Archives: Articles

IssueM Articles

AM Best expects lower annuity sales in 2020

The U.S. life/annuity (L/A) insurance industry saw its pre-tax operating income rise by 34% in 2019, to $63.4 billion, driven by a decline in transaction-driven volatility relative to previous years and favorable equity markets for the year, according to a new AM Best report.

In its Best’s Special Report, “US Life/Annuity 2019 Statutory Results: Favorable Operating Results and Underwriting Performance,” AM Best said that the L/A industry’s underwriting performance was favorable, although margins narrowed owing to the ongoing decline in net investment returns.

For 2020, AM Best expects that annuity sales will not continue to grow at the same pace as the previous year given the current economic uncertainty, as the low interest rate environment, along with the impact of COVID-19, will exacerbate spread compression.

Low rates likely to continue to drag on margins until longer-term interest rates and credit spreads return to more historical levels. The ongoing drag from the low interest rate environment continues to hurt margins and stifle earnings growth, as is evident in the continued weakening in the industry’s investment returns, an AM Best release said.

The 2019 pre-tax operating gain rose was still below 2016-2017 amounts. The increase was driven mainly by earnings volatility in 2018, because of a fair amount of one-off transactions and company-specific events, which negatively impacted the industry’s statutory results. Partially offsetting the lower returns was the ongoing growth in absolute invested assets, which reached a record $4.49 trillion at year-end 2019.

Many transactions, which included affiliated reinsurance and captive transactions, were large in dollar amounts, but often had a neutral impact on enterprise-wide operating results.

Companies have been looking to offset the drag somewhat through expense efficiencies. The general expense to net premiums written ratio declined to 10.1% from 11.1% at year-end 2018, which shows that companies have found ways to be more efficient despite increasing their technology spending.

Statutory net income rose by 19% to $47.2 billion in 2019. There was a slight increase in realized losses, totaling $6.7 billion, as equity hedges and the decline in long-term interest rates impacted this line item.

While companies continued to build up capital, those capital levels will be tested in 2020, AM Best said. Modestly low single-digit premium growth was driven solely by a rise in annuity sales. AM Best expects growth to be challenged in 2020 due to the COVID-19 pandemic.

Companies are learning to make effective use of digital capabilities for sales, but innovation initiatives to bolster growth may be tested sooner than anticipated.

“However, even with falling equity markets, fixed annuities are still an attractive choice for consumers, and the need for guaranteed income could rise. Improving public perception about annuities, as well as simplification, should lead to increased sales,” the Special Report said.

© 2020 RIJ Publishing LLC. All rights reserved.

Honorable Mention

After the big deal, AM Best affirms ratings of Jackson National and Athene

Jackson National Life Insurance Company’s financial strength and long-term issuer credit ratings remained “A” (Excellent) and “a+,” respectively, in the wake of its recently announced investment and reinsurance transactions with Athene Holding Ltd., according to the ratings agency AM Best.

AM Best has commented that the Credit Ratings (ratings) and outlooks of the members of Athene Group (Athene) remain unchanged following the recent announcement of its fixed annuity reinsurance agreement.

The agreement adds $27 billion of fixed deferred and fixed indexed annuity statutory reserves from Jackson National Life Insurance Company and includes a $1.25 billion ceding commission, with a net $29 billion in assets transferred to Athene.

AM Best also affirmed the ratings of Jackson’s wholly owned subsidiary, Jackson National Life Insurance Company of New York, and its direct parent, Brooke Life Insurance Company. Jackson National Life is headquartered in Lansing, MI.

On June 18, 2020, JNL’s parent company, Britain’s Prudential plc (Prudential), announced an agreement to reinsure JNL’s $27.6 billion IFRS book of fixed and fixed indexed annuity business to Athene Life Re Ltd, a subsidiary of Athene Holding Ltd.

Concurrently, Prudential (no relation to Prudential Financial in the U.S.) also announced that it has reached an agreement with Athene Holding Ltd for its subsidiary, Athene Life Re Ltd, to invest $500 million in Prudential’s U.S. holding company in exchange for an 11.1% economic interest (9.9% voting interest) in Prudential’s U.S. business.

Athene’s investment will be deployed in JNL, and the net impact of the capital investment and the reinsurance transaction is expected to be accretive to absolute and risk-adjusted capitalization. AM Best will monitor the execution of the announced transactions and Prudential’s future strategic plans for JNL in order to determine their impact on JNL’s ratings.

AM Best views this deal as potentially accretive to Athene’s business profile by expanding and increasing the diversification of earnings sources, dependent on the execution and integration of the block.

As part of the transaction, and expecting to close in July 2020, Athene will invest $500 million in Prudential plc’s U.S. holding company in exchange for an 11.1% economic interest (9.9% voting interest) in Prudential plc’s U.S. business.

The outlooks of Athene Holding Ltd.’s Long-Term Issuer Credit Rating (Long-Term ICR) of “bbb”, its existing Long-Term IRs and the Long-Term ICRs of its operating insurance subsidiaries were affirmed with a positive outlook on May 22, 2020 and remain unchanged.

Not many people talk to advisers about decumulation: Allianz Life

Even before the recent equity market turmoil, more than half (55%) of non-retirees said they were worried they won’t have enough saved for retirement and 31% said they were way too far behind on retirement goals to be able to catch up in time.

Yet only 12% said “setting long-term financial goals” was their top priority and merely 6% identified developing a formal plan with an adviser as their top priority, according to a survey conducted in January 2020 by Allianz Life.

The upshot is that “many financial professionals may be missing opportunities to shift conversations about retirement from accumulation to protection,” an Allianz Life release said.

The 2020 Retirement Risk Readiness Study from Allianz Life Insurance Company of North America (Allianz Life) surveyed three categories of Americans:

  • Pre-retirees (those 10 years or more from retirement);
  • Near-retirees (those within 10 years of retirement); and
  • Retirees

While retirees were fairly confident about how long their money will last, six in 10 non-retirees said running out of money before they die is one of their biggest concerns. But only 27% of non-retirees who have advisers said they have discussed longevity risk and fewer than 15% had shared their financial insecurities about retirement with their advisers.

Before the recent market turmoil, 49% of all respondents identified a stock market drop as the greatest threat to their retirement income. But fewer than 30% of Americans with advisers said they had discussed market risk, including only 22% of those within 10 years of retirement.

Inflation-related anxiety

Nearly half (48%) of those surveyed viewed inflation as a threat in retirement. More than half (59%) were worried that the rising prices will prevent them from enjoying their retirement. Sixty-seven percent of those 10 years or more from retirement (versus 59% for near-retirees and 40% for retirees) expressed that concern. Only around two in 10 are talking about inflation with their advisers.

Allianz Life conducted an online survey, the 2020 Retirement Risk Readiness Study, in January 2020 with a nationally representative sample of 1,000 individuals age 25+ in the contiguous USA with an annual household income of $50k+ (single) / $75k+ (married/partnered) OR investable assets of $150k.

TIAA and Savi partner for student debt resolution

TIAA, a leading financial services provider, today announced that it is working with social impact technology startup Savi to make it easier for nonprofit institutions to offer a meaningful student debt relief solution to their employees.

The companies together launched a student debt solution designed to help employees of nonprofit organizations reduce their monthly student loan payments immediately, and to qualify over time for relief from the balance of their federal student loans by enrolling in the federal Public Service Loan Forgiveness (PSLF) program.

TIAA and Savi conducted a pilot of the solution from July 2019 through March 2020 with seven nonprofit institutions, four in higher education and three in healthcare. Within that period, employees who signed up for the solution were on track to save an average of $1,700 a year in student debt payments. Some employees’ payments were cut in half.

In addition, employees had an average projected forgiveness of more than $50,000 upon successful completion of 120 months in the PSLF program. The total projected forgiveness from the pilot exceeds $53,000,000 to date.

Fidelity nears settlement with its own plan participants

The nation’s largest retirement plan recordkeeper, Fidelity Investments, is close to settling a suit in which participants in its own 401(k) plan said they were charged excessive recordkeeping fees, NAPANet reported this week.

In October 2018, plan participants, as plaintiffs, accused their employer of violating its fiduciary duties by using the plan “as an opportunity to promote Fidelity’s mutual fund business at the expense of the Plan and its participants.”

The Fidelity Retirement Savings Plan had nearly $15 billion in assets and covered 58,000 participants at the end of 2016, according to the suit.

Judge William G. Young of the U.S. District Court for the District of Massachusetts ruled in late March that

“Fidelity has breached its duty of prudence with regard to its failure to monitor the recordkeeping expenses, and the class members may recover under the equitable doctrine of surcharge,” explaining that, “as with the failure to monitor the proprietary mutual funds, the Plaintiffs at trial will bear the burden of proving the exact extent of loss (an exercise that may or may not be trivial given the parties’ stipulations), while Fidelity will bear the burden of showing this lack of monitoring has not caused this loss.”

Fidelity “…does not dispute that the Plan Fiduciaries declined to monitor recordkeeping expenses but argues that it has not violated its fiduciary duties because all expenses were returned to the Plan through the mandatory Revenue Credit, and thus netted to zero,” wrote Judge Young. The “argument rests on the proposition that there is no breach of a duty to be cost-conscious where there are no costs.”

MetLife inks first U.K. longevity reinsurance deal

Metropolitan Tower Life Insurance Co., a subsidiary of MetLife, Inc., has announced its first United Kingdom longevity reinsurance transaction with Pension Insurance Corporation plc. Metropolitan Tower will provide reinsurance to PIC for longevity risk associated with about £280 million of pension liabilities.

“With this transaction, MetLife is establishing itself as a reinsurance solution for direct insurers in the U.K,” said Graham Cox, executive vice president and head of Retirement & Income Solutions at MetLife, in a release.

“While this is MetLife’s initial step into the U.K. longevity reinsurance market, our long history and mortality expertise position us well for the future,” he said. “In 2019, there were more than £40 billion of U.K. pension risk transfer transactions completed.”

© 2020 RIJ Publishing LLC. All rights reserved.

 

DOL Has Discouraging Words for ESG Funds

Under a new Department of Labor proposed rule, ERISA plan fiduciaries would not be able to include ESG funds in plans when the investment strategy of the vehicle is to “subordinate return or increase risk for the purpose of non-financial objectives.”

“Private employer-sponsored retirement plans are not vehicles for furthering social goals or policy objectives that are not in the financial interest of the plan,” said Secretary of Labor Eugene Scalia, in a press release Tuesday evening. “[Plans] should be managed with unwavering focus on a single, very important social goal: providing for the retirement security of American workers.”

The proposal would make five core additions to the regulation:

  • New regulatory text to codify the Department’s longstanding position that ERISA requires plan fiduciaries to select investments and investment courses of action based on financial considerations relevant to the risk-adjusted economic value of a particular investment or investment course of action.
  • An express regulatory provision stating that compliance with the exclusive-purpose (i.e., loyalty) duty in ERISA section 404(a)(1)(A) prohibits fiduciaries from subordinating the interests of plan participants and beneficiaries in retirement income and financial benefits under the plan to non-pecuniary goals.
  • A new provision that requires fiduciaries to consider other available investments to meet their prudence and loyalty duties under ERISA.
  • The proposal acknowledges that ESG factors can be pecuniary factors, but only if they present economic risks or opportunities that qualified investment professionals would treat as material economic considerations under generally accepted investment theories. The proposal adds new regulatory text on required investment analysis and documentation requirements in the rare circumstances when fiduciaries are choosing among truly economically “indistinguishable” investments.
  • A new provision on selecting designated investment alternatives for 401(k)-type plans. The proposal reiterates the Department’s view that the prudence and loyalty standards set forth in ERISA apply to a fiduciary’s selection of an investment alternative to be offered to plan participants and beneficiaries in an individual account plan (commonly referred to as a 401(k)-type plan). The proposal describes the requirements for selecting investment alternatives for such plans that purport to pursue one or more environmental, social, and corporate governance-oriented objectives in their investment mandates or that include such parameters in the fund name.

This proposed rule says little that is new. “ERISA fiduciaries may not sacrifice investment returns or assume greater investment risks as a means of promoting collateral social policy goals,” a DOL Field Assistance Bulletin said in 2018, and in previous bulletins.

But this proposal lacks the nuance or flexibility that the DOL has expressed in the past. Phyllis Borzi, the director of the Employee Benefit Security Administration under President Obama, described previous policy to RIJ in an email this week.

“Throughout the history of ERISA, on a bipartisan basis, the DOL has consistently refused to ban either ESG/ETI investing or proxy voting,” Borzi told RIJ this week. “Instead, the Department has consistently said that while financial considerations must be paramount and fiduciaries cannot sacrifice return to advance other objectives, that when faced with multiple investment possibilities with equal financial characteristics and impacts, a fiduciary can take ESG/ETI factors into consideration (the so-called “all things being equal” rule).

“But since the end of the George W. Bush Administration, the U.S. Chamber of Commerce has aggressively and successfully lobbied the Department to issue guidance that in effect creates a strong deterrent effort for a fiduciary to consider these factors,” she said.

“In the Obama Administration, the Department issued guidance to reiterate the balanced interpretation of ERISA that existed since the late 70’s and reverse the strong inference that the legal barriers were nearly insurmountable to engage in ESG investing. One of the earliest things the Trump Administration did was to try to go back to the unfavorable interpretation issued in the waning days of the Bush Administration. This is simply a continuation of that effort.”

Is there a danger that activist fiduciaries might try to divert plan assets toward their own social or political goals? This concern may have been pertinent in the defined benefit pension era, when fiduciaries controlled vast pools of money, but it seems less so in the 401(k) era, when participants can choose their own investments.

A study of thousands of companies, published in the Journal of Sustainable Finance and Investment, found no evidence of poor performance by ESG companies. “The results show that the business case for ESG investing is empirically very well founded. Roughly 90% of studies find a nonnegative ESG–CFP (corporate financial performance) relation,” the study said.

A 2016 survey by Natixis Global Asset Management of 951 U.S. employees participating in defined contribution plans demonstrated interest from individuals in ESG investments: 64% said they were concerned about the environmental, social and ethical records of the companies they invest in and 74% said they would like to see more socially responsible investments in their retirement plan offerings.”

© 2020 RIJ Publishing LLC. All rights reserved.

Better than Throwing Darts

When Kent Jacquay, a 47-year-old former insurance producer with a knack for computer programming, speaks to groups of insurance agents about selling fixed indexed annuities (FIAs) his favorite prop is a dartboard—a metaphor for how they tend to pick contracts for clients.

To improve their methodology, Jacquay set up a software company in Fort Wayne, Indiana in 2018 called Index Resource Center LLC. His anchor product is Indexalyzer, a Excel-based tool for sorting, filtering and comparing fixed indexed annuity (FIA) contracts.

Jacquay has been acquainted with FIAs since 1996, when the products were new and only insurance agents sold them. He believes FIAs can uniquely enhance the financial lives of American retirees by giving them a chance for higher returns than fixed-rate products but with equal protection from loss.

“The FIA was designed to beat MYGAs (multi-year guaranteed rate annuities), bonds, and certificates of deposit—anything that’s guaranteed not to lose money,” he told RIJ. “And it does its job really well.”

But FIA insurance marketing organizations (IMOs) and agents who sell FIAs don’t do an equally good job of explaining—or even understanding—the growth mechanisms that drive the products, he says. And when it comes to navigating the bewildering array of “crediting” strategies and indices that determine a contract’s likely returns, they don’t know much more than their clients.

“We have all these agents selling billions of dollars of these products. But they have few clues about how the crediting rates have performed,” Jacquay said. “If I look at the crediting choices and try to choose where to put my money, how do I know what to do? Do I choose a two percent monthly cap on the S&P 500 Index, or a 120% participation rate on the Barclays Focus 50? Nobody knows.”

Lots of tools are advertised on the Internet that claim to help insurance agents and financial advisers select the “best” FIA. “There are a million different software vendors trying to sell their wares to marketing organizations,” said Sheryl Moore, CEO of Wink, Inc., the annuity data and analysis firm, noting that there’s little or no regulation of them.

But that is changing. Many broker-dealers (who are more closely regulated than insurance agents) now sell FIAs. At the same time, the Securities & Exchange Commission’s “Reg BI” (Regulation Best Interest) is about to require brokers to be more ethical. Demand should grow for tools like Indexalyzer that can document an adviser’s due diligence regarding product recommendations. The tools themselves are likely to come under greater scrutiny as well.

How Indexalyzer works

Via GoToMeeting, Jacquay guided me on a virtual tour of Indexalyzer this week. He demonstrated its sorting and comparison functions. The number of variables is immense, and the number of potential combinations of those variables must run into the millions.

Options to consider include the insurance carrier, the strength rating of the carrier, and the various products each carrier offers. Within each product, there are multiple term lengths, multiple indices, and a host of triggers, caps, spreads, fees and participation rates that affect returns (and reflect the structure of the underlying call options). Some products offer lifetime income options and/or bonuses.

(A “cap” means that the client is credited with interest equal to the index gain up to a cap. A “participation rate” indicates the percentage of the index gain that the client’s account will receive.)

Jacquay proudly pointed out Indexalyzer’s ability to back-test the performance of a specific crediting strategy. He showed me the annual returns of a specific strategy using a specific index. He knows that past returns don’t predict future returns, but he thinks they allow for rankings that reveal the strongest contracts. (Mutual funds use past returns in their marketing, of course.)

“We take the past ten years’ movement of the indices, to the month, to see how the products performed. We apply every bonus and every fee that would affect the average 10-year compound rate of return. Updating the indices every month is crucial. Most of the others do it once a year. We update rates from carriers every day. Indexalyzer shows how each crediting method and index performed over the past 10 years.

“We don’t try to predict the future,” he added. “We’re just looking at the most recent ten years. We don’t say, ‘You can expect a certain percent return out of this product.’ We’re showing exactly what happened in a real market cycle, for all the different crediting options. We help the client and agent make a more informed decision about seven or eight or ten options, to see which performed well and which didn’t.”

(His back-tests showed that some contracts averaged returns of 8% or more over the past ten years, but that shouldn’t be surprising. The S&P 500 Index rose three-fold over a recent 10-year period, to 3,335 on Feb. 5, 2020 from 1,066 on February 5, 2010.)

For investors, a perplexing and even deal-breaking aspect of FIAs is that carriers can, after the first crediting term, change their caps or participation rates in response to changing investment conditions, such as interest rates or volatility levels. The minimums are published in the contracts, Jacquay said, but they do not commonly appear among the specs on product rate sheets.

(These are not the minimum non-forfeiture interest rates paid by issuers of fixed annuities and required by state insurance laws. They are the lowest rates that the issuer can use without re-filing the contract for approval by regulators.)

“You have this one variable that can’t be predicted, and that’s the carriers’ ability to change the rates after the first year,” he told RIJ. “You might see statements from the carriers about their past renewal records, but you don’t know what will happen in the future. The insurance companies always have a card they can play: they can take the performance down to the minimum.”

Jacquay can’t predict such reductions, but can model hypothetical reductions in the rates, to stress-test a crediting rate. Such reductions don’t necessarily destroy the contract value, he said. “The agents and IMOs get furious when a carrier lowers its rates. But I say, Let’s look at what that really does to the final return. We can adjust the rates in Indexalyzer to the minimum to see how it performs. The product may still be doing its job in outperforming guaranteed fixed rate products. I’d like to own a product that does its job [of outperforming fixed-rate products] even at the minimum.”

Takeways

Of course, no one can predict the returns of an FIA, just as no one can predict the returns of a risky security. But an FIA’s caps and participation rates are so suggestive of future returns that it’s difficult not to be enticed by them. For instance, some contracts offer participation rates of more than 100%, while other have no caps on returns.

But there must be rules of thumb that agents can use when for comparing FIAs, right? Here are some takeaways from my conservation with Jacquay:

  • Consider term length first. Does the client have the desire or ability to park the money in an investment for one year? Three years? Ten years?
  • Will the client use the product to generate retirement income? Contracts that are designed for income may not be optimal for accumulation and vice-versa.
  • The client’s risk tolerance is an important consideration. Would he or she buy from a company with a B++ credit rating if the payouts were potentially higher, or only from an A rated company? This decision may depend in part on the term length.
  • The month-to-month crediting strategy, which may appear to have tremendous potential, has consistently produced low returns in the recent market cycles.
  • The crediting strategy (caps, participation rates) is a more important consideration than the index. An uncapped strategy (100% participation) is more advantageous when equity markets are rising. In flat markets, a capped strategy may be more advantageous than a participation rate.
  • When choosing an index, most agents recommend and most clients adopt the S&P 500 Index. But Jacquay suggests that other indices, with higher risk profiles, may be more suitable for less risk-averse clients. Differences in indices, however, may be rendered moot by offsetting differences in crediting rates.

Bottom line: Don’t expect fixed indexed annuities to produce equity-like returns. Their advantage stems from their ability to outperform other products with no-loss guarantees, such as fixed rate annuities and certificates of deposits.

© 2020 RIJ Publishing LLC. All rights reserved.

Your Safest Retirement Asset

For as long as I’ve paid into Social Security, I’ve regarded it as an asset, not a liability. So I’m always perplexed by the way Social Security is denigrated.

People call it a Ponzi scheme, as if the U.S. Treasury’s ability and responsibility—as the creator of our sovereign currency, and because benefits are earned—to send out Social Security checks would ever be in doubt.

Social Security is also often slandered as a zero-sum game between generations—as if the program were strictly a liability for workers and not an asset until mailed to retirees. This is an intentional distortion. I believe I receive an asset in return for my payroll taxes. It’s not marketable; that’s part of what makes it so valuable.

Already, I hear legislators refer to an approaching Social Security “train wreck.” There is no approaching train wreck. When people want to fool you, they show you half of a balance sheet. They show you the liabilities and distract you from the assets.

So you will hear higher Social Security taxes described as “unaffordable,” even though the program adds $1 trillion of consumer demand into the U.S. economy each year and keeps tens of millions of older people out of poverty—and less dependent on their children.

You will hear about scary trillion dollar “shortfalls,” even though the shortfall is a tiny percentage of payroll over the next 75 years. If payroll taxes do go up a bit, everyone’s (except for the wealthiest, and they don’t need it) Social Security asset will not have to shrink by 25%.

Many people say that they’d rather invest their payroll taxes in stocks. This idea does not acknowledge that the certainty of future Social Security benefits gives them more risk budget or risk tolerance to spend on stocks. They also say that the low worker-to-retiree ratio in the U.S. (a result of declining birth rates) means that there will be shortages of goods and inflation. As long as the Chinese keep accepting dollars for goods, shortages seem unlikely.

You hear that today’s bailouts mean that we won’t be able to afford a better-funded Social Security program. Quite the opposite. The bailouts prove that there are no strict limits to what we can or can’t afford. Do we still have to pay taxes? Of course. But we will pay the taxes (progressively) with money that the government has already spent into the economy.

Social Security has for decades been the “third-rail” of American politics. I hope it stays that way.

© 2020 RIJ Publishing LLC. All rights reserved.

Aon launches ‘PEP,’ with Voya as recordkeeper

Aon plc, the global employee benefits firm, has launched a Pooled Employer Plan (PEP), with itself as the “pooled plan provider” and fiduciary. After a competitive bidding process, Aon chose Voya Financial as the recordkeeper for the new plan, which will be available Jan. 1, according to an Aon release today.

If they catch on, PEPs could transform the federally-regulated 401(k) defined contribution savings industry in the U.S. By allowing service providers to consolidate dozens or hundreds of small individual plans into large omnibus plans, they would gain vast new economies of scale.

Lots of questions still remain about PEPs:

  • Will the benefits of those economies of scale will be passed on to plan participants?
  • Will PEPs significantly expand access to workplace retirement savings plans in the U.S.?
  • Are there conflicts of interest inherent in provider-sponsorship of 401(k) plans?
  • Will PEP sponsors try to consolidate existing plans or create new plans?
  • What fiduciary responsibility will employers retain?
  • Will PEPs create new monopoly power among service providers in the retirement business?
  • Will PEPs wipe out large numbers of “mom-and-pop” 401(k) service providers?
  • Could PEPs increase or decrease the likelihood of offering annuities in 401(k) plans?

The U.S. Department of Labor is currently gathering comments on some of those issues. (See today’s story in RIJ on the official Request for Information.)

The new PEP stems from the Setting Every Community Up for Retirement Enhancement (SECURE) Act provision allowing employers to join forces to create 401(k) plans. Voya serves approximately 13.8 million individual and institutional customers in the U.S. Click here for more information from Aon.

According to today’s press release:

“Aon’s PEP will relieve employers of many fiduciary duties they have today. Due to the economies of scale, it also has the potential to lower fees for plan participants and provide access to state-of-the-art features that may be difficult for individual employers and fiduciary committees to both assess and access independently.

“The defined contribution plan provides the efficiency and scale of a pooled plan, while maintaining individual employer autonomy to define matching and other contribution levels, and various key plan design features. It also has the potential to provide cost savings to employers of all sizes.

“The SECURE Act, which was federal legislation passed into law December 2019, was designed to encourage broader 401(k) plan participation and greater retirement savings.

“With the law’s passing, employers will no longer need to sponsor their own individual 401(k) plan and absorb the risks and workload associated with that role. Instead, employers from all industries and sizes may pool resources together to increase efficiency and create better outcomes for participants.”

© 2020 RIJ Publishing LLC. All rights reserved.

DOL requests input on ‘pooled’ 401(k)s

Changes to U.S. labor laws by the SECURE Act of 2018 created the opportunity for a variety of 401(k) service providers—asset managers, recordkeepers, fiduciaries—to sponsor “pooled” 401(k) plans for a number of unrelated companies.

In the past, only employers could sponsor individual plans, and only related companies or businesses could create or join pooled employer plans, or PEPs. So the legal change represents a potential sea change in the way the U.S. does defined contribution.

On the one hand, the shift to provider-sponsorship could free employers from cumbersome and expensive pension-like responsibilities. On the other hand, sponsorship of plans by profit-seeking service providers creates obvious potential for self-dealing.

To explore that potential, and confront it, the DOL’s Employee Benefits Security Administration is “seeking information regarding the possible parties, business models, conflicts of interest, and prohibited transactions that might exist in connection with PEPs” to assess “the need for new prohibited transaction exemptions or amendments to existing exemptions.”

Written comments and recommendations for the proposed information collection should be sent within 30 days of publication of this notice to [email protected]. You can also submit comments by clicking here.

As stated in the June 18 issue of the Federal Register, the DOL would like feedback by July 20, 2020, on the following questions:

  1. What types of entities are likely to act as pooled plan providers? For example, there are a variety of service providers to single employer plans that may have the ability and expertise to act as a pooled plan provider, such as banks, insurance companies, broker-dealers, and similar financial services firms (including pension recordkeepers and third-party administrators).

Are these types of entities likely to act as a pooled plan provider? Are some of these entities more likely to take on the role of the pooled plan provider than others? Why or why not? How many entities are likely to act as pooled plan providers? Will a single entity establish multiple PEPs with different features?

  1. What business models will pooled plan providers adopt in making a PEP available to employers? For example, will pooled plan providers rely on affiliates as service providers, and will they offer proprietary investment products?
  2. What conflicts of interest, if any, would a pooled plan provider (along with its affiliates and related parties) likely have with respect to the PEP and its participants? Are there conflicts that some entities might have that others will not?
  3. To what extent will a pooled plan provider be able to unilaterally affect its own compensation or the compensation of its affiliates or related parties through its actions establishing a PEP or acting as a fiduciary or service provider to the

PEP? What categories of fees and compensation, direct or indirect, will pooled plan providers and their affiliates and related parties be likely to receive as a result of operating a PEP, including through the offering of proprietary investment products? Are there likely to be any differences in types of fees and compensation associated with operation of a PEP as compared to a single employer plan?

  1. Do respondents anticipate that the Department’s existing prohibited transaction exemptions will be relied on by pooled plan providers, and if so, which exemptions are most relevant? Are any amendments needed to the Department’s existing exemptions to address unique issues with respect to PEPs? Do respondents believe that there is a need for additional prohibited transaction exemptions? If so, please describe the specific transactions and the prohibited transactions provisions that would be violated in connection with the transactions.
  2. If additional prohibited transaction relief is necessary, should the Department consider developing distinct exemptions for different categories of pooled plan providers (e.g., to specifically address the unique prohibited transactions involved for certain entities) or should the Department address pooled plan provider conflicts more generally, in a single exemption? What are advantages and disadvantages of either approach?
  3. To the extent respondents do not believe additional prohibited transaction relief is necessary, why? How would the conflicts of interest be appropriately addressed to avoid prohibited transactions? Are different mitigating provisions appropriate for different entities? Why or why not?
  4. Do employer groups, associations, and PEOs described in the Department’s

MEP Final Rule face similar prohibited transactions to those of pooled plan providers, and do they have similar need for additional prohibited transaction relief? Are there prohibited transaction issues unique to employer groups or associations, or PEOs?

Plan Investments
  1. What plan investment options do respondents anticipate will be offered in PEPs and MEPs? Are the investment options likely to be as varied as those offered by large single employer plans? Are the options likely to be more varied than those offered by small single employer plans?
  2. What role will the entities serving as pooled plan providers or MEP sponsors, or their affiliates or related entities, serve with respect to the investment options offered in PEPs and MEPs?
Employers in the PEP or MEP
  1. How many employers are likely to join a PEP or MEP? Will joining a PEP or MEP be more appealing to employers of a particular size? Are there any estimates of the total number of employers and participants likely to be covered by newly formed PEPs and MEPs? Are there any estimates of the number of employers and participants that will migrate from a single employer plan to a newly formed PEP or MEP?
  2. Will larger employers also seek to join PEPs or MEPs in order to take advantage of additional economies of scale? Will any additional prohibited transactions exist as a result of substantial size differences between employers in the PEP or MEP (e.g., because a large employer has greater ability to influence decisions of a pooled plan provider or MEP sponsor as compared to a small employer)?
  3. Will the existence of multiple employers in a PEP or MEP cause greater exposure to prohibited transactions in connection with investments in employer securities or employer real property? In what form will PEPs and MEPs hold employer securities or employer real property?
  4. Do respondents anticipate that prohibited transactions will occur in connection with a decision to move assets from a PEP or MEP to another plan or IRA, in the case of a noncompliant employer? Do respondents anticipate that any other prohibited transactions will occur in connection with the execution of that decision?
Where to view comments

All comments received must include the agency name and Regulation Identifier Number (Z–RIN) for this request for information (1210–ZA28). In light of the COVID–19 pandemic, the DOL asks that all comments be submitted electronically and not followed with paper copies.

Comments will be available to the public, without charge, online at http://www.regulations.gov and http://www.dol.gov/agencies/ebsa, and at the

Public Disclosure Room, Employee

Benefits Security Administration, Suite

N–1513, 200 Constitution Avenue NW,

Washington, DC 20210.

© 2020 RIJ Publishing LLC. All rights reserved.

‘We Are Going To Buy Your Bonds Whether You Want Us To Or Not’

This week the Federal Reserve announced it is expanding its corporate bond-buying program. Via Victoria Guida at Politico:

The Fed is going to create an index of U.S. corporate bonds that it will purchase on the open market as long as they meet eligibility standards — an approach that will spare the companies from having to seek aid directly from the central bank.

The goal of the $750 billion emergency lending program is to keep cash flowing in the markets and support “the availability of credit for large employers,” the Fed said on Monday. Stocks rose on the news, reversing sharp losses earlier in the day.

The announcement represents a shift in strategy for the central bank, which was previously only going to buy individual bonds issued by companies that approached it directly. Now the Fed will buy bonds of all eligible companies, whether they ask or not.

Brian Chappatta at Bloomberg wonders why the Fed is doing this at all:

The most surprising part of this is there is virtually no evidence that the corporate-bond market needs this kind of intervention — it has been working nearly flawlessly for months.

This does create a bit of a problem for my narrative (not that it’s all about me). I  have typically described the Fed’s asset purchase program and lending program in terms of market functioning. The Fed identifies a gap in the credit market and tries to bridge that gap. In some cases, bridging the gap might be possible by simply being a credible backstop to a credit market. This appeared to be the case in the corporate debt market.

Just the willingness of the Fed to prevent a liquidity crisis from becoming a solvency crisis was enough to revive the corporate debt market. As Chappatta noted, the market appeared to be functioning just fine. So why the extension of the program? Isn’t the best case scenario the one in which the Fed can stabilize credit markets without actually buying anything?

This isn’t the first time the Fed has done something like this. Last week, the Fed put a floor under the asset purchase program by holding it “at least at the current pace to sustain smooth market functioning.” Heather Long at the Washington Post quickly eyed the logical conundrum:

Hi, good afternoon, Chair Powell. I’m struggling with two things that I’m hoping you can provide some clarity on. The first is the ongoing bond buying program. You say that it’s needed to continue the smooth functioning of markets, but I guess most of us aren’t really seeing instability in markets right now. So, if you could kind of give us some clarity of what you’re seeing that needs to continue to be smooth at that level and that pace.

Powell responds:

CHAIR POWELL. There have been gains in market function, although not fully back to where you would say they were, for example, in — in February, before the pandemic arrived. We don’t take those gains for granted though. This is a — this is a highly fluid situation and we’re we’re not taking those for granted. And in addition, as I pointed out in my — in my statement, those purchases are clearly also supporting highly accommodative — or accommodative financial conditions, and that’s — that’s a good thing, so that’s why we’re doing that.

 

It is not a particularly satisfying answer. It doesn’t fully embrace that asset purchases are increasingly less about market functioning and increasingly more about accommodative financial conditions. In other words, quantitative easing does not just allow for the transmission of accommodative interest rate policy, but is accommodative policy by itself. I discussed this Monday in my Bloomberg column.

The Fed did a stealth easing last week and it kind of flew under the radar.After this week’s bond market news, I am more convinced that the Fed is rapidly moving beyond market functioning but not being very direct about that move. It is fairly easy to conclude that the Fed is working to push down interest rates (or push up prices) across a range of financial assets but not directly saying this is the Fed’s objective. I understand why they want to pursue such a policy. I don’t understand why they don’t just say they are pursuing such a policy.

The Fed’s behavior this past week does give us a clue on how yield curve control is going to work. In theory, an advantage of yield curve control is that the Fed could control interest rates by just promising to purchase debt at a certain price. The promise alone should be effective with minimal actual purchases. Just as the Fed’s promise was enough to stabilize the corporate debt market.

A risk management focused policy that maybe didn’t quite know which was more important, the price or the quantity, might choose to do both. In that world, the Fed set interest rates at zero along the one, two, etc. year horizons while at the same time expanding the quantity of assets purchased. I think that’s how it would work. At least that what I am thinking tonight.

Bottom Line:  The Fed appears to be taking actions that are not obviously necessary to meet its stated objective of smooth market functioning. It looks like the Fed is trying to enhance the portfolio balance effect of asset purchases. I am not opposed to that, but I am wondering why they don’t just say it.

One reason could be that they fear Congress will limit the amount of fiscal support should the Fed push monetary policy further now. I am at a loss for another reason. The implication is that, short-term psychological shift aside, even if the economy just limps ahead it looks like the Fed is providing support for a wide range of asset classes.

This post originally appeared on Tim Duy’s blog.

Offer Partial Social Security Benefits as a Work-Longer Incentive

Workers often face uncertainty about their jobs, but not since the Great Depression have so many been unemployed or worried about becoming unemployed. Some have been laid off temporarily but don’t know if their job will come back. Others find themselves without a job and searching in a labor market with few openings.

These problems hit older workers especially hard, as research shows they have the toughest time getting a new job and, once reemployed, have great difficulty restoring their former pay level. Their problems will be with us for some time as we recover from the COVID-19 pandemic and recession.

I have a simple suggestion to help older workers that would cost the government little money because it mainly changes how and when older workers receive their Social Security payments, with adjustments that keep their value actuarially fair. The goal is to give people much more flexibility to adapt to changing financial needs and employment prospects.

Social Security could make it easier for those eligible for old age benefits after age 62 to opt in and out of benefit receipt and collect partial benefits, with each delay in benefit receipt boosting future annuity payments through delayed retirement credits and related adjustments, similar to what is already sometimes allowed.

Older workers hoping to get back in the labor market can then adjust as their opportunities and needs change. This approach would grant older workers, whether retired or not, flexibility to use some of their Social Security benefits to buy a very good annuity at variable levels over time.

The ability for some eligible beneficiaries to opt in and out of the system and a mandated system of partial benefits for others already exists, though the process is confusing.
Consider those older than the full retirement age (or FRA, age 66 and 2 months for those born in 1955). Technically, they can receive benefits, suspend them, and resume collecting. But Social Security doesn’t broadcast this ability, so few know it exists.

For every year these workers delay collecting benefits until age 70, they receive an 8% increase in their annuity, plus inflation adjustments. Thus, if I were born in 1955 and delay benefit receipt 46 months after the full retirement age, from 66 and 2 months to age 70, I can get about a 31% higher annual benefit every year after age 70. But I could also take benefits at age 66 and 2 months, stop receiving them completely for two full years at ages 67 and 68, then start receiving them again at age 69, thereby increasing my future annual annuity by 16%.

Why not make this system simple and transparent? Why not allow workers simply to take a partial benefit that works the same way? And why not give them the option not just to opt in and out of the system periodically, but also to cut back on some benefits in exchange for later actuarial adjustments?

For instance, we could allow people to take half their benefit in a given year and receive half the delayed retirement credit, then receive no benefit the next year in exchange for a full delayed retirement credit, and switch again to a full benefit in a third year. This would allow people to adjust over time according to their needs and work prospects—a particularly valuable option during the ups and downs of recession and recovery.

The language surrounding credits and adjustments for delayed benefit receipt confuses even financial advisers. It derives from a long history in which delayed benefit receipt was defined by an earnings test that took back Social Security benefits as beneficiaries earned more. Congress removed the earnings test for those past the FRA, but as the FRA increases toward age 67 for those born in 1960 and later, more older workers are quickly becoming subject to it and fewer for the delayed retirement credit.

A variation on a historically much stricter earnings test remains for those retiring between age 62 and the FRA. In essence, in 2020, Social Security is reducing benefits by one-half of earnings above $18,240 for beneficiaries between age 62 and the FRA, although a different formula applies to the year when the FRA is reached. But benefits lost in those early years are offset by a little more than 7% per year increase in later payments.

The point to remember is that those between age 62 and the FRA essentially are often forced to take something similar to a delayed retirement credit. The amounts involved are fixed by an earnings-related formula, not their financial needs. One survey found three out of five respondents incorrectly viewed the earnings test as a permanent tax on work, so it also deters work, especially for those in their early 60s.

Getting $.07 or $.08 every year of remaining life on every $1.00 deposited, plus an inflation adjustment, is a great annuity rate for those with average or better life expectancies, better than anything available in the private market, especially now that the Federal Reserve has cut interest rates to nearly zero. The main losers in the mandated system are those younger than the FRA with chronic health problems that would lead to an early death; they would be better off not purchasing an annuity.

This simple reform would enable people to make adjustments according to their own financial needs in times of reduced income or unemployment and to buy the decent annuities the system offers over time and in variable amounts.

Although congressional action would be necessary to allow beneficiaries to take partial benefits before the FRA, the Social Security Administration needs no authority to clarify the existing opportunity to opt in and out for those older than the FRA. The sooner it can adapt, the sooner workers—including those forced to retire earlier than planned during economic downturns—can adapt according to their own needs and future opportunities.

As our population gets older, we are moving into a world where the worker-to-beneficiary ratio in Social Security falls from 4:1 in 1965 to 3:1 in 2010 to close to 2:1 in 2040. At the same time, older people recently have increased their rate of participation in the labor market, and their employment rate actually increased during the last recession.

Even if the COVID-19 crisis had not swelled the number of older workers and retirees in need of greater flexibility, Congress could make this convoluted system of actuarial adjustments salient and transparent for millions of current and future Social Security beneficiaries.

This column originally appeared on Urban Wire on May 29, 2020.

Nationwide launches suite of variable annuity income benefits

Nationwide Life Insurance Company has launched three new income riders—the Nationwide Lifetime Income Rider+ (L.inc+) Suite—that will be available for an additional cost with certain Nationwide Destination 2.0 variable annuities.

Options within the Nationwide L.inc+ Suite can provide either “a consistent income stream that will never decrease, a fluctuating income stream with more market exposure for greater growth potential, or a front-loaded stream to fill an income gap.”

All guarantees and protections are subject to the claims paying ability of Nationwide Life Insurance Company. The three riders are:

Nationwide Lifetime Income Rider+ Core (L.inc+ Core): Consistent retirement income for life. For clients seeking a level of certainty for predictable retirement income by converting part of their savings into a steady retirement paycheck. L.inc+ Core offers guaranteed income with maximum equity exposure of 60%.

Nationwide Lifetime Income Rider+ Accelerated (L.inc+ Accelerated): Retirement income for life with greater growth potential. For clients who are comfortable with fluctuating retirement income in exchange for greater growth potential. L.inc+ Accelerated offers guaranteed income for life with the ability to allocate up to 100% in equities.

Nationwide Lifetime Income Rider+ Max (L.inc+ Max): Front-loaded retirement income for life. For clients who expect to need more of their income in the early years of retirement, for example to bridge an income gap until another source of income, such as Social Security, becomes available. L.inc+ Max offers guaranteed income for life with 100% equity exposure for greater growth potential.

Nationwide has also introduced an “Income Carryforward” feature. It allows contract owners to roll forward one year of unused income during the income phase. According to the prospectus, the Carryforward privilege:

“permits a Contract Owner to withdraw any part of the Lifetime Withdrawal Amount not taken in a given calendar year (the Income Carryforward amount) in the next calendar year, and the next calendar year only.”
For example, “Assume a Contract Owner purchases a contract on April 1, 2020 for $100,000, with a Roll-up Interest Rate of 6.00%. On April 1, 2021, assume the Current Income Benefit Base is $106,000 ($100,000 x 0.06). In May of 2021, assume the Contract Owner elects to begin lifetime income, taking the first Lifetime Withdrawal on May 1, 2021. At the time of the first Lifetime Withdrawal, assume the applicable Lifetime Withdrawal Percentage is 4.00%. Assuming no change to the Current Income Benefit Base from April 1, 2020, the Lifetime Withdrawal Amount would be $4,240 ($106,000 x 0.04).”

 

The L.inc+ Suite also offers a one-time “Non-Lifetime Withdrawal” that won’t impact the roll-up rate to the income benefit base, a 5% roll up to the income benefit base during the accumulation phase, and provides monthly income for life—even if the contract value falls to zero. An annual step-up feature allows clients to lock in the income benefit base at the highest anniversary contract value. L.inc+ also offers inflation protection through a simple interest roll-up rate.

In addition, the L.inc+ Suite offers enhanced dollar cost averaging and asset rebalancing, offers the ability to take IRS required minimum distributions (RMDs) without impacting guaranteed lifetime income, and income is calculated on a calendar year basis, to simplify clients’ planning by knowing exactly when their annual income will re-set.

© 2020 RIJ Publishing LLC. All rights reserved.

Ties grow between Athene and Jackson National

Athene Holding Ltd. has agreed to reinsure Jackson National Life’s $27.6 billion in-force fixed and fixed index annuity liabilities, effective from June 1, 2020. Athene will pay Jackson a ceding commission of $1.25 billion. Jackson will continue to provide account administration and services for the reinsured policies, a release said.

In addition, Athene will invest $500 million in Jackson and receive an 11.1% financial interest in Jackson and 9.9% of the shareholder voting rights.

Jackson National Life, a unit of Prudential plc of the U.K., is the top issuer of annuities in the U.S., with first-quarter 2020 sales of just under $5 billion. Of that, about $1 billion was fixed and fixed indexed annuities and the rest was variable annuities. Jackson’s Perspective II contract is the top-selling variable annuity.

Together, the Athene investment and reinsurance transactions are estimated to boost Jackson’s Risk-Based Capital (RBC) ratio by about 80 percentage points. “Today’s transactions with Athene… further strengthen our capital position and enhance our ability to grow,” said Michael Falcon, CEO of Jackson Holdings LLC.

Insurance companies buy risk (i.e., selling protection against risk), and need to reserve a minimum amount of so-called risk-based capital to increase their capacity to take on new risks (by selling more insurance products). Some products demand more capital than others.

A ceding commission is the fee a reinsurance company (in this case, Athene) pays to a ceding company (Jackson) for administrative, underwriting, and business acquisition expenses. Reinsurers collect premium payments from policyholders and give a portion to the ceding company, along with the ceding commission.

© 2020 RIJ Publishing LLC. All rights reserved

A New Kind of Income Annuity

The first baby boomers reached age 66 eight years ago, but still no one has brought to market a scalable, plug-and-play, broadly appealing retail financial product that middle-class Americans can use to convert savings into pension-like lifetime income streams.

While a variety of income products exist, they haven’t quite satisfied the diverse (and sometimes conflicting) demands of retirees, advisers, academics, regulators, and life insurance companies. Nothing checks enough of those boxes to fill the gap that defined benefit pensions used to fill in the wallets of American retirees.

But now a group of entrepreneurs in the Midwest think they’ve cracked the code.

Achaean Financial, a Lake Forest, Illinois-based financial product developer, with Ash Brokerage, an independent brokerage general agency based in Fort Wayne, Indiana, and a soon-to-be-named life insurer are launching an immediate index-linked annuity. Starting within a year of purchase, it generates monthly retirement income that can go up with inflation but never down.

This package may be unprecedented. The indexed annuity itself is called IncomePlus+ Indexed, or IP+ Indexed. It’s one of a pair of products (the other is an immediate variable income annuity, with an investment-holding sleeve or “separate account”) that former Lincoln Financial executive Lorry Stensrud has been developing for the better part of a decade. (Both versions of IP+ are protected under a patent originally issued by the U.S. Patent and Trademark Office in June 2014 with subsequent patents pending.)

In Tim Ash, Stensrud has found a distributor as enthusiastic about retirement income as he is. (Ash even uses the “D word”—decumulation—on his website.) The two firms have a non-exclusive partnership where IP+ and Ash’s proprietary JourneyGuide retirement planning software will be marketed together, but also separately, to Ash Brokerage’s 8,000 affiliated advisers and other advisory and distribution organizations.

“We’re at the cusp of rolling it out,” Tim Ash, CEO of Ash Brokerage, told RIJ recently.

Tim Ash

“Dozens of broker-dealers have expressed interest in IP+, and  a few hundred advisers are licensing JourneyGuide,” he added. “We’re working with a well-known global financial services company and hope to announce a joint-venture with it that involves JourneyGuide. The expected underwriter of IP+ Indexed is an A-rated U.S.-based life insurer, to be announced in the coming weeks.”

As we did a year ago, RIJ is devoting much of its coverage in June to the topic of index-linked retirement products. The options strategies in indexed variable annuities (IVAs) were our focus on June 11. On June 4, we provided an analysis of first-quarter IVA sales, based on data from Wink, Inc. This week we write about a hybrid product that blends features of an indexed annuity and a single premium immediate annuity.

The method to our madness

Before we unpack the Ash-Achaean strategic partnership, let’s pause to consider a question that might be on your mind, especially if you’re a fee-based adviser: “Why annuities? Why insurance contracts? Why not rely on Modern Portfolio Theory (MPT) and diversify the clients’ risks among uncorrelated risky assets, like good old stocks and bonds?”

The short answer: Mortality credits and guarantees. Without an annuity, a retiree can’t accrue mortality credits (the extra income that comes from pooling longevity risk with other retirees) or get guarantees (which help retirees reserve their risk budgets for other opportunities). Low bond yields only make mortality credits more important. Guarantees help retirees sleep better at night.

But why an indexed annuity? Weren’t indexed annuities the bad boys of the insurance world? Yes, but times have changed. Most life insurers now see options (the reactor core of indexed annuities) as a safer, more productive way to get upside than either stocks or bonds, especially for the delivery of lifetime income. Now back to our story.

FIA engine on a SPIA chassis

Capturing mortality credits in IP+ Indexed was an essential design goal for Stensrud, Achaean’s CEO and a past retirement executive at Lincoln Financial. A SPIA can do that, but SPIAs didn’t meet Stensrud’s other design requirement: the ability to deliver rising income in retirement.

So, with Milliman actuary Tim Hill, Stensrud and his team welded an indexed annuity engine onto a SPIA chassis. The result is a SPIA that, like a fixed indexed annuity, captures part of the equity-market’s gains though the purchase of call options. IP+ Index also has a “surplus” fund to even out the monthly income across fat and lean years.

Lorry Stensrud

“Our edge is three-fold. It’s longevity-based, so you get mortality credits,” Stensrud said. “Benefit two is that we have the greatest potential for increasing income. Benefit three is the surplus account.”

As Hill described it, IP+ Indexed works like this: A contract owner’s purchase premium would go into a life insurer’s general fund. That premium, plus the growth of the general fund, finances lifetime income that can’t go down, plus options on an equity index. When the index rises, those options appreciate in value and supplement the client’s base income.

“We envision a three-year call option to start,” Hill told RIJ. “For the first three years [the client’s] income wouldn’t increase. At the end of the third year, we’ll look at how the index performed. If, for instance, the index were up 9% at the end of the third year, we would divide that by three and get 3%. In years four, five and six, we’d give the client the lesser of 3% or the inflation rate for the previous year.”

If inflation were one percent in the fourth year, for example, the client’s income would go up by 1%. The other two percent would go into a “smoothing” account (the surplus account), to grow at the same rate as the general fund. In years when equity gains don’t cover inflation, “we can add money from the smoothing account,” Hill added. “The goal is to deliver a smooth, well behaved, gradually increasing income stream using index methodology.

“Retirees might put 20%, 30% or 40% of their nest egg into IP+, to provide a layer of income on top of Social Security,” he said. “Payments would start out about five to eight percent lower than a straight SPIA, but higher than an inflation-adjusted SPIA. Then they’d increase over time.” Each increase establishes a new minimum guaranteed income level.

“As the surplus account grows, it can be used to offer income increases greater than inflation since the purpose of the product is to provide retirement income and not to accumulate a store of funds. Any balance in the surplus account becomes a death benefit. It is always the policyholder’s money,” said Lawrence Ryan, Achaean’s executive vice president.

IP+ Indexed is also more liquid than a SPIA. “If your circumstances change, you can take money out,” Hill said. “If you took out 20% of your money, for instance, your payments would go down by 20%. The total cash surrender value would be the [original] premium, minus income already paid out, with a market-value adjustment” for interest rate risk.

No trade-offs

Over the last several years, while Stensrud and Hill were perfecting their products and looking for a way to bring them to market, Ash was fine-tuning JourneyGuide, a tool designed not only for planning but for providing all the tests and documentation that registered reps at broker-dealers are expected to need in order to comply with the SEC’s “best interest” ethical standard for advisers, which goes into effect at the end of this month.

Though JourneyGuide is product-agnostic, Ash was also looking for income annuities that would improve retiree outcomes. So, after Stensrud and Ash Brokerage had their first meeting 18 months ago, Ash asked his team (headed by former Goldman Sachs financial engineer Michael Smith) to run Stensrud’s product through a JourneyGuide stress test.

JourneyGuide uses Monte Carlo simulations to see how well a product, relative to competing products or strategies, improves the size and sustainability of client’s income in retirement. “We do over five million calculations to test a product’s performance over poor markets, average markets, and bull markets,” Ash told RIJ.

“The tests show us the trade-offs in the product. The interesting thing about IP+ Indexed was that there were no trade-offs. For people who want income now, it outperformed just about every other instrument in the annuity space.” The competition included indexed annuities with guaranteed lifetime withdrawal benefits that deliver optimal income only after a 10-year waiting period.

A survey of Ash advisers showed demand for IP+ Indexed, at least in principle. At a recent Ash Brokerage Retirement Income Summit, 41 out of 51 advisers said they would be “highly likely” (based on a scale of 7 or more out of 10) to offer the product.

With respect to adviser compensation—always a factor in the annuity distribution world—IncomePlus+ Indexed can be sold either by commissioned registered reps or fee-based advisers. JourneyGuide uses a tool, created by CANNEX, to calculate the net present value of the expected annuity payments at any point during the life of retiree. The adviser can then apply his fee ratio to that number.

Satisfying ‘Reg BI’

With the Security and Exchange Commission’s Regulation Best Interest going into effect at the end of this month, advisers need products that demonstrably serve a client’s “best interest.” As those who familiar with the world of annuity sales know, advisers often recommend that clients swap old annuities for new ones, especially when there’s no early-withdrawal penalty for doing so. These swaps—called “1035 exchanges”—have long been a large source of new annuity sales.

To discourage churning by advisers, however, regulators require that replacement contracts be more valuable for the contract owner than the old contracts. That’s sometimes difficult to do, in part because older annuities—especially variable annuities with living benefits—are often more generous than newer ones.

IP+ Indexed is designed to solve this problem. Monte Carlo simulations have shown that it can deliver more monthly income, with a better chance of keeping pace with inflation, than the guaranteed lifetime withdrawal benefits on either variable annuities or indexed annuities.

What fees are associated with this product? As with most annuities that are sold by commission-taking advisers, the manufacturing and distribution costs are baked into the payout rates. The insurance company might charge 1.5% of the client’s account balance each year (about a third of what it earns on the client’s investment) for overhead and guarantees. Advisers might get either a 0.75% (of principal) trail each year by the insurer (if they work on commission) or 1% a year by the client (if they are fee-based) for ongoing advice.

Costs aside, IP+ Indexed, coupled with JourneyGuide, could be the solution that breaks through the insurance–investment barrier, and convinces a significant number of advisers and clients that combinations of insurance and investments are the most efficient way to finance retirement.

“This is the industry challenge,” said Ash. “Advisers still don’t know how good annuities are and they don’t know how to integrate them into financial plans.” But he believes the JourneyGuide software can show advisers how to do that, whether they use IP+ Indexed or another product in their plans. “We didn’t build JourneyGuide to sell annuities,” he said. “But we did prove that certain annuities may dramatically improve retirement outcomes.”

For previous RIJ articles on Achaean Financial and JourneyGuide, click here and here, respectively.

2020 RIJ Publishing LLC. All rights reserved.

How Equitable Invented the Structured Annuity

In 2008, the Great Financial Crisis hit Equitable (then AXA Equitable) hard. It had been a big competitor in the pre-crisis variable annuity “arms race,” where life insurers outdid each other with generous deferral bonuses on guaranteed lifetime withdrawal benefit riders.

When the stock market crashed and interest rates dropped, the assets that supported those guarantees lost value. Some VA issuers had to pony up lots of fresh capital. Equitable’s French parent (much like ING-USA’s Dutch parent) wanted to reduce its exposure to VAs.

So Equitable developed new products (while also offering to buy back some of its most costly VA contracts). The first new contract was its Retirement Cornerstone Series of VAs. The Cornerstone product had two investment sleeves, one risky and the other not. The value of the non-risky sleeve supported the income rider, and the client decided how to allocate between the two sleeves.

Then, though Equitable wasn’t a manufacturer of fixed indexed annuities, and its AllianceBernstein sibling didn’t create structured notes, Equitable’s in-house Innovation Hub, established after the financial crisis, invented the indexed variable annuity. Basically a structured note in an annuity wrapper, it used options to define the contract owner’s upside potential and level of downside protection. Though the contract owner would have the ability to convert the IVA value to a lifetime annuity if so desired, the product was intended mainly for accumulation.

Thus was Structured Capital Strategies (SCS) born. Thriving through the teen years of the 21st century, this product sparked what today is a healthy and growing $20 billion-a-year business. SCS has led this market in sales every year ($1.227 billion in the first quarter of 2020).

Equitable recently added a new feature to the SCS product suite, called Dual Direction. If the S&P 500 Index has lost up to 10% by the end of a five-year term, the client receives the equivalent percentage, up to and including 10%. If the market grows, the client can experience up to 100% of the upside gain over the five-year period.

Recently, RIJ spoke with Robin M. Raju, head of individual retirement at Equitable. When we asked Raju for the SCS “genesis” story, here’s what he told us:

Robin M. Raju

“Coming out of the [2008] crisis, it was clear that the variable annuity with living benefits was not economically sustainable. We wanted to get out of competing to offer the highest guaranteed roll-up rates. That’s when we switched to our Cornerstone product, which lent itself to a rising interest rate environment. We also did what we always do: We went out and started talking to our clients.

“We’re fortunate to have access to a force of 5,000 affiliated advisers. This was back in 2008 or 2009. Everyone was holding cash on the sidelines. We asked people, what type of product would you like to see in terms protecting retirement income. We also asked, what has changed for you? What are the needs of clients now? We found that people still wanted exposure to the equity markets. They also wanted some downside protection.

“Then we consulted with our internal think tank, the Innovation Hub. We have a good derivatives team, so we brought the problem to the team, and asked, Can this be solved with options in the financial markets? They said it could.

“What the client’s money earns in the general account—that money would fund part of the upside. With the Dual Direction enhancement that we introduced this year, we buy a call and a put at-the-money [i.e., options to buy or sell at the current price]. We also sell an out-of-the-money put to reintroduce the downside exposure beyond -10% (i.e., create the buffer), and buy and sell an out-of-the-money call to set the upside cap and finance the structure.

“Today, in our S&P 500 Index version, we can provide protection as far down as -10%, and still give the client 100% of the upside. [See today’s lead story for a description of the options strategy for more conventional IVAs.]

“Working with our affiliated advisors, we were able to sharpen the marketing story. It had to be simple, and not about all the bells and whistles of the product. So when we went to third-party distributors, we had a good story, and it was not about rates. It was about protection.

“This is a great product for these times, which are a lot like 2009-2010. There’s so much money sitting in cash, and this is better than cash. But it takes time to educate, to achieve growth, and to drive more growth. Two-thirds of our current sales probably come from third-party distributors, and about one-third from our affiliated force. We love the competition from other life insurers because it increases the overall size of the pie.

“To make this more transparent to the client, we created an app. It’s a simple app that advisers can use with clients or clients can use on their own. We update the cap rates every two weeks [on new contracts], and that reflects the market conditions. If volatility goes up, it produces higher upside participation. We’ve seen periods of high and low volatility since 2010, and the value proposition has held up well. The client benefit is always there.”

© 2020 RIJ Publishing LLC. All rights reserved.

Demand for income-generating products is underestimated: CANNEX

A survey conducted in mid-February captured the level of surprise among advisers and clients at the sharp economic downturn this spring. Only 6% of advisers and only 11% of client thought a downturn was very likely, according to the sixth annual Guaranteed Lifetime Income Survey (GLIS), published this week.

The GLIS studies, produced by Greenwald & Associates and CANNEX, have consistently shown that guaranteed lifetime income products become more attractive during market downturns and volatility. This year’s survey showed that 71% of clients said a guaranteed lifetime income product was a highly valuable addition to Social Security, up from 67% a year ago.

A summary of this year’s survey results can be found here.

“COVID-19 has upended lives, the economy, and financial markets in ways that are likely to drive demand for guaranteed lifetime income in retirement,” said Tamiko Toland, head of Annuity Research at CANNEX, a provider of annuity data and analytics.

The surveys have also shown that advisers consistently underestimate their clients’ interest in guaranteed lifetime income products, such as annuities. Only 14% of advisors believe their average client is “highly interested” in guaranteed lifetime income (GLI), but 42% of consumers say they are highly interested or already own a GLI product, according to the survey.

About three in five clients said advisors should include guaranteed lifetime income products in a retirement income strategy, the survey showed. Eight in ten believe advisors should present two or three options for producing income in retirement.

Regarding the SECURE Act, which was intended to encourage 401(k) plan advisers to offer annuities to their participants, three in ten advisors said they expected the availability of annuities in 401(k) plans to increase the amount of annuities they sell and 35% said it will make clients more receptive to annuities.

Estimates of monthly retirement income in employer sponsored retirement plans, mandated by the SECURE Act, are more helpful for retirement planning than savings goals or estimates of retirement expenses, consumers and advisers believe, according to the survey.

The GLIS covered 1,000 Americans ages 55 to 75 with $100,000 in investable assets or more, and 302 financial advisors with at least $15 million in assets under management.

The survey was conducted in mid-February, a month before the COVID-19 market crash.

Among clients, 11% considered a market downturn very or extremely likely in 2020 and 29% considered a downturn at least somewhat likely. A third (35%) of surveyed clients considered a downturn very or extremely likely within 5 years.

© 2020 RIJ Publishing LLC. All rights reserved.

These Hedges (Probably) Won’t Clip You

A 53-year-old actuary decided four years ago to buy a indexed variable annuity, or IVA. He wasn’t old enough yet for the “retirement red zone,” when a badly timed loss can be hard to recover from. He wanted higher yields, but was afraid to go longer into stocks.

After doing a small mountain of due diligence, he decided to move $50,000 from certificates of deposit into an AXA Equitable (now Equitable) Structured Capital Strategies IVA.

“My money was in savings or CDs, earning between 1% and 2.5%, and I wanted to earn more without too much risk,” he told RIJ recently. “So on June 15, 2016, I took $50,000 and bought a contract with a five-year ‘lock'” or term.

At the time, the S&P500 Index was between 2,000 and 2,100. The Russell 2000 Index was about 1,150. Within the contract, he put $12,500 each into these four crediting strategies:

  • -10% buffer, S&P 500 Index, 86% cap
  • -10% buffer, Russell 2000 Index, 67% cap
  • -20% buffer, S&P 500 Index, 38% cap
  • -20% buffer, Russell 2000 Index, 39% cap

To translate: If the S&P 500 Index rises over the next five years, he receives all of the gain up to 38% or 86% (depending on the buffer). If the Russell 2000 has a net gain, he receives up to 39% or 67%. If the index is down after five years, he loses nothing unless it has fallen more than 10% (or 20%, with the bigger buffer). Note that the larger caps come with smaller buffers.

For example, if the S&P 500 Index were up by 50% after five years, his investment earns 50% with the -10% buffer and 38% with the -20% buffer. If either of the indexes were down 25% after five years, his actual loss would be either 15% or 5%, depending on whether the -10% or -20% buffer applied.

“As long as the markets didn’t have a bad five-year run,” he said, “I knew I wasn’t going to lose any money.” Before we tell you exactly how he’s fared so far, here’s some background.

A member of the IVA target market, from a photo in an Equitable brochure.

How IVAs get priced

Indexed variable annuities, as a product category, have existed for only about 10 years. Only 11 life insurers in the U.S. manufacture them. Five carriers—Equitable, Brighthouse Financial, Allianz Life, Lincoln Financial, and CUNA Mutual—account for about 95% of annual sales. Sales topped $13 billion in 2018 and $17 billion in 2019. LIMRA SRI expects sales of $20 billion in 2020. The products are typically sold by commission-earning, securities-licensed advisers at independent broker-dealers and banks.

A kind of Goldilocks product for our perplexing, Fed-dominated times, IVAs are nonetheless complicated. Few people know much about options, and IVAs involve combinations of options on equity indexes or ETFs (exchange-traded funds). And while most advisers have a seat-of-the-pants sense that equity and bond returns will fluctuate around their long-term averages, they have no feel for the direction of IVA returns. Will these geese lay golden eggs or rotten ones?

Let’s walk through one of the purchases made by the actuary mentioned above. He assigned 25% of his $50,000 pool of money to a crediting method where he would receive all of the S&P 500 Index gains over five years up to a cumulative gain of 86%, or (if the index dropped over five years) would absorb any net loss beyond the first 10%.

‘Call spreads’ set the caps

How are the caps and buffers of these crediting methods achieved? By the life insurer’s purchase of a package of options from an investment bank. The IVA packages are priced according to current interest rates, volatility levels of the chosen index (according to the VIX Index), as well as the length of the term and the depth of the buffer that the client chooses. The prices of the options fluctuate over time, and caps on new business are adjusted as often as every two weeks.

Different combinations of options are possible, but here’s a common one:

  • To set the buffer, the insurer sells an out-of-the money put. A “put” is the right to sell at a certain “strike price.” “Out of the money” means the strike price is below the current index level. If the strike price is 10% below the current price, the client is exposed to net losses beyond that.
  • To set the cap, the insurer buys a call spread. He sells an out-of-the-money call (the right to buy the index at a strike price higher than current market price) and simultaneously buys an at-the-money call (the right to buy the index at today’s price). The strike price of the out-of-the-money call will be the cap on gains.

Here’s how Tim Hill, an actuary at Milliman, described the buffer:

“Suppose the index is down 5%. The 10% out-of-the-money (OTM) put I sold expires with no value,” he told RIJ. “I don’t have to pay anything and I take nothing from the customer account value. Suppose the index is down 15%. The 10% OTM put expires with a value of 5% (15% – 10%), so I take 5% from the customer’s account value. Suppose the index is down 25%. The 10% OTM put expires with a value of 15% (25% – 10%), so I take 15% from the customer’s account value.”

The insurer buys these options with its “hedge budget.” Where does this money come from? Part of it comes from the income generated by the client’s premium in the insurer’s general fund, minus the insurer’s expenses and profit. Part comes from selling the above-mentioned out-of-the-money put and out-of-the-money call. Those transactions generate revenue because the client is selling part of his downside protection (provided by the underlying bond investments in the insurer’s general account) and part of his upside potential (provided by the at-the-money call).

“We sell an out-of-the-money put in response to the customer’s choice of buffer and get cash up front for that,” Stephen Turer of Lincoln Financial told RIJ. “We take that cash and our investment yield and together, that’s the gross option budget. Then we buy the at-the-money call to set the cap.”

The hedge budget and the options prices are affected by many factors, including the insurer’s expenses, the sales commissions paid to advisers at broker-dealers or banks, its profit requirements, its sales appetite at any particular moment, as well as the level of market volatility and prevailing interest rates.

“We’ve heard from the investment banks, anecdotally, that options prices are a little smaller for structured products, especially when volatility is high. That can allow for fairly generous caps because the market is already pricing-in the volatility,” said a product manager at an insurance company who spoke on condition of anonymity.

IVAs are said to be well suited to the present environment, where volatility levels are high—which drives up the revenue from selling the put—and market interest rates are low—which reduces the yield of competing bonds, CDs or fixed annuities.

“This product works well in this environment of low rates and high volatility,” Lincoln’s Turer said. “A put option gets more valuable [for the seller] when rates go down, and a call gets a little more expensive [for the buyer]. When rates go down, it usually means that expected growth goes down, so the call option gets cheaper and downside protection gets more expensive.

“So the customer gets great value by sharing the downside risk,” he added. “That’s the cool part of it. The customers are sharing the risk, but on their own terms [by picking the level of exposure]. The IVA looks better right now than a fixed indexed annuity. It’s better than some of the other places you could put your money. It’s a great story.”

Our actuary’s experience

Last December 7, a Wall Street Journal columnist wrote warily (and slightly misleadingly) about IVAs. He focused on the buffer concept, and found its protections against loss too skimpy and unclear to the investor. (He didn’t specify that IVAs are not equity investments; they are, as described above, bond investments spiced with options on the performance of equity indexes.)

IVA owners can lose money, of course. Suppose someone’s crediting term ended on March 23, 2020, when the S&P 500 closed about a third below its mid-February peak. That investor would have locked in a 13% or 23% loss, depending on whether he had a -10% or a -20% buffer. The buffer would have prevented him from bearing the entire loss; but the contract may have prevented him from participating in the V-shaped rebound that has since followed.

The actuary mentioned at the beginning of this story, who works for a life insurance company (but not one that writes an IVA) seems pleased so far with his gamble on an IVA.

On the day we spoke, the S&P 500 Index was at 3,194 and the Russell 2000 was at 1,507. They were up 55% and 31% in the four years since he bought them as an alternative to CDs. “If the price stays at this level for the next year it means I made much more than if I were still sitting in savings,” he told RIJ.

“I’m getting the full upside on three out of four of my crediting strategies,” he said. Only his S&P 500 Index strategy with a -20% buffer has failed to deliver the entire index return; he gets 38% instead of 55%. “Buyers should also beware of this: I’m getting only 38% and 86% of the S&P 500 Index without dividends. Over the past 30 years, according to my calculations, the index without dividends has returned about 75% of the total return, with dividends.

“I think I understood exactly what I was buying,” he added, noting that no one should buy this type of product without understanding it. “If it turns out that I misunderstood what I was buying, I’ll be writing to you in a year—and totally blasting the salespeople by name.”

© 2020 RIJ Publishing LLC. All rights reserved.

 

Is Employer-Sponsorship of Plans Suboptimal?

Olivia Mitchell, a professor at the Wharton School and executive director of Wharton’s Pension Research Council, knows a lot about retirement systems. If she doesn’t know something, she can call any of the defined contribution or defined benefit experts she knows, from Philadelphia to Frankfurt and Singapore to Sydney.

In a recent article, “Building Better Retirement Systems in the Wake of the Global Pandemic,” she suggests that we need to rethink the idea of having employers sponsor retirement plans—and forcing them to deal with all the associated regulations and financial ramifications.

“Tying workers’ pensions (and in some countries, health insurance) to an employment relationship is quite risky when firms go out of business and worker mobility results,” she writes. “Therefore, in the wake of the pandemic, retirement and health insurance coverage are likely to be delinked from employer-provided plans in many countries, instead of continuing what was once termed ‘industrial feudalism’ under which workers were discouraged from leaving their firms for fear of losing their benefits.”

Olivia Mitchell

In an interview this week, we asked Mitchell what a non-employer plan might look like? “A multiple employer system could be one model,” she told RIJ, “but it would only allow portability for employees across firms in each system. A state-run system could be of interest, but only insofar as employees remain employed in that state.”

In her paper, she mentions tontines, as well as Singapore’s mandatory deferred income annuity, and shares the policy recommendations that she and other pension experts have made:

  • Generate and make available better data about mortality and morbidity patterns. These could help insurers price longevity risk around the world.
  • Develop guidelines for measuring and forecasting social security and pension assets and liabilities, as well as the assessment of long term care needs for the aging population.
  • Encourage delayed retirement, “delicately where possible.” One study has shown that older people might claim their social security benefits later and work longer if they could receive a partial lump sum when they finally claimed, in exchange for the deferral.
  • Create a centralized database that helps mobile workers track their pension accounts as they move across employers.
  • Improve the “gig economy,” since it gives older people flexible, part-time, and on-demand work opportunities. Though pension, health, and other employee benefits have traditionally not been provided to gig workers, that situation has begun to change.

Asked which of the systems she admires most, of those she’s seen around the world, she said, “As to which is the best: that’s a hard call. Each country has a different first pillar social security, tax, and social insurance system, so the pension platforms and designs in each must be integrated with these institutions as well. So what works in Australia might not work in the US, without some major redesign.”

It turns out that her type of defined contribution plan is the one she participates in.

“My favorite U.S. platform is the national educational retirement system that covers many of us in higher education,” she said. “Typically employees have a choice of a handful of money managers who are vetted/selected by the fiduciaries of each employer, but the pension accounts are fully portable across all university/research/medical system affiliates, with a national purview.

“TIAA/CREF was the first mover here, followed by many other fund managers across the land. The participating employers’ payroll systems are usually the conduits for the contributions to the custodian who allocates the funds to the requisite accounts,” Mitchell added. “It allows for national labor mobility, flexibility over contributions, and the potential for annuitization.”

© 2020 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Hear the ‘Stones on iHeartRadio, courtesy of Alliance for Lifetime Income

As the sole sponsor of the 2020 Rolling Stones “No Filter” tour, which was postponed due to COVID-19, the Alliance for Lifetime Income, which educates the public about annuities, has created an alternate way to experience the Stones.

Fans can listen to Rolling Stones music via the “iHeartRadio Stones No Filter Radio Tour.”

The six-city on-air tour on iHeartRadio’s Rock and Classic Rock stations will showcase an hour-long special of Rolling Stones music hits, interviews with the band, live recordings from past concerts, and an interview with the Rolling Stones tour production director, Dale “Opie” Skjerseth.

The events will be broadcast on local stations in Charlotte, Dallas, Detroit, Minneapolis, Pittsburgh and St. Louis, as well live-streamed on www.iheart.com and the iHeartRadio app. The series will be aired live on Friday nights from 9:00-10:00PM local time for six consecutive weeks, starting June 26. All six cities were part of the original 2020 “No Filter” U.S. tour, planned for May 8–July 9.

The stations hosting the radio concerts are as follows:

  • June 26 – St. Louis – KLOU 103.3
  • July 3 – Detroit – WLLZ 106.7
  • July 10 – Minneapolis – KQQL 107.9 (KOOL 108)
  • July 17 – Charlotte – WRFX 99.7
  • July 24 – Dallas – KZPS 92.5
  • July 31 – Pittsburgh – WDVE 102.5

iHeartRadio is also committing financial support on behalf of the Alliance to Feeding America food banks in the six tour cities.

The Alliance is a non-profit consumer education organization. It raises awareness and educates Americans about the need for protected lifetime income to cover basic expenses in retirement.

2020 was the second consecutive year that the Alliance was the sole sponsor of the Rolling Stones U.S. tour. In 2019, the Alliance said it reached 1.5 million concertgoers and 24 million social media followers with its education efforts.

Higher reserve requirements hurt life/annuity companies in 1Q2020

The U.S. life/annuity (L/A) industry posted a $23.1 billion net income loss in the first quarter of 2020, driven mainly by a 51% increase in expenses over the same prior-year period.

These preliminary financial results are detailed in a new Best’s Special Report, titled, “First Look – Three Month 2020 Life/Annuity Financial Results,” and the data is derived from companies’ three-month 2020 interim period statutory statements that were received by June 2, representing an estimated 91% of total industry premiums and annuity considerations.

According to the report, the L/A industry saw a $23.7 billion increase in total income to $230.4 billion for the period. However, a $94.1 billion increase in total expenses, mainly due to a combined $57.3 billion year-over-year increase in aggregate reserves for life and accident and health contracts at Prudential, Brighthouse, Jackson National, AXA Equitable and Transamerica, negated the rise in total income.

The growth in expenses led to the L/A industry reporting a net pretax operating loss of $50.1 billion, its first since 2008. A tax benefit of $8.5 billion and a $22.0 billion increase in net realized capital gains reduced the impact, resulting in the total industry net loss of $23.1 billion. Despite the net loss, capital and surplus for the industry remained flat from the end of 2019 at $405.4 billion, aided by a $17.9 billion change in unrealized gains and a $6.9 billion increase in asset valuation reserve.

AIG adds factor-based global index to its indexed annuity contracts

AIG Life & Retirement, a division of American International Group, Inc., will begin offering the new AQR DynamiQ Allocation Index as a crediting strategy option in AIG’s Power Protector Series of Index Annuities, according to an AIG release this week.

The multi-style index has been designed by AQR Indices, LLC, a subsidiary of AQR Capital Management, LLC. It is the first AQR index built for use in an indexed annuity, the release said.

The AQR DynamiQ Allocation Index dynamically allocates across global equity and fixed income markets. The index uses AQR’s style-based (factor) methodology to identify assets for a variety of market environments.

The AQR DynamiQ Allocation Index is not available for direct investment, only to help determine the interest earned in the index annuity. Assets allocated to the index annuity are protected against market downturns, so consumers never lose principal or any interest earned due to market volatility.

AQR’s index methodology is based on research into styles, or factors, that drive an asset’s performance, the AIG release said. The AQR DynamiQ Allocation Index is designed to boost performance potential while managing downside risk by combining five styles:

  • Value (cheap assets)
  • Momentum (assets that show positive long-term performance)
  • Carry (higher-yielding fixed income assets)
  • Defensive (higher quality, lower risk equities)
  • Trend (assets that show positive short-term performance)

These styles are dynamically allocated across asset classes and geographic regions on a monthly basis based on a systematic, rules-based process that seeks to take advantage of changing market conditions, the release said.

The AQR DynamiQ Allocation Index is available exclusively in the Power Protector Series of Index Annuities, which is issued by American General Life Insurance Company and distributed primarily through independent marketing organizations.

TruChoice advisers get access to Envestnet Insurance Exchange

TruChoice Financial Group, LLC, a distributor of insurance products to investment advisors, registered representatives, and insurance agents, has arranged for its advisers to use the Envestnet Insurance Exchange, allowing them to hold annuities and insurance alongside managed accounts.

To implement the partnership, TruChoice will work with Fiduciary Exchange LLC (FIDx), the fintech that powers the Exchange. TruChoice advisers can now generate proposals, do research, open insurance policies, manage in-force transactions, and create client reports without leaving the Envestnet platform.

The Envestnet Insurance Exchange connects the brokerage, insurance, and advisory ecosystems, and provides management of annuity solutions from pre- to post-issuance. Investment advisors and registered representatives utilizing TruChoice can seamlessly plan, research, generate proposals, open policies, manage in-force transactions, and create client reports within the Envestnet platform.

Minneapolis-based TruChoice was established in early 2018 as an umbrella for its four founding firms—American Financial, Ann Arbor Annuity Exchange, GamePlan Financial Marketing, and The Annuity Store. These four organizations wholesale fixed-income annuities, life insurance, and long-term care insurance. In 2018, their advisers sold over $2.85 billion in fixed-income annuity business and $25 million in life insurance business.

The Envestnet Insurance Exchange supports a wide range of commission- and fee-based annuities from AIG Life & Retirement, Allianz Life, Brighthouse Financial, Global Atlantic Financial Group, Jackson National Life Insurance Co., Nationwide, Prudential Financial, and Transamerica.

Troubled muni bonds weigh on insurers: AM Best

Given the severe medium-term impacts on the municipal bond markets driven by the pandemic, according to a new AM Best special report.

The significant decline in revenue of states and cities during the COVID-19 pandemic likely will affect municipal bondholders, according to a recent Best’s Special Report, “Severe Test for the Municipal Bond Market.”

The report describes insurers’ muni exposures as “significant.” “U.S. insurance companies with more significant exposures, particularly revenue bonds for the more vulnerable sectors such as transportation and retail, are more likely to feel the negative market effects,” a release from A.M. Best said.

More than two-thirds of the municipal bonds held by insurers are from New York, New Jersey, Illinois, Massachusetts, California, and others hit hard the pandemic.

Of the three major insurance segments, property/casualty insurers have the greatest municipal bond exposure, although it has decreased by 20% since 2016, when the Tax Cuts and Jobs Act made the tax-exempt status of this asset class less advantageous.

Nevertheless, the segment’s exposures remain considerable, as municipal bonds constitute nearly 14% of the property/casualty segment’s invested assets, compared with 12% and 4.1% for the health and life/annuity segments, respectively.

The life/annuity segment’s municipal bond exposures represent 42% of their capital and surplus, exceeding that of other two segments. Companies rated by AM Best account for nearly 90% of the insurance industry’s municipal bond holdings.

Given their relative value and tax-exempt characteristics, municipal bonds will continue to play a role in an insurer’s strategic asset allocation. However, selecting appropriate exposures will be critical to insurers’ ability to manage through this tumultuous cycle. “The expertise and risk management practices of insurers and their investment managers will be tested,” said Jason Hopper, associate director, industry research and analytics. “Insurers that have a deep understanding of the municipal bond markets and well-defined risk thresholds based on solid credit risk fundamentals will perform better during and after the pandemic crisis.”

All asset classes have been affected by the pandemic, providing yet another illustration of rising correlations during times of stress. AM Best will continue to monitor the overall impact of deteriorating conditions on insurers’ ability to maintain adequate capital appropriate for their business and investment risks.

Owners of self-directed retirement accounts holding more cash: Schwab

The average account balance of self-directed brokerage accounts (SBDAs) held by retirement plan participants was $252,675 at the end of 1Q2020, down 6% from 1Q2019 and 14% from 4Q2019, according to Charles Schwab’s latest SDBA Indicators report.

SDBAs are brokerage accounts within retirement plans, including 401(k)s and other types of retirement plans, that participants can use to invest retirement savings in stocks, bonds, exchange-traded funds, mutual funds and other securities that are not part of their retirement plan’s core investment offerings.

The first quarter SDBA Indicators Report also showed Trading volumes increased in the first quarter of 2020 compared with the previous quarter, with an average of 13 trades per account, up from seven in Q4 2019. These trends matched trends in broader investor activity during the turbulent first quarter of 2020.

Asset allocations remained similar to last quarter, with the exception of an increase Cash holdings rose to 19% in 1Q2020 from 12% in 4Q2019. Mutual funds continue to represent 34% of participant assets (34%), followed by equities (27%), cash (19%), ETFs (17%), and fixed income (3%).

Allocation trends

Mutual funds: Large-cap funds had about 30% of all mutual fund allocations, followed by taxable bond (22%) and international (14%) funds.

Equities: Information technology remained the largest equity sector holdings at 29%, up from 27% last quarter. Apple (AAPL) continues to be the top overall equity holding, comprising 11% of the equity allocation of portfolios.

The other equity holdings in the top five include Amazon (AMZN) (6.5%), Microsoft (MSFT) (3.6%), Berkshire Hathaway (BRKA) (2.5%), and Tesla (TSLA) (2.1%).

ETFs: Among ETFs, investors allocated the most dollars to U.S. equity (48%), followed by U.S. fixed income (18%), international equity (13%) and sector ETFs (10%).

Report highlights

On average, participants held 10 positions in their SDBAs at the end of Q1 2020, which has remained steady both year-over-year and quarter-over-quarter. Gen X made up approximately 43% of SDBA participants, followed by Baby Boomers (37%) and Millennials (14%).

Baby Boomers had the highest SDBA balances at an average of $367,425, followed by Gen X at $199,071 and Millennials at $65,207. Gen X had the most advised accounts at 45%, followed by Baby Boomers (41%) and Millennials (11%).

‘Schwab Stock Slices’ now available

Schwab also announced that its new Schwab Stock Slices service is now available in the Schwab Personal Choice Retirement Account, the firm’s SDBA offering. The service lets investors own any of America’s leading companies in the S&P 500 for as little as $5 each, even if their shares cost more. Investors can use the new service to purchase a single stock slice or up to 10 different Stock Slices at once, and they can hold slices of as many S&P 500 companies in their account as they wish through multiple purchases. Schwab Stock Slices are purchased commission-free online, just like regular stock trades at Schwab.

The SDBA Indicators Report includes data collected from approximately About 145,000 retirement plan participants with balances between $5,000 and $10 million in their Schwab Personal Choice Retirement Account were surveyed for the latest SDBA Indicators Report. Schwab extracts data quarterly from all accounts that are open as of quarter-end and meet the balance criteria.

Empower on path to implementing SEC’s ‘Reg BI’

With the Securities and Exchange Commission’s (SEC) Regulation Best Interest set to take effect June 30, Empower Retirement will continue to act as a fiduciary for its client retirement plans, the Denver-based full-service retirement plan provider said this week.

Empower serves approximately 9.6 million individuals through defined contribution retirement plans, Individual Retirement Accounts and retail brokerage accounts.

In a release, Empower said it “will continue to expand the scope of its field representative service model so that individual retirement plan participants can discuss investment strategies with their Empower representative.”

“Reg. BI,” as the new SEC rule is known, requires broker-dealers and their registered representatives to act in the best interest of their retail customers, including both plan participants and IRA owners, when recommending securities and investment strategies, including rollovers and account-type recommendations.

The regulation is designed to ensure that broker-dealers and their registered representatives act under a higher standard of care when making such recommendations to everyday investors..

Investment advice provided to participants in retirement plans that are subject to the Employee Retirement Income Security Act (ERISA) must satisfy ERISA’s fiduciary conduct standards. Empower representatives offer fiduciary investment advice designed to meet ERISA’s standards, to participants in both ERISA and non-ERISA plans.

Reg. BI applies to investment recommendations made to retirement plan participants in 401(k), 403(b) and 457 plans, among others, as well as IRA owners and retail brokerage customers. It does not apply to interactions with plan sponsors or plan advisors and representatives.

Empower will continue to provide investment education to those plans that have not authorized Empower’s advice service, and those participants and retail customers who are interested in making their own investment choices without a recommendation or advice from Empower.

When allowed by the plan sponsor, field representatives of Empower’s registered investment adviser (RIA), provide fiduciary advice to plan participants who seek it. As such, Empower will update disclosure and procedures around client interactions, and its supervisory structure in place through Empower Advisory Services.

Under Reg. BI, broker-dealers will need to diligently collect information to determine if an investment is in the individual’s best interest. The registered representatives of the broker-dealers must disclose to the individual any conflicts of interest they have—such as payments from companies whose products they recommend.

Lincoln expands retirement plan investment options

Lincoln Financial Group is offering a new Multi-Manager solution built on Lincoln Variable Investment Product (LVIP) funds within the Lincoln Director program.

Lincoln Director Multi-Manager gives plan sponsors access to more than 80 LVIP funds with Lincoln Investment Advisors Corp. (LIAC) serving as the investment advisor. LIAC provides unbiased, third-party oversight over the selection of fund managers from a stable of experienced sub-advisory firms to provide day-to-day portfolio construction. Financial professionals and their clients can construct their investment lineup from the LVIP fund list, or they can choose to receive 3(38) fiduciary support from Morningstar Investment Management LLC to develop, monitor and update the portfolios on an ongoing basis. In addition, financial professionals have access to Lincoln Financial’s Client Investment Support team.

The Lincoln Director Multi-Manager funds also offer YourPath Multi-Manager collective investment trust (CIT) portfolios. By offering multiple glide path options based on risk tolerance, YourPath CIT portfolios provide a more personalized target-date investment for retirement plan participants. The selection of these portfolios allows plan sponsors to offer participants conservative, moderate and growth glide paths developed by Morningstar Investment Management. Plus, they may be used as a plan’s Qualified Default Investment Alternative (QDIA), Lincoln’s release said.

Troubled muni bonds weigh heavy on insurers: AM Best

Given the severe medium-term impacts on the municipal bond markets driven by the pandemic, according to a new AM Best special report.

The significant decline in revenue of states and cities during the COVID-19 pandemic likely will affect municipal bondholders, according to a recent Best’s Special Report, “Severe Test for the Municipal Bond Market.”

The report describes insurers’ muni exposures as “significant.” “U.S. insurance companies with more significant exposures, particularly revenue bonds for the more vulnerable sectors such as transportation and retail, are more likely to feel the negative market effects,” a release from A.M. Best said.

More than two-thirds of the municipal bonds held by insurers are from New York, New Jersey, Illinois, Massachusetts, California, and others hit hard the pandemic.

Of the three major insurance segments, property/casualty insurers have the greatest municipal bond exposure, although it has decreased by 20% since 2016, when the Tax Cuts and Jobs Act made the tax-exempt status of this asset class less advantageous. Nevertheless, the segment’s exposures remain considerable, as municipal bonds constitute nearly 14% of the property/casualty segment’s invested assets, compared with 12% and 4.1% for the health and life/annuity segments, respectively.

The life/annuity segment’s municipal bond exposures represent 42% of their capital and surplus, exceeding that of other two segments. Companies rated by AM Best account for nearly 90% of the insurance industry’s municipal bond holdings.

Given their relative value and tax-exempt characteristics, municipal bonds will continue to play a role in an insurer’s strategic asset allocation. However, selecting appropriate exposures will be critical to insurers’ ability to manage through this tumultuous cycle. “The expertise and risk management practices of insurers and their investment managers will be tested,” said Jason Hopper, associate director, industry research and analytics. “Insurers that have a deep understanding of the municipal bond markets and well-defined risk thresholds based on solid credit risk fundamentals will perform better during and after the pandemic crisis.”

All asset classes have been affected by the pandemic, providing yet another illustration of rising correlations during times of stress. AM Best will continue to monitor the overall impact of deteriorating conditions on insurers’ ability to maintain adequate capital appropriate for their business and investment risks.

Emory University 403(b) fee suit moves toward settlement

A preliminary settlement approval motion on behalf of Emory University employees and retirees in their suit against the university involving their 403(b) retirement plan has been filed by their counsel, Schlichter Bogard & Denton, the St. Louis-based scourge of retirement plan sponsors and service providers.

The complaint, Henderson, et al., v. Emory University, et al., was originally filed in the U.S. District Court in the Northern District of Georgia in Atlanta in August 2016. The plaintiffs sued for alleged breach of fiduciary duty under the Employee Retirement Income Security Act (ERISA).

Emory denied it committed any fiduciary breach in its operation of its plan. The settlement creates a $16.75 million settlement fund for the plaintiffs, and non-monetary changes in rules governing the 401(k) plan.

The case was part of a group of cases filed by Schlichter Bogard & Denton, LLP, which is the first law firm ever to sue a university 403(b) plan alleging excessive fees. Schlichter Bogard & Denton, LLP also filed the first cases over excessive fees in 401(k) plans.

The complaint alleged that Emory University breached its duties of loyalty and prudence under ERISA by causing plan participants to pay excessive fees for both administrative and investment services in the plan.

Besides the financial compensation, Emory agreed:

  • To conduct a Request for Proposals for bids on recordkeeping fees;
  • To prohibit the recordkeeper from using confidential information obtained from Emory employees and retirees to market IRA’s, insurance, and wealth management services
  • To hire an independent consultant to make recommendations regarding plan investments
  • To inform plan participants of changes in plan structure.

According to the motion, Schlichter Bogard & Denton, LLP will monitor Emory’s compliance with the terms of the settlement for three years.

© 2020 RIJ Publishing LLC. All rights reserved.

Does Your Suffering Need Buffering?

Ten short years ago, the annuity developers at AXA Equitable (now Equitable Financial) faced a dire challenge. Their flagship variable annuity had become an albatross, thanks to volatility and low rates in the wake of the Great Financial Crisis. They needed to create a new vehicle for the new environment.

So they invented the “structured” or “indexed” variable annuity (IVA). For gains, it relied on the purchase of options on an equity index. It posed a risk of loss for the client—but a “buffer” broke the fall. It was essentially a structured note in an annuity wrapper.

Sales of the quirky product blossomed, breathing life into Equitable Financial’s bottom line. Other annuity issuers took notice. They created IVAs of their own, gradually eating into AXA’s market share. So far, 11 life insurers have launched IVAs, most recently Prudential.

The IVA is now the darling of annuity issuers and distributors. At less than $5 billion, its 1Q2020 sales were still much less than sales of fixed indexed annuities (FIAs) ($16.4 billion) or variable deferred annuities ($25.6 billion). But, year over year, only IVA sales have risen.

“Structured annuities are the new shining star of the annuity market,” said Sheryl Moore, CEO of Wink, Inc., the Des Moines-based annuity market analysis firm. “There’s a perfect storm fueling sales for this product, as there was for fixed indexed annuities after 2008. This is where life insurers will start focusing their product development resources.”

For the second consecutive June, Wink and RIJ are collaborating on a four-week series of articles about the indexed annuities market. This year we’re drilling down on IVAs, but we won’t ignore other parts of the market. In this article, we’ll use IVA data from Wink’s Sales and Market Report for first-quarter 2020 as a framework for discussion.

Top IVA Issuers

For the past five quarters, the same companies in the same order have been the top five sales leaders: Equitable Financial, Brighthouse, Allianz Life, Lincoln National and CUNA Mutual. These five companies alone account for 95% of annual sales. While scores of life insurers sell variable deferred or fixed deferred annuities, only 11 companies sell IVAs so far. Equitable has led in sales since 2010, and has had the largest share of the indexed variable annuity market since creating the category in 2010. But that market share has gradually slipped from 100% to 50% to the present 25%. Among its competitors, the fastest follower seems to be Lincoln—whose high sales growth rate reflects its relatively recent entry into the market, in 2018.

The upward trend in IVA sales is expected to continue this year. After IVAs sold $11.2 billion in 2018 and $17.4 billion in 2019, LIMRA Secure Retirement Institute (SRI) expects another bump in 2020—for a near doubling in two years. “We’re expecting registered index-linked annuities (IVAs) sales of $19 billion to $21 billion this year,” Todd Giesing, senior annuity research director, SRI, said in an interview.

Top-selling IVA contracts

We’ll look more closely at the five best-selling contracts. In most cases, they offer links to the performance of the S&P 500 Index, the Russell 2000 Index, and the MSCI-EAFE global index; options on these popular indexes are liquid and priced efficiently. A few other indexes are offered for variety, as noted below. All of the products are registered securities, but, as retirement savings products, they offer tax-deferred growth.

Most of these contracts allow owners to opt (in advance) for a fixed, positive rate of return if the index return is zero or positive. This feature goes by multiple names; it is variously called a Step Rate, a Step Up, a Precision Rate, and a Trigger Rate. It tends to be available only when the one-year term crediting option and -10% buffer are chosen, and ranges varies from 7.75% to as much as 14%. Contract owners can divide their principal among different crediting strategies.

The leading contracts all offer the client some protection against downside risk through their buffers. All feature a -10% downside buffer; Allianz Index Advantage also offers a floor. Deeper levels of protection, such as -15%, -20%, -25%, and -30% buffers, are offered in different combinations within different contracts. Lincoln Level Advantage offers 100% downside protection, which matches the protection of an FIA. With a buffer, investors lose nothing until market losses exceed the buffer limit. With a floor, investors can’t lose more than the floor limit.

These five contracts include death benefits and six-year surrender-charge periods (typical of products sold by commission). Enhanced death benefits are sometimes available for a surcharge, and the first-year penalty (e.g., 7%) for withdrawals greater than 10% of the contract varies by company.

(We wish we could describe or at least mention many of the other indexed variable annuities offered by the 11 life insurers in this niche. We’ll try to make up for that in a future article. Please note that, while we’ve tried to publish up-to-date rates, the rates available on new products change frequently. )

Lincoln National Life Level Advantage B-share. “Uncapped” crediting strategies are a big sales hook in the (fixed and variable) indexed annuity market, implying that the client will earn 100% of the index return (dividends excluded), however high it goes. Lincoln’s Level Advantage offers an uncapped strategy on four indexes, but only when clients leave their money in for six years, accept a -10% buffer, and link their investment to the performance of the Capital Strength Index, which invests in 50 stocks hand-picked by First Trust Advisors for favorable cash-on-hand levels, debt ratios and volatility. The contract also offers “100% participation” crediting methods on three-year holding periods with a -10% buffer.

Owners of this contract can also invest part of their balances in any of 14 investment options. They can access Lincoln’s patented i4Life lifetime income option, for an extra fee of 40 basis points per year. This contract gives the client the option to lock in gains at the end of each contract year of a six-year term, rather than waiting six years to lock in gains.

Brighthouse Life Shield Level 6. Not to be outdone on offers of upside potential, this contract offers a 300% participation rate on the performance of the large-cap S&P 500 Index, the MSCI-EAFE Index and a 90% participation rate on the small-cap Russell 2000 Index. But that option requires a six-year holding period and acceptance of net losses beyond the first 10%. “Level 6” refers to the six-year surrender period; there’s also a Level 3 product with no surrender penalties after a three-year holding period.

Equitable Structured Capital Strategies Plus. Only a few weeks ago, Equitable enhanced this product with a new optional feature called “Dual Direction.” If, at the end of the six-year term, the index return is between zero and -10%, the client will receive a gain equal to the loss. That is, if the S&P 500 was down 6% after six years, the client would earn 6% over six years. Structured Capital Strategies also offers uncapped upside on the six-year term option linked to the S&P 500 Index and MSCI-EAFE.

Allianz Index Advantage. Unlike the other leading contract, the Index Advantage includes an 1.25% “product fee.” This annual fee, paid by the contract owner, gives the product a bigger hedge budget. This presumably allows the purchase of more upside-potential from the options sellers. Another version (“Index Advantage NF”) has no product fee. This contract also has a $10,000 minimum initial premium—considerably less than the $25,000 some competitors require. This product is alone in offers “floor” in addition to a buffer. The floor protects the contract owner from losses in excess of 10%.

Allianz Index Advantage Income. Otherwise identical to Index Advantage, this contract offers a rider that guarantees income for life. The income rider costs 70 basis points of the contract value per year. At age 67, for example, a contract owner could receive 5.70% of the contract value each year for life (5.20% for a couple). An inflation-averse contract owner can opt for an annual increase in the payout percentage but the first-year payout percentage will be lower. For instance, at age 67, the payouts would be only 4.90% for a single owner (4.40% joint) but the payout percentage would go up by 40 basis points every year thereafter. The minimum initial premium for the contract only $5,000.

Where IVAs are sold, and who sells them

Annuity products may be complex and hard to understand, but annuity “distribution” is arguably even harder to grasp. Different annuity contracts travel different routes from manufacturer to wholesaler to distribution firm to adviser to client. Depending on product design, certain annuities can be sold by certain kinds of advisers in some venues but not others. 

Because investors can lose money on them, IVAs must be registered with the Securities and Exchange Commission and only securities-licensed advisers can sell them. IVAs are typically sold by commission, so representatives of RIAs (Registered Investment Advisors), can’t sell them; RIAs charge a percentage of the value of the assets they manage.

Consequently, most IVAs are sold by investment advisers at either independent broker-dealers (55%) or at banks (27%). Insurance agents without securities licenses—who are the biggest sellers of fixed indexed annuities—can’t sell them. Wealth managers at full-service brokerages (aka “wirehouses”) generally do not sell them, preferring to sell their companies’ proprietary structured products, according to Giesing.

Most popular contract structures

In their search for higher yields, more contract owners appear to be opting for the longer-term versions of these products, according to Wink’s data. In 1Q2019, 95% of the IVA contracts (by premium volume) used one-year point-to-point crediting methods. In other words, clients locked in gains (or losses) on each contract anniversary. (This particular data was based on responses from two-thirds of companies surveyed and covered 51% of premium.)

But a year later, in 1Q2020, 37% of premium volume went to contracts where investors chose to keep their money invested for terms longer than one-year. The six-year term is popular because it offers some of the highest and most alluring potential gains. Generally, the longer the holding period, and the smaller the downside buffer, the higher the upside potential for the crediting method, regardless of the index selected.

“The pricing will be more favorable with the longer-durations,” according to SRI’s Giesing. “Investors are also opting for more downside protection. As market volatility has increased, issuers are seeing more flows into the larger buffers—the -20% and -30% buffers.”

Wink’s survey suggests that investors are comfortable with the buffer concept. For more than three-quarters of premium, the contract owner chose a downside buffer (where the owner’s losses don’t start until the account value has dipped by at least 10%), 13.8% chose a downside floor (where the owner absorbs losses up to 10%, but no farther), and 9.9% chose 100% protection—thereby turning their IVA into the equivalent of a super-safe FIA with a maximum upside of only about 3.4% per year.

Additional sales patterns

Qualified sales (where the premium is paid with tax-deferred money) represented 62% of total first quarter structured annuity sales, with 64% of the premium coming from Individual Retirement Accounts (IRAs) and 36% from employer-sponsored retirement plans. The average issue age from all contracts was 62. The evidence suggests that older investors are buying this product to protect their assets during the so-called “red zone” around the retirement date, when they are vulnerable to losses that they don’t have time to recover.

The average structured annuity sales premium reported was $138,685 a decline of nearly 3%, compared to the previous quarter. The average structured annuity premium ranged from $43,786 to $677,524. The policy count overall was 18,982 policies for the quarter, an increase of more than 6% as compared to the previous quarter. The average policy count per issuer was 2,109.

© 2020 RIJ Publishing LLC. All rights reserved.