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Nationwide, Annexus partner on in-plan annuity

Posted on February 3, 2021 by Editorial Staff -

Nationwide and Annexus Retirement Solutions are partnering to launch a new product for the 401(k) market this year. The product will be a collective investment trust consisting of a series of target date funds (TDFs) that will include a fixed indexed annuity or (FIA) with a guaranteed lifetime withdrawal benefit.

The annuity part of the offering is called “Lifetime Income Builder.” The name of the overall savings-to-income solution, as well as the names of the asset managers who will offer investments in the TDFs, will be forthcoming, a Nationwide spokesperson told RIJ.

According to a release today:

“Lifetime Income Builder… provides plan sponsors an efficient structure designed to be QDIA (qualified default investment alternative) compliant and which offers a combination of liquidity, portability, and ease of use that is currently missing from other in-plan income solutions. This innovative investment option combines guaranteed lifetime income along with a systematic withdrawal strategy that efficiently addresses the risks a participant faces in generating retirement income.

“The new retirement plan investment option… is an expansion of an already successful partnership between Nationwide and Annexus, which has involved bringing new products to market over the past seven years,” the release added.

In October 2020, Nationwide launched an FIA as a stand-alone investment inside a 401(k) plan. You can find an RIJ story about it here.

The passage of the SECURE Act in 2019, which went into effect at the start of 2021, reduced the legal liability that a plan sponsor would face if, for example, it chose to offer an annuity product in its retirement plan and the issuing life insurer later became insolvent and couldn’t meet its liabilities. This relative tweak in pension law has unleashed a surge of new products that, in effect, make defined contribution plans a little more like old-fashioned defined benefit plans, in terms of providing lifetime income.

The introduction of this type of product indicates the further normalization of the use of FIAs. Ten years ago, FIAs were a controversial product sold almost exclusively by independent insurance agents in the “wild west” territory of the annuity business. Five years ago, the Department of Labor tried to make it difficult for advisers to sell FIAs and variable annuities to retirement clients for their IRAs.

But the long-standing low interest rate environment, which began in 2009 and could very well last until 2023 or longer, has up-ended the annuity industry. The retreat of other products has led to the gradual emergence in popularity of index-linked annuities, both fixed and variable.

They tap into the equity markets for their upside potential, via the purchase of options on equity indexes. Many, but not all, broker-dealers now sell retail FIAs, and RIAs can buy no-commission individual FIAs through online platforms like RetireOne, DPLFinancial and Envestnet.

Experts, Predictions, & Financial Crises in France, 2001-2018

Posted on February 3, 2021 by No Author -

Does the Pandemic Limit Biden’s Fiscal Options?

Posted on January 28, 2021 by Eugene Steuerle and Erald Kolasi -

Largely as a consequence of the pandemic, trillions of dollars have been flowing out of the Treasury’s coffers. The Congressional Budget Office (CBO) projects the federal budget deficit for 2020 alone will exceed $3 trillion, three times higher than pre-pandemic estimates. Meanwhile, President-elect Joe Biden has suggested that trillions of dollars more should be spent to deal with the pandemic and then to address many of the nation’s social needs that will continue to exist beyond the current economic slowdown.

To determine how the longer-term budgetary effects of the pandemic have been playing out so far, and how similar pandemic-related expenditures might also affect the long-term direction of government spending, we compare the CBO’s September 2020, mid-pandemic, projections of real dollar changes in 2030 versus 2019 under current law to what CBO projected pre-pandemic in January 2020.

For the most part, we see fairly modest differences in budget forecasts of where increases in future spending would occur. Almost all of the pandemic-related boosts in spending are temporary, and the long-term trends remain dominated by the growth patterns that Congress and previous presidents had already built into the law, not by long-term societal needs and inequities highlighted by the pandemic.

The one exception is for interest costs. They still rise significantly under the September 2020 projections, but by about $100 billion less than in January 2020, largely reflecting CBO’s forecast of a lower interest rate environment due to Federal Reserve policy and the effect on saving and investment of a world-wide economic slowdown.

Comparing the mid-pandemic to the pre-pandemic forecast, lower interest rates would more than offset the additional interest costs associated with higher levels of debt, resulting in overall lower federal debt service as late as 2030. To be clear, lower interest costs due to a world-wide slump and slower projected economic growth are not good news.

Until recently, a growing economy would provide enough revenue to give a president significant leeway to chart new paths for spending. Such opportunity will likely elude President-elect Biden, however. When 2030 is compared to 2019, Social Security, health, and interest on the debt alone are projected to comprise 91% of the total real spending growth of about $1.4 trillion.

These three sources of additional costs would absorb 122% of the total revenue growth of about $1.1 trillion, assuming current law would remain unchanged after September 2020. Already this 122% figure is an understatement of what is likely to occur over the coming decade, as the new, largely temporary COVID-19 relief adopted in late December, along with the relief likely to be enacted in early 2021, will add to longer-term interest costs, assuming rates don’t fall further.

Moreover, President-elect Biden made campaign promises to increase taxes only for those with very high incomes. That implies that, unlike CBO’s measure of current law, he could feel compelled to accept a lower “current law” revenue base by extending the middle-class individual income tax cuts included in the 2017 Tax Cuts and Jobs Act (TCJA) that are scheduled to expire after 2025.

Under January pre-pandemic projections, Social Security, health, and interest on the debt would constitute a very similar 94% of the total growth in spending and 127% of the total growth in revenues.

Although annual deficits by 2030 are large and growing, they remain close to the pre-pandemic projections. Of course, the accumulated debt will be much larger than formerly predicted. Thus, so far, the long-term impact of the pandemic and the nation’s responses to it reinforce and accelerate pre-existing budgetary trends, both in terms of overall spending projections and ever-larger gap between revenue and those expenditures.

President-elect Biden’s first priority will be to address the pandemic and the short-term economy, thus further increasing government spending. The open question: Once the pandemic is controlled, how will Congress and the incoming President adjust long-term spending and tax policy?

Higher debt levels alone may make it harder for the President to shift the nation’s fiscal path. Yet, absent significant reductions in the built-in growth rates in health and retirement programs, a substantial increase in revenues, or both, our current fiscal trajectory will increasingly hamstring the nation’s ability to address other priorities.

How to Solve the World’s Retirement Crisis

Posted on January 28, 2021 by Kerry Pechter -

The process of replacing defined benefit pensions with defined contribution plans at US companies has taken a long time. If you date the beginning of the end of DB plans to 1974, when ERISA was signed into law—or even to the termination of the Studebaker-Packard pension in 1963, which led to ERISA—the transition has lasted about half a century.

Will it take just as long to restore reliable monthly paychecks to the defined contribution plans? It might.

In a way, retrofitting 401(k) profit-sharing plans into vehicles for retirement income tests the Second Law of Thermodynamics. DC atomizes the collective pools of DB savings into individual accounts. To reverse that evaporation process will take a lot of work, imagination, and possibly new types of bonds from the US Treasury.

Given the high stakes—tens of trillions in retirement savings in the US alone—a lot of thought has gone into solving the DB-to-DC puzzle. The prestigious Journal of Investment Management focused its most recent issue on ‘Retirement Investing,’ featuring three articles by some of the top minds in the field. RIJ provides summaries of (and links to) these articles below.

“A Six-Component Integrated Approach to Addressing the Retirement Funding Challenge,” by Robert C. Merton and Arun Muralidhar

Nobel-winning economist Robert Merton and Arun Muralidhar have collaborated for years on a retirement income-generating government-sponsored investment they call Standard-of-Living Indexed Forward-starting Income-only Securities, or SeLFIES. Their recent JOIM paper ties SeLFIES to the Coronavirus pandemic. It also outlines their six-component approach to the global retirement funding challenge.

As described by the authors, a single risk-free, consumption-indexed SeLFIE bond might pay a real $5/year each over a retirement period of 20 years. A person age 55 today who wanted $50,000 per year, starting in 10 years and lasting for 20 years, would buy 10,000 of the 2031-series SeLFIES, either all at once or in increments.

“Individuals do not have to know anything about interest rates or rates of return or compounding. They only need to know the income in retirement paid by each SeLFIES bond and its price to figure how much income is being added to his retirement by purchasing the bond,” the authors write. So-called “gig workers” who don’t belong to a formal DC plan could buy SeLFIES on their own.

It may have been beyond the scope of the paper to consider how the US government would use the proceeds of selling trillions of dollars in SeLFIe bonds. Today, Social Security already relies on general federal tax receipts for the redemption of the special-purpose, non-tradable bonds in its trust fund, which represent surplus payroll tax receipts that were collected and lent to the US Treasury since the Social Security reforms of 1983.

SeLFIES are a component of the authors’ vision for a six-point plan that they believe would solve much of the world’s retirement income crisis. The six components, applicable in any country by any government, are: A basic minimum defined benefit pension or Social Security benefit as a safety net; a defined contribution plan; the availability of retail annuities (including reverse mortgages); the issuance of SeLFIES; public policies that encourage and allow older people to work longer; and innovations that make it easier to access retirement savings in emergencies, such as those imposed by the pandemic.

“How Much Can Collective Defined Contribution Plans Improve Risk-Sharing?” by Deborah Lucas and Daniel Smith.

In their paper, Deborah Lucas of the MIT Sloan School and Daniel Smith of the MIT Golub Center for Finance and Policy consider the Collective Defined Contribution (CDC) concept, a hybrid of DB and DC found in Europe and Canada. Then they ask if the CDC’s risk-management strategy could be replicated in a DC plan with individual accounts, managed by individual participants with average investment skills.

In a CDC plan, all of the participants contribute to a common, professionally managed investment pool. This spreads out the risks and minimizes the costs of individually managed accounts. Each participant has a notional account that reflects the growth of his or her contributions, and the number of shares in the pool he/she has purchased. The pool maintains a reserve fund which captures excess profits during boom years. [See RIJ story on a CDC experiment in New Brunswick, Canada.]

Retirees get income from the same big pool, based on the number of shares or value of their notional accounts at retirement. If their balance falls short of the cost of an annuity to cover a minimum target income, their balance would get topped up by a distribution from the reserve fund. This technique provides a smoothing effect across annual cohorts of participants so that no one bears the brunt of sequence risk.

In a CDC plan, Lucas and Smith say, the participants are selling an implicit call to the reserve fund (which receives a transfer from the collective fund when market returns are high) and buying an implicit put from the fund (which sends a transfer to the collective fund when market returns are low, assuming reserves are sufficient). Thus each retiree’s income only rarely falls below a target level and sometimes exceeds it.

Lucas and Smith ask if, all else being equal, 401(k) participants could replicate this risk-management technique individually, in what the authors call an “options-augmented DC plan,” by purchasing one-year puts and selling one-year calls on their entire accounts? Yes and no, they say.

“The options augmented model was able to produce outcomes that were considerably more predictable than the benefits in a 60/40 DC plan, and fairly similar to those of the CDC model,” the author write. They offer a couple of observations: The one-year options strategy might demand too much financial sophistication from participants, and the CDC model’s risk-management policies might be too conservative to produce desired levels of retirement income.

“Towards Replacing the Defined Benefit Plan: Assured Retirement Income Provided by a Liquid Investment Fund,” by Miguel Palacios, Hayne Leland and Sasha Karimi.

The authors propose a new kind of DC fund that would allow individuals to create minimum assured future income streams for themselves for a period of time (typically 20 years). It employs a “floor-and-upside” strategy that divides savings between a “risk-free” and a risky asset. The risk-free asset is a ladder of safe zero-coupon US Treasury securities—which the authors call MIF, or Maximum Income Fund—whereas the risky asset is a diversified equity index fund.

The allocation between the risk-free and risky assets is such that the minimum assured income stream is satisfied for all investors, regardless of when they invest, while maximizing exposure to the risky asset. In their example, the minimum assured income is 80% of MIF. Shares in the fund are issued so that the minimum annual income stream per share is $1. When income begins, part of the savings in the fund can be used to buy income beyond the period for which income is assured.

The new savings alternative is called the RLI, or Robust Liquid Income Fund. Over their working lives, plan participants buy more RLI shares. The share price would fluctuate, depending on a number of factors, but the minimum income would always be assured. Outstanding performance of the equity-index sleeve would result in increases to the minimum income, which would be paid with new shares or share “splits,” such that the assured annual income per share remains at $1.

The difference between the value of the fund and the value required to provide assured income for the specified period of time, which is the balance of the equity index sleeve of the RLI, can be used by investors when income begins to buy a longevity annuity component to guarantee income beyond the first 20 years of retirement. This would likely be a tax-favored deferred income annuity called a Qualified Lifetime Annuity Contract (QLAC).

There are several challenges here. There’s the challenge of dividing each new contribution between the risky and risk-free sleeves of RLI in proportions that will both ensure the provision of at least 80% of the MIF income over the first 20 years, while also maximizing the exposure to risky assets so that there’s a chance for more than 100% of the MIF income—plus the purchase of the QLAC.

Another set of challenges involves ensuring that each share will buy $1 of annual income for 20 years, no matter when the share is purchased, regardless of asset values on that day, and without affecting any other participant’s balance.

The authors claim to have a special sauce—a proprietary algorithm—that dynamically adjusts the allocation between the risk-free and risky assets to achieve an income for each participant that might not be as high the income from a fund that was 100% invested in a Treasury bond ladder but which could potentially be much higher. They note the concept’s flexibility: there’s lots of room to customize it and adjust the risk/return balance by changing the various inputs, goals, and asset choices.

Honorable Mention

Posted on January 28, 2021 by Editorial Staff -

Sammons Financial buys $3 billion Ohio-based RIA/TAMP

Sammons Financial Group has purchased Beacon Capital Management, a Dayton, Ohio-based. registered investment advisory (RIA) firm and turnkey asset management program (TAMP) with more than $3 billion under management. Berkshire Global Advisors advised Sammons for the transaction. Terms of the agreement are undisclosed.

The purchase extends the reach of Sammons products—life insurance, annuities, and retirement planning solutions—into the fee-based RIA market, which life/annuity issuers have spent several years trying to break into and have increasingly retooled their once commission-only products for. Beacon boasts of a proprietary stop-loss strategy for protecting clients from market volatility.

“The purchase allows Sammons Financial Group to further grow into a specific retirement market segment—one that aligns well with our current business model in life insurance, annuities, and retirement planning solutions,” said Rob TeKolste, president, Sammons Independent Annuity Group, in a release. “In 2020, we concentrated on developing products and building channel partner relationships.”

With more than $114 billion in GAAP assets, Sammons Financial Group is a diversified financial services organization with a long history of leadership in the life insurance and retirement marketplace. The Sammons Financial Group insurance companies emerged from 2020 with more than $10 billion in total premiums.

The acquisition is expected to close early in the second quarter of 2021. All Beacon employees and contract wholesalers will become part of the Sammons Financial Group family of businesses. All advisor relationships and investment strategies will remain unchanged. The companies do not anticipate any changes in the service experience for the clients of Beacon Capital Management or its advisors.

MetLife unit completes pension risk transfer deal with Weyerhaeuser

Metropolitan Tower Life Insurance Company, a subsidiary of MetLife Inc., has agreed to provide annuity benefits to nearly 5,200 retirees and beneficiaries in Weyerhaeuser Company’s defined benefit (DB) pension plan, representing pension obligations of approximately $765 million.

“Plan sponsors are looking to pursue pension risk transfer transactions sooner rather than later. MetLife’s 2020 Pension Risk Transfer Poll found that among plan sponsors interested in a buyout, the majority (81%) said they would transact within five years, including 24% who said they would secure a buyout within two years,” a MetLife release said.

MetLife, through Metropolitan Life Insurance Company and Metropolitan Tower Life Insurance Company, is a market leader in the pension risk transfer industry. It manages benefit payments of approximately $3 billion a year for about 720,000 annuitants.

Metropolitan Life Insurance Company issued its first group annuity contract in 1921 to fund a defined benefit plan. MetLife’s Retirement & Income Solutions (RIS) business includes U.S. Pensions, Institutional Income Annuities, and Structured Settlements in addition to other institutional products.

Equitable publishes study on educators’ retirement savings rates

When given a choice of retirement plan providers, K-12 educators are more likely to contribute toward their retirements and have better financial outcomes, according to research conducted for Equitable, the principal franchise of Equitable Holdings, Inc. (NYSE: EQH)

The research, “Benefits of Multiple 403(b) Providers,” surveyed 800 K-12 educators. The research showed when educators chose their retirement plan provider, they:

Were more likely to participate. When more providers are available, educators are more likely to save. According to National Tax-deferred Savings Association (NTSA) data included in the report, average participation rates in 403(b) plans increased steadily from 25% in single-provider districts to 33% in districts with 15 or more providers.

Experienced better financial outcomes. Where educators had a choice of providers, annual contributions were 22% higher, averaging $4,843 versus $3,961, and median account balances averaged $40,000 versus $30,000. Median account balances increased steadily with an increase in providers offered.

Were more satisfied with their plan. Seventy percent of respondents with a choice of providers reported they were satisfied with their plan, versus 57% without a choice. Educators also reported higher levels of familiarity with the details of their plan, with 66% of those with a choice of providers reporting they were familiar with their plan compared to 50% of those without a choice of providers.

Had more confidence. Eighty-seven percent of those with provider choice said they had confidence in their retirement plan, compared to 80% among those without a choice of providers.

The study also found educators with a choice of providers are significantly more satisfied with their financial professional than those without a choice. Sixty-nine percent of those surveyed with both a choice of providers and access to a financial professional felt their advisor mitigates investment risk.

Industry best practices can help plan administrators improve processes for seamless, multiple 403(b) plan management. These best practices include maintaining a single plan document when working with multiple plan providers and partnering with other providers to educate employees on saving for retirement.

The survey was conducted by independent market research firm Zeldis Research Associates. More than 800 K-12 educators in multi- and single-provider districts across the United States were polled. The sample was nationally representative by age, region and gender. Of the plan participants surveyed, 12% are Equitable plan participants.

National Guardian Life buys Everplans

National Guardian Life Insurance Company (NGL) has acquired Everplans, a New York City-based digital life-planning and organization company. Everplans will remain a separate entity and operate as a wholly owned subsidiary of NGL.

Everplans helps people manage, organize, securely store and share critical information with those in their lives who may need it during an emergency, or in the event of death. The company currently maintains a consumer subscription service, which is also offered by financial professionals, attorneys, insurance agents and employers.

Everplans’ founders, Abby Schneiderman and Adam Seifer, wrote the recently released book, In Case You Get Hit by a Bus – How to Organize Your Life Now For When You’re Not Around Later (Workman Publishing).

As a mutual insurance company founded in 1909 in Madison,WI, NGL provides individual and group life and annuity products to some 1.27 million policyholders. Founded in 2012, Everplans serves the clients, policyholders, and employees of 400+ companies, including some of the largest providers of insurance and financial services.

Caroline Feeney appointed group CEO at Prudential

Prudential Financial, Inc. (NYSE: PRU) has appointed Caroline Feeney as CEO of its US Insurance & Retirement Businesses. In her new role, Feeney will continue to report to Andy Sullivan, executive vice president and head of US Businesses for Prudential.

Feeney assumed this newly created role effective January 25, with responsibility for growing the company’s US businesses and keeping them aligned with PGIM, Prudential’s asset management business. She will oversee Group Insurance, Individual Life Insurance, Prudential Annuities, Prudential Retirement, and the Retail Advice and Solutions organization, as well as the group charged with improving the service experience for Prudential’s retail and institutional customers in the US.

Feeney has held progressively more senior roles during her 27-year career at Prudential, most recently serving as CEO of Individual Solutions. Previously, she served as president of Prudential Advisors and president of Individual Life Insurance, and spent time in field leadership roles. She also leads the company’s Women Empowered business resource group and champions women’s financial issues, diversity and professional development both within and outside of Prudential.

Pacific Life offers new income-oriented variable annuity

Pacific Life has launched Pacific Choice Income, a new variable annuity with two living benefits—Enhanced Income Select 2 and Future Income Generator.

Enhanced Income Select 2 offers higher withdrawals early in retirement, the flexibility to start and stop withdrawals, and an income rollover feature that allows them to carry over remaining unused amounts into the next contract year’s withdrawal.

Future Income Generator provides steady income for life, even if the contract value goes to zero, while providing the opportunity to receive additional income if the markets perform well. Both benefits offer a 5% simple-interest credit for 10 years, or until the first withdrawal.

US insurers’ exposure to CLOs passed $132 billion in 2019: AM Best

Posted on January 28, 2021 by Editorial Staff -

US life/annuity and property/casualty insurance companies have ramped up their investments in collateralized loan obligations (CLO) in recent years, to $132.7 billion in 2019 from $75.1 billion in 2016, according to a new AM Best report.

The asset managers who have been acquiring, investing in, providing investment expertise to life/annuity companies since 2010—Apollo was the first of several—saw the opportunity to profit by investing part of the assets supporting fixed annuities into the investment-grade senior tranches of CLOs.

CLOs are securitized bundles of below investment-grade loans to businesses with strong cash flows but poor credit—like equipment leasing companies, cellphone tower companies and music royalty companies. Certain asset managers have expertise originating the loans inside the CLOs, creating the CLOs, and selling off tranches with different credit ratings to clients with different risk/return targets.

“CLOs have become a popular alternative asset class that insurers have been increasing allocations to as they shift away from traditional investment-grade corporate holdings to mitigate the decline in portfolio yields from maturities and newer low-yielding high-grade corporate assets,” said the Best’s Special Report, “Collateralized Loan Obligations Holdings Continue to Grow, But Exposures Are Manageable.”

Rated life/annuity insurers drove growth of more than 40%, to more than $114 billion in 2019 from $65 billion in 2016. The rated property/casualty insurers also have also increased their CLO holdings during the same period, by about 45% to $18.5 billion.

The steady rise has pushed the share of CLOs in the fixed-income portfolios of life/annuity companies to 4.0% in 2019 from 2.7% in 2016. Property/casualty companies’ exposure is lower—still below 3%—but is also growing.

According to the report, the investor-friendly structural features and protections of CLOs have attracted insurers. For example, CLOs cannot short securities or use derivatives, as well as over-concentrate, over-lever or stray from tight indenture requirements.

“Historically favorable performance, attractive yield and credit quality have further made CLOs appealing to insurers,” AM Best said in a release. “As a result, not only have insurers been expanding their positions, but there also has been steady growth of companies newly investing in this asset class.”

The credit quality of the US insurers’ CLO exposures has declined slightly from 2018. The underlying fundamentals of the leveraged loan market and a possible mismatch between risk and rating emanating from the COVID-19 pandemic could exacerbate fears of a decline in CLO performance and foreshadow downgrades and write-downs.

However, AM Best notes that the majority of the insurance companies’ exposure has been in senior and higher-quality tranches that are less likely to default.

“In the event of credit rating downgrades to CLO securities, insurers with larger exposures may be hit with higher capital charges,” said Jason Hopper, associate director, industry research and analytics.

“Worsening performance and potential write-downs also would further pressure risk-adjusted capital levels for some, although the far majority of insurers’ CLO exposure is held by carriers at the high end of AM Best’s credit rating scale.”

Financial Habits of Highly Effective Savers

Posted on January 28, 2021 by No Author -

MassMutual buys Great American Life for $3.5 billion

Posted on January 28, 2021 by Editorial Staff -

Massachusetts Mutual Life Insurance Company has agreed to buy Great American Life Insurance Company, a leading issuer of fixed and fixed indexed annuities, from American Financial Group, Inc. (NYSE:AFG), a company controlled by the billionaire Lindner family of Cincinnati.

The purchase price is $3.5 billion, subject to adjustment at closing, according to a news release. The transaction is expected to close in the second quarter of 2021, subject to regulatory and other necessary approvals. Great American Life will operate as an independent subsidiary of MassMutual.

MassMutual was the US sales leader in fixed-rate deferred annuities through the first nine months of 2020, with $5.18 billion in sales. This acquisition makes it an instant player in the fixed indexed annuity business as well. Great American sold $1.77 billion worth of FIAs in the first three quarters of 2020, ranking ninth.

“This transaction is symbiotic,” Sheryl Moore, CEO of Wink Inc., the annuity data and marketing shop in Des Moines. “MassMutual, in addition to having a robust life insurance line, dominates the multi-year guaranteed annuity market and has competitive variable annuities too. Great American complements them with its strong market share in the fixed, indexed, and structured annuity segments. Plus, each company is strong in different distribution channels. Between them, they have every distribution covered except direct response.”

The deal also helps strengthen AFG’s position as a publicly held property/casualty company, according to a release from ALIRT, which analyzes the life insurance business.

“AFG has a large commercial lines property/casualty business, with an emphasis in specialty business lines,” the ALIRT release said. “AFG’s property/casualty business is substantially larger than its annuity operations, and in addition the property/casualty business is viewed much more favorably by investors in publicly traded stocks, for many of the reasons noted above, as well as the more pronounced effect of the low interest rates on spread based businesses such as annuities.

“Thus, investors in AFG stock (and AFG management) may prefer using capital presently allocated to GALIC (and AILIC) either to grow its core property/casualty business, and/or for shareholder remuneration,” ALIRT said.

ALIRT added, “AFG’s sale of GALIC is yet another transaction in a long list of companies that have sold part or all of their US individual life insurance or annuity businesses, and/or altered their product strategies. These groups include but are not limited to the following (and some groups executed more than one transaction):

“The long-dated liabilities associated with many life insurance and annuity contracts are under ongoing pressure from the falling investment returns, while other businesses (property/casualty insurance, group retirement and accident & health businesses, international operations, etc.) are now viewed more favorably by institutional investors in publicly-traded stocks.”

AFG is led by co-presidents and co-CEOs Carl H. Lindner III and his brother Stephen Craig Lindner, who own 12.87% and 5.63% of the company’s outstanding shares, according to Standard & Poor’s. The late Carl H. Lindner, Jr., acquired American Financial Group in 1973, after having grown his 1940 ice cream and dairy processing operation into a business empire.

Carl Jr. owned the Cincinnati Reds baseball team from 1999 to 2005, and Carl III owns FC Cincinnati, a major league soccer team. In the past two days, AFG shares rose from almost $80 to just under $93, giving the company a current market capitalization of more than $8 billion.

What’s up with the ‘ESG’ rule: Wagner Law Group

Posted on January 22, 2021 by Wagner Law Group -

This is a brief summary of the full text of the Wagner Law Group’s post-election assessment of the Department of Labor’s intentions regarding a retirement plan sponsor’s fiduciary duties when considering “Environmental, Social and Governance”-related funds for the plan.

Late in 2020, the DOL amended its Investment Duties regulation for the first time in 40 years. In the end, the Final Rule on investment decision making that emerged from the filter of constituent comments does not prohibit fiduciaries of ERISA employee benefit plans from selecting investments that have ESG or other collateral objectives or benefits, and does not create different standards for consideration of such investment options.

Rather, the amended regulation requires that fiduciaries make investment choices based on consideration of pecuniary factors, which is consistent with the DOL’s existing guidance. The Final Rule does, however, shift focus from considering investment options under the totality of the facts and circumstances to considering only defined pecuniary factors to the exclusion of non-pecuniary factors. This could be a distinction without a difference, however, given the expanded interpretation in the Preamble and the flexibility incorporated into the final regulatory language.

The Biden Administration flagged this rule for review under the umbrella of an Executive Order focused on public health, the environment and climate change. Given that the slimmer Final Rule is no longer the stranglehold on ESG investing that the original proposal had been, the Biden Administration could decide not to expend its resources changing it.

Instead, it could opt for reminding benefit plan fiduciaries that, despite the prior administration’s efforts, the DOL does not restrict fiduciary consideration of relevant factors in selecting investments for employee benefit plans, including when considering investment vehicles with ESG or other collateral benefits or goals.

Watch now: A ‘Deep Dive on Retirement Drawdown Strategies’

Posted on January 22, 2021 by Kerry Pechter -

So many webinars, so little time.

But the title of yesterday’s webinar, “A Deep Dive on Retirement Drawdown Strategies,” made it impossible for me not to add to my calendar. Some 1,800 financial advisers attended it, indicating a level of interest in retirement income planning that the continuing eduction credit opportunity can’t have entirely explained.

The meeting’s sponsor was The American College of Financial services and hosted by Steve Parrish, an adjunct professor of Advanced Planning at the College and co-director of the New York Life Center for Retirement Income, which offers the Retirement Income Certified Professional designation. (Steve’s article on using life insurance in retirement appeared in RIJ only a few weeks ago).

Steve’s guest speakers were Joe Elsasser, an advisor and founder of Covisum, an Omaha-based fintech company, and James DiLellio, an associate professor of Decision Sciences at Pepperdine University’s Graziado Business School in Malibu, CA, who blogs at etfmathguy.com.

You can link directly to the webinar here. You can download the slides here.

Here are a couple of my takeaways from the one-hour webinar:

Evaluating the new IRA stretch period

Citing a paper he’d recently co-authored on the SECURE Act of 2019 and retirement planning, DiLellio and Pepperdine colleague Michael D. Kinsman found that while the Act had abolished the so-called lifetime Stretch IRA, it can still make financial sense for the beneficiary of IRA assets to let them grow for 10 years (the new deferral time limit on inherited IRAs) in the tax-deferred account.

The potential savings simply aren’t as great as they used to be. Relative to the strategy of transferring the inherited assets to a taxable brokerage account and letting them grow for 10 years, DiLellio and Kinsman found the heir’s accumulation advantage to average about 14%, instead of the 33% possible under the old Stretch IRA rules. The savings ranged from 10% to 17%, depending on the tax rates and types of assets involved.

Anticipating tax ‘soft spots’

Elsasser, who said he advises more middle-market retirees than high net worth retirees, talked about his firm’s software, which enables advisors to identify “soft spots” in a retiree’s potential tax liabilities and to avert these spikes from occurring by changing the mix of distributions from taxable, tax-deferred and Roth IRA accounts.

In one extreme example, Elsasser said he had spotted the risk that the retiree would suffer a total effective tax liability of almost 50% of his income for one specific year, if the maximum taxes on 85% of his household’s Social Security benefits, required minimum distributions, and capital gains all happened to coincide. By customizing the pattern of distribution among accounts each year, he tries to maximize the long-term value of a retiree’s estate.

NY Life, Schwab Flex Their Annuity Muscles

Posted on January 21, 2021 by Kerry Pechter -

New York Life and Charles Schwab have little in common. Schwab is a publicly held direct-to-consumer all-purpose financial services platform. It doesn’t own a life insurance company. New York Life is America’s most venerable mutual life insurer, and the top seller of fixed-rate annuities in the US in 2020.

Both are welcoming in the new year with new variable annuity contracts. But they’re approaching the product category from very different angles. Schwab’s Genesis VA has an income benefit, for instance, and will be distributed by Schwab advisers and independent RIAs (registered investment advisors).

New York Life’s IndexFlex VA includes the firm’s first index-linked annuity. The hybrid product gives contract owners three risk/return possibilities: fund-like variable subaccounts, a fixed account, an index-linked account. It’s a bit of a surprise that New York Life decided to dabble in index-linked products, but desperate (low interest) times evidently call for innovation.

“As soon as I read the filing for IndexFlex, my jaw dropped,” said Sheryl Moore, CEO of Wink, the annuity marketing and data service. “With fixed interest rates as low as they are, and variable annuity sales waning, these companies don’t have a choice but to develop an indexed offering.”

These companies are bringing their very different VAs to market at a time when sales of the category, aside from registered index-linked VAs (RILAs) have trended downward for several years. But VAs are still the only vehicle where investors can put almost unlimited amounts of after-tax money for liquid, long-term tax-deferred growth. For retirees, the VA value proposition—guaranteed income for life without sacrificing liquidity—still makes a lot of sense.

New York Life’s IndexFlex

New York Life executives have considered but, until now, always refrained from issuing an FIA. The product would fits its image and culture like a rodeo bronc at a riding academy. But the low-yield environment may be giving it no choice but to turn, like so many other life insurers, to options on equity indexes as a source of yield.

The product offer a limited form of one-stop shopping, “The policies are designed for individuals who want the ability to hold variable funds, index-linked investments and a traditional fixed account in the same contract,” the prospectus says. “The policies offer fewer variable investment options, and fewer optional riders and other features than certain of New York Life’s other variable annuities.”

Within the index-linked option, policyholders can choose a crediting method with either a “capped rate” or a “flat rate,” aka performance trigger. With the capped rate, investors earn the return of the index (the S&P 500 or Russell 1000) up to, for example, 3.5%. With the flat rate, investors earn exactly 3%, for example, whenever the index shows positive performance. Either way, they can’t lose money if they leave their money in the product for the length of the term.

The product has three surrender periods—a five-year, six-year, and seven-year term—with first-year surrender charges of 8%. The annual mortality and expense risk (M&E) charges (usually how an annuity issuer recovers the commission it paid the agent or adviser) are 1.30%, 1.25% and 1.20%, respectively. Annual expense ratios of the variable subaccounts range from 0.37% to 1.06%.

In an email to RIJ, New York Life described the logic behind IndexFlex. “In designing this product, we leaned into simplicity and transparency and what sets IndexFlex apart is the guaranteed nature of the cap rates within the index-linked account,” wrote Dylan Huang, SVP, Head of Retail Annuities, Investment Solutions and Wealth Planning, at the insurer.

As for why New York Life decided to bundle a variable and an indexed annuity in the same contract, he wrote, “We ultimately chose to proceed with a variable annuity design, sold by prospectus, because we were focused on ensuring certainty, transparency and a customer-first design and believe that IndexFlex is best offered by registered professionals who are trained to offer investment solutions. ”

Schwab’s Genesis VA

Schwab’s Genesis VA joins its shelf of immediate, deferred, fixed, variable and income annuities. Schwab used to distribute Great-West annuities, but Great-West sold almost all of its individual life insurance and annuity business to Protective Life in mid-2020 through a reinsurance deal. Schwab advisers will distribute the product directly to Schwab clients. An advisory version will be available through independent RIAs who custody assets with Schwab Advisor Services.

Schwab is touting the low 45-basis-point annual contract fee. The contract offers an optional guaranteed lifetime withdrawal benefit (GLWB), called SecurePay, for an additional 1.15% per year (up to a maximum annual charge of 2%). Annual expense ratios of the 63 investment options range from 0.03% to 1.67%.

This product, like all VA/GLWB contracts, is intended for people who want retirement income that they can’t outlive and that can’t go down because of poor market performance, without ever depriving them of access to their money. Payout rates for single policyholders are 3.75% of the benefit base (never less than the initial account value, minus ad hoc withdrawals) from ages 60 to 64, 5% from ages 65 to 69, 5.25% from ages 70 to 70 and 5.75% from ages 80 onward. Joint contract payout rates are 50 basis points lower across the board.

Owners who wait at least 10 years from the purchase date and then irrevocably annuitize their contracts get a 2% bonus added to their account values. Those who annuitize can do so on a fixed or variable basis. For the variable annuity, the contract’s assumed rate of return (used for calculating the first payment) is 5% per year, and the amount of subsequent monthly income fluctuates around that number.

For the (still small but) growing number of RIAs who recommend annuities to clients, there’s an “advisory” version of Genesis. The base contract fee is only 25 basis points per year. RIAs can tack on their own fee of up to 1.5% per year (1% if they select the optional return-of-purchase-payments death benefit, which costs 20 basis points a year). RIAs can get their fees deducted directly from the contract as long as their clients don’t choose the SecurePay living benefit option.

2020 US Fund Flows Highlights from Morningstar

Posted on January 21, 2021 by No Author -

Unlocking the Code of Moshe Milevsky’s Latest Book

Posted on January 21, 2021 by George A. (Sandy) Mackenzie -

Moshe Arye Milevsky’s latest book, Retirement Income Recipes in R (Springer 2020), is an ambitious and comprehensive review of recent work on the economics of retirement income and pension annuities. As its title suggests, it emphasizes the applications of the relevant algorithms by relying on the widely used open-source software R. (Be prepared to hear a lot about programming with software R. I used R for Dummies as an aid.)

The book’s basic premise is that we don’t know how long we’ll live or what the rate of return on our investments will be. Therefore, in planning for retirement, we should try to minimize our risk of outliving our money. At the same time, we should try not to have too much of our money outlive us—unless we want to leave a bequest.

Moshe Arye Milevsky

Milevsky’s objective is to reveal the economic drivers that determine how long a portfolio will last in retirement. He starts by assuming that the rate of withdrawals and the rate of return on assets are fixed for the duration of retirement. He then derives a formula for “portfolio longevity.” The formula illustrates the interplay between the rate of investment return and the rate of withdrawal (for spending) and their joint effects on portfolio longevity.

The model spans the period from the start of a hypothetical individual’s working life to his/her death. A person starts out with a certain amount of financial capital (an initial lump sum) and a certain amount of human capital (the discounted value of expected future earnings). As the years go by, his/her salary and consumption grow at a designated rate. For the sake of maintaining equilibrium, the discounted value of future consumption equals the discounted value of the personal’s capital (financial and human). Starting with this framework, Milevsky plugs in real-world features, such as uncertain investment returns.

One of the book’s virtues is that Milevsky intersperses his technical exposition (often in the language of R) with thoughtful and sometimes reproving analyses of common approaches to financial planning. (Look for these in the “Final notes” section of each chapter.) In particular, the venerable “4% safe withdrawal rule” really takes it in the shorts. An inflexible withdrawal rate could put the investor under water in an alarmingly small number of years.

In subsequent chapters, Milevsky progresses to more advanced models and covers sequence of returns risk (the risk that years with low or negative rates of return will occur early in retirement, and retirees may need to liquidate depressed assets for income), mortality risk at different ages, and Benjamin Gompertz’ eponymous law of mortality, published in 1825, which captures in continuous time the year-to-year decline in survival rates (i.e., increase in mortality rates) as populations age.

The Gompertz function permits a much more sophisticated analysis of lifetime uncertainty as well as the value and pricing of annuities. Later Milevsky addresses the implications of the empirical finding that, ironically, lifespans vary more widely within groups with shorter average life expectancies (poorer, less healthy populations) than within groups with longer life expectancies (wealthier, healthier populations). He uses this more nuanced approach to longevity when calculating lifetime ruin probabilities (or their complement, lifetime success probabilities) and to the valuation of immediate and deferred annuities.

Key to the financial economists’ approach to the demand for annuities, according to Milevsky, is the concept of longevity risk aversion. Some persons or households are more averse to an unstable level of consumption over their lifetime than others and would pay to avoid that uncertainty. Risk-averse households would presumably be more willing to reduce consumption during their working lives to raise or maintain their level of consumption in retirement. Longevity risk-averse households are likely to have a stronger preference than other households for life annuities, because annuities can insure against poverty (and the proverbial diet of cat food) in extreme old age.

In the penultimate chapter, Milevsky introduces an idea for a new kind of annuity: the Ruin-Contingent Life Annuity (RCLA). This is a deferred annuity that starts to pay income only when a garden-variety equity index (the S&P 500 Index, for instance) falls below a stipulated threshold. The RCLA, which is embedded in all variable annuities with guaranteed lifetime withdrawal benefits, mitigates both longevity risk and market risk. As a financial product, the RCLA is still at the drawing-board stage. Milevsky regards it as the potential basis of a $100 billion dollar industry.

In sum, Milevsky’s latest book is rich in practical ideas, and is also filled with the algorithms and procedures necessary for anyone to apply R to the creation of their own retirement income planning tools. Like many of his other previous books, Retirement Income Recipes in R is also full of fascinating historical asides. This reviewer found the book to be demanding in places, but also a book that will reward any investment in time with a high rate of return.

Note: The opening chapters of the book explain how to download R and the front-end R-studio. This provides screens in which to enter R’s functions and data and observe the results of computations, simulations and projections. These chapters also provide simple examples of R’s syntax. Each chapter ends with exercises to reinforce the reader’s grasp of the material. Some readers might also want to refer to one of the many introductory texts on the R language, such as R for Dummies.

Honorable Mention

Posted on January 20, 2021 by Editorial Staff -

Life sales show new life in 2020

US life insurance application activity ended 2020 up 4%, the highest annual year over year growth rate on record, according to the year-end MIB Life Index. December 2020 was up 3.7% over December 2019, the highest year-over-year growth rate for the month of December since 2011.

Growth in 2020 was largely driven by younger age groups with full year activity over 2019 increasing among ages 0-44 by +7.9% and +3.8% for ages 45-59. In contrast, activity for ages 60+ fell 1.7%. In the previous two years, the 60+ age group experienced growth while the 44-and-under group saw declines.

Month-over-month, December 2020 was down 9.5% from November, representing an expected, though somewhat stronger than usual, seasonal decline. Year-over-year, application activity increased in all but 2 months in 2020.

The year began strong with February experiencing a record 5.6% year-over-year growth. But activity in March and April declined (by 2.2% and 3.0%, respectively). Activity returned to growth in May and produced year-over-year growth months in July (14.1%), August (9.1%), September (4.4%) and October (7.6%) and then again in December (3.7%).

Based on information provided to MIB, growth was seen across all face amounts up to and including $2.5M, with double-digit growth in face amounts above $5m. However, activity by face amount varied greatly among age groups.

Activity for those ages 0-44 increased across all face amounts, with double-digit growth in policies over $250k and up to and including $1m as well as over $5. In contrast, activity for age 71 and older increased only in face amounts over $5m, decreasing in all other categories.

Information provided to MIB showed overall growth across all product types. Data suggests that younger applicants <30 years old favor indexed or interest-sensitive products. Those ages 61 and older are concerned about guaranteed value. Universal Life applications for ages 0-44 increased 11.2%. Increases in Traditional Whole Life for ages 61+ grew 7% 8%. Term applications for those over ages 61 decreased with age.

Lawsuit against Penn’s 403(b) plan settles for $13 million

More than four years after they filed a complaint alleging that the University of Pennsylvania’s 403(b) retirement plan charged “excessive fees,” attorneys for some 20,000 employees and retirees participating in the plan have filed a preliminary settlement approval motion.

The settlement terms include the creation of a $13 million settlement fund for the plaintiffs and substantial non-monetary relief, including a requirement that Penn conduct a Request for Proposal for bids on recordkeeping fees, a fixed fee for administrative services, and to prohibit recordkeepers from cross-selling its financial products to plan participants. Additionally, Penn agreed to a three-year monitoring period.

“Sweda et al. v. The University of Pennsylvania et al.,” was filed in 2016 in the US District Court for the Eastern District of Pennsylvania by the St. Louis law firm of Schlichter Bogard & Denton, which specializes in such suits. This case was among the first ever filed against a university over excessive fees.

Plan participants alleged that Penn breached its fiduciary duty under the Employment Retirement Income Security Act (“ERISA”) by, among other things, permitting the plans to charge participants excessive recordkeeping fees and retaining underperforming investments in the plans’ lineups.

Schlichter Bogard & Denton pioneered excessive fee 401(k) and 403(b) litigation. In 2009, the firm won the first full trial of a 401(k) excessive fee case against ABB. The firm’s Tibble v. Edison is the only 401(k) excessive fee case to be argued before the United States Supreme Court. On May 18, 2015, the firm won a unanimous 9-0 decision.

Metro-area businesses expect to recover sooner than rural counterparts: Principal

Owners of small and medium-sized businesses, especially in rural communities, report more uncertainty about when and how they may recover from the prolonged economic impacts of COVID-19, according to a new report based on the Principal Financial Well-Being Index.

“Survey participants are more concerned and cautious about the economic outlook than in September of 2020,” a Principal release said. While almost half (46%) of businesses surveyed said they are “fully operational,” about one in every four businesses said they’re uncomfortable with their current cash flow situation. About 70% expect their finances to improve, hoping that vaccines and government support may alleviate the situation.

The most recent survey results highlight discrepancies between how rural and metro small and medium-sized businesses are being impacted by the continued economic challenges of COVID-19. Less than a quarter of rural businesses reported being fully operational compared to almost half of metro respondents. A third of rural businesses believe their local economy is declining in comparison to 18% of metro businesses. And 61% of rural businesses feel unsupported or impartial to federal government policies or initiatives designed to help their businesses2 compared to 36% of metro counterparts3.

A majority of rural business owners expects recovery to take two years or more. Most metro-area business owners expect recovery within the next year. Overall, businesses are focused on improving customer satisfaction (30%), offering a new product or service (22%), and creating or improving their website, apps and social media channels (15%).

Although 70% of the respondents said they made no changes to their benefits packages, (81% were businesses with less than 500 employees), many indicate they intend to add or increase “telehealth” services (31%), Employee Assistance Programs (28%), and childcare support (27%) in 2021.

Some may cut other benefits to make room for those. Of businesses with two to 499 employees, 15% are willing to decrease or drop long-term care insurance; 18% of firms with 500 or more employees are willing to give up hospital indemnity (18%).

Modeling Variable Annuity Owner Behavior

Posted on January 14, 2021 by Kerry Pechter -

Older Americans own some $2.2 trillion worth of in-force variable annuity contracts, including about $894 billion in contracts with riders allowing the policyholders to convert their balances into income streams that are guaranteed to last as long as they live.

Actuaries at the issuers of those contracts have to predict (or “model”) the future behavior of the policyholders. They ask questions like: Which owners will switch on income, and when? How many will let their riders lapse? What is the “moneyness” of the contracts? That is, what are the assets worth relative to the liabilities? (More on that below.)

Timothy Paris, CEO of Ruark

The answers to those questions help quantify the risks to the issuer, and help determine the amount of money that issuers need to set aside to support the guarantees. To obtain those answers, many of the large issuers contribute data on policyholder behavior to ongoing studies by Ruark Consulting, LLC, an actuarial consulting firm in Simsbury, Conn.

Ruark’s latest survey

Ruark recently released the results of its 2020 industry study of variable annuity (VA) policyholder behavior. The survey covered 89 million policyholder-years for 13.9 million VA policyholders from 20 participating companies with $675 billion in account value as of the end of the study period, from January 2008 through June 2020. It included data on surrenders, income utilization and partial withdrawals, and annuitizations of VA contracts.

In addition to the usual death benefits and other riders, these contracts had either GLWB riders (guaranteed lifetime withdrawal benefits), which pay an age-related percentage of an account value with a floor) or GMIB riders (guaranteed minimum income benefits), which pay the policyholder a minimum monthly or annual amount.

Overall, the study contained good news for VA issuers; most policyholders use the rider as the carriers intended them to. Under the terms of the riders, a policyholder receives benefits only if he or she a) initiates a stream of payments from their account (at a rate capped by the carrier), and b) are still living when their own money runs out (i.e., when the value of their underlying mutual funds hits zero).

Ruark found that only about 13% of policyholders turned on their income streams in the first year of ownership. In each of the second through 10th years, they turned on income at about half that rate. But “commencement rates more than double in year 11 with the expiration of common 10-year bonuses for deferring income.” After they start taking guaranteed income, more than 85% take it as long as they can.

Policyholders and their advisers, Ruark has shown, are quite aware that, after a market crash or a drop in interest rates, the rider guarantee becomes more valuable or “in-the-money.” After such an event, their account value might be lower than the present value of the guaranteed income stream. Knowing that this is the adverse event that the rider insures them against, they tend to turn on the minimum income stream right away in hopes of seeing money from the insurer before they die.

COVID-related findings

The study period for 2020 was designed to capture early effects of COVID-19 and related market movements. Ruark’s COVID-related findings include:

The in-the-money exposures on GLWB contracts were 23% higher than in Ruark’s 2019 study (and 40% higher for contracts deepest in-the-money).
Among contracts issued since 2011, deep in-the-money exposure increased to 9% of total exposure, up from 6% in 2019. The study contained over 740,000 exposure years prior to withdrawal commencement for contract durations 11 and beyond, more than doubling the comparable exposure in Ruark’s 2019 study.
Contracts with guaranteed lifetime withdrawal benefits (GLWB) persisted at greater rates than expected, as current-generation products exhibited greater sensitivity to 2020 market movements than they did in the past.
Surrender rates fell uniformly on older product types in 2020; this is suggestive of a new, unique surrender practices, distinct from the practices observed before and after the 2008 financial crisis.
GLWB commencement rates were depressed in 2020 among contracts with the highest propensity to exercise the benefit: in-the-money contracts following the end of the deferral bonus period.

“We expected that 2020 behavior would be different,” said Timothy Paris, Ruark’s CEO. “By looking at industry-level data, we are better able to identify and quantify those differences— especially on the most recent products.”

‘Moneyness’

For annuity issuers with many billons of dollars in long-term VA rider liabilities, the big question is this: Given trends in interest rates, performance rates of funds in the separate accounts, contract lapse rates, and owner survivor rates, what level of claims can I expect in five, 10 or 20 years? How much reserves and capital do I need to hold to support those anticipated claims?

Actuaries don’t have digital crystal balls, but they do have metrics to tell them whether contracts are currently “out of the money” (not on course to trigger a claim before the client dies) or “in the money” (on course to trigger a claim). They also have two yardsticks—nominal and actuarial—to measure the “in-the-moneyness.”

An income rider is nominally in-the-money if and when the owner’s account value is below the guaranteed “benefit base.” This is the notional minimum amount on which the clients’ income payments will be calculated. Initially equal to the account value, the benefit base may later be higher or lower than the account value. For instance, a client’s investments may start at $100,000 and then fall to $95,000, but the benefit base can’t be less than $100,000. After 10 years of annual deferral bonuses, the benefit base might be $200,000, regardless of the actual account value.

Contracts are actuarially in-the-money—and pose the greatest risk of loss for the insurers—if the owners are also on track to live past the point when they will have begun receiving benefits from the insurer’s general fund instead of their own separate accounts. The fewer the number of clients who reach the point of receiving money from the general fund, the more profitable the product to the issuer.

Some owners of VA living benefits (either guaranteed lifetime withdrawal benefits or guaranteed minimum income benefits, which are more like deferred income annuities with a floor) never use the rider. At a certain age, they may no longer believe they need the protection, so they’ll surrender the contract and stop paying the fee for the GLWB or GMIB rider. Other owners (and their advisers) are very savvy. They know when the contract is nominally or actuarially in the money, and they will act accordingly.

Which assumption should issuers of VAs with income riders model their future liabilities (and reserve requirements) base their future liability and reserve estimates on—nominal or actuarial moneyness?

“Some issuers argue that annuity owners are not actuaries or calculating machines,” Paris told RIJ. So they’ll look to simpler proxies, like ‘nominal moneyness.’ Others believe that while annuity owners aren’t doing detailed calculations, they have some sense of actuarial/economic value. So they use an actuarial moneyness measure. We spend more time talking with our clients about this issue than anything else, because it is critically important to the long-term profitability of these products.”

AM Best assesses variable annuity regulatory reforms

Posted on January 14, 2021 by Editorial Staff -

AM Best expects variable annuity (VA) reforms from the National Association of Insurance Commissioners’ (NAIC) to diminish noneconomic volatility that resulted under the previous framework and may reduce the use of captives by US life insurance and annuity writers.

In its Best’s Market Segment Report, “Variable Annuities Reforms Leading to Mixed Results for Life/Annuities Insurers,” AM Best notes that the new rules eliminate a Standard Scenario Amount (SSA). The SSA was the primary cause of noneconomic volatility as it was a single-prescribed scenario, reflecting an immediate drop in equity prices, followed by low returns thereafter, and did not recognize hedging beyond the first valuation year.

In addition, policyholder behavior assumptions used to determine the SSA did not reflect more-recent industry experience. The VA reforms also change the accounting treatment for hedges, currently marked to market, to better match the liability being hedged.

The VA reforms were in effect as of Jan. 1, 2020, but companies had the option to adopt the changes earlier. Early adoption may have had some advantages, but one disadvantage was the loss of the option to grade in the changes over the next three years. Of the companies with larger exposures to VA business, four adopted VA reforms as of year-end 2019—Jackson National, Equitable, Transamerica, and Brighthouse—with mixed results.

Although the NAIC’s changes will help fix various flaws in the existing framework, the potential for volatility will challenge VA writers. While increased hedging levels no longer will result in potential noneconomic volatility, the levels will still be driven by market conditions and the impact on the actual costs of such hedges.

Other financial solutions are still limited, given the decline in reinsurance activity. Moreover, the use of captive reinsurance is likely to decline significantly because of the recommended changes; however, as long as true economic values and those of various accounting regimes differ, the use of alternative financing methods will continue.

During the first quarter of 2020, companies with large exposures to VAs reported significant reserve increases due to market performance, leading to large declines in pretax operating income. Operating losses continued through the third-quarter 2020, albeit at lower levels than in the first quarter.

The challenges of the past year have put pressure on VA writers, and persistently low interest rates have made it more difficult to manage VA blocks of business. The VA reforms will serve to diminish the noneconomic volatility under the previous regime, but ongoing developments related to the pandemic will likely lead to more uncertainty, with potential increases in equity market volatility.

Economic Impact of DB Pension Expenditures in US, 2018

Posted on January 14, 2021 by Editorial Staff -

Why Sammons MYGA Sales Spiked in 2020

Posted on January 13, 2021 by Kerry Pechter -

Opportunities occur when luck meets preparation, wise people are known to say. When the pandemic panic struck US financial markets last March, and bond prices fell, a window opened and Sammons Financial Group jumped through it—scooping up investment-grade fixed income assets whose prices were beaten-down and whose yields were elevated.

Market timing? Yes, but in the best sense of that expression.

The employee-owned (ESOP) company—created by the late entrepreneur Charles Sammons, an Oklahoma Territory orphan who diversified a Dallas hay-and-grain business into insurance and finance and died a billionaire in 1988—made hay out of those yields by increasing the payout rates of its fixed-rate annuities.

Fixed rate annuities were what many nervous investors fled to in the middle of 2020. Sammons’ high payout rates got attention and led to a spike in sales. By the end of the third quarter of 2020, Sammons YTD fixed annuity sales were $6.59 billion, second only to New York Life. Six months earlier, by contrast, Sammons had been ranked 15th, with only $880 million in YTD fixed annuity sales. The West Des Moines-based company has $100 billion in assets, according to its website.

Bill Lowe

“It was an interesting year for us,” Sammons Institutional Group president Bill Lowe said in an interview this week. “We had been preparing for a recession and were going up in the quality in our portfolio in preparation for it. During a recession, credit spreads widen and high quality assets appreciate in value.

“No one predicted the pandemic, but when spreads gapped, we had an opportunity get some attractive yields. So we saw a monstrous increase in sales of fixed multi-year guaranteed rate annuities (MYGAs).” Of Sammons’ $6.59 billion in fixed annuity sales through the end of the third-quarter 2020, $3.93 billion was in MYGA contracts and $2.59 billion was in fixed indexed annuities (FIAs).

One might think that the same opportunity to buy depressed high-quality bonds was available to all of Sammons’ direct competitors in the fixed annuity market. Not necessarily.

“It all depends on what your portfolio looked like,” Lowe said. “We had been moving up in quality. A large share of our assets were rated NAIC 1.” That’s the highest strength rating that the National Association of Insurance Commissioners assigns to insurer’s general account assets.

Life/annuity companies with weaker investment portfolios, perhaps because they were already straining for yield and taking more risk, “couldn’t have bought what we did. If their assets had slipped out of NAIC 2, there are greater capital requirements for those bonds.

“Many companies needed to increase their reserve capital because of their variable annuities with guaranteed lifetime withdrawal benefits (VAs with GLWBs),” he added. “So, yes, everybody saw the same opportunity, but not everybody was in a position to take advantage of it.”

As Sammons ramped up sales, some of its competitors intentionally reduced theirs. “Other companies really pulled back. Some companies almost exited the fixed annuity business. Or they dropped rates to such uncompetitive levels that they were effectively out of the business. So there was less competition. We had the added advantage of being an A-rated company. There are not a lot of A-rated fixed rate annuity carriers.” Sammons Financial is rated A+ by Fitch, AM Best and Standard & Poor’s.

Five factors contributed to Sammons’ sales burst in 2020, Lowe said. The first was competitive rates, based on the timely bond purchases. The second was Sammons’ strength ratings. The third was the rate advantage that fixed annuities always enjoy relative to Treasury bonds and certificates of deposit.

“The prescription for uncertainty is certainty. People want something certain when there is uncertainty. If you look at the fixed annuity market overall, it was up slightly [1%] year-over-year on September 30, 2020,” Lowe told RIJ.

“In the third quarter of 2020, fixed rate sales were up 60% compared with the third quarter of 2019. People could see what had happened to the yields on other safe money, such as Treasuries or certificates of deposit. Those rates were not very attractive.”

Regarding the last two items that contributed to Sammons’ 2020 success, “one is that we were well-equipped to do e-business. We required that of our strategic partners. In a pandemic, you can’t do paper applications. That’s one reason why the overall annuity market dropped,” he said.

“Advisers couldn’t meet face to face with their clients. Even if a client lived only a mile away, advisers would still have to mail the contract to the client. That’s why rep productivity dropped a lot in April and May.

“The last point in our favor was the simplicity of the fixed rate annuity sale. During a disruption, the fixed rate product is easy to sell over the phone. A VA with a GLWB is much harder. In the third quarter we were the number one seller of fixed rate annuities in the industry and number one in the bank channel.

“We’ve expanded our distribution in the bank channel. Banks are where the action takes place in MYGAs. Early on, the ‘seven-year’ MYGA business was terrific. Over time sales gravitated toward the three-year contract. It’s always a big seller.

Lowe was asked if Sammons’ sales burst was sustainable. “The BBB+ instruments gapped significantly last March. They’ve since come back, and spreads have tightened over the year. Can our competitiveness be sustained? Will we see another opportunity like March, April, and May?

“I can only say that we were well positioned for this last spring. When you combine very attractive rates with a 100-plus year-old company that’s conservative and rated A+, and you have the distribution positioned in the right places, you’re going to be positioned for an opportunity like this.”

Before 2020, Sammons reported the annuity sales of its two member insurers, Midland National and North American Company for Life and Health Insurance, separately to the Secure Retirement Institute at LIMRA. In January of last year, the company refreshed its brand. It adopted an oak leaf as its corporate symbol and began reporting its consolidated annuity sales as Sammons Financial.

New law to show who qualifies for a PPP loan

Posted on January 12, 2021 by Wagner Law Group -

The Payroll Protection Program (PPP), a component of last year’s CARES (Coronavirus Aid, Relief, and Economic Security) Act, provided relief for struggling small businesses affected by the pandemic. But as of August 8, 2020, loans under the PPP ceased, with approximately $130 billion in unused funds.

Now we have PPP2, or the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act, a part of Consolidated Appropriations Act of 2021. The lending program has reopened, and an additional $284 billion has been made available. (The act’s modifications to the PPP are described below.)

Under PPP2, only community financial institutions will initially be able to make first-draw PPP loans on January 11 and second-draw PPP loans (described below) on January 13. The PPP will open to all participating lenders shortly thereafter, although a precise date has not been specified.

Loan application forms were released on January 8: Form 2483, Payroll Protection Program Borrower Application Form, and Form 2483-SD, PPP Second Draw Borrower Application Form, a new form for second-draw loans. The IRS also issued an 82-page interim final regulation, reflecting existing guidance under the PPP as well as guidance on the newly enacted provisions.

(Please see Wagner’s law alert dated January 1, 2021, for in-depth coverage of the CAA provisions impacting employer-sponsored benefit plans.)

Significantly, the PPP now permits businesses that have already received one PPP loan to receive a second loan, referred to as a second-draw loan. To be eligible for this second-draw loan, a business must have 300 or fewer employees, including domestic and international affiliates, with special rules for businesses in the hotel and food industry.

In addition, the business must have used or will use the full amount of its prior PPP loan on eligible expenses and demonstrate at least a 25% reduction in gross receipts for any quarter in 2020 compared to the same quarter in 2019. A borrower that was in operation for all four quarters of 2019 can submit copies of its annual tax forms that show a reduction in annual receipts of at least 25% in 2020 compared with 2019.

The maximum loan amount for second-draw loans is the lesser of 250% (350% for businesses in the food and hotel industries) of the applicant’s monthly payroll costs in the one-year period prior to the loan, with a cap per employee of $100,000 annualized, or $2 million, a ceiling substantially lower than the $10 million cap on first-time PPP loans.

The business must also have been in existence on February 15, 2020, and the application for the second-draw loan must be submitted by March 31, 2021. The loan funds must be used during a covered period. Under the CARES Act, the covered period was either eight weeks or 24 weeks, but the CAA permits the borrower to select any period between eight weeks and 24 weeks as the covered period.

Certain businesses are not permitted to receive a second PPP loan, including:

Publicly held organizations
A business with ties to the Peoples Republic of China
Banks
Life insurance companies
Businesses that derive more than one-third of their annual gross revenue from gambling activities
Entities engaged in political or lobbying activities
Advocacy organizations and think tanks
Persons required to register as a foreign agent

However, the Act has expanded coverage to Code Section 501(c)(6) organizations, such as business leagues; housing cooperatives; destination marketing organization; and certain news organizations.

The CCA requires that at least 60% of the PPP loan be used on payroll expenses. Additionally, both new borrowers and those borrowers that have not yet applied for forgiveness may use the PPP loans for four new categories of expenses:

Covered operation expenditures, which includes payments for any business software or cloud computing software that facilitates business operations;
Covered property damage, which includes costs related to property damage and vandalism or looting due to public disturbances during 2020 that was not covered by insurance or other compensation;
Covered supplier costs; and
Covered worker protection, including personal protective equipment; a combined air or air pressure ventilation or filtration system; and onsite or offsite screening capabilities.

Further, businesses that returned funds, possibly because they were unsure if they satisfied SBA conditions, or did not accept the full amount possible, may be eligible for increased PPP loan amounts equal to the difference between the maximum amount available and the amount retained.

Other changes under the CCA include:

Simplified forgiveness applications for recipients of loans of $150,000 or less reversing the IRS’s position
Clarification that organizations receiving PPP loans will be able to deduct expenses paid for by funds received under the loan
Greater flexibility for seasonal employees
repeal of the Cares Act provision requiring PPP borrowers to deduct the amount of their Economic Injury Disaster Loan advance from their PPP forgiveness amount
Permitting PPP borrowers to use the employee retention tax credit.

Honorable Mention

Posted on January 12, 2021 by Editorial Staff -

Annuity distribution expert Scott Stolz joins SIMON

Scott Stolz, CFP, RICP, has joined SIMON Annuities and Insurance Services LLC as Head of Insurance Solutions. The former president of Raymond James Insurance Group, will be responsible for expanding the reach of SIMON’s annuities platform across new channels and will play an integral role in the development and release of new analytics and design capabilities as the insurtech platform achieves new scale.

Stolz joins SIMON with more than 35 years of experience in the insurance industry, industry-wide recognition for his leadership, and an aligned vision for delivering a simplified pre- and post-sale experience for financial professionals. He most recently served as President of the Raymond James Insurance Group, Global Wealth Solutions, overseeing Annuities & Insurance.

Prior to his 15½-year tenure with Raymond James, he served as Senior Vice President of Jackson National Life, Vice President of North American Security Life, and Senior Vice President of SunAmerica. Stolz earned both a BSBA and MBA from Washington University in St. Louis, with a focus in Finance.

A frequent contributor to industry publications on insurance-related topics, Stolz has authored articles featured in Financial Advisor magazine, ThinkAdvisor, Research magazine, and Investment News. He is an active leader who appreciates the opportunity to volunteer his time for social and professional causes, dedicating time each year to SunCoast United Way, and formerly serving on the boards of the Insured Retirement Institute, LIMRA’s Retirement Institute, and as a Board Trustee for the American College of Financial Services.

TIAA private equity affiliate raises $6.4 billion in new capital

Churchill Asset Management, an investment-specialist affiliate of TIAA-owned asset manager Nuveen, raised more than $6.4 billion of new committed capital in 2020, more than doubling its 2019 fundraising figures, with an additional $2.2 billion expected to close in the first quarter of 2021, the private equity financing specialist announced this week.

The firm’s investment teams closed and/or committed more than $6 billion in new investments across 229 distinct transactions in 2020, despite the slow down in second quarter deal flow due to the COVID-19 pandemic, according to a release. The firm is focused on “private equity-backed businesses that maintain a defensible market position.”

Churchill specializes in middle market financing, including origination, structuring, underwriting, syndication, and deal monitoring and oversight. The firm has invested $36 billion in private capital across more than 960 transactions. With over $27 billion of committed capital, it provides first lien, unitranche, second lien and mezzanine financing, in addition to equity co-investments and private equity fund commitments.

MetLife unit in longevity reinsurance deals with Legal & General

Metropolitan Tower Life Insurance Company, a subsidiary of MetLife, Inc., announced this week that it completed four United Kingdom longevity reinsurance transactions with Legal & General Assurance Society Limited in 2020.

Under the agreements, Metropolitan Tower Life Insurance Company will provide reinsurance to Legal & General for longevity risk associated with a combined total of approximately $2 billion of pension liabilities.

Thrivent promotes two new senior managers

Nikki Sorum has been named senior vice president of Thrivent Advisors and Luke Winskowski has been promoted to senior vice president of Advice and Wealth Management, the financial services giant Thrivent announced.

Thrivent recently launched a new brand and national advertising campaign, and is expanding its distribution capabilities, said Mary Jane Fortin, chief commercial officer at Thrivent, in a release.

Sorum will lead Thrivent’s career network of financial professionals as well as the remote channel. Her team also will focus on related business areas, including practice management and leader development. Sorum was previously senior vice president of membership at Thrivent.

Winskowski will lead the newly created Advice and Wealth Management organization. He will oversee advice delivery, product solution wholesaling and sales support, health protection solutions, and custody and brokerage services. He will continue to be vice president and head of the Thrivent Advisor Network, Thrivent’s platform for independent investment advisors.

MRA Associates joins CAPTRUST

CAPTRUST Financial Advisors has added Phoenix-based MRA Associates. The 59-person firm brings $3.29 billion in assets under management to CAPTRUST.

Founded in 1991, MRA provides investment advisory, wealth management, and tax consulting for private clients and institutions. The firm is led by Managing Partner and Chief Executive Officer, Mark Feldman and the Executive Leadership Team comprised of Brad Lemon, Christina Burroughs, and Mike Hirte and includes 55 advisors and staff.

MRA also brings to CAPTRUST a new service offering: income and estate tax compliance and consulting services for individuals, families, trusts, and related closely held operating businesses and entities.

Since 2006, CAPTRUST has added 44 firms. Consistent with previous firms that have joined, MRA’s locations in Phoenix, Las Vegas and Wayzata, Minnesota will now take on CAPTRUST’s name and branding.

Financial illiteracy costs Americans $415 billion in 2020: NFEC

Among the 1,548 respondents divided into six different age groups, American adults each lost $1,634 on average in 2020 due to lack of money management knowledge, according to a 1,548 responses to an end-of-year survey by the National Financial Educators Council.

The NFEC survey posed a single question: “During the past year (2020), about how much money do you think you lost because you lacked knowledge about personal finances?” For the complete survey results conducted between December 30, 2020 and January 3, 2021, visit: https://www.financialeducatorscouncil.org/financial-illiteracy-costs/.

By extrapolating these results to represent the 254 million adults in the US, NFEC estimated that financial illiteracy cost the country’s citizens more than $415 billion in 2020.

The 2020 data ($1,634 per adult) was a significant increase from 2018 ($1,230) and 2019 ($1,279) surveys. The total cost for the adult population in 2019 (240 million) was $309 billion. The 2020 data accounted for a population increase of 14 million more adults. If the 2019 population data were used today, it would show an increased cost of adult Americans $85 billion more than last year.

About one in five (21.6%) survey respondents said they had lost more than $2,500 in 2020 because of lacking personal finance knowledge. Just over 40% reported losing more than $500 due to this knowledge gap. This figure was calculated by averaging the total number of respondents selecting each category, using the lowest number in each range.

The NFEC has been conducting the survey for five years. In a 2016 NFEC survey, US adults indicated that they had lost an average of $9,725 across their lifetimes due to lack of financial knowledge; one in three respondents reported lifetime losses over $15,000. Nearly 25% of participants said they had lost more than $30,000 across their lives because of this knowledge lack, which underscores just how important teaching financial literacy can be.

Deficits in personal finance capability increase people’s risk of incurring bank fees, facing high interest rates on loans and credit cards, and losing money in investments. It should be noted that the survey results may represent an underestimate of actual losses, since people may lack financial knowledge but remain unaware of their lost opportunities.

Lincoln partners with Morningstar on 401(k) managed accounts

Lincoln Financial has added an Advisor Managed Accounts service, which enables a retirement plan’s registered investment advisor (RIA) to create plan-specific investment portfolios and leverage the proprietary portfolio assignment process from Morningstar Investment Management LLC, according to a release this week.

These personalized investment programs, offered through the Lincoln Alliance program, enable the RIA to use each plan participant’s age and plan balance, among other information, to create the portfolios used by the program.

“The Advisor Managed Accounts service complements and builds on our suite of custom asset allocation products, such as YourPath,” said Ralph Ferraro, senior vice president, Retirement Plan Products and Solutions, Lincoln Financial Group, in a release.

More than half of plan sponsors offer a managed account option in their plans, the release said, and this number is likely to increase. Morningstar Investment Management found that, even after accounting for age and income, more than 70% of off-track participants (participants with a less than 70% chance of achieving retirement income goal) studied increased their savings rates after using managed accounts.

Morningstar Investment Management provides the technology platform that allows the RIA to create plan-specific portfolios, then matches each participant with an unique asset allocation, and acts as fiduciary for the participant portfolio assignment process. Advisor Managed Accounts can be offered as the Qualified Default Investment Alternative (QDIA), with the plan sponsor designating it as the QDIA for all participants, or on an opt-in only basis, so each participant can actively choose the service.

Sammons Financial buys $3 billion Ohio-based RIA/TAMP

MetLife unit completes pension risk transfer deal with Weyerhaeuser

Equitable publishes study on educators’ retirement savings rates

National Guardian Life buys Everplans

Caroline Feeney appointed group CEO at Prudential

Pacific Life offers new income-oriented variable annuity

Evaluating the new IRA stretch period

Anticipating tax ‘soft spots’

New York Life’s IndexFlex

Schwab’s Genesis VA

Life sales show new life in 2020

Lawsuit against Penn’s 403(b) plan settles for $13 million

Metro-area businesses expect to recover sooner than rural counterparts: Principal

Ruark’s latest survey

COVID-related findings

‘Moneyness’

Annuity distribution expert Scott Stolz joins SIMON

TIAA private equity affiliate raises $6.4 billion in new capital

MetLife unit in longevity reinsurance deals with Legal & General

Thrivent promotes two new senior managers

MRA Associates joins CAPTRUST

Financial illiteracy costs Americans $415 billion in 2020: NFEC

Lincoln partners with Morningstar on 401(k) managed accounts

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