts of interest, including incentivizing above-average growth levels, and single-manager concentrations. Scrutiny of private credit, particularly from bank and insurance regulators, is expected to increase, given limited transparency and potential spillover risks.”

Open Letter to Scott O’Neal, Actuary, NAIC

Posted on February 25, 2025 by Larry Rybka -

February 24, 2025

Re: AG ReAAT 013025

Dear Mr. Scott O’Neal, Assistant Managing Life Actuary, NAIC:

I am writing to comment on AG ReAAT 013025 and the need to strengthen controls over parties that back promises made to US policyholders. I am Chairman and CEO of Valmark Financial Group, a financial services company that includes in its portfolio Valmark Securities, Inc., an SEC-registered broker-dealer, as well as Executive Insurance Agency, Inc., a brokerage general agency. Through these entities, independent financial professionals registered by Valmark collectively oversee more than $70 billion of in-force insurance death benefit in both fixed and variable life insurance policies and additionally advise clients on nearly $4 billion of fixed and variable annuity values.

In both my professional role and personally, as a policyholder of several life insurance and annuity policies myself, I share the concerns expressed by state insurance regulators, rating agencies, and consumer advocates surrounding the risk that domestic life insurers may currently enter into reinsurance transactions that materially lower the amount of reserves and thereby facilitate the release of reserves that prejudice the long-term interests of their policyholders. Further, I support the state insurance regulators in their stated goal of seeking to better understand the amount and quality of reserves and type of assets supporting long duration insurance business that relies substantially on asset returns. Unfortunately, I do not believe the current AG ReAAT proposal goes anywhere near far enough to fix the problem.

As with any complex problem, there is not one place to direct all the blame. Without rehashing all the many ways financial engineering has allowed insurance carriers to indirectly avoid posting the needed “hard assets” to ensure that all promises made to policyholders are kept, even in prolonged periods of volatile bond and equity markets, the phenomenon of private equity companies directly owning insurance companies, as well as their involvement in the reinsurance market, combined with opaque financial information from some offshore reinsurance schemes, weaken the actual reserves left to support policies owned by everyday Americans. AG ReAAT, while well meaning, is far from sufficient, let alone robust enough to afford real protection to policyholders.

The issue of safe reserving levels for new insurance products is not a new one. I have been around long enough to remember company product actuaries arguing that reserve levels for innovative long-term care insurance, annuities with living benefits, term products with 30-year guarantees, and universal life with secondary guarantees were “redundant.” Now, 20-25 years later, in retrospect these reserving assumptions were not conservative enough.

The issue of hiding or covering these transactions with reinsurance from related parties was brought to light 12 years ago by Benjamin Lawsky, who was at the time financial services superintendent of the New York Department of Financial Services. Lawsky uncovered what he called “shadow insurance” reinsurance transactions that artificially inflate carriers’ surplus. In the 12 years since, insurance regulators have done little other than allow this situation to now mushroom with transactions that dwarf the size of the transactions Lawsky initially spotlighted as problematic.

The present system, which is potentially only being nominally refined by the proposed AG ReAAT, centers around an actuary, either on the payroll of a carrier or hired as a consultant by a carrier, conducting an analysis of a carrier’s post-reinsurance reserve and highlighting risks. Given the nature of the relationship between the carrier and its appointed actuary, one has little trouble seeing the potential for conflict in this arrangement, it is doubtful that many risks get “highlighted.” The complexity of the transactions, the numerous counterparties and the confidential nature of the reinsurance treaties involved make it impossible to “check the work” of these actuaries.

AG ReAAT takes the position that “[i]n the event that the Appointed Actuary believes that additional reserves are required (based on their application of appropriate actuarial judgment), then the Appointed Actuary should reflect that in their Actuarial Opinion.” Essentially, if the actuary hired by the carrier thinks its boss needs to set more money aside to cover the promises made to policyholders, the actuary needs to put it in a report. It is not hard to envision said report being filed away with little attention given to its “recommendations.” There seems to be little in the way of resources to check these reports and no substantive penalties for being “optimistic” about reserve assumptions.

In keeping with the tenor of the NAIC’s proposed recommendations, AG ReAAT takes the position that “[t]his Guideline [AG ReAAT] does not include prescriptive guidance as to whether additional reserves should or should not be held. As is already the case, such determination is up to the Appointed Actuary, and the domestic regulator will continue to have the authority to require additional reserves as deemed necessary.”

One is left to wonder how exactly the NAIC hopes to achieve meaningful protections for the everyday American policyholders that rely on their life insurance policies to provide protections for loved ones when the NAIC’s new rules do not even mandate anything be done when an appointed actuary actually believes that additional reserves are required. The term “window dressing” comes to mind when describing AG ReAAT. Unfortunately, for life insurance policyholders, window-dressing regulation is nothing new.

I urge the NAIC and state regulators to impose more meaningful protections for policyholders.

Very truly yours,

Larry J. Rybka

Lawrence J. Rybka, JD, CFP, is the CEO of Valmark Financial Group. Valmark, Founded in 1963, Valmark includes a FINRA Broker-dealer, SEC-registered Advisor, and Producer Group. It works through independently owned and branded financial services firms committed to high ethical standards in over 30 states throughout the United States. With its member firms, Valmark manages over $10 billion in invested assets, $70 billion in in-force life insurance policies, and $4 billion in annuity contracts.

The French Just Want to Enjoy Their Retraite

Posted on February 25, 2025 by Kerry Pechter -

Here in France, the multi-layered state retirement system looms large in people’s lives. Private-sector workers in France contribute to not one but two mandatory, pay-as-you-go (paygo) state-run savings plans: the CNAV and the AGIRC-ARRCO. Together the two plans replace a big chunk of their pre-retirement income taxes. Since 2019, the French have had a new voluntary, tax-favored defined contribution savings program called the PER.

Judging by the words they use to describe it, the French seem to hold their paygo system in greater esteem than Americans hold our Social Security program. We call our payments into Social Security a payroll tax. They call their payments a contribution. While it’s not unusual to hear Americans dismiss Social Security’s funding method as generational warfare or a Ponzi scheme, I’ve heard the French describe their paygo structure as an expression of solidarity across generations.

The French will even take to the streets in defense of their retirement programs. In 2023, when I was in Bordeaux, where my daughter lived at the time, the trade unions responded to President Macron’s threat to raise the retirement age to 64 from 62 with a series of peaceful but loud parades and demonstrations. When Macron made good on his threat, they set fire to the door to City Hall.

This February I returned to France. Hoping for sunny weather, I took an apartment in the southwest corner of Marseille. From my balcony here I can look up at the craggy limestone cliffs (the famous “calanques”) behind my building. Or I can look downhill and see sailboats skimming the bay. The weather is bound to improve any day now.

Pétanque: It takes steel balls

How do reasonably-fit retirees spend their afternoons here? They play pétanque. This variant of lawn bowling or bocce is played with hollow steel balls and has the same objective as horseshoes. There are two teams of one, two, or three players. Each player takes a turn at tossing one or two steel balls at a small red or green wooden target ball (the “jack”) from a fixed point about 20 feet away.

Petanque players in Marseille

Each player tries to land his or her ball (tossed underhanded, either palm-up or palm-down) as close to the jack as they can. Alternately, they can try to knock the other teams’ balls away from the jack. On the international level, the pétanque government body is the Fédération Internationale de Pétanque et Jeu Provençal (FIPJP). It was founded in 1958 in Marseille and had almost 800,000 members as of 2022. There are about 300,000 registered pétanque players in France.

“Pétanque is uniquely French,” wrote the Canadian writer Paul Shore about the game. “The players tend to be middle-aged to elderly men whose exposure to the sun from playing the game gives them a healthy, light-brown tinge, usually coupled with a skin texture similar to that of a well-aged French prune. These gentlemen seldom speak, and when they do open their mouths, what is heard is usually slang or profanity, or silence followed by a puff of smoke from the drag they took of a cigarette several minutes earlier.”

It’s a cliché to see groups of six or eight older men, all tall and dressed mostly in black, on the pounded-earth pétanque pitches in the park at the harbor end of my street. But one day I saw a game of mixed couples. The women seemed to specialize in the precision work of landing their balls close to the jack. The men appeared to assume the dirty job of sabotaging others’ work. At this level of competition, outcomes appeared stochastic. (The older Frenchmen have another odd sport that one of my flyfishing guides showed me: Coarse fishing. It involves a long pole hung out over a slow-moving stream, the sequestering of caught fish in a submerged “keepnet,” later weighing them to accumulate points, and then releasing them.)

The retired gendarme

A few evenings ago, after watching the pétanque players, I wandered into a strange neighborhood to admire a restored Belle Epoque villa. Dated MDCCC LXXIV (1874), it was adorned with a frieze of ceramic dolphins, like a blue headband just below the dentils under its eaves. Medallion profiles of Artemis and Apollon flanked the entrance from above.

The 1874 villa in Marseille.

The neighborhood had many expensive villas like that, but most were hidden behind tall stone-and-stucco garden walls. Eventually I got lost in the maze of tiny lanes, and stopped a tall, weathered 70s-something man to ask for directions. He was walking slowly down the middle of the narrow street while his two young granddaughters danced restlessly around him.

He turned out to be a retired policeman who had joined the force at age 25 and retired 15 years ago, at age 55. His inflation-adjusted pension income paid €3,050 per month, or about $3,192. He had retired too soon to take advantage of the voluntary supplemental retirement savings plans that France has launched since 2019. (I was friendly with many police officers and sheriff’s deputies when I was a newspaper reporter. The prospect of early retirement was their primary motive for taking a nasty job.)

Shortly after I arrived in Paris, in early February, I had the pleasure of talking about the new savings plans with Simon Colboc. I met Mr. Colboc through the JASPER Forum, an informal consortium of retirement wonks who meet periodically for international Zoom calls about innovation in defined contribution plans worldwide.

Mr. Colboc has a remarkable resume that spans every financial sector you can imagine—public, private; individual, institutional; academic, non-profit. For 18 months, he’s been secretary general of the FECIF, or European Federation of Financial Advisers and Financial Intermediaries. He’s a former banker at BNP Paribas and at Fortis (now merged into a single bank), co-heads the course on life insurance at his alma mater, the CentraleSupelec in Paris (where he earned a master’s degree in economics and engineering and played rugby).

Simon Colboc

Mr. Colboc dabbles in private equity, private credit and reinsurance. He is responsible for distribution at Brussels-based Assured Partners, which operates in the US, the UK and Europe and provides “bespoke insurance solutions to the financial institutions sector.”

Oysters and white wine

Over lunch at Au Petit Riche, a stylish 1854 brasserie near the Opera in Paris’s 9^th Arrondissement (crisp tablecloths, banquettes, mirrors, palm fronds, Normandy oysters, and cold white wine), Mr. Colboc told me about a relatively new voluntary savings program in France called PER.

PER stands for Plan D’Épargne Retraite, or Retirement Savings Plan, which was instituted in 2019. There are three types of PERs: individual, which correspond to IRAs in the U.S.; employer-based, which resemble our 401(k) plans; and mandatory, which are like our defined benefit pensions. Over 11 million French workers (out of 31.6 million) contribute to a PER, with total assets amounting to €119 billion (~$124.8. billion). French investment firms manage the money, just as mutual fund companies manage tax-deferred defined contribution savings in the U.S.

The PER represents a kind of voluntary icing on a multilayered, mandatory cake. France has a basic, non-contributory pension for the poor; a mandatory state pension for private sector workers (the CNAV); and a mandatory occupational private-sector pension that offers points that translate into income in retirement (AGIRC-ARRCO).

Taken together, lifelong contributions to the CNAV and AGIRC-ARRCO will replace 60% to 80% or more of the average French private-sector salary, producing an income of around €3,000 per month. (Separately, there are the pensions in the public sector, including substantial pensions for French civil servants.)

As in the U.S., there is much handwringing among France’s reigning technocrats about the long-term burden of retirement in an aging country with a low fertility rate and an aversion to increased immigration. In the U.S., however, we have an advantage. We have our own currency. The French gave up the franc, and monetary independence, for the euro in 2002.

Personally, I don’t know so many Americans see the costs of Social Security (payroll taxes) as a drain on the U.S. economy, when retirees spend Social Security benefits right back into the economy. That phenomenon used to be generally perceived (and accepted) as “taking water from one end of the pool and pouring it into the other.”

In terms of the effect on GDP, therefore, Social Security should be looked at as a wash, or even a driver. The paygo system is also, as I’ve come to believe, a much more efficient way to insure middle-class people against longevity risk than by having all of us assume a lot of financial risk for 40 or 50 years, with no guarantee of success, and lose small fortunes on fees and volatility in the process.

If a country has control over its currency, and is actuarially conscientious, it can run a paygo program indefinitely. Since the benefits keep traveling through the economy, they still find their way into investments. Financial markets crash with regularity; Social Security marches on.

Raising payroll taxes is natural

If you accept our paygo retirement system as a form of social insurance (which it is), then occasional fluctuations in solvency levels should not be taken as indications that the system has failed. It’s natural for the cost of pensions to fluctuate with changing demographics.

French academic Michael Zemmour argued in the progressive journal Alternatives Economiques in January that it makes perfect sense to expect a government to find the money to fulfill its guarantees to retirees. Social insurance is just a matter of national financial plumbing, not a zero-sum game.

“Faced with an increasing social risk—more unemployment, more illnesses, more retirees—it seems quite natural to bring in additional revenue,” Zemmour wrote. “This is the case for any insurance. If bad weather insurance faces more bad weather, we do not find it absurd to ask the question of increasing contributions. Not increasing pension revenue is a relatively extreme position.” Bien sûr.

Private Credit AUM

Posted on February 25, 2025 by No Author -

The Dimming of Brighthouse—Or a New Dawn?

Posted on February 3, 2025 by Kerry Pechter -

Last week the Financial Times reported: “Brighthouse Financial is seeking to sell itself, with some of the most prominent private capital managers expected to make bids for the US provider of life insurance and annuities.”

Though the report was not confirmed by Brighthouse management, the FT story moved the market.

Stock investors seized on the rumor of an acquisition, driving up the price of Brighthouse shares by 20% to $62, its highest level since 2018. Brighthouse was created in 2017 when MetLife spun off its retail annuities business as a separate company. The CEO since then has been MetLife veteran Eric Steigerwalt.

Brighthouse Financial, which has a current market value of ~$3.66 billion, consists of Brighthouse Life, Brighthouse Life of NY, New England Life, and a brokerage firm, Brighthouse Securities.

Veteran life insurance/annuity professionals were not so thrilled. Rather, many were dismayed by the possibility that Brighthouse might join the stream of U.S. annuity issuers that have been pulled into holding companies controlled by Apollo, KKR, Blackstone and other “alternative asset managers” that specialize in private credit origination.

The asset managers’ capital infusions gave new life to several life/annuity companies that were weakened by the low yields of investment grade bonds during the 2010s. The asset managers’ hoped to manage insurers’ existing general account assets and raise new revenue through annuity sales.

The annuity issuers were put in service of what RIJ has called the “Bermuda Triangle” strategy. It’s a business strategy whereby a global asset manager sources annuity liabilities in the U.S., uses offshore reinsurance to reduce capital requirements, and uses increasing portions of the reserves to finance high-risk, customized, illiquid, potentially high-return loans.

Brighthouse Life’s ~$112 billion in general account assets (i.e., policyholder and annuity contract owners’ money) should make it attractive to one of the half-dozen largest asset managers. Brighthouse also brought in $7.8 billion worth of annuity revenue in the first nine months of 2024, largely through the sale of registered index-linked annuities (RILAs), an SEC-regulated, broker-distributed type of variable annuity.

On the other hand, Brighthouse is burdened by blocks of legacy VAs with what, it turned out, were over-generous, under-priced guarantees. Contract owners were promised that they would never run out of income if they followed the contracts’ spending caps. MetLife and other big life/annuity companies sold more than a trillion worth of these products in the early years of this century before the stock market crash of 2008 and the Fed’s zero-interest-rate policy exposed the danger of trying to insure long-range equity returns.

Those VA/GLWBs, as they are often called, were once seen as a way for life insurers to capture a big chunk of Boomer savings. But they became an albatross instead. MetLife created Brighthouse in 2017 largely to get money-losing VA/GLWB blocks off its balance sheet, where they were depressing its share price.

“The VA book was a core part of what MetLife rolled into Brighthouse,” a former investment banker familiar with MetLife’s VA hedging program on the condition of anonymity. “At the time, Brighthouse crowed that the RILA business would be a natural offset for the VA risk. They would sell RILAs to grow their way out of legacy VAs.

“But Brighthouse couldn’t outrun its past. RILAs couldn’t make enough money to outrun the back-book. The [January 10] AM Best report indicated they’ve run out of the marginal benefit of the RILA book.”

On January 10, 2025, an AM Best release explained:

The operating performance has been dragged by the performance of the variable annuity (VA) and growth in registered index-linked annuity (RILA) lines of business, along with associated hedging programs. The losses in the VA and RILA lines of business were driven by strong equity markets and the structure of the hedging program.

At the start of third-quarter 2024, Brighthouse began to hedge new sales of its RILA products separately from legacy VA, after previously hedging them together. The run-off block the company inherited when it spun off from MetLife, Inc. has also contributed negatively to earnings. The company has experienced a statutory net loss of ($2.6) billion at year-end 2023, and a net loss of ($1.3) billion through third-quarter 2024.

Yet AM Best said in the same release that it was affirming Brighthouse’s overall A (excellent ) strength rating).

Troubling signals were coming out of Brighthouse a year ago. Yahoo! Finance reported in February 2024:

“Eric Steigerwalt, President and Chief Executive Officer of Brighthouse Financial Inc., sold 25,000 shares of the company on February 26, 2024, according to a recent SEC filing. The transaction was executed at an average price of $46.96 per share, resulting in a total value of $1,174,000… The recent sale by Eric Steigerwalt follows a pattern observed over the past year, where there have been no insider buys and five insider sells for Brighthouse Financial Inc.”

For old-school life/annuity professionals, it’s been painful to see so many once-venerable life insurers change hands since 2009. An annuity distribution professional and product developer who 10 years ago lamented this trend in a presentation to his peers told me in an email last week:

“What I missed, in retrospect was that this problem would get so much bigger in 10 years, that mainstream big life companies like MetLife would sell, that almost every legacy insurance company would do reinsurance with four or five offshore private equity-owned reinsurers, and that these transactions might leave the jar empty for the policyholder,” he said in an email to RIJ last week.

It’s difficult to predict what an asset manager might do with Brighthouse, aside from taking over the management of its general account. On the liability side, there’s a potential conflict. Brighthouse sells RILAs, which are securities that are distributed by advisers at brokerage firms. But the asset managers who now control much of the annuity industry prefer to sell fixed indexed annuities (FIAs), which are insurance products sold by insurance agents.

Those two businesses converge and overlap to some degree. For instance, the performance of RILAs and FIAs are both tied through options to the performance of equity or balanced indexes. Many advisers and agents are licensed to sell securities and insurance products.

Selling RILAs is different from selling FIAs. So far, the private equity/private credit firms have preferred to buy FIA issuers. They’ve stayed away from the big RILA issuers—former VA/GLWB issuers Equitable, Prudential, Nationwide, Lincoln—who are too big to gobble up and diversified enough to have survived the turbulence of the past 15 years. Whether they still have legacy VA/GLWB problems, and whether those problems are contained, I don’t know.

Hindsight is easy. But many life/annuity companies, after converting from mutual companies to stock companies 25 years ago, may have entered the big bad world of equities without a complete understanding of the risks. As “risk-buyers” (i.e., guarantee-sellers), they may also have come to the risk-selling” world of investments with a built-in disadvantage.

The 2008 stock market crash, in a sense, revealed their inexperience in that world. It’s possible that annuity businesses, by themselves, aren’t profitable enough to put up the kinds of quarterly numbers that investors crave.

As sources of new AUM, however, they appeal to asset managers. If an asset manager buys Brighthouse, I bet they’ll take it private.

Cannex puts 401(k) annuities to the test

Posted on February 2, 2025 by Kerry Pechter -

Lots of new 401(k) annuity products are being pitched to plan sponsors and their advisors these days. There are in-plan and out-of-plan annuities, deferred and immediate annuities, as well as variable, fixed, and fixed indexed annuities. It’s hard to make sense of their differences.

Cannex, the annuity data and analysis firm, recently made the selection process a bit more rational. It compared and contrasted five different ways that 401(k) participants might convert their savings to income in retirement.

The research was sponsored by ALEXIncome, a fintech startup that RIJ first wrote about in March 2024. Led by CEO Ramsey Smith and partner and head-of-product Graham Clark, ALEXIncome aims to create a platform from which asset managers, life insurers and other plan service providers can launch new products into that space.

Five income options

The Cannex study hypothesized a plan participant, 40 years old in 2023 and with plan savings of $100,000 in a target date fund (TDF). This imaginary participant intends to add $10,000 (increased by 3% each year) to the TDF each year for the next 25 years, and to retire at age 65.

The study then imagines five different paths—each representing one of the most common methods for drawing down 401(k) in retirement—that the participant might take:

An annuitization strategy where, at age 65, the participant would take the fixed income portion of the TDF (50% of the total TDF value) and buy a single premium immediate annuity (SPIA) with it.
An annuitization strategy in which a participant in a hybrid TDF would, from age 40 to age 65, contribute to a fixed-rate deferred annuity sleeve inside the TDF at age 40 instead of contributing to bond funds. At age 65, the new retiree would convert the deferred annuity to a SPIA.
A systematic withdrawal strategy, where the participant would determine an amount equal to 4% of the final balance of the TDF and spend that amount (adjusting it upward each year by 2%) starting at age 65.
A strategy where participants would stop contributing to the bond funds in their TDFs at age 50. Instead, they would contribute to a deferred fixed indexed annuity contract with a guaranteed lifetime withdrawal benefit rider. At age 65, the retired participant would start taking withdrawals according to the terms of the rider.
A strategy where the participant, starting at age 50, pays a fee of 1% per year of the value of the TDF to wrap a guaranteed lifetime withdrawal benefit rider around it. The rider establishes a benefit base that guarantees the participant a minimum monthly income starting at age 65 without requiring the participant to annuitize the contract.

These strategies were put through 1,000 randomized Monte Carlo simulations of future market conditions to see which one delivered the most income (including income from both the annuity and from the participant’s investments) to the participant in retirement. All else being equal, the ALEXIncome came out ahead on several metrics.

Proof-of-concept analysis

Graham Clark

“This was a proof-of-concept analysis,” said Clark, noting that ALEXIncome sponsored the study but didn’t control the results. “It stacked the proto-type of ALEXIncome’s hybrid-TDF against four established, well-known alternative income solutions.

“The question was,” Clark said, “‘Can we deliver the same level of income, or higher levels, when compared to existing alternatives?’ The simple answer is yes. In creating a hybrid defined benefit/defined contribution model within a 401(k), ALEXIncome performs favorably relative to each of the other prevailing options.”

Most people don’t use SPIAs in retirement—SPIAs have always had much lower annual sales than deferred annuities, and owners of deferred annuities rarely annuitize them—because keeping their life savings liquid and readily available is so important to them.

But many academic studies have shown that one way to generate more retirement income from a limited amount of resources is to divide one’s savings between the purchase of an illiquid fixed income annuity and a portfolio of mutual funds.

The 4% rule, by comparison, gives retirees more control over their money but it leaves a retiree’s risk of running low on money in old age fairly high. Living benefits, such as guaranteed lifetime withdrawal benefits, provide both guaranteed income and liquidity, but tend to produce less annual income from the same amount of savings as SPIAs.

Both Smith and Clark have Wall Street experience with FIAs. They have found that the costs of the index strategies and the derivatives associated with building FIAs tend to reduce their performance, as does the 1% fee associated with guaranteed lifetime income benefit riders on both FIAs and variable annuities.

Ramsey Smith

“People ask, ‘What makes you different?’” Smith told RIJ. “We’re more interested in creating a benchmark than in differentiation. We want to find a standard that launches the industry in the direction it should take, and that solves a problem for people, rather than to try to come up with a different bell and whistle.”

Smith is urging annuity issuers to jump on the 401(k) opportunity. “Insurance companies should all be thinking carefully about this,” he said. “They need to understand that this is a Once-in-a-Generation opportunity to establish themselves in the 401(k) space. I don’t see any other [distribution] channel that presents as clear a path to re-establishing a footprint in the greenest of green fields or the bluest of blue sky opportunities.”

Clark thinks 401(k)s could eventually become the largest annuity distribution channels, but only if the life insurers collaborate on it. “If you had full penetration of the 401(k) market, with 15–20% of total account values in annuities, that would equal the size of the retail annuity market today,” he told RIJ. “But you’ll need everyone’s capacity to do it.”

Private Credit AUM to Double by 2028: Moody’s

Posted on February 1, 2025 by Editorial Staff -

A new report from Moody’s Investors Services on the global market for private credit assets describes the anticipated hockey-stick growth of that market, the use of such assets by insurance companies, and the potential dangers such assets might pose to the global financial system.

The world’s private credit assets under management (AUM) is on track to roughly double in the next few years, from just over $1.5 trillion in 2023 to about $3 trillion by 2028, “with 70% of this growth from the US, as appetite for private capital grows unabated,” according Moody’s Ratings Outlook, January 21, 2025: Private Credit.

Partnerships between alternative asset managers (AAMs) and insurance companies will drive part of the rising creation and consumption of private assets, respectively. The Moody’s report showed that, as of the end of the third quarter of 2024, private credit and insurance assets accounted for 52% the AUM of the four largest AAMs (Apollo, Blackstone, Carlyle and KKR).

“US insurers have recently increased their exposure to alternative investments, including private credit, which marks a shift from their typical approach of favoring more traditional, long-term investments. Partnerships between asset managers and insurers have accelerated this trend,” the report said.

AAMs “that own or have partnerships with insurance companies are investing insurance company general account assets into ABF investments. The insurance industry has shown a willingness to sacrifice liquidity and accept the greater complexity that may come with ABF to pocket better returns for equivalent investment grade risk.”

According to the ratings agency’s report:

The AAMs have poured capital into the insurance sector, acquiring minority or controlling stakes in insurance companies. These evolving partnerships have allowed US life insurers to leverage the managers’ direct access to asset originator platforms, lowering costs and improving yield generation for the insurance company. The partnerships also allow insurers to gain proficiency in complex asset classes, including private credit, real estate and asset-based finance, without having to invest significant capital.

Relative to public credit markets, private credit markets offer illiquidity premiums, portfolio diversification and stronger covenant protections. Private credit investments are not traded on secondary markets… this shields them from the daily swings in the publicly traded fixed-income sectors.

Synergies between insurance companies and alternative managers will grow, but it will be essential to monitor risks, especially credit and asset-liability mismatch (ALM) risks, Moody’s analysts said. Among the potential risks posed by private credit:

“Ongoing competition for assets will help market liquidity, it will also add to risk-taking, leverage and weakness in documentation… Lower-than-promised returns or an eventual downturn could challenge the expanding role of partnerships between banks and private credit, which are mostly untested.
Private credit lenders have still been introducing additional leverage to the economy, with much less transparency Leverage is increasingly “stacked”—it is not necessarily clear how to distinguish asset-level leverage, fund-level leverage (tacit leverage) and the creation of tranche-structured leverage in ABS transactions. An equity position in an investment may be funded with debt from banks.

Moody’s also expects the market for private credit to expand to include retail investors. “While still less than 20% of total private debt AUM, retail private debt AUM is growing faster than institutional AUM. Some managers are bringing evergreen funds to market. Others are rolling out first-ever private-credit exchange traded funds (ETFs),” the report said.

Where PRT Meets DC: The Agilis/Alight Plan

Posted on February 1, 2025 by Kerry Pechter -

Taking a page from the pension risk transfer (PRT) business, Agilis, an actuarial/risk management firm, and Alight, the jumbo-plan 401(k) recordkeeper, have rolled out what appears to be a new way to market annuities to participants in defined contribution plans.

Their product is called PensionBuilder (not to be confused with Principal Financial’s Pension Builder 401(k) annuity). Agilis and Alight launched their PensionBuilder in November 2024 after, they say, establishing the right to use the name. The firms are currently pitching the concept to 401(k) teams at Fortune 500 plan sponsors. [At deadline, RIJ could not confirm the status of the Pension Builder brand name with Principal.]

Here’s how PensionBuilder works: If a plan sponsor is amenable, a PensionBuilder team would periodically advertise a fixed-payment single premium income annuity (SPIA) to its participants—but only to those, current or retired, who are older than age 59½. If enough of those participants agree in principle to buy an annuity, PensionBuilder will ask life insurers to price a group income annuity for the entire cohort.

PensionBuilder would thus act like the pension committee at a corporation that decides to replace its defined benefit plan with a group annuity underwritten by a life insurer. That’s a “pension risk transfer.” Agilis and Alight are, in effect, mapping the PRT concept onto defined contribution plans. No one has done that before.

(If Agilis and Alight are less than familiar to you, here’s why. Agilis, based in Waltham, Mass., was created in August 2022 through a buyout by managers at River and Mercantile Group. It has about $1 billion in discretionary assets under management (AUM) and about $5.8 billion in non-discretionary AUM, according to a public filing. Alight is the third biggest plan recordkeeper, with more than $1.2 trillion, but is less well-known than Fidelity, Empower, or Vanguard because 62% of its plans are non-401(k) and because its 175 or so 401(k) plans are mainly “jumbo” plans.

Here’s the marketing and distribution approach that PensionBuilder borrows from the PRT business:

Older plan participants—current participants age 59½ or older who are still working and retirees still participating in the plan—will receive periodic PensionBuilder SPIA offers online.
If enough participants—representing $100 million in combined premiums, say—show a strong interest in buying the SPIA annuity, Agilis and Alight will ask several life insurance companies to bid for the business.
The bids will, if all goes as planned, represent an “institutional price” that would (all else being equal) provide more monthly income in retirement than any participant would receive by purchasing a retail annuity. At the individual level, each SPIA would be priced according to the participant’s age and gender.
The SPIA prices will be offered during specific windows of 60 days. This limitation is intended to stimulate participants to take action and overcome their natural tendency to procrastinate on large financial decisions.
The premium for each individual SPIA must be no less than $60,000 but no more than 80% of the total 401(k) balance.

PensionBuilder offers only SPIAs, which are easy to understand. They typically involve the irrevocable exchange of a lump sum for a fixed monthly income for life. But deferred annuities with guaranteed lifetime withdrawal benefit riders—which guarantee somewhat less income for life than SPIAs but allow flexible withdrawals—have always sold better.

Agilis and Alight say that this approach might have more appeal to both plan sponsors and participants than competing annuity solutions. With PensionBuilder, the annuity purchase happens outside the plan, in an IRA. That allows annuity pricing to be gender-specific, which compensates men for their shorter life expectancies. Plan sponsors don’t incur legal liability for choosing the best annuity provider, nor do they incur expenses.

“A company may offer employees discounts on auto insurance, for instance. In the meetings we’ve had, that’s how we describe it,” Bill Mischell, managing director of Agilis Partners, told RIJ in an interview. “We’re saying to the plan sponsor, ‘We don’t charge you anything.’ To the participant, we say, ‘You don’t have to do any of the work.’” Mischell was formerly a senior partner at Mercer.

Bill Mischell

PensionBuilder will rely on each plan sponsor’s recordkeeper to agree to furnish Agilis with enough data on individual participants so that it and the life insurers can accurately and individually price the annuity. “We don’t need the plan sponsor to do much,” Mischell said.

To communicate with participants, “We’ll set up portals,” he said. “A participant would log into the portal and see annuity estimates. They don’t have to click on a link or call an 800 number.” Agilis provides a modeling tool to help participants calculate how much income they want, need or can afford. Participants indicate their ages and marital status, “Then we give them an estimated payout rate. They have 60 days to decide whether they’re interested. We’re targeting a ‘Yes’ group with $100 million.”

After that, Mischell said, “We produce an Excel spreadsheet with, we hope, thousands of participants on it, and then we go into something that resembles a PRT deal.” He added, “The insurer says, tell us the premium and we’ll tell you the benefit. We pick the insurer that offers the best combination of price and safety. In all likelihood, we’ll be splitting the placement between two or three insurers. For example, one insurer might take people 72 and younger, and another will take those over 72,” depending on how the liabilities correspond to the maturities of the insurer’s assets.

PensionBuilder’s success will depend on reaching enough participants, and getting preliminary agreements from enough of them, to achieve the economies of scale large enough to produce annuity price discounts that are attractive enough to overcome individuals’ reservations about annuities.

Such “institutional pricing” of annuities isn’t easy to obtain. The Hueler Income Solutions annuity distribution platform tries to achieve advantageous annuity pricing for retirees from 401(k) plans by calling on life/annuity companies to bid against each other for individual contracts. PensionBuilder will ask insurers to bid on group contracts.

Since Agilis and Alight are not asset managers or life insurers, they have no compelling reason to promote an income solution that involves target date funds or embeds any particular kind of annuity in a target date fund. On the other hand, because PensionBuilder doesn’t require participants to start making gradual contributions to deferred annuities long before they retire, it doesn’t have as long a period to make participants comfortable with the annuity concept before asking them to make a full commitment.

What Agilis and Alight bring to the table is the relationships they’ve established in the PRT business. “We’ve worked with the PRT departments of between 10 and 20 insurers in the PRT industry, and almost all of them have expressed interest in working with PensionBuilder,” Mischell said.

“They see that while the DB market has assets of $3.5 trillion, the DC market is $11 trillion. If we’re targeting deals of $100 million or more, that gives the insurers a lot more investment opportunity. In the individual market, there’s a high acquisition cost, the contracts just trickle in one at a time, and [pricing is complicated by the fact that] the market is constantly moving.”

For clients, Agilis and Alight have specific types of companies in mind. “Our primary target is a company that has never had a DB plan or froze its DB plan 10 or 20 years ago,” Mischell told RIJ. “We’re also looking at companies that have recently done PRTs. In year one, 2025, we will work with one retirement plan at a time. In 2026, we plan to work with groups of two or three plans—the more the better—that have the same recordkeeper.”

A Flood of ‘Flow Reinsurance’

Posted on February 1, 2025 by Kerry Pechter -

“Flow reinsurance,” a type of reinsurance that’s increasingly used by U.S. annuity issuers to manage their capital requirements, reminds me of mortgage lenders’ “originate-to-distribute” model that helped lead to the Great Recession of 2008.

That may sound like a rash assertion, but those who take an interest in the Bermuda Triangle strategy might want to consider it.

The originate-to-distribute model of the early 2000s involved the ongoing, immediate sale of new mortgages from the banks that originated them to “shadow banks.” Flow reinsurance involves the ongoing, immediate transfer of risks from a life insurer to a reinsurer as soon as new annuities are issued.

Flow reinsurance has been around for at least 15 years, but it’s increasing. “By our count… at least 12 of the 19 top writers of fixed and indexed annuities as measured by 2023 direct premiums and considerations will have flow reinsurance capabilities covering at least a portion of their new business production,” according to a December 12, 2024, report from S&P Market Intelligence.

“We expect more arrangements of the kind to come online in 2025 as incumbent annuity writers seek to enhance their competitive position and fledgling players continue to grow their market share,” wrote an S&P analyst.

Given the companies that are using it, and how they use it, flow insurance appears to be a refinement of the Bermuda Triangle strategy. I could be wrong, but it looks like an accelerant of that strategy—enabling U.S. life insurers to skip the step that would otherwise might require them to capitalize new annuity sales before reinsuring them. It may be related to the use of sidecars, which are being set up by Bermuda reinsurers to provide “just-in-time” capital for U.S. annuity issuers.

Benefits of flow reinsurance

Like traditional block insurance, flow insurance transfers risk from an insurer to a reinsurer. Both can be used to conserve capital. According to a release from Gallagher Re, which advises insurers on and arranges various kinds of reinsurance deals, “As a capital management tool, [flow reinsurance] reduces required surplus and new business strain, thereby maintaining balance sheet capacity for sales growth.”

Gallagher mentions the acceleration aspect: “The up-front allowances commonly provided by reinsurers may exceed the direct writer’s acquisition costs, leading to improved profitability. The combination of accelerated earnings and a reduced capital base substantially enhances a carrier’s return on investment,” the release said.

Illustration of Flow Insurance, from Gallagher Re • In the first line, the carrier is retaining all the business expected to be sold at current pricing levels. • The second line illustrates the type of improvements that could be achieved by reinsuring 50% of new business sales. We have assumed that 80% of the reinsurer’s ceding commission is used to improve product competitiveness, and the remaining portion is used to mitigate strain. • The last line indicates the potential for increased sales resulting from improvements in product competitiveness. [Note: A carrier’s independent results are dependent on the product design, investment guidelines, target capital, ceding commission structure and other company specifics.]

Many flow reinsurance treaties today are “quota share reinsurance.” According to Google A.I., “Quota share flow reinsurance refers to a type of reinsurance agreement where an insurer cedes a fixed percentage of their insurance policies to a reinsurer….” The primary insurer is “essentially ‘flowing’ a portion of their risk to the reinsurer, with both parties sharing premiums and losses proportionally based on that agreed percentage.”

Use of flow reinsurance is now common among many of the largest annuity issuers. S&P named Sammons Enterprises (Midland Life), Allianz, American Equity Investment Life, F&G Annuities & Life, Aspida, Corebridge and other annuity issuers as having set up flow reinsurance agreements, often with their own affiliated reinsurers and often offshore.

Flow reinsurance characterizes much of the reinsurance that forms a key leg of the “Bermuda Triangle strategy.” This often involves the separation of annuity sales, risk management, and asset management to different companies within the same holding company, with the reinsurer based in Bermuda or the Cayman Islands.

The current practice of flow reinsurance can be traced back to the same affiliated companies that pioneered the Bermuda Triangle strategy as we know it today: Apollo Global Management and Athene. Athene Holding and Athene Life Re of Bermuda commenced operations in June of 2009, “entering into two flow reinsurance agreements with a highly rated U.S. life insurance company,” according to Athene Life Re’s website.

Other companies followed suit. To name only a handful: In 2019, Somerset Re, also domiciled in Bermuda, entered into a flow reinsurance deal with Prudential. In 2022, Fortitude Re, Bermuda’s largest multi-line reinsurer, signed a flow reinsurance transaction between its subsidiary Fortitude International Reinsurance Limited and a leading Japanese life insurer. In 2024, Resolution Life announced that its Bermudian reinsurance platform, Resolution Re, entered into a flow reinsurance agreement with a Japanese insurer.

Flow reinsurance is often associated with the relatively new concept of “asset-intensive reinsurance.” It involves transferring the financial risks of the assets backing annuity liabilities (but not the actual investment assets, which in a “modified coinsurance” arrangement the original insurer may continue to hold in trust for the reinsurer) to a reinsurer, who may also be the manager of the assets.

“Asset-intensive, or funded reinsurance, is another trend we are seeing more and more,” according to the European Insurance and Occupational Pension Authority. “It extends beyond traditional underwriting risk to also cover market risk. These contracts frequently involve outsourcing the management of the underlying assets to a reinsurer, which introduces substantial counterparty risk that is usually mitigated through collateralization.”

Similarity with originate-to-distribute lending

These strategies can increase the sales capacities of annuity issuers just as they increased the sales capacities of mortgage lenders 15 to 20 years ago—by reducing the reserve or capital requirements that traditionally go with the acquisition of new risks through lending. Higher sales generate higher fee revenue. But both practices arguably create moral hazard and add to “systemic risk” by removing traditional brakes on overproduction.

That makes flow reinsurance reminiscent of originate-to-distribute mortgage lending. The two, of course, are not identical. Annuity issuers commonly receive money in chunks of $100,000 or more from members of the public, while mortgage lenders lend money to members of the public. So, what’s the similarity?

Once annuity issuers gather premiums, their asset managers may then reach for yield by lending to low-credit, high-cash-flow borrowers, such as companies involved in aircraft leasing, cellphone towers, or music licensing and distribution. Those “leveraged loans” are analogous to subprime mortgages. Life insurers live or die between the risk they buy when making guarantees to annuity owners and the risk they buy when investing general account assets.

Since flow reinsurance also reduces the demand for fresh capital that new annuity sales traditionally requires (the definition of today’s “capital light,” Bermuda Triangle insurance business model), it could also leave reinsurers or insurers (in cases where they still bear the responsibility for fulfilling financial guarantees to contract owners) without enough surplus to endure a wave of defaults on leveraged loans during some future financial crisis.

The risks of private credit lending are real, and can grow in proportion to the growth in private credit assets. “There is nothing structurally wrong with private credit as an asset class. Its returns should be competitive with other asset classes of comparable risk, on average, over time,” wrote financial scholar Larry Siegel, research director of the CFA Institute, in 2024.

“There’s the rub—on average, over time,” Siegel said. “The glory days of any new asset class tend to be early in its evolution. Once a lot of money has poured into the asset class, valuations become stretched, opportunities become exhausted and expected returns decrease. That is what has happened with private credit.”

Honorable Mention

Posted on February 1, 2025 by Editorial Staff -

Merit Life reincarnated as Knighthead Life

Cayman-based Knighthead Insurance Group has acquired Merit Life Insurance Co. and rebranded it as a Knighthead Life. Headquartered in Charlotte, NC, Knighthead Life will be led by Edward Massaro, who remains CEO and chief investment officer of Knighthead Insurance.

Knighthead Insurance Group includes Knighthead International, Knighthead Re, and Knighthead Life. Knighthead Life is the brand name of Knighthead US Holdings, Inc. and its subsidiaries, Merit Life Insurance Co. and Knighthead American Life Insurance Company.

The acquisition of Merit Life followed Knighthead’s infusion of capital into the distressed annuity issuer last year, which coincided with Knighthead Insurance Group raising $550 million in new capital. Knighthead called the acquisition “key to the group’s strategy of being an annuity market leader across its international, U.S. and reinsurance lines of business.”

Knighthead Insurance was founded in 2014 with the incorporation of Knighthead Annuity & Life Assurance Company, a Class D Cayman insurer and reinsurer. Now managing about $5.5 billion of annuity reserves, it was created to sell “fixed annuities to international clients and reinsurance of similar liabilities to U.S. cedents” (i.e., U.S. annuity issuers wishing to reinsure annuity business). It is affiliated with New York hedge fund Knighthead Capital, founded in 2008 by Ara Cohen and Thomas Wagner.

With its combination of alternative asset management experience, affiliated reinsurance operations in the Cayman Islands or Bermuda, and U.S. retail annuity sales, Knighthead appears to have adopted what RIJ calls the “Bermuda Triangle” strategy.

This three-way strategy is designed to use U.S. fixed deferred annuity sales as a feeder of cash to global asset managers to fund private credit deals, while reducing the capital requirements of new annuity sales through offshore reinsurance (sometimes called “asset-intensive reinsurance” because it involves the reinsurance of financial risk rather than biometric risk).

Knighthead Insurance markets a multi-year guaranteed fixed annuity (MYGA) and a fixed indexed annuity (FIA). The MYGA offers 3-, 5-, 7- and 10-year contract terms. The FIA offers 3-, 5-, and 7-year contract terms. Performance is linked to the S&P 500, MSCI-EAFE, MSCI-EM Indices or to a fixed account.

Merit Life and 777 Re

Merit Life has changed hands before. In 2020, Brickell Insurance Holdings, purchased it from OneMain Holdings, a lender to “nonprime consumers.” Brickell was also the holding company for 777 Re, whose risky investment practices (including purchases of European soccer clubs) eventually got it into trouble.

In late 2023, the Bermuda Monetary Authority (BMA) expressed “significant concerns with [777 Re’s] corporate governance, risk management and decision-making functions, along with an inability to secure adequate capital and liquidity support from its parent company.” In October 2024, BMA cancelled 777 Re’s registration in Bermuda.

In April 2024, when 777 Re was in trouble, AM Best downgraded Merit Life’s Financial Strength Rating to B++ (Good) from A− (Excellent) and the Long-Term Issuer Credit Rating to BBB+ (Good) from A− (Excellent). In May 2024, Knighthead Capital was reported to have bought it.

After a capital infusion from Knighthead in November 2024, AM Best upgraded Merit Life’s Financial Strength Rating to A− (Excellent) from B++ (Good) and the Long-Term Issuer Credit Rating to A− (Excellent) from BBB+ (Good). Then, last month, it was announced that Knighthead Insurance Group had bought Merit Life.

Edward Massaro came to Knighthead Annuity after serving as chief operating officer and head of business Development at Knighthead Capital, which was founded in 2008 by Ara Cohen and Thomas Wagner.

Wagner had been involved in the distressed and high-yield asset business for many years. Earlier, he was a managing director at Goldman Sachs, where he was responsible for running the distressed and high-yield credit trading desks.

Cohen is co-manager of Knighthead’s $9 billion portfolio, including a long/short Evergreen Hedge Fund, a number of closed-end vehicles including a specialized travel fund, a dedicated real estate lending business, and an insurance asset management business.

Morgan Stanley to distribute five Allianz Life index annuities

Under a new partnership between the two firms, Morgan Stanley’s 16,000 financial advisers and brokers will begin offering five Allianz Life annuity contracts—four variable index annuities and one fixed index annuity (FIA)—to Morgan Stanley clients.

The four variable annuities, or registered index-linked annuities (RILAs), are:

Allianz Index Advantage+ Variable Annuity
Allianz Index Advantage+ New York Variable Annuity
Allianz Index Advantage+ Income Variable Annuity
Allianz Index Advantage Income ADV Variable Annuity

The RILAs all offer several index as crediting options as well as “Performance Lock,” which lets clients “lock in” their gains before the end of the contract’s term.

The FIA – Essential Income 7 – offers guaranteed lifetime income with an optional rider, “Increasing Income.”

In 2023, Allianz Life distributed more than $13.73 billion in benefits to owners of its fixed index annuities, registered index-linked annuities, and fixed index universal life insurance contracts. An Allianz Life subsidiary, Allianz Investment Management LLC (AllianzIM), a registered investment advisor, produces a suite of exchange-traded funds (ETFs). Allianz Life and AllianzIM are U.S. subsidiaries of Allianz SE of Germany.

BlackRock’s LifePath Paycheck reaches $16 billion in AUM

BlackRock has announced that its LifePath Paycheck product, a hybrid target date fund (TDF) that includes a mix of investments and an optional rider that lets plan participants lock-in guaranteed lifetime income, now has some $16 billion under management.

LifePath Paycheck launched in April 2024, and is now offered to more than 200,000 participants in the 401(k) plans of six employers: Avangrid, Adventist HealthCare Retirement Plans, Tennessee Valley Retirement System (TVARS) and BlackRock itself.

Overall, BlackRock’s LifePath TDFs have nearly $500 billion under management, according to a BlackRock spokesperson.

Fidelity Investments and Bank of America have enabled access to the solution on their recordkeeper platforms, and other recordkeepers, including Voya Financial, are also planning to support their clients’ implementation of the LifePath Paycheck solution, BlackRock said in a release.

Data Connection

Posted on January 30, 2025 by No Author -

Annuity issuers enjoy third-straight year of record sales: LIMRA

Posted on January 30, 2025 by Editorial Staff -

Total U.S. individual annuity sales rose 12% year-over-year in 2024, to a record $432.4 billion, according to preliminary results from LIMRA’s U.S. Individual Annuity Sales Survey of 83% of the U.S. annuity market. It was the third year of record-high annuity sales.

Lower interest rates in the second half of the year undermined demand for fixed-rate deferred and income annuities in the fourth quarter 2024. As a result, quarterly annuity sales fell 13% from the fourth quarter of 2023, to $100.4 billion.

“Since the pandemic, we have seen a significant rise in consumer interest in investment protection and guaranteed retirement income solutions,” said Bryan Hodgens, senior vice president and head of LIMRA research, in a release.

“Fixed-rate deferred annuities drove the record demand for annuities in 2023. As interest rates began to fall in 2024, we saw a shift to products—such as registered indexed-linked and fixed indexed annuities — with greater investment growth potential. We expect this shift to continue in 2025.”

Fixed-rate deferred
Total fixed-rate deferred annuity (FRD) sales fell 50% in the fourth quarter of 2024 from the same period in 2023, to $29.4 billion. For all of 2024, FRD sales totaled $153.4 billion, down 7% from 2023.

“If interest rates continue to drop this year as expected, it will undoubtedly diminish demand for FRDs in 2025. Yet with a significant amount in FRD contracts coming out of surrender over the next couple of years, LIMRA believes many conservative investors will reinvest their assets in these products,” Hodgens commented. “We are forecasting FRD sales to fall as much as 25% in 2025 but remain more than double the FRD sales prior to 2022.”

Fixed indexed annuities

Fixed indexed annuity (FIA) sales set a new sales record in 2024. FIA sales were $30.4 billion in the fourth quarter, a 22% increase from prior year’s results. In 2024, FIA sales totaled $125.5 billion, up 31% from the prior year. This marks the third consecutive year of record FIA sales.

“Investor demand for protection-based solutions remains high and is driving the growth and competition in the FIA market,” said Hodgens. “Although lower interest rates likely will reduce some demand in 2025, LIMRA predicts innovative index design and competitive participation rates will keep FIA sales above $100 billion in 2025.”

Income annuities

Income annuity product sales struggled in the fourth quarter due to the drop in interest rates, however year-end results remained at record levels. Single premium immediate annuity (SPIA) sales were $3.1 billion in the fourth quarter, down 14% from the prior year’s results. For the year, SPIA sales increased 2% to $13.6 billion, setting a new annual sales record.

Deferred income annuity (DIA) sales were $1.1 billion in the fourth quarter, down 17% from sales in the fourth quarter 2023. Still, DIA sales ended 2024 up 17% to $4.9 billion.

Registered index-linked annuities

Registered index-linked annuity (RILA) sales were $17.3 billion in the fourth quarter, up 33% year over year. RILA sales reached $65.2 billion in 2024, 37% higher than prior year. This is the 11^th consecutive record-setting year for RILA sales.

“LIMRA sees a lot of opportunity in the RILA market as investors want to capitalize on the strong equity market gains while mitigating potential downside risk,” noted Hodgens. “Carriers are offering attractive buffers, floors and participation rates. Product designs will sustain momentum for RILA sales in 2025. LIMRA projects RILA sales will remain at or slightly above the sales in 2024.”

Traditional variable annuities

In 2024, traditional variable annuity (VA) sales grew for the first time in three years. Fourth quarter traditional VA sales grew 38% year-over-year to $17 billion and total 2024 sales jumped 19% to $61.2 billion.

“Double-digit growth in the equity market, product innovation and increased interest from registered investment advisors propelled sales to top $60 billion in 2024,” said Hodgens. “If market conditions remain stable, LIMRA is projecting VA sales remain above $60 billion in 2025.”

Preliminary fourth 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 2024 will be available in mid-March, following the last of the earnings calls for the participating carriers.

Honorable Mention

Posted on January 3, 2025 by Editorial Staff -

Nestimate publishes ‘Retirement Income Landscape’ chart

Here’s what the company, whose software helps plan sponsors, advisors, and consultants choose the right annuities for their defined contribution plans, recently distributed:

Fixed indexed annuity surrender rates have ‘steadily increased,’ Milliman research shows

New research from Milliman, the global consulting and actuarial firm, shows that average surrender rates of fixed indexed annuity have been steadily increasing each quarter since 2022, with rates at the end of 2023 nearly double the average between 2019 and 2021.

These and other findings “validate previous observations of decreased surrender rates in fixed indexed annuity contracts when used for income generation. The studies also highlight how contract size is a key differentiator in surrender rates, especially in non-GLWB contracts at the end of the surrender charge period.”

The findings came from Millman’s two 2024 Fixed Indexed Annuity Industry Experience Studies, which cover surrender behavior and partial withdrawals, including income utilization for guaranteed lifetime withdrawal benefit (GLWB) riders.

“Our most recent studies, which contain data through the first quarter of 2024, provide insight into behavior for FIA policies that experienced a positive change in interest rate since issue,” said Ben Johnson, Milliman actuarial data scientist, Life and Annuity Predictive Analytics. “Contracts that experienced increases in interest rates since issue saw elevated surrender rates, especially when credited rates were significantly lower than prevailing market rates.”

Key findings:

Recent data shows that contracts with credited rates much lower than market rates can have surrender rates over three times as high as those with credited rates relatively close to the market rate.
Surrender rates increased for contracts in their surrender charge period compared to pre-2022 levels, especially for contracts with a living benefit.
Observations since 2022 suggest surrender rates are more than 1.5 times higher for contracts without living benefits – and more than twice as high as contracts with living benefits – compared to pre-2022 levels.
As GLWBs become more valuable (in-the-money), average surrender rates tend to decrease, particularly at the end of the surrender charge period where deep in-the-money surrender rates are about 11% and out-of-the-money surrender rates are about 22%.
Once GLWB income has commenced, surrender rate patterns are significantly muted and below 5% on average for all durations.

Milliman’s Fixed Indexed Annuity Experience Studies introduce an advanced behavioral model that is integrated into Milliman’s Recon platform. This model, with a 99.8% actual-to-expected accuracy ratio, further empowers annuity writers to conduct their own experience studies, delve into industry data, and develop tailored models.

Allianz sets up Bermuda reinsurer

Global insurer Allianz, parent of Allianz Life in the U.S., has established a new independent strategic reinsurance platform called Sconset Re Ltd., which will be capitalized through equity investments from high-quality institutional partners.

Located in Bermuda, Sconset Re “will specialize in assuming fixed indexed annuity product risk and its asset management, and will aim to deliver more efficient returns across the subject business,” a press release said.

Initially, the new platform will reinsure a $4 billion block of annuity liabilities and will enter into a forward flow agreement for $5-10 billion of new business. PIMCO, an investment management firm, will manage most of the investment portfolio.

Both Voya and Antares have been named as two of the institutional partners of Sconset Re, with each set to manage a portion of the sidecar’s asset portfolio.

Deutsche Bank acted as the sole financial advisor to insurer Allianz on the transaction, and also acted as the sole arranger of a debt financing facility to Sconset Re.

“This transaction is representative of the opportunity that Allianz sees with its life and asset management business in the U.S,” says Deutsche Bank.

Empower to distribute Allianz Life’s in-plan annuity solution

Allianz Life Insurance Company of North America’s in-plan annuity solution will be available through the nation’s second-largest retirement plan provider, Empower, the insurer said in a release.

“Allianz Lifetime Income+” will be the first fixed indexed annuity on Empower’s platform. As the only in-plan annuity on Empower’s platform designed as an individual contract, Allianz Lifetime Income+ offers portability options without any changes to fees, features, or benefits.

Allianz Lifetime Income+^® will soon be available to the more than 80,000 retirement plans and more than 18 million customers that use Empower for retirement plans, advice, wealth management and investments in the United States, the release said.

State Street and Verizon sued over pension risk transfer deal

State Street Global Advisors faces a federal class action lawsuit alleging that it violated its fiduciary duty in advising a client, Verizon Communications, to exchange two pension plans for group annuities provided by Prudential Insurance Company of America (PICA).

The suit was filed on behalf of 56,000 retirees from two Verizon defined benefit plans with about $5.7 billion in plan assets on December 30, 2024 in U.S. District Court, Southern District of New York.

The defendants are State Street and Verizon Communications Inc. and its pension departments. RGA Reinsurance Company was involved in the pension risk transfer (PRT) deal but wasn’t named as a defendant.

The large-plan PRT business is booming and highly competitive among large life/annuity companies. Last month, LIMRA’s U.S. Group Annuity Risk Transfer Sales Survey reported that total U.S. single-premium PRT premium was $14.2 billion in the third quarter, up 36% from prior year’s results. Year-to-date (YTD), total single-premium PRT premium increased 21% to $39.9 billion. PRT premium includes (“buy-out” and “buy-in” deals).

“Single-premium buy-out premium totaled $13.1 billion in the third quarter, up 62% from prior year’s results. There were 203 contracts finalized in the third quarter, level with prior year. YTD buy-out premium jumped 26% to $36.5 billion. Through September 2024, there were 530 buy-out contracts, 10% growth over prior year. This marks a record-high number of buy-out contracts sold,” a LIMRA release said.

The class action complaint alleges that State Street and Verizon violated their fiduciary duty under U.S. labor law to act solely in the interests of plan participants when they agreed to exchange the pensions for PICA annuities.

According to the complaint, State Street and Verizon chose an annuity provider on the basis of their own financial interests rather than the financial safety of participants or retirees.

“Instead of going through a rigorous, independent and thorough selection process

that took into consideration the requisite analysis that an ordinary and prudent ERISA fiduciary is required to undertake, Verizon and State Street chose to purchase substandard annuities for Verizon retirees from PICA and RGA, which are both heavily dependent upon transactions with affiliates that are not transparent and expose plan participants to unreasonable amounts of risk and uncertainty.

“These affiliates are domiciled in ‘regulation light’ jurisdictions where wholly owned captive reinsurers and affiliates are permitted to count debt instruments as assets and are not required to file publicly available financial statements in accordance with Statutory Accounting Principles (SAP), the requisite accounting standard under which all U.S. life insurance companies operate. Without clarity around the assets, liabilities, structure and claims paying ability of these wholly owned captive reinsurance companies and affiliates, State Street and Verizon could not possibly have met their obligations as prudent fiduciaries under ERISA.”

The plaintiffs are represented by Edward Stone Law in New York and Kantor & Kantor LLP in Northridge, CA.

Under the pension deal, announced last March, Prudential and RGA each irrevocably guarantee and assume 50% of the benefit obligation to the retirees, except in certain jurisdictions where Prudential will irrevocably guarantee and assume 100% of the benefit obligation.

At the time, transaction marked the second major pension risk transfer agreement between Prudential and Verizon. In 2012, Prudential completed an approximately $7.5 billion transfer that covered approximately 41,000 of Verizon’s retirees.

Under the terms of the agreement, PICA is responsible for administrative services. This includes providing protected retirement income payments to this transaction’s population of retirees and their beneficiaries on behalf of Prudential and, where applicable, on behalf of RGA, beginning July 1, 2024.

Since 2012, Prudential has completed pension risk transfer deals or “pension buyouts” with General Motors, HP Inc. (2021), IBM (2022 and 2024), Shell USA (2024) and Sound Retirement Trust (2024).

Eldridge reorganizes, is criticized for loans from Security Benefit

Eldridge Industries announced plans to launch Eldridge, an asset management and insurance holding company with approximately $74 billion in assets under management. Eldridge will be wholly owned by Eldridge Industries and consist of two divisions: Eldridge Capital Management and Eldridge Wealth Solutions.

Eldridge Capital Management will focus on four investment strategies – corporate credit, GP solutions, real estate credit, and sports, media, and entertainment – and will conduct business under the Eldridge brand. Eldridge Wealth Solutions, an insurance and retirement solutions platform, will be comprised of Eldridge’s wholly owned insurance companies, Security Benefit and Everly Life.

Related story: “Security Benefit had more collateral loans to affiliated borrowers than all other US insurers combined, according to the most recent data. It also has piled into structured credit and lower-rated bonds to a greater extent than others,” Bloomberg reported.

“That’s prompted scrutiny from ratings firms, regulators and creditors, some of whom have balked at investing. ‘These types of assets could become illiquid very fast, especially in a crisis environment like the one we had back in ‘09,’ said John Han, a credit analyst at F/m Investments, which passed on a recent Security Benefit bond offering.

Eldridge will be managed by a newly formed Executive Committee, chaired by Todd Boehly, Chairman and CEO and controlling shareholder of Eldridge Industries. Mr. Boehly, in his capacity as Chairman of Eldridge’s Executive Committee, will be involved with strategic oversight and partnerships of both Eldridge Capital Management and Eldridge Wealth Solutions.

Eldridge will have offices in New York, Greenwich, Beverly Hills, Chicago, Dallas, Atlanta, Overland Park, Des Moines, Topeka, London, and Abu Dhabi. The transaction is expected to close in January 2025.

DOL names new members of ERISA Advisory Council

Posted on January 3, 2025 by Editorial Staff -

The U.S. Department of Labor (DOL) has appointed five new members and leaders for the 2025 Advisory Council on Employee Welfare and Pension Benefit Plans, also known as the ERISA Advisory Council or EAC.

The 15-member council provides advice on policies and regulations affecting employee benefit plans governed by the Employee Retirement Income Security Act of 1974.

By law, members serve for staggered three-year terms representing nine fields. Three members represent employee organizations, three represent employers and three represent the general public. The accounting, actuarial counseling, corporate trust, insurance, investment counseling and investment management fields are each represented by one member.

Assistant Secretary for Employee Benefits Security (EBSA) Lisa M. Gomez announced appointments in these fields:

Actuarial Counseling:Christian Benjaminson is a vice president and principal consulting actuary at Cheiron Inc. primarily advising multiemployer plans in the trucking, manufacturing, construction, communications and grocery industries. Benjaminson has more than 25 years of experience as an actuarial consultant and a Society of Actuaries’ Fellow, and an enrolled actuary and member of the American Academy of Actuaries.
Employee Organizations:Wendell Young is the President of United Food and Commercial Workers Local 1776 Keystone State as well as Vice President of the UFCW International Union. Young serves as a trustee overseeing health and pension benefit trust funds for the union’s 35,000 members. He also serves on the Strategic Initiative Steering Committee for the International Foundation of Employee Benefit Plans.
Employers:Jay Dorsch is the chair of the Employee Benefits and Executive Compensation practice of Cozen O’Connor, a law firm representing clients in all aspects of employee benefits and executive compensation matters and related fiduciary and tax concerns. Dorsch represents clients before the IRS, the Department of Labor and the Pension Benefit Guaranty Corp.
General Public:Elizabeth Hopkins is a senior partner at Kantor & Kantor LLP and head of the law firm’s pension practice. Hopkins joined the firm in 2018 after a long career at the DOL Department of Labor where, for 15 years, she served as head of the ERISA appellate and amicus program. In that role, she oversaw nationwide litigation designed to advance the interests of workers and their families with regard to their employee benefits.
Investment Counseling:Craig Wright is a founding partner at Strategic Financial and has 15 years of experience as a financial advisor. Wright received a master’s degree in business administration from Southwest Baptist University. He is a Certified Financial Planner and has holds a Chartered Financial Consultant designation.

Continuing as Council Chair for 2025 will be current member Mayoung Nham, a principal with the law firm of Slevin & Hart PC with 15 years’ experience in employee benefits law.

Current EAC member Anusha Rasalingam will serve as the council’s Vice Chair in 2025. A partner at Friedman and Anspach, Rasalingam has 20 years of experience in employee benefits law. She advises on healthcare and retirement benefits issues for single and multiemployer plans, and counsels on compliance with multiple areas of ERISA.

Outgoing members are Tonya Manning, U.S. Defined Benefit Consulting and Administration Practice Leader and Chief Actuary at Gallagher; Shaun C. O’Brien, Policy Director at the American Federation of State, County and Municipal Employees; Holly Verdeyen, partner and U.S. Defined Contribution Leader at Mercer; Jeffrey Lewis, partner at Keller Rohrback LLP; Beth Halberstadt, senior partner and U.S. Defined Contribution Investment Solutions Leader at Aon Investments USA Inc.