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What Recordkeepers Think about 401(k) Annuities

Posted on June 28, 2024 by Kerry Pechter -

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

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

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

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

The results of the recently-published survey showed that:

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

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

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

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

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

Calamos Structured ETFs: An alternative to FIAs

Posted on June 28, 2024 by Editorial Staff -

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

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

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

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

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

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

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

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

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

Posted on June 28, 2024 by Editorial Staff -

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

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

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

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

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

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

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

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

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

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

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

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

DOL Lets Pension Risk Transfer Rules Stand – For Now

Posted on June 26, 2024 by Kerry Pechter -

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The DOL report acknowledged the concern about reinsurance:

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

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

Bermuda Shorts

Posted on June 26, 2024 by Editorial Staff -

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Oceanview establishes reinsurer in Cayman Islands

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

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

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

Bermuda Triangle insurer receives ‘negative’ outlook

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

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

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

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

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

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

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

The Bermuda Triangle’s 1980s Roots

Posted on June 26, 2024 by Kerry Pechter -

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

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

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

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

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

The annuity point of the triangle

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

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

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

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

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

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

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

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

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

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

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

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

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

Financial reinsurance, aka “surplus relief”

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

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

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

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

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

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

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

That was then, this is now

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

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

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

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

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

An In-Plan Annuity with Three Life Insurers

Posted on June 4, 2024 by Kerry Pechter -

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

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

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

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

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

Secure Income Portfolio

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

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

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

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

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

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

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

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

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

Multiple annuity providers

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

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

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

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

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

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

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

Annuities enjoy record sales in 1Q2024

Posted on June 3, 2024 by Editorial Staff -

U.S. annuity sales were $106.7 billion in the first quarter of 2024, 13% above prior year results, according to results from LIMRA’s U.S. Individual Annuity Sales Survey. This is the highest first quarter sales results since LIMRA started tracking sales in the 1980s. The survey covers 92% of the total U.S. annuity market.

“Demand for investment protection and guaranteed retirement income remains strong. This is the 14^th consecutive quarter of year-over-year growth in the U.S. annuity market,” said Bryan Hodgens, head of LIMRA research, in a press release.

“That said, total annuity sales have come down from fourth quarter 2024, largely due to a softening in the fixed-rate deferred annuity market. However, LIMRA expects annuity sales to perform well through 2024.”

Fixed-Rate Deferred
Total fixed-rate deferred annuity (FRD) sales were $43 billion in the first quarter, 4% higher than first quarter 2023 sales. This is the ninth consecutive quarter of growth for FRD annuity sales. FRD annuities remain the primary driver of annuity sales growth, representing more than 40% of the total annuity market in the first quarter.

Fixed indexed annuities
Fixed indexed annuity (FIA) sales had a record first quarter. FIA sales totaled $28.6 billion, up 24% from the prior year. FIA sales have experienced 12 consecutive quarters of year-over-year growth.

“Growth was widespread with 61% of FIA carriers and 8 of the top 10 carriers reporting sales growth,” the release said. “Sustained strong interest rates have allowed carriers to improve FIA crediting rates and raise cap rates, which increased the overall product line attractiveness. LIMRA expects FIA sales to continue to grow through 2025.”

Income annuities
Income annuity product sales continue to thrive under the higher interest rates. Single premium immediate annuity (SPIA) sales were $3.6 billion in the first quarter, 6% higher than the prior year’s results. Deferred income annuity (DIA) sales were $1.2 billion in the first quarter, increasing 40% year over year.

Registered index-linked annuities
For the fourth consecutive quarter, registered index-linked annuity (RILA) registered record quarterly sales. RILA sales increased 39% in the first quarter to $14.5 billion.

“For the second consecutive quarter, RILA sales outperformed traditional variable annuities (VAs). RILA sales should continue to outpace traditional VA sales throughout 2024. LIMRA is forecasting RILA sales to surpass $50 billion in 2024,” the release said.

Traditional variable annuities
Traditional VA sales improved in the first quarter, up 7% year over year to $13.7 billion.

“While traditional variable annuity sales grew in the first quarter, sales remain historically low,” said the release. “Today’s investors have more annuity options to achieve their accumulation goals than they did a decade ago.”

A Plan Sponsor’s Guide to In-Plan Annuities

Posted on June 3, 2024 by Kerry Pechter -

So many annuities, so little time. For 401(k) plan sponsors who feel inclined to add a guaranteed income option to their plans, the learning curve is likely to be steep and high. In-plan or out-of-plan annuity? Fixed, fixed indexed, or variable? Which life/annuity company?

A new whitepaper aims to flatten and shorten that curve. The 39-page document, “Prudent Practices for Retirement Income Solutions,” is sponsored by companies with both long experience and substantial stakes in the growth of the 401(k) annuity phenomenon.

Led by Broadridge Financial Solutions, the group includes Broadridge’s fi360 service for plan fiduciaries, annuity product data providers CANNEX and The Index Standard, internet “connectivity” provider, Micruity, and ERISA lawyer Fred Reich of Faegre Drinker Biddle & Reath.

Broadridge is not alone in anticipating the need for guides to assessing 401(k) annuities. “[The National Association of Plan Advisors] has already developed an education program for plan advisors to help them understand the process for evaluating lifetime income options. PSCA [Plan Sponsor Council of America] is in the process of doing the same for plan sponsors to be launched toward the end of this year,” Brian Graff, CEO of the American Retirement Association, the umbrella organization that includes NAPA and PSCA, told RIJ last week.

The Broadridge whitepaper suggests a process that plan “fiduciaries”—consultants whom the Employee Retirement Income Security Act of 1974 requires to act solely in the best interest of plan participants when recommending or managing plan investments or administering a plan—can use if and when selecting one or more decumulation strategies for the plan.

“We’re focused on increasing consideration of retirement income in 401(k) plans. A rising tide will lift all ships, so it benefits everyone [to] have a standard way of looking at it and educating the market,” Broadridge’s John Faustino told RIJ in a recent interview. “Plan sponsor advisers will be able to use our technology to identify the options and needs of a given plan and monitor it on automated basis.”

The ten-step process is described in the table below, reprinted from the whitepaper.

According to Faustino, three types of income tools are available to plan sponsors: fixed income annuities, target date funds with flexible lifetime withdrawal benefit riders, and managed payout programs without guarantees.

“A lot of our work is focused on hybrid and insurance side. But the consortium advocates for consideration of introducing retirement income while purposely staying away from making recommendations,” Faustino told RIJ. Broadridge intends to involve other retirement trade groups in the consortium’s work. Faustino mentioned LIMRA, SPARK Institute, and the American Retirement Association.

Together, these groups are encouraging and preparing themselves for a world made achievable by the SECURE Acts, passed by Congress in 2019 and 2022. The first SECURE Act introduced a new “safe harbor” that was meant to “remove the plan fiduciary’s fears that it would have to make a determination as to the viability of an insurer to provide lifetime benefits, and the concern that it could be liable for the future insolvency of an insurance carrier the plan fiduciary may select,” according to the white paper.

If, as appears to be the case, the push for annuities in 401(k) plans has come mainly from insurers and asset managers—more than from plan sponsors or plan participants—then it’s not surprising to see the push for education about annuities and retirement income coming from the same source. The Broadridge initiative bears that out.

Some surveys have shown that participants want retirement income tools, at least in principle. But most participants aren’t asking plan sponsors for annuities. At the most recent national conference of the Plan Sponsor Council of America, a panel took up the question of retirement income solutions in plans.

In a report on the PSCA website’s news page, the author wrote, “A refrain heard a few times throughout the conference was ‘retirement income products are like automatic enrollment, participants weren’t asking to be auto-enrolled, but the solution was developed to meet a need and is now commonplace.’ This refrain seems to be pushing back against the notion that there isn’t a need for retirement income solutions because no one is asking for them.”

The largest plan sponsors are likely to be the first to adopt income solutions, to be among the first to be approached by annuity providers, and to be able to dedicate the most resources to educating participants about retirement income. Of some 710,000 defined contribution plans in the US, about 1,200 have at least 10,000 participants. These large plans account have 42.1 million participants (42% of the total participant population) and $3.6 trillion in plan assets (46% of total DC assets).

Athene’s group annuities not the ‘safest available,’ lawsuit charges

Posted on June 2, 2024 by Editorial Staff -

A “pension risk transfer” or PRT allows a company to swap its traditional defined benefit plan for a group annuity issued by a life insurer. To help ensure that plan participants get their benefits from the life insurer in retirement, US pension law requires companies to select the “safest available annuity.”

A federal class action suit, filed last March 13, charged aerospace and defense contractor Lockheed Martin and its plan adviser, State Street Global Advisors, with failing to pick the safest available annuity in 2021 when they replaced Lockheed’s $9 billion pension with a group annuity from Athene Life and Annuity, a leading life/annuity company. The suit was filed by a group of the plan’s participants.

The lawsuit is noteworthy. Athene was the largest seller of annuities in the US in the first quarter of 2021, with $9.73 billion in sales, and it executed the largest PRT transaction of 2023: the transfer of AT&T’s $8.05 billion pension to an Athene annuity. St. Louis attorney Jerry Schlichter, famous for his successful suits against defined contribution plan sponsors for not protecting their participants from high fees, co-filed the suit against State Street and Lockheed.

Thomas D. Gober

On May 28, in a new filing on behalf of the plaintiffs, certified fraud examiner Thomas D. Gober charged that State Street shouldn’t have recommended Athene to Lockheed, and that Lockheed shouldn’t have bought its group annuity from Athene, because of what Gober described as Athene’s thin surplus, illiquid investments and use of opaque offshore reinsurance with its own affiliates. Athene itself is not a defendant in the case.

The fraud examiner’s 16-page filing said, in part:

By Apollo causing most of the business to be sent to offshore affiliates that do not file under SAP [statutory accounting principles], it makes opaque the solvency or liquidity of the offshore reinsurers. Relevant here, as of December 31, 2023, Athene Iowa is counting on more than $155 billion of reinsurance with its own captives and offshore affiliates.

Comparing that amount in affiliated reinsurance with Athene Iowa’s total reported surplus (its only buffer between a viable carrier and one in receivership) of $2.88 billion [1.44%, or assets of $202 billion divided by liabilities of $199 billion] the gravity of the lack of transparency and risk of the offshore reinsurers is of great concern.

The fact that the Bermuda-based Athene Re controls such a large percentage of Athene Iowa’s assets would make an orderly liquidation under state insurance laws unwieldy and costly as marshaling assets located in Bermuda for the benefit of pensioners will not be a simple and straightforward process.

The surpluses of other large life/annuity companies, such as TIAA (13.83%), New York Life (12.24%), Nationwide (6.77%), and Pacific Life (6.5%) are much higher than Athene’s, Gober said.

Athene rejects the allegations. An Athene spokesperson told RIJ in a May 30 email:

These are baseless complaints instigated by class action attorneys who are attempting to enrich themselves at the expense of retirees. Athene is a safe and secure provider of annuity benefits, with outstanding financial strength, proper reserves, excellent capitalization, and strong credit ratings.

Pension group annuities provide many protections that enhance retirement security. Insurers like Athene have deep expertise in managing annuity obligations, are subject to robust regulation, and hold regulatory capital to protect policyholders.

The suit may serve as a test of the legal soundness of what RIJ has called the “Bermuda Triangle” strategy, a business model initiated by Athene and copied by other annuity issuers. In Gober’s statement, he referred to the model as the “Bermuda triangle” and illustrated it with this graphic:

The strategy varies in its details but typically involves a US life/annuity company that sells fixed rate or fixed indexed annuities, a Bermuda or Cayman-based reinsurer, and a large asset manager or investment firm that devotes a portion of the annuity reserves to investments in “alternative” assets, such as collateralized loan obligations and asset-backed securities. In the strategy, all three entities are often affiliated or part of the same holding company.

Practitioners of the Bermuda Triangle business model claim that the reinsurance reduces capital requirements and alternative assets bring in higher investment yields. This allows annuity issuers to offer higher crediting rates for annuity policyholders and higher profits for equity shareholders—a win-win for all stakeholders.

Critics claim that the strategy produces under-capitalized, shakier life/annuity companies, and that without the use of questionable “regulatory arbitrage” between the US and reinsurance havens like Bermuda, some of those life insurers would be insolvent.

The regulation at the heart of this case, Instructional Bulletin 95-1, “was issued on March 6, 1995, in the wake of the failure of Executive Life Insurance Companies of California and New York,” according to a Department of Labor document. “[IB 95-1] provides guidance to pension plans considering the purchase of annuities ‘to transfer liability for benefits purchased under the plan to [an] annuity provider.’ IB 95-1 also emphasizes the fiduciary responsibility owed to plan participants in the selection of the ‘safest annuity available’ and makes it clear that ‘[c]ost consideration may not … justify the purchase of an unsafe annuity;’ nor is it appropriate to rely solely on insurance rating services.”

Annuity sales boom attracts private equity-backed insurers: AM Best

A June 4 Best’s Special Report, “Annuity Premiums Soar, Surrender Protection Strengthens,” states that annuity products have been attractive for consumers in the last few years, propelled by the rising interest rate environment and crediting rates that generally have been higher than competing products offered by larger national banks.

As insurers look to capitalize on the favorable environment, newer market entrants have added much-needed capacity to the market, particularly through multiyear guaranteed annuities (MYGA) with their attractive interest rate spreads and shorter durations. With the overall 2023 premium growth, annuity writers posted a 68% year-over-year increase in indexed annuity net premium income to $28.9 billion; 48% growth in fixed deferred annuities; and a 33% increase in premium for variable annuities without guarantees.

“Growth in the annuity market has heightened competition, as many new companies have entered the space, including several new private equity and asset management-backed insurers looking to capitalize on the difference between the cost of liabilities and potential favorable investment returns,” said Erik Miller, director, AM Best. [Emphasis added.]

Baby Boomers seeking income and wealth transfer solutions for trillions of dollars in assets is also driving consumer demand. Additionally, surrender benefits rose 32% in 2023; however, according to the report, the share of policies with market value adjustment surrender charges also has more than doubled in the last 10 years.
“Older annuity policies with lower rates were outside of the surrender charge protection, and so with the favorable crediting rates, insurers have been able to sell new annuity products with the higher rates to these customers while also locking them into policies with surrender charges,” said Jason Hopper, associate director, industry research and analytics, AM Best.

26North inks $4.9 billion reinsurance deal

26North Reinsurance Holdings, which was founded in 2022 by one of the co-founders of Apollo Global Management, closed a $4.9 billion reinsurance deal with Life Insurance Company of the Southwest (LSW), a unit of National Life Insurance Co., 26N Re said in a release.

The deal will see a subsidiary of 26N Re reinsure a “seasoned and diversified” block of multi-year guarantee and fixed annuity products issued by LSW, the company said. LSW is a member company of National Life Group, which was founded in Vermont in 1848.

In addition, 26N Re agreed to provide a quota share reinsurance agreement for future fixed annuities issued by LSW. The transaction brings 26North’s total assets under management to approximately $22 billion.

“This transaction will significantly scale our reinsurance business and continue to diversify 26North’s platform,” said Josh Harris, founder of 26North and co-founder of Apollo in 1990, in a statement. “We believe that our culture of prudent risk management and strong governance allows 26N Re to partner with the highest-quality cedants who are looking to leverage our long-term capital and asset management expertise.”

Harris has a long history in private equity. He worked for Drexel Burnham Lambert for two years in the 1980s, left to get a degree at Harvard Business School, and then joined former Drexel partners Leon Black and Marc Rowan to establish Apollo Global Management in 1990, according to Harris’ Wikipedia page.

By then, Drexel had filed for bankruptcy due to illegal junk bond activity. A major investor in Drexel junk bonds (i.e., financer of Drexel’s leveraged buyouts), the Executive Life insurance companies, failed in 1991.

In a separate news release last month, Agam Capital, “an analytics-driven platform partnering with insurance companies to enhance their financial flexibility,” is advising and partnering with 26N Re in the formation and launch of AeCe ISA, Ltd. (“AeCe”), a Bermuda-domiciled Class E life and annuity reinsurer. Agam’s founders are Chak Raghunathan and Avi Katz.

National Life Group is a minority owner in AeCe, which will reinsure single premium deferred annuities written by LSW.

Agam’s “pALM” analytical platform and other Bermuda capabilities will support 26North in the development and establishment of a new entrant into the fast-growing market for life and retirement reinsurance solutions in Bermuda. Agam described pALM as a “proprietary asset and liability management (ALM) system” offering “a fully embedded dynamic strategic asset allocation (SAA) and enterprise risk management (ERM) infrastructure.”

As part of the launch, AeCe will leverage Agam’s Bermuda ISAC structure which offers a comprehensive suite of operational, management and governance services to Bermuda based reinsurers. Separately, Agam and AeCe entered into a long-term Management Services Agreement.

Suit continues against Aon plc over Bermuda reinsurance

Clear Blue Insurance Co. and Aon plc, the insurance broker, will have until June 21 to present motions in Clear Blue’s lawsuit again the Aon plc and Aon Insurance Managers (Bermuda) Ltd. in a case related to the bankruptcy of the insurtech firm Vesttoo Ltd., AM Best reported in May.

Clear Blue seeks to recover damages from Aon for, according to the complaint, “hosting a rogue operation on its Bermuda-based platform in clear violation of law, regulation, contract and standard market practice.”

Clear Blue sued Aon in New York state court in 2023 for alleged damages connected with letters of credit issued by Vesttoo involving Aon and its Bermuda-based segregated cell entity, White Rock. The complaint said, “Clear Blue entered into a series of reinsurance transactions with and/or involving Aon, its wholly owned subsidiaries Aon Insurance Managers, White Rock and White Rock’s various segregated accounts, causing material financial, regulatory and reputational damage to Clear Blue.

“Aon and its entities could have stopped the Vesttoo fraud ‘dead in its tracks,’ but “facilitated it by removing all the statutory, regulatory and contractual safeguards and ignoring standard market practice.”

“This complaint is meritless,” an Aon spokesperson told AM Best. “Vesttoo has publicly admitted that its executives conspired with third parties in a highly sophisticated and elaborate fraud. As one of the victims of that fraud, Aon is focused on continuing our work to develop a path forward for all affected parties.”

The Supreme Court of Bermuda recently sanctioned a bankruptcy plan filed by Vesttoo creditors and approved the joint provisional liquidators (JPLs) of Aon’s White Rock Insurance SAC to remove objections to the Chapter 11 plan involving White Rock and other parties, AM Best said.

The Bermuda court’s decision, filed with the U.S. Bankruptcy Court for the District of Delaware, allows the JPLs to unconditionally withdraw their objections to previously proposed versions of the bankruptcy settlement plan and cedent settlements with the Official Committee of Unsecured Creditors of Vesttoo, appointed in the Vesttoo Chapter 11 case involving White Rock. The liquidators are also authorized to consent to confirmation of the plan.

The liquidators are also allowed to consent to cedent settlements with the committee and JPLs for White Rock involving insurers Clear Blue, Chaucer, Beazley plc., Markel Corp. and Porch, according to the Bermuda court ruling. Underwriting entities of Clear Blue parent Pine Brook Capital Partners II (Cayman) have current Best’s Financial Strength Ratings of A- (Excellent).

Strength ratings of Everlake Life (formerly Allstate) downgraded

In May, AM Best downgraded the financial strength rating (FSR) to A (Excellent) from A+ (Superior) and the long-term issuer credit ratings (Long-Term ICR) to “a+” (Excellent) from “aa-” (Superior) of Everlake Life Insurance Company and Everlake Assurance Company, collectively known as Everlake Life Group (Everlake Life). Both companies are domiciled in Northbrook, IL.

According to AM Best:

The outlook of these Credit Ratings (ratings) has been revised to stable from negative. The ratings reflect Everlake Life’s balance sheet strength, which AM Best assesses as very strong, as well as its strong operating performance, neutral business profile and appropriate enterprise risk management (ERM).

The change in Everlake Life’s business profile assessment to neutral from favorable reflects the strong competitive environment for bidding on flow reinsurance of annuities; Everlake Life’s moderate market share and reserve profile; and is similar to peers with a strategy of seeking flow reinsurance of annuities.

Everlake Life’s reserve profile, which includes universal life with secondary guarantees and structured settlements, is unlikely to change in the near term, even with the successful acquisition of additional multiyear guarantee annuity business, which was done in 2023 and is expected to continue.

According to its website, Everlake Life Insurance Company and Everlake Assurance Company are US based insurance companies specializing in life insurance and annuities. Everlake U.S. Holdings Company purchased Allstate Life Insurance Company and Allstate Assurance Company on November 1, 2021.

Everlake Life has over 1.6 million policies in force and over $23 billion in assets under management. It also administers select policies issued by Lincoln Benefit Life Company, Surety Life Insurance Company, American Maturity Life Insurance Company, and Columbia Universal Life Insurance Company.

According to AM Best, Everlake Life’s balance sheet strength assessment benefits from its strongest level of risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), prudent asset liability management and development of its own internal capital modeling. This is partially offset by affiliated reinsurance in support of a significant block of term life insurance.

The operating performance continues to be assessed as strong given the three- and five-year return on equity ratios, which compare well against other strong-level peers, in addition to diversified profits between ordinary life and individual annuity products.

Everlake Life’s growth will be dependent on management successfully executing its strategy to acquire new business given the run-off of a large in-force block, but management has recently been more successful in acquiring new business. The ERM approach employs a typical three lines of defense strategy, including individual risk owners in the business areas, an ERM committee and an audit risk committee that reports directly to the board of directors. Risk appetite and tolerance statements with limits and triggers are quantitative and clear.

Midland National FIA for RIAs leads its category

Capital Income, Midland National’s first commission-free fixed index annuity (FIA), was named top fee-based fixed index annuity in 2023, according to LIMRA.

The product emerged from Midland Advisory, an internal team that Midland National Life formed in 2021 to design annuities for registered investment advisors (RIAs) and their clients. Midland is part of Sammons Financial Group.

Since its launch, Capital Income has consistently ranked high as a strong indexed annuity choice for advisors. In addition to earning the 2023 overall top spot from LIMRA, Midland National performed well in fourth quarter 2023 sales. Notable results from the Q4 2023 Wink Report include:

No. 3 Deferred Annuity Companies – RIA Distribution

Deferred Annuity for RIA Distribution & Fee-Based Overall
- No. 1 Capital Income FIA
- No. 5 Oak ADVantage 7-year MYGA
- No. 6 Oak ADVantage 5-year MYGA
Indexed Annuity Products – RIA Distribution
- No. 1 Capital Income FIA
- No. 9 IndexMax ADV 5-year

Midland National Capital Income carries a guaranteed lifetime income rider with an income multiplier that can double income payments for up to five years for contract owners with health problems.

If a fee-based advisor does not have an insurance license but wants to provide a client with an annuity, Midland National makes Capital Income available through outsourced insurance desks that can act as agents of record. This enables the advisor to maintain discretionary authority over the client’s account.

Test-drive annuities at CANNEX/Luma ‘Marketplace’

Posted on June 2, 2024 by Editorial Staff -

CANNEX, the annuity data provider, has partnered with Luma Financial Technologies, a fintech firm, to launch the CANNEX Annuity Marketplace. The new platform is designed to help financial professionals at small and mid-sized firms research, compare, and select annuities for clients.

Advisers, agents and retirement plan sponsors can use the platform, accessible through a portal on Luma’s website, to analyze the performance of hundreds of fixed, fixed indexed-linked, variable, and income annuities based on CANNEX’s annuity data, research, and illustration resources.

The Annuity Marketplace will provide income, rate, yield, and product information on annuities from more than 60 issuers, a CANNEX release said. Advisers can illustrate the outcomes of market scenarios and investment choices across products, asset allocations, riders, and annuity categories.

The proliferation of new annuity products, the expansion of annuity sales, and the passage of regulations that require advisers and agents to find products “consistent with best interest requirements and client goals” has increased “the importance of being able to understand and evaluate annuities on a standardized basis” said Gary Baker, president, CANNEX USA, in a release.

“The marketplace provides an important resource for financial professionals looking to help clients incorporate annuities into their financial plans,” added Jay Charles, director of Annuity Products, Luma Financial Technologies.

CANNEX is an independent financial data and research services company with operations in Canada and the U.S. Since 1984, it has provided data, analytics, illustrations and research services to insurance companies, banks, brokers, service providers and independent advisers.

Fintech software developed by Luma Financial Technologies is used by broker/dealer firms, RIA offices, and private banks worldwide. Founded in Cincinnati in 2018, Luma also has offices in New York, Zurich and Miami.

The age-old question: How long will your clients live?

Posted on June 2, 2024 by Editorial Staff -

Our financial lives would probably be both more difficult and easier if we all knew exactly when we would die. Personal credit would presumably dry up as the “deadline” approached. But deciding how much to save for retirement would be easier.

A new white paper from HealthView Services, a Danvers, MA-based firm that collects longevity data for advisers, financial institutions and employers, could help advisers estimate how much longer a 65-year-old is likely to live.

From a mountain of data gathered from 266 million people, HealthView teases out predictions that individuals and advisers can use in planning for retirement. The white paper shows, for instance, that 65-year-olds with no chronic health problems should expect to live to age 88 (if male) and age 90 (if female).

But only about one in 20 Americans are disease-free at age 65. People suffering from high blood pressure, diabetes, heart disease, cancer, and other chronic diseases die one to six years sooner. Men age 65 with diabetes have a life expectancy of only 79 years.

Turning the data around, the white paper also reports the probabilities of living to age 90 for people with various diseases. People with no chronic disease at age 65 have a one in five chance living to age 95 “and beyond.” Those with diabetes should forget about living to 95.

HealthView quantifies the somewhat morbid inverse relationship between life expectancy and spending capacity. Assuming a new retiree with $1.1 million in savings, the paper’s authors conclude that, compared with someone in excellent health, a high blood pressure sufferer could afford to spend $448,000 more in retirement, smokers can afford to spend $616,000 more, and diabetes sufferers can spend $728,000 more, because of their shorter life expectancies.

The white paper describes a hypothetical couple, both 55 years old. One has a history of diabetes and a life expectancy of age 82. The other is healthier and can expect to live to age 90. By HealthView’s calculation, the healthier partner can expect to spend $3.17 million in retirement (including Social Security benefits and income from an annuity) while the partner with diabetes can expect to spend only about $2 million.

Though the white paper doesn’t make a point of this, the term “average life expectancy” may be misleading. When various cohorts of 65-year-olds are described as having average life expectancies of 14, or 16, or 18 years, it means that half of them will be deceased by then and half will live longer.

For financial advisers trying to estimate how long their high-net-worth clients will live, the white paper suggests that only the very healthiest people should reasonably expect to live to age 95. Others may need less savings for retirement or, conversely, be able to spend more of their savings during retirement. Luck, of course, will still play a role.

US Individual Annuity Sales, 1Q 2024

Posted on May 30, 2024 by No Author -

Double Trouble in the Bermuda Triangle

Posted on May 30, 2024 by Kerry Pechter -

There’s trouble in the Bermuda Triangle. Anyone who manufactures, sells, or owns annuities should hope the trouble is resolved quickly. But now that a state insurance commission is involved (in one instance) and a hornet’s nest of European football fans (in another), resolution could be slow.

For more than a decade, observers of the annuity industry watched the growth of what RIJ calls the Bermuda Triangle strategy, where large asset managers acquire life insurers to issue fixed-rate and fixed indexed annuities and finance high-yield investments with the annuity revenue.

Some observers worry that the largest asset manager-led insurers might fail and leave their policyholders to seek reimbursement from state guaranty funds. But I’ve expected solvency issues to appear first sooner among smaller, less well-capitalized fast-followers or imitators of the strategy.

Recent problems at two relatively small Bermuda Triangle life/annuity groups seem to fulfill that expectation.

PHL Variable goes into rehab

In one of the two unrelated cases, PHL Variable Insurance Co. was taken into “rehabilitation” by the Connecticut Insurance Department (CID) this month. According to a CID document, the COVID pandemic accelerated claims on PHL’s block of multimillion-dollar investor-owned-life-insurance policies. The long interest-rate drought of the 2010s also hurt the insurer’s ability to support their guarantees.

In part because of those problems, PHL currently has negative $900 million in capital and surplus. Its “aggregate assets are projected to be exhausted in 2030” when “approximately $1.46 billion of policyholder liabilities will remain unpaid,” according to the CID.

PHL’s owners clearly don’t want that headache. Once part of the Hartford-based Phoenix Companies, PHL became part of Nassau Financial in 2016, when Nassau, then only a year old, bought the publicly-traded Phoenix, took it private, and retired the Phoenix brand.

David Dominick

Nassau was created with $750 million from Golden Gate Capital, a San Francisco investment firm with stakes in businesses as diverse as Bob Evans restaurants, VirginiaGreen lawn products, and Securly child security software. Golden Gate’s leader, David Dominick is a private equity specialist with experience at Bain Capital. Dominick hired Phil Gass and Kostas Cheliotis to start and run Nassau.

Gass and Cheliotis had been at HRG Group and Fidelity & Guaranty Life, both practitioners of the Bermuda Triangle strategy. With Gass as CEO, Nassau began assembling the components of the triangle. In 2016, Nassau bought Phoenix, bought (and later sold) Saybrus Partners, an insurance distributor. In this period, it also bought Constitution Life and CorAmerica (a commercial real estate loan originator).

In 2018, Nassau formed Nassau Re Cayman and Nassau Asset Management. In 2018, Nassau issued a fixed-rate deferred annuity. In 2019, it issued its first fixed indexed annuity (FIA). In 2020, Nassau bought Foresters Life Insurance and Annuity and Delaware Life of New York (but not Delaware Life). It also formed Nassau Private Credit and Nassau Alternative Investments. Nassau’s FIA sales were about $691 million in 2021, $890 million in 2022 and $1.1 billion in 2023.

Nassau’s PHL unit, burdened by its investor-owned life policies, was already declining toward insolvency, however. Starting in 2019, PHL entered several reinsurance deals with “captive” and “affiliated” reinsurers to reduce its liabilities and bolster its surplus. It’s not clear how much independent capital these reinsurers posted. Ultimately, these band-aid solutions failed.

PHL now looks like an orphan. In 2021, after putting some capital into PHL, Nassau requested and received permission from regulators to “deconsolidate” from PHL and transfer it to GG Holding, the ultimate parent of Nassau and Golden Gate Capital. GG Holding told regulators that it won’t put more money into PHL. PHL’s remaining captive reinsurer, Concord Re, evidently can’t cover PHL’s liabilities.

On March 31, PHL was taken into rehabilitation by Connecticut regulators. Since KPMG, PHL’s external auditor, said that PHL’s ability to continue as a going concern was in doubt, “rehabilitation” sounds unrealistically optimistic. There are a variety of simple and complex life insurance policies and annuities on its books. The biggest money loser is the block of corporate-owned life insurance, whose owners paid far less in premiums than PHL counted on, according to CID documents.

Don’t mess with European soccer fans

In the other Bermuda Triangle disaster, the life insurance companies include Atlantic Coast Life (domiciled in Missouri but based in Salt Lake City), Sentinel Security Life and Haymarket Insurance (both domiciled in Utah). ACL and SSL issue fixed indexed annuities and both are units of New York-based Advantage Capital or A-CAP, whose CEO is Kenneth King.

The asset manager is 777 Partners of Miami and 777 Re of Bermuda. The freewheeling principals of those companies, Josh Wander and Steve Pasko, principals appear to have misjudged the pride that European football club fans take in their teams. After 777 Partners started on a series of leveraged buyouts of soccer teams in Britain, France, Australia, Germany, Spain, Italy and Belgium, managers and fans of those clubs rebelled against the presence of foreign moneymen on their pitch.

Their protest was reported in January in Josimar, a Norwegian football publication. The story was picked up by Semafor, the New York Times Athletic, and others. If you go to Elon Musk’s “X” channel and search for #777OUT, you’ll see and hear the excitement. But remove children from the room before you do.

As the hashtag indicates, fans of those clubs want the Miami-based 777 out of their teams’ front offices. They resent their chronically under-financed but beloved teams being swept up by what they see as a carpetbagging American leveraged buyout firm. (Fans of “Ted Lasso” may empathize.) Wander and Pasko were forced to resign from 777 Partners in late May.

In recent years, the two had poured hundreds of millions of dollars into European football clubs, with at least some of the money allegedly coming from King’s life/annuity companies in the US. But in 2023, the spree collapsed. Creditors went unpaid. Lawsuits were filed against 777 Partners and 777 Re demanding repayment of tens of millions of dollars.

The circular exchange of obligations between insurers, reinsurers and asset managers characterizes the Bermuda Triangle strategy, and that sort of paper chase seems to have been operative at 777. One unhappy counter-party alleged that 777 uses a “web of companies… to move around money and assets to operate and conceal a sprawling fraudulent enterprise.”

The 777 debacle also involves alleged malfeasance. Leadenhall Capital Partners, a London firm with a fund devoted to “life insurance-linked investments,” has sued Wander, Pasko, and King. Leadenhall claims that 777 didn’t mention that the $350 million in collateral against which Leadenhall loaned 777 money was already pledged to someone else. According to Leadenhall’s complaint, AM Best downgraded A-CAP’s credit rating to “bbb” with negative implications on February 23, 2024, citing A-CAP’s “high reinsurance leverage and declining counter-party credit quality.”

The question is whether these two examples of ill-fated Bermuda Triangle operations are isolated catastrophes, or leading indicators of a wider problem. To me, they confirm that a successful business strategy—and the Bermuda Triangle strategy has proven successful for the largest players—will eventually attract players who, for one reason or another, can’t make it work. Someone else eventually has to pick up the pieces.

News briefs

Posted on May 1, 2024 by Editorial Staff -

High interest rates lead to record-breaking 1Q2024 annuity sales

Total U.S. annuity sales were $113.5 billion in the first quarter of 2024, 21% above prior year results and just shy of the quarterly sales record set in the fourth quarter 2023, according to preliminary results from LIMRA’s U.S. Individual Annuity Sales Survey, representing 84% of the total U.S. annuity market.

This is the highest first quarter sales results since LIMRA started tracking sales in the 1980s. “The remarkable sales trends over the past two years continued into 2024. Favorable economic conditions and rising investor interest in securing guaranteed retirement income have resulted in double-digit sales growth in every product line,” said Bryan Hodgens, head of LIMRA research. “While there are potential regulatory and economic headwinds in the second half of the year, LIMRA expects annuity sales to continue to perform well.”

Fixed-rate deferred annuities

Total fixed-rate deferred annuity (FRD) sales were $48 billion in the first quarter, 16% higher than first quarter 2023 sales. FRD annuities remain the primary driver of annuity sales growth, representing more than 42% of the total annuity market in the first quarter.

“Eighty-five percent of FRD sales are short duration products (less than five years). Higher interest rates combined with insurers’ ability to offer, on average, better crediting rates, have propelled product sales to another level,” noted Hodgens. “To put these first quarter results in perspective, from 2008 to 2021 the average annual FRD sales were just $42 billion, 14% lower than first quarter 2024 results.”

Fixed indexed annuities

Fixed indexed annuity (FIA) sales had a record first quarter. FIA sales totaled $29.3 billion, up 27% from the prior year. “FIA products continue to offer very competitive crediting rates while protecting the principal investment, an attractive proposition for today’s investors,” said Hodgens.

Income annuities

Income annuity product sales set a quarterly record due to rising interest rates. Single premium immediate annuity (SPIA) sales were $4 billion in the first quarter, 19% higher than the prior year’s results. Deferred income annuity (DIA) sales were $1.1 billion in the first quarter, increasing 35% year over year.

Registered index-linked annuities

For the fourth consecutive quarter, registered index-linked annuity (RILA) registered record quarterly sales. RILA sales increased 40% in the first quarter to $14.5 billion. “Product innovation and new market entrants suggest the RILA market still has significant growth potential. LIMRA is forecasting RILA sales to exceed $50 billion in 2024,” Hodgens said.

Traditional variable annuities

Traditional variable annuity sales improved in the first quarter, up 13% year-over-year to $14.5 billion.“Strong equity market performance over the past year has made traditional VAs more attractive,” said Hodgens. “While these products will not command the market share they did 10 years ago, LIMRA predicts the continued equity market growth will propel traditional VA sales to grow as much as 10% in 2024 from current levels.”

Preliminary first 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 first quarter 2024 will be available in mid-May, following the last of the earnings calls for the participating carriers.

Life insurers like private credit, survey shows

A third of insurers said they intend to increase their allocations to private debt in 2024, as the class now constitutes a mainstay of investment portfolios, according to a new survey out by Mercer and Oliver Wyman, A.M. Best reported.

The two units of Marsh McLennan surveyed 80 insurers globally and found almost three-fourths, 73% of them, are currently invested in private markets. Of those, 39% said they intend to increase that allocation over the year and 32% of those tallied in the wider industry said they plan to do so in 2024.

Common headwinds to increasing allocations in the class included the cost and complexity of both investment instruments and manager selection, the report found.

“With elevated interest rates and fixed income volatility, as well as considerable uncertainty around inflation, many insurers are reevaluating their investment frameworks and assessing ways to put excess cash to work,” Amit Popat, Mercer’s global head of financial institutions, said in a statement. ”

Allocations to private debt strategies are in focus for a significant proportion of insurers, as they seek access to the enhanced income, diversification, and structural protection benefits afforded by the asset class.”

The report found 43% of life insurance companies intend to expand their private allocation, while 37% of nonlife carriers have similar goals. Geographically, insurers in the United Kingdom and Canada were most likely to say increasing private placements topped their list, with 50% each, followed by 41% in the United States, 38% in Asia and 37% in Europe.

Six-in-10 cited optimizing their fixed income portfolio as an opportunity in 2024, while 51% cited diversifying portfolios away from traditional asset classes, such as domestic fixed income and domestic equities. Another 40% cited enhanced cash management as an opportunity this year.

Market volatility, cited by 61% of respondents, was the most-cited challenge to investment frameworks over the next 12 months, prompting insurers to reexamine fixed-income strategies, the survey found. Just 7% of insurers said they plan to increase cash in 2024, while 27% planned to reduce exposure.

“The market experience of the past year, which didn’t pan out exactly as many had expected, has reinforced the need for insurers to maintain a solid core while also maintaining agility to respond to and capitalize on evolving market risks and opportunities,” said Joshua Zwick, head of Oliver Wyman’s Asset Management Practice, in a statement.

Another asset management report recently found recessionary risk in the United States remains a top-of-mind concern for many insurers globally, and companies are increasingly eyeing the use of artificial intelligence, according to a Goldman Sachs Asset Management survey.

Jackson National introduces ‘+Income’ VA rider

Jackson National Life Insurance Company has added a lifetime income benefit (a guaranteed minimum withdrawal benefit or GMWB) option to the contracts in its Market Link Pro II and Market Link Pro Advisory II registered index-linked annuities. The new GMWB is called “+Income.”

The optional GMWB will be priced at 1.45% (to a maximum of 3%) of the contract value per year. Single and joint-life versions of the living benefit will be available, a Jackson release said. The payout rates start at 4% for contract owners ages 50 to 59 and go up to 6% for those ages 80 and older. Payout rates are 0.5% less for joint contracts, all else being equal.

Jackson’s RILAs offer five index options, which can be used in any combination, along with up to three crediting methods. In June 2023, Jackson enhanced the RILAs by adding a new crediting method (Performance Boost), a 3-year term, and an intra-term “Performance Lock” feature.

The available “price” indexes (which exclude dividend yield) include the S&P500 Index, the Russell 2000 Index, the MSCI EAFE Index, the MSCI Emerging Markets Index, and the MSCI KLD 400 Social Index. The Jackson RILAs offer “floors” (which set limits to a client’s losses during a single crediting period) and “buffers” (which absorb a client’s initial losses, up to an established limit, during a single crediting period).

RILAs are classified as variable annuities, are regulated as securities, and are sold through broker-dealers. They are structured products that resemble fixed indexed annuities (which are principal-protected insurance products, not securities). RILAs tend to offer higher potential upside performance and greater potential loss than FIAs.

At Jackson’s proprietary RILA Digital Ecosystem, financial professionals and clients can find information the Jackson Market Link Pro Suite. The platform provides access “to a data-driven tool that enables clients to generate customized, hypothetical scenarios of the various RILA options. To coincide with the launch of +Income, the tool now includes a new option to illustrate how lifetime income can impact client portfolios,” the release said.

What are ‘excess return’ indexes?

Posted on May 1, 2024 by Editorial Staff -

In Ibexis’ FIA Plus contract, the BoA and HSBC indexes are “excess return” indexes. In that context, the term “excess return” is not intended to reference “out-performance relative to a benchmark” or “alpha.” It means the net performance of a market index above the yield of a risk-free asset, such as short-term Treasury bonds.

Why use excess return indexes in FIAs? They help stabilize both an FIA’s cost (what the insurer pays for options on the index) and its renewal rates (the new participation rates or caps that the insurer announces at the start of each contract year). This will require a brief explanation of the internal dynamics of an FIA.

To create a plain-vanilla FIA, a life/annuity company uses a percentage of a contract owner’s premium (roughly dictated by the current corporate bond yield, minus the insurer’s expenses, or currently about 4% of premium) to buy a call option on a selected market index.

If the index goes up during a specific crediting period (one contract year, for instance), the options gain value, the contract owner gets the gain, up to a cap or participation rate that depends on the issuer’s options budget. If the index goes down during the crediting period, the options expire without value. The contract owner’s account value neither gains or loses value, because they only spent a year’s worth of interest to buy the options, without using principal.

But there’s a potential problem. Over the multi-year term of an FIA contract, volatility waxes and wanes. High volatility in interest rates or equities can drive up the cost of options. FIA issuers must either absorb the higher costs or pass them along to the contract owners in the form of lower crediting rates at the end of each contract year. If issuers renew rate caps and participation rates at stingier levels, contract owners and agents become unhappy.

An excess return index in effect absorbs fluctuations in interest rates and leaves options prices stable. Stable options prices mean stable renewal rates. Contract owners and agents like that.

The cost of options also varies with equity price volatility. To tame this kind of volatility, sophisticated algorithms inside many of today’s FIA indexes automatically move money from risky assets to cash when volatility soars (and back again when markets settle down). This mechanism also helps keep options prices and renewal rates stable.

When you embed both mechanisms–the excess-returns mechanism and the volatility controls–in the design of an FIA index, they smooth out performance. “When the two main drivers of hedge cost changes— interest rates and volatility—are removed from the equation, the index that’s left is highly stable and predictable,” explained Kevin Cloud, a vice president and actuary at CreativeOne, one of Ibexis’ designated wholesalers.

Vol-control mechanisms can actually dampen expected returns enough to reduce options prices (all else being equal) on an index. The FIA issuer can then afford to offer richer crediting rates. That’s why you see participation rates of 200% or more on some indexes.

For instance, “if a price-return version of an index had an expected return of 12%, the expected return of an ‘excess return’ version of that index might be only 7%,” Cloud told RIJ. “That might translate into a participation rate of 100% for the price-return version but 140% for the excess return version.”

On page 329 of its new “Retirement Security Rule: Definition of an Investment Advice Fiduciary,” issued on April 23, 2024, the Department of Labor warned that these mechanisms can make crediting rates look deceivingly generous:

“The complexity of some index options allows insurance companies to reduce volatility by adjusting the index’s exposure to risk based on market conditions. These include volatility-targeting indexes, which are designed to maintain a consistent level of volatility over time by automatically adjusting exposure to riskier assets, and minimum variance indexes, which select stocks with the lowest historical volatility and adjust the weights of each stock to achieve a target level of risk,” the DOL rule said.

“Some indexes incorporate an ‘excess return’ component, where a benchmark return is subtracted from the gross return to determine the amount of ‘excess’ return that contract owner will earn. Depending on market conditions, it is possible that the excess return feature will materially erode the return on the annuity, which may create confusion and disappointment for owners who do not fully understand the complexity and potential impact of this feature.”

The case for affiliated reinsurance in the Cayman Islands

Posted on May 1, 2024 by Editorial Staff -

RIJ has published many stories on “Bermuda Triangle” life/annuity companies that sell fixed annuities in the US, reinsure their liabilities in Bermuda to modulate their capital requirements, and rely on private equity firms to invest policyholder money in high-yield “alternative” assets.

The Cayman Islands are also a good place to buy reinsurance, according Nathan Gemmiti, CEO of Ibexis Life, the subject of RIJ’s lead story this month. Ibexis Life reinsures about 80% of its new fixed indexed annuity liabilities in the Cayman Islands instead of Bermuda.

In a recent conversation with RIJ, Gemmiti rejected the suggestion that insurance regulations in the Cayman Islands are “lighter” than in the US.

“In both Bermuda and Cayman, per US regulations governing off-shore reinsurance, in order for the US insurer to get reserve credit, the affiliated reinsurer must establish a segregated account with dedicated reserves to at least the statutory levels in the US,” Gemmiti told RIJ in a recent email.

US insurers must use conservative Statutory Accounting Principles (SAP) when calculating how much capital they need to post in support of their guarantees. But Bermuda-based and Cayman-based reinsurers can use Generally Accepted Accounting Principles (GAAP), which require potentially lower capital outlays. Offshore reinsurance lets US life/annuity companies enjoy the benefits of GAAP standards indirectly, through their offshore affiliates.

“As with Bermuda, US insurance authorities permit US insurers to buy ‘modified coinsurance’ from an affiliated reinsurer in Cayman,” Gemmiti said. “Cayman-domiciled reinsurers can also apply to use most international recognized accounting standard for reserving, such as ‘GAAP’ accounting rules, which can lead to reserving on an economic basis, rather than strict Statutory Accounting Principles that apply to insurers in the US. The NAIC has been discussing principles-based reserving [like GAAP], but these changes have not occurred.”

Cayman is becoming more attractive than Bermuda to US life/annuity companies, Gemmiti suggested. Cayman is trying to align its rules with the National Association of Insurance Commissioners (NAIC) in the U.S., while Bermuda is more aligned with Europe.

“The Cayman Islands has publicly stated that it is in the process of seeking NAIC reciprocal status with the support of a US state sponsor. Bermuda, on the other hand, has European Union Solvency II equivalent status,” Gemmiti said. “This distinction has led to many US based annuity insurers to look to the Cayman Islands.”

A legal perspective

“The Cayman Islands has deservedly been recognized as a leading captive jurisdiction,” according to an August 2023 report, “Five Reasons Reinsurance is Ramping Up in Cayman,” from an attorney at Conyers, a law firm that consults on the laws of Bermuda, the British Virgin Islands, and the Cayman Islands.

“Around 70% of all licenses issued by the Cayman Islands Monetary Authority (CIMA) in recent years have been for commercial or affiliate reinsurers, with private equity groups, traditional reinsurance and insurtech increasingly selecting Cayman for the establishment of side-cars and reinsurance platforms,” the report said.

“The confidence in the jurisdiction has been evidenced by the entry of larger players in the life & annuity space, including RBC Re’s re-domicile from Barbados to Cayman in 2021 and Talcott Re’s establishment of a Cayman reinsurer which assumed a $26 billion block of business in 2022.”

Conyers listed five reasons for considering reinsurance in the Cayman:

Tailored capital and/or accounting models. Cayman does not have Solvency II equivalency or NAIC reciprocal jurisdiction status (at least not yet…), which means our legislative and regulatory regime is less prescriptive and therefore affords prospective Cayman reinsurers greater flexibility to propose a bespoke capital model to our regulator without being significantly constrained by specificities in legislation.
No day one presence requirement for B(iii) reinsurers. A Class B(iii) licensee may engage and rely on a Cayman Islands licensed insurance manager to provide accounting, administrative and other management services, without the necessity for the reinsurer to put boots on the ground, either in the C-suite or other roles from day-one.
Attractive lifestyle for employees. For Class D licensees or other clients who prefer to have C-Suite officers on the ground in Cayman, the Cayman Islands Government allows for a 25 year work permit exclusively for reinsurance executives (as detailed further in our article on our immigration practice in Conyers Coverage Issue 9). Expats can also own and invest in property. The quality of the schools, infrastructure and lifestyle offered on the Island are some of the softer attractive features of establishing a reinsurer in Cayman for those looking to build out resourcing in the long term.
Speed to market. CIMA’s published timeframes for the approval of a new license is 6 to 8 weeks from the time of submission of a complete and comprehensive application. This provides commercial certainty for groups looking to have a license in place in order to write a transaction with inherent deadlines. CIMA is known to be commercial and available which permits licensees to build strong working relationships with the regulator.
Financial, political and economic certainty. Cayman’s stability (financially, politically, economically) particularly relative to other offshore domiciles (for example, the Cayman Islands runs an attractive budget surplus. The Cayman Islands Government has expressly stated that it does not intend to enact local legislation in the Cayman Islands for the purposes of collecting a Global Minimum Tax locally.

BlackRock relaunches its “LifePath Paycheck” retirement income tool

Posted on May 1, 2024 by Kerry Pechter -

BlackRock, which manages $1 trillion in assets and is one of the leading distributors of target date funds (TDFs) through defined contribution (DC) retirement plans, has relaunched its LifePath Paycheck program. The program would make it easy for plan participants to buy income annuities with part of their DC savings while leaving the balance in the plan and in BlackRock funds.

BlackRock is partnering with two life/annuity companies, Equitable and Brighthouse, to provide annuities to the program. Before retirement, participants would contribute to a group deferred annuity. At retirement, participants would have an opportunity to buy single-premium immediate income annuities (SPIAs). To buy the SPIA, participants would have to make an active decision to move part of their plan assets to a rollover IRA and then buy the annuity with their IRA money.

So far, 14 DC plan sponsors, with a combined $27 billion in target date fund (TDF) assets, intend to offer LifePath Paycheck as an income option for some 500,000 employees, a BlackRock release said. Avangrid, Adventist HealthCare Retirement Plans, and Tennessee Valley Authority Retirement System have signed on to place their auto-enrolled participants into the product.

Since TDFs, along with managed accounts, are “qualified default investment alternatives” under the Pension Protection Act of 2006, the contributions of employees who have been “auto-enrolled” into a 401(k) plan can be automatically invested in their plan’s TDFs.

Here’s how LifePath Paycheck works, according to BlackRock:

When participants who have invested in a BlackRock target date fund reach age 55, a portion of their investment portfolio starts flowing into a new asset class called lifetime income, which provides participants with the option to purchase a lifetime income stream in retirement.
Beginning at age 59½, those participants of an eligible retirement plan can, if they choose, redeem their investment in LifePath Paycheck and withdraw a portion of their retirement plan savings—about 30% of their LifePath Paycheck investment at age 65—and purchase annuities that provide lifetime income from insurers selected by BlackRock.
The rest of their savings stays in the plan. If they don’t make a decision on how to invest the money, it will be invested for them in a liquid portfolio of about 50% stocks and 50% bonds.

It was not immediately clear how the two insurers, Equitable and Brighthouse, would share the flow of contributions to the group deferred annuities or the flow of IRA assets into the SPIAs. It was also unclear who would educate participants regarding their decision to annuitize part of their plan savings or not.

Employers could default participants into LifePath TDFs, and into the deferred annuity inside the TDF, but no one could default them into actually buying an irrevocable annuity. Participants would have to make an active decision to do that.

LifePath isn’t new. Its first incarnation was SponsorMatch, a savings-to-income option developed by Barclays Global Investors (BGI) and MetLife before the Great Financial Crisis of 2008. At that time, insurers Prudential, The Hartford, John Hancock, and Great-West were all developing or launching savings-to-income programs, primarily using variable annuities with lifetime withdrawal riders.

BlackRock bought BGI in 2009 and introduced the LifePath brand in 2010. MetLife spun off its retail annuity business into Brighthouse Financial in 2017.

In 2013, BlackRock introduced its “CoRI” concept. This educational tool for plan participants showed how much annuity income their bond investments would buy at retirement. It included an index that tracked the cost today of $1 of inflation-adjusted lifetime income, starting when the participant reached age 65. The CoRI concept was difficult to communicate, however, and faded from view.

In 2020, BlackRock LifePath Paycheck was officially born. Like the current offering, it involved a target date fund whose assets could eventually be converted to an income annuity. Brighthouse Financial and Equitable were the designated underwriters of the annuity. Voya would be the recordkeeper. That program has now been relaunched.

As the Boomer retirement wave rolls through the financial services environment, asset managers like BlackRock have trouble controlling their own destinies. They distribute target date funds through retirement plans, but they are DCIO (defined contribution investment only) companies. They don’t administer plans or offer rollover IRAs to retirees from their plans (as Vanguard, Fidelity and TIAA do). They stand to lose assets when participants retire.

“Everybody likes Rip van Winkle when he’s asleep in the QDIA. But Rip wakes up one day and says, ‘I have to do something with this money,’” said Mark Fortier. Fortier helped the fund manager AllianceBernstein collaborate with three life insurers to integrate variable deferred annuities into the 401(k) plan at United Technologies (now RTX Corp) in 2012.

DCIO asset managers must find ways to retain participant assets post-retirement and enrich the value of their TDFs, whose fees have shrunk under pressure from participant lawsuits. At the same time, they must make themselves relevant to the retirement income discussion.

That’s especially true for BlackRock, whose LifePath TDFs are a $250 billion business. “BlackRock’s main purpose is to hold onto its franchise in TDFs,” Fortier told RIJ. They’re trying to counteract Vanguard and Fidelity and break their duopoly on large retirement plans. Like everybody in that space, they’re also fighting against fee compression. Fund fees are down to single digits.” That is, BlackRock might be able to charge 10 or 15 basis point more for a TDF with an annuity or income feature than for a plain vanilla TDF. “People are doing everything they can to squeeze more juice out of that lemon,” Fortier said.

By putting group deferred annuities in their TDFs and encouraging participants to buy income annuities in rollover IRAs, however, BlackRock (and other asset managers in similar positions) risk sending a mixed message to participants. They want participants to roll out about 30% of their money from the plan to buy an annuity, but leave 70% of their savings in the plan and in BlackRock funds.

Asset retention is BlackRock’s primary goal, Fortier said. “They’re not measuring success in terms of conversions to annuities,” he told RIJ. “This is about maintaining dominance in the mutual fund world, and slowing the downward spiral on fees.” The biggest obstacle to incorporating income solutions into qualified plans lies beyond the control of asset managers, he said. “They think these are product problems. But they’re advice and education problems.”

Michelle Richter, executive director of the Institutional Retirement Income Council, released this comment on BlackRock’s LifePath Paycheck:

“The income stream option built into BlackRock’s LifePath strategies is a material product design advancement for the field of in-plan retirement income, which is frequently more cost-effective than are retail income solutions. Target date funds could prove a way to increase retirement income accessibility for America’s retirement savers; from there, making annuitization optional within the design prevents additional costs or liquidity changes for those who do not expressly choose it. The design is clever, and is entirely consistent with BlackRock’s record of introducing in-plan income solutions seeking to weave together traditional investment with insurance approaches.”

The DOL Should Challenge the Fifth Circuit’s Opinion

Posted on May 1, 2024 by Kerry Pechter -

Back in 2018, the Fifth Circuit U.S. Court of Appeals sided with the American Council of Life Insurers (ACLI) and the U.S. Chamber of Commerce to quash the Department of Labor’s proposed “fiduciary rule,” which could have hindered the sales of annuities to IRA owners.

Last week, the DOL issued a new but similar rule. Why would the DOL ignore a powerful precedent and seek a rematch?

DOL may believe that the Fifth Circuit ruling was flawed. As I read it, the text of the 2018 opinion didn’t reflect a strong understanding of the annuity business. It ignored well-reasoned opinions in favor of the rule by two other federal judges. It was also handed down in a circuit where many judges are said to be prejudiced toward business interests and against regulations.

The DOL rule, then and now, charged that insurance agents should be held to the same ethical standards as, say registered investment advisers, when trying to persuade older investors to buy annuities with their IRA savings. That would be as counterproductive, the Fifth Circuit majority seemed to believe, as requiring emergency medical technicians (EMTs) to be doctors and carry malpractice insurance.

Oddly, the Fifth Circuit majority didn’t seem aware of the truism that annuities are “sold, not bought.” On the one hand, it’s true that a few self-educated individuals actively study and buy annuities on their own. But not many. Most people need to be persuaded to buy an annuity. The Fifth Circuit opinion said that “sales” and “advice” are distinct. But the judges didn’t seem to understand that annuity sales frequently require persuasion, which is arguably more aggressive than advice.

The opinion that buried the earlier fiduciary rule also didn’t acknowledge the similarity between some of today’s top-selling deferred annuities and investments. Nor did that opinion reflect an understanding that many financial professionals have both insurance and investment licenses. The majority just didn’t seem to know much about this business.

Why focus on FIAs?

The majority seemed shocked that the DOL singled out fixed indexed annuities for oversight. But the two judges conceded nothing about the complexity or opacity of those products, the high commissions that insurers offer agents to sell them, or the pressure needed to close a six-figure annuity sale.

The judges in the majority didn’t seem to know that most investment advisers, let alone agents, don’t know much about retirement income planning. They lack the specialized training required to help middle-class people orchestrate their qualified and unqualified savings, Social Security benefits, and real estate wealth into lifelong retirement income. Large, out-of-context, one-off product sales are not what retirees need.

When insurance agents encourage IRA owners or rollover candidates to liquidate tens or hundreds of thousands of dollars in stock and bond assets to buy an FIA that could be at least partly illiquid for up to 10 years, they’re arguably more like EMTs who perform open-heart surgery on people with chest pains.

Differences of opinion

Although two judges voided the DOL rule in 2018, two other judges wrote in favor of it. Their opinions are worth reading. A federal judge in Northern Texas had ruled in favor of the DOL rule in 2017; his ruling was overturned by the Fifth Circuit. The chief judge in the Fifth Circuit, Carl E. Stewart, in his dissent, rejected the plaintiffs’ accusations that the DOL acted arbitrarily and capriciously, that DOL was usurping Congress, or that the DOL was trespassing on the turf of state insurance commissions in trying to regulate insurance. From Judge Stewart’s perspective, the DOL was doing its job.

Opinionated opinions

A number of articles and individuals have suggested that the Fifth Circuit of the federal court system, with its several one-judge jurisdictions and many recent Trump appointees, is a venue where business interests have a high probability of getting their cases before sympathetic judges.

Articles in two publications suggested that the Fifth Circuit has been politicized to some extent. “The real upshot of what the judges [in the Fifth Circuit] are doing is deregulation,” said Stephen Vladeck, a professor at the University of Texas law school, in a story by legal journalist Jeffrey Toobin in the New York Review of Books.

“The Fifth Circuit and other conservative judges have resurrected or invented a series of doctrines—from nondelegation in the 1930s to ‘major questions’ in the 2020s—in an attempt to cripple the administrative state,” Toobin wrote.

Of the 16 active Fifth Circuit judges, five were appointed by Donald Trump. “[These judges] have begun to shift an already right-leaning court toward a more monolithic brand of conservatism. These are judges…whose views are less hidden and whose outcomes are easier to predict,” said a 2018 Texas Tribune story based on interviews with legal experts and Fifth Circuit lawyers. “You know what you’re getting if you bring your case here.”

Other federal judges are concerned about this. In March 2024, the U.S. Judicial Conference, the 26-member policy-making body for the federal courts, adopted a new rule aimed at “curtailing ‘judge shopping’ by state attorneys general, activists and others who challenge government policies in courthouses where one or two sympathetic judges hear most cases,” according to Reuters.

The majority opinion sounded opinionated. Sardonically, the judges twice put quotes around the term “conflicts of interest.” The quotes implied that such conflicts exist only in the imaginations of regulators. They reflected a lack of acquaintance with the incentives in financial services that run counter to the interests of consumers.

The financial literacy of the average American has been shown by many surveys to be low. Yet when the judges wrote that “individual investors, according to DOL, lack the sophistication and understanding of the financial marketplace possessed by investment professionals who manage ERISA employer- sponsored plans,” they suggested that only the DOL thinks so. That’s not the case. [Emphasis added.]

In arguing that the DOL bureaucrats were trespassing on the turf of Congress or state insurance commissioners, the majority conjured the hobgoblin of “deep state” Washingtonians. Their opinion also echoed the conservative tenet that regulations are pointless, because they only criminalize the law-abiding, raise the cost of doing business, and do nothing to deter the scofflaws.

After losing at the Fifth Circuit, DOL attorneys chose not to appeal the defeat to the whole 16-judge panel of the Fifth Circuit. The likeliest reason is that Trump administration was happy with the decision to vacate the fiduciary rule. Moreover, Trump’s second Secretary of Labor, Eugene Scalia (son of the late Supreme Court Justice Antonin Scalia), had been the lead attorney for the plaintiffs in the Fifth Circuit appeal. The younger Scalia did not try to undo his own victory.

Retirement Savings Concentration within Ethnic Groups

Posted on April 30, 2024 by No Author -

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Financial reinsurance, aka “surplus relief”

That was then, this is now

Secure Income Portfolio

Multiple annuity providers

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Fixed-rate deferred annuities

Fixed indexed annuities

Income annuities

Registered index-linked annuities

Traditional variable annuities

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Jackson National introduces ‘+Income’ VA rider

A legal perspective

Why focus on FIAs?

Differences of opinion

Opinionated opinions

Data Connection

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