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AIG and CUNA Mutual enhance variable annuities

AIG refreshes income benefits on Polaris variable annuities

AIG Life & Retirement, a division of American International Group, Inc., has enhanced some of its Polaris variable annuities to give “greater flexibility, personalization and control” to owners of these retirement accumulation and income-generating contracts.

The Polaris Income Plus Daily Flex and Polaris Income Plus Flex riders will have higher lifetime income rates. Contract owners will also be able to create their own combinations of features and investments more easily, an AIG release said.

Within a new Build Your Own Allocation open architecture option, contract owners and advisors can choose from 77 portfolios across 12 different asset classes to build a variable annuity investment portfolio. They will be able to:

  • Add money to the contract after the first contract year
  • Take early withdrawals if needed without locking in lifetime withdrawal rates
  • Make income benefit changes in response to changing life events (such as marriage, divorce or death of a spouse) and changing income needs or preferences at retirement.

AIG recently announced “Plan for 100,” a campaign to educate individuals, employers and financial advisors about using annuities to reduce the risk of running out of money in retirement. A new website (Planfor100.com) and a new podcast series are part of the campaign.

New CUNA Mutual Group contract has variable annuity and indexed variable annuity sleeves

CUNA Mutual Group has issued Horizon II, a new iteration of the MEMBERS Horizon Variable Annuity, with an enhanced death benefit that provides the greater of total purchase payments or current contract value. Policyholders can also invest in risk-control accounts to moderate account volatility.

Horizon II investors can allocate part of their retirement savings to a variable portfolio with equity, fixed income and specialty subaccount options. The rest can be allocated to risk control accounts linked to various market indexes, with a customized downside floor and upside cap. Each year, the owner can adjust their risk control limits.

A product illustration tool is available for appointed advisors. The tool shows how allocations to the risk control accounts and variable subaccounts could perform over a chosen time period and also illustrates the death benefit feature. The final printed output can be provided to clients.

Available in nearly all 50 states, Horizon II is sold by prospectus through registered representatives and is underwritten by MEMBERS Life Insurance Company, a subsidiary of CUNA Mutual Group.

© 2019 RIJ Publishing LLC. All rights reserved.

Facebook’s Libra Must Be Stopped

 

Facebook has just unveiled its latest bid for world domination: Libra, a cryptocurrency designed to function as private money anywhere on the planet. In preparing the venture, Facebook CEO Mark Zuckerberg has been in negotiations with central banks, regulators, and 27 partner companies, each of which will contribute at least $10 million. For fear of raising safety concerns, Facebook has avoided working directly with any commercial banks.

Zuckerberg seems to understand that technological innovation alone will not ensure Libra’s success. He also needs a commitment from governments to enforce the web of contractual relations underpinning the currency, and to endorse the use of their own currencies as collateral. Should Libra ever face a run, central banks would be obliged to provide liquidity.

The question is whether governments understand the risks to financial stability that such a system would entail. The idea of a private, frictionless payment system with 2.6 billion active users may sound attractive. But as every banker and monetary policymaker knows, payment systems require a level of liquidity backstopping that no private entity can provide.

Unlike states, private parties must operate within their means, and cannot unilaterally impose financial obligations on others as needed. That means they cannot rescue themselves; they must be bailed out by states, or be permitted to fail. Moreover, even when it comes to states, currency pegs offer only an illusion of safety. Plenty of countries have had to break such pegs, always while insisting that “this time is different.”

What sets Facebook apart from other issuers of “private money” is its size, global reach, and willingness to “move fast and break things.” It is easy to imagine a scenario in which rescuing Libra could require more liquidity than any one state could provide. Recall Ireland after the 2008 financial crisis. When the government announced that it would assume the private banking sector’s liabilities, the country plunged into a sovereign debt crisis. Next to a behemoth like Facebook, many nation- states could end up looking a lot like Ireland.

Facebook is barreling ahead as if Libra was just another private enterprise. But like many other financial intermediaries before it, the company is promising something that it cannot possibly deliver on its own: the protection of the currency’s value. Libra, we are told, will be pegged to a basket of currencies (fiat money issued by governments), and convertible on demand and at any cost. But this guarantee rests on an illusion, because neither Facebook nor any other private party involved will have access to unlimited stores of the pegged currencies.

To understand what happens when regulators sit on their hands while financial innovators create put options, consider the debacle with money market funds in September 2008. Investors in MMFs were promised that they could treat their holdings like a bank account, meaning they could withdraw as much money as they put in whenever they wanted. But when Lehman Brothers collapsed, MMF investors all tried to cash out at the same time, whereupon it became clear that many funds could not deliver. To forestall a widespread run on all MMFs and the banks that backed them, the US Federal Reserve stepped in to offer liquidity support. A run on Libra would require support on a much larger scale, as well as close coordination among all central banks affected by it.

Given these massive risks, governments must step in and stop Libra before it launches next year. Otherwise, as Maxine Waters, the Chairwoman of the US House Committee on Financial Services, has warned, governments may as well start drafting their own living wills.

In the parlance of finance and banking, a “living will” is a written plan that banks provide to regulators describing how they will unwind themselves in the event of insolvency. In the case of a government, a living will would have to explain how the relevant authorities would respond to Libra breaking its peg and triggering a global run.

Obviously, this raises a number of pertinent questions. Would governments vow, like former Fed chairman Ben Bernanke in September 2008, followed by European Central Bank President Mario Draghi in July 2012, to do “whatever it takes” to ensure the currency’s survival? Would they even have the capacity to do so, let alone coordinate their actions – and share losses – with all the other countries involved? Would governments be able to seize control of the system if it proves incapable of sustaining itself?

Silence in response to Facebook’s announcement this week is tantamount to endorsing its dangerous new venture. Governments must not allow private, profit-seeking parties to put the entire global financial system at risk. If banks are “too big to fail,” then states definitely are. If governments fail to protect us from Facebook’s latest act of hubris, we will all pay the price for it.

Katharina Pistor is Professor of Comparative Law at Columbia Law School. She is the author of The Code of Capital: How the Law Creates Wealth and Inequality.

© 2019 Project Syndicate.

Making a Case for the COLA-SPIA

People tend to hyperventilate about the inflation of the 1970s. But the decade was exuberant for me, especially after the economy started to recover from the 1974-75 bear market. My take-home pay tripled in the 70s (from a very low base). My bachelor expenses (basement apartment, 10-year-old Beetle) were trivial.

So I don’t have the inflation-related post-traumatic distress that someone who endured, for example, Israel’s triple-digit inflation in the early1980s. As I look ahead to retirement, inflation risk isn’t one of my primary sources of financial anxiety. Maybe it should be.

Recently I followed an email conversation between pension legend Zvi Bodie of Boston University, retirement blogger Dirk Cotton, Morningstar retirement researcher David Blanchett, and CFP/actuary Joe Tomlinson about inflation-adjusted income annuities, with the annual payout either indexed to inflation or increased each year by a fixed percentage (a cost-of-living-adjusted or COLA SPIA).

Bodie and Cotton felt strongly that buying an inflation-adjusted SPIA instead of a fixed SPIA (for those who buy SPIAs) is a no-brainer. No other contract provides stable purchasing power throughout retirement. And what good is declining purchasing power—as a fixed SPIA would deliver—over a 25-year or 30-year retirement?

Blanchett felt otherwise. If a retiree has other assets that can keep up with inflation—stocks, Social Security benefits—and if the SPIA represents only a fraction of the wealth on his or her household balance sheet, then perhaps the retiree could rely on those things to hedge against inflation. He may also have remarked that the Treasury yield curve doesn’t reflect much in the way of inflation fears.

As I read their exchange of messages, I remembered that Bodie long ago rejected the idea that stocks are certain to out-perform in the long run and keep pace with inflation. If stocks were always a sure long-run bet, put options on equities should get cheaper as they get longer-dated, he has pointed out. But they don’t. And what if inflation drives up interest rates and stocks collapse? That doesn’t sound like the recipe for a safe harbor from inflation.

If stocks in fact are not reliable inflation hedges, then the argument for an inflation-adjusted SPIA is obviously much stronger. The more I think about it, the more sense it makes. We demand inflation-indexed Social Security benefits, so why shouldn’t we insist on the same from our SPIAs?

Tomlinson agrees with Bodie. “I’m not a fan of the stock market, in particular, as providing an inflation hedge. I don’t think the history of stock market performance supports that,” Tomlinson told RIJ in an email this morning. “And why shouldn’t my goal be to have 100% (not 80%) of my money for retirement be in the retirement “currency,” i.e., spending power.”

But hardly anyone buys inflation-adjusted SPIAs because their first-year income is so dramatically lower than the income from a fixed SPIA. (Only company, Principal, offers a true inflation-indexed SPIA. About 15 companies offer SPIAs with various annual COLA adjustments.) The starting payout for a life-only COLA-SPIA for a $100,000 premium is currently about $4,200, according to CANNEX.

I couldn’t help noticing that a $4,200 fixed SPIA with a cash refund (according to immediateannuities.com) costs only about $68,000. That’s a big difference. It occurs to me that I might buy the fixed SPIA and stash the remaining $32,000 in a side fund (stocks or fixed-rate annuity or indexed annuities) and use the returns to top-up the purchasing power as needed. After all, inflation may turn out to be quite moderate in an aging America.

That’s too high-maintenance an approach, Tomlinson counters. “I think the liquidity need should be kept separate from meeting a basic level of living expenses (that will likely increase with inflation). Unfortunately, if one uses the basic living expense money to fix the car or fix the roof, that money is no longer available to buy food,” his email said.

But I can think of another reason not to buy COLA-SPIA: What if it doesn’t generate enough income at the start of retirement to cover my essential expenses?

What if I need $6,200 a year at age 65, and only have $100,000 to spend? Then maybe I need to buy the fixed SPIA and figure out another way to maintain my purchasing power. If I believe that my essential expenses won’t change much over the next 20 years (and some research shows that retirees spend less as they get older on everything but medical care) then maybe a fixed SPIA would fill the bill.

I started free-associating and considered the merits of spending $68,000 at age 65 on a fixed SPIA paying $4,200 and then applying $32,000 to the purchase of a fixed rate deferred income annuity paying $7,740 for life starting ten years later, at age 75. That would boost my income considerably, just when I’ll probably need a boost.

Tomlinson ran some Monte Carlo projections to compare that strategy to the $100,000 COLA-SPIA at age 65 and found something interesting. The fixed SPIA/fixed DIA strategy outperformed the COLA-SPIA strategy until age 82 or 83 (almost exactly the average age of death for a 65-year-old). From then until age 90, the COLA-SPIA paid out more per year. Clearly, the longer you expect to live, the more sense the COLA-SPIA will make.

Either way, Tomlinson favors maintaining purchasing power in the most straightforward way. Personally, I don’t believe in “best” solutions. There are only better and worse solutions for a particular retired household. Every retiree (or retired couple) will have idiosyncratic needs that demand flexibility and creativity from the advisor. The goal is—or I hope it would be, if I were the client—to create a custom collage of income-generating accounts, return-generating accounts and emergency spending accounts that mitigate the various risks in a way that prevents a financially stressful retirement.

“I’m for keeping things simple for people,” Tomlinson said. “First optimize Social Security. Then if that ‘paycheck’ isn’t enough, buy a SPIA. An attractively priced inflation-indexed SPIA would be ideal. But if markets don’t provide the ideal, the COLA-SPIA may be the next best alternative.”

© 2019 RIJ Publishing LLC. All rights reserved.

The Derivatives that Power Index Annuities

Fixed indexed annuities (FIAs) are among the safest but also the most esoteric of consumer financial products. The insurance agents who sell them, it’s often said, rarely understand them in depth. FIA owners virtually never do. To fully appreciate the complexities of FIAs, you have to talk to the actuaries who build them.

For this third part of RIJ’s series on FIAs, we’ll explore their mechanics with two actuaries, one retired from the global actuarial consulting firm, Milliman, and one who works on FIAs at Milliman today.

Historical performance data is spotty, but FIAs appear to deliver long-term returns somewhere between the returns of bonds and equities. They do that with call options that capture part of the gains of an equity index but none of the losses. Since so few people grasp derivatives, few people fully grasp FIAs.

FIAs mystify most people for another reason. Once a year, owners can pick from an array of choices as cryptic as those on a roulette table. These choices will determine the owner’s returns, but he or she is hard-pressed to guess how they will perform, other than that they can’t lose money.

A quarter century or so after FIAs were invented (by Genesis Financial for Keyport Life and Lincoln Benefit Life in 1995), FIAs have still barely penetrated broad public awareness. But they are emerging as a “goldilocks” tool that addresses older Americans’ financial needs (and anxieties). And so FIAs deserve an increasing amount of attention.

A lesson in options

We don’t have room here to explain all of the different variations in FIA construction. So, as a simple hypothetical example, we’ll describe the steps in the creation of a one-year point-to-point crediting strategy that offers the return of the S&P500 Index up to a cap with no risk of losing principal.

Imagine a 55-year-old man or woman buying an FIA contract with a payment of, say, $100,000. The issuer of the contract invests perhaps $97,600 of that into the pool of fixed income assets that comprises the insurer’s general account. It will earn about 4% a year.

The insurer still has $2,400 ($100,000 minus $97,600) to play with. If this were a fixed deferred annuity, $2,400 plus appreciation ($2,500) would be credited to the client. But this is an indexed annuity, so the plot takes a different turn. The insurer buys an option strategy or “hedge” with the $2,400.

“An indexed annuity is just like a fixed annuity, but with a non-traditional way of crediting interest,” said Noel Abkemeier, the retired Milliman actuary who has worked on various FIAs for life insurers since 1995. “All other characteristics are the same. Instead of giving you the 2.50% at the end of the year, we’re using 2.4% to buy a call at the beginning of the year, and that will produce your result.”

In this case, for a one-year point-to-point crediting strategy with an upper limit or cap on the potential gain, the insurer buys a “call spread.” It’s actually a pair of options. In one coordinated transaction, the insurer buys an “at-the-money call” (in this case, the right to the index return on $100,000) from an investment bank and sells the bank an “out-of-the-money call” (the right to the index return on $100,000 plus the cap). The two options form a bracket that defines the upper and lower limits of what the annuity owner can gain (up to the cap) or lose (nothing).

What determines the height of cap? In this case, the cap was 5%. That’s how much upside the insurer’s $2,400 (his “option budget”) would buy at today’s options prices. But the prices of one-year calls can fluctuate depending on changes in the one-year risk-free interest rate, the estimated volatility of the index, or the dividend yield of the index. If option prices were lower on this particular day, or if the insurer decided to increase its option budget, the cap might have been, for example, 7% or 8%.

“Once you know your option budget, you can go to the capital markets and ask, ‘What kind of an option can I buy today for that much money?’” said Tim Hill, an actuary who regularly works on FIAs at Milliman. “If I have 2.4% of principal to spend, I might find that, in today’s market, I can afford to buy a 5% cap.”

If the index gains only 3% over the one-year crediting period, the annuity owner earns 3%. If the index falls below its level at the beginning of the year, the insurer receives no value from the call and writes off the $2,400 as a sunk cost. If the index rises by 7% by the end of the year, the insurer collects 7% on the at-the-money call but pays out 2% on the out-of-the-money call that was sold. That leaves a 5% net gain for the annuity owner.

But that example illustrates only one of the many ways that the insurer can spend its option budget in search of profit. Let’s say that the insurer wants to buy a single at-the-money call, allowing the owner to capture all of the index growth on $100,000 in the coming year. But that option might cost $5,000. If the insurer’s option budget is only $2,400, its actuary might pick an option that buys all of the index growth, but only on $45,000. In this case, the owner has a 45% “participation rate” instead of a 5% cap.

A hundred indexes

The possibilities are endless. Another crediting method is the “spread fee method.” In that case, the insurer credits nothing on the first 3% or 4% of the index gain and credits the annuity owner with everything beyond that. (The insurer does not keep the 3% or 4%; that is simply priced into the option cost.) If the index goes up 20%, the owner nets 16% or 17% for the year. Even though the insurer usually (but not always) spends the same option budget on every crediting method it offers, there’s no way to predict which of the crediting methods will produce the highest gains after a year.

“Today there are twelve different ways of calculating indexed interest on these products, over 100 different indices on which to base your gains, and four different methods of limited indexed interest—cap, participation rate, spread, forced asset allocation model,” said Sheryl Moore, president and CEO at Wink, Inc., the life insurance and annuity analysis firm. “The average number of indexed crediting method choices on a single product is 4.4, according to our data.”

As a rule of thumb, Abkemeier said, the participation story appeals to people who look to FIAs for a piece of equity returns (“You get up to 45% of the market!”), while the cap story appeals to people who are hunting for yield in excess of a fixed-rate annuity or a CD (“You can earn up to 5% when the 10-year Treasury pays 2.9!”). The spread fee approach is attractive to individuals who want to capture the benefits of a spike in the index return.. FIAs are versatile enough to serve any of these types of clients.

There’s an additional wild card in these products: the renewal rates. If the cost of options rises (falls) over the course of a contract year, and the issuer may reduce (increase) the cap in order to stay within the option budget.

Exotic indexes

There are other variables that contribute to the complexity of FIAs. As mentioned above, there are now over 100 indexes offered. About half of all FIA premium is allocated to the S&P500 Index, but insurers increasingly offer newly-invented indexes that are based on a combination of both stocks and bonds or indexes that contain dynamic rebalancing methods that target a volatility level that’s lower than the S&P500 Index.

Because of their lower volatility (that is, they are likely to generate a narrower range of returns over time), options on their performance are cheaper than options on the S&P500 Index. So, for the same option budget, the insurer can buy a higher cap. But the cap is higher because the index has less upside potential.

“An 8% cap on a volatility-controlled index is probably no better than a 6% cap on the S&P500 Index since they are rooted in the same hedge budget,” said Abkemeier .

Many FIA contracts offer purchasers a premium bonus. Given that they appear on some of the most popular contracts, they must be successful in stimulating sales. But since there are only so many pennies in a dollar, the bonus has to be paid for by reducing a benefit elsewhere in the product. Bonuses can be misleading; they might not be fully available to the client until after a deferral period.

There’s a free lunch (sort of)

Some have criticized FIAs for offering contract owners what they call “manufactured” returns. At an annuity conference a few years ago, an executive from a large independent broker-dealer said that its advisors are not allowed to sell FIAs for that reason. Milliman’s Tim Hill doesn’t buy that criticism.

“The gains are synthetic only in the sense that you’re not technically investing in the market,” he told RIJ. “It’s the investment bank that creates the payoff. But there’s no arbitrary nature to it. The premium gets invested in corporate bonds and you use a portion of it to buy the option.”

But there is a kind of free lunch here, Abkemeier said. “Call options are priced on the basis of the risk-free rate of return, and that’s less than the long-term equity premium,” he said in an interview. “They tend to pay off more than you put into them. So the deck is stacked in your favor.

“This advantage is greatest when the crediting method uses a spread fee and least when the crediting method uses a cap. A product with a participation rate falls in between. An FIA is a good investment when you compare it with a fixed rate annuity.”

Next week: The fourth and final article in our series on FIAs will focus on their ability to generate guaranteed lifetime income.

© 2019 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Wink to provide insured product sales data by index

Wink, Inc., the life insurance and annuity research firm, will begin reporting indexed annuity and indexed life product sales at an index level, for each index available in a product, Wink president and CEO Sheryl J. Moore announced this week.

“Since 2012, hybrid indexes have driven indexed annuity product development, and that trend is gaining momentum with indexed life as well,” said Moore, owner of Moore Market Intelligence and Wink, Inc. “Insurance companies used to be protective about the sales of volatility-controlled, proprietary or bespoke indices because they were new. Now product manufacturers want this information disclosed quid pro quo.”

Wink, Inc. is responding to their requests for intelligence with its new report, which will provide data and insight on the following:

Indexed annuity and indexed life sales by index

  • More than a decade of historical sales for each index
  • Sales by Index by year
  • Sales by Index by quarter

Product information

  • The indexes each company uses
  • Products/crediting methods on which index is offered
  • Indexed crediting criteria (how frequently interest is credited, how it is measured, and how it is limited)

Index intelligence

  • Index launch date
  • Index ticker symbol
  • Index components
  • Index target volatility
  • Whether the index is Excess/Total/Price Return
  • Index classification (multi-asset or equity)
  • Rebalancing frequency
  • Index leverage
  • Index performance drag
  • URL link to index values

“This report, capturing over 60,000 data points, will be an invaluable resource for those interested in hybrid indices on insurance products,” Moore said, adding that Wink’s annual report with 2018’s data will be distributed within the month.

Participants are new to (and naïve about) investing: Schwab

On average, 401(k) participants believe they’ll need a nest egg of $1.7 million to retire on, but relatively few are investing enough to reach that goal, according to new research from Schwab Retirement Plan Services.

Schwab’s nationwide survey of 1,000 401(k) plan participants also showed that most people (58%) say their 401(k) is their only or largest pot of retirement savings. About two-thirds (65%) say their 401(k) was their first investment account, and 64% said they viewed themselves as savers, not investors.

Half of those surveyed (51%) contribute 10% or less of their salary to their 401(k), with an average annual contribution of $8,788. Schwab has determined that investing 10% to 15% of salary each year, starting in one’s 20s, can produce an amount sufficient to retire on. But those who delay saving until age 45 or older would have to save 35% of salary each year.

When survey participants were asked how they decided on a contribution percentage, 55% said they chose a percentage they “were comfortable with;” 36% contributed “as much as their employer matched;” and 8% said they were automatically enrolled at a default percentage chosen by their employer. Among those auto-enrolled into their 401(k) plan, 33% have never increased their contribution rate and 44% have never changed their investment choices.

Just half of participants (52%) feel their situation warrants professional financial advice. They named some of the specific areas where they would like help, including:

  • Determining at what age they can afford to retire (41%)
  • Calculating how much they need to save for retirement (40%)
  • Receiving specific advice on how to invest their 401(k) (37%)
  • Figuring out what their expenses will be in retirement (35%)

Many participants leverage and find value in web-based financial tools, with just over half (52%) saying they have used an online retirement calculator. Of those who have used one, 71% felt encouraged and wanted to learn more, and 61% took positive actions related to their finances, such as:

  • Increasing their 401(k) contributions (48%)
  • Changing their spending habits (29%)
  • Accessing online advice (28%)

In other survey findings:

87% consider a 401(k) a must-have benefit. Only health insurance ranked higher (89%).

Obstacles to saving include: Paying for unexpected expenses like home repairs (37%), paying off credit card debt (31%), and needing enough money for basic monthly bills (30%). Just 14% named paying off student loans as an obstacle.

Participants’ top sources of financial stress are saving enough money for a comfortable retirement (38%), paying off credit card debt (25%) and keeping up with monthly expenses (24%).

Finally, 26% of participants have taken a loan from their 401(k). Of those, more than half have taken multiple loans.

This online survey of U.S. 401(k) participants was conducted by Logica Research for Schwab Retirement Plan Services, Inc. Survey respondents worked for companies with at least 25 employees, were current contributors to their 401(k) plans and were 25-70 years old.

iPipeline partners with Atidot, a data mining firm

iPipeline, a provider of cloud-based software solutions for the life insurance and financial services industry, said it will partner with Atidot, a Gartner “Cool Vendor” insurtech company that helps “the life insurance industry with big data and predictive analytics.”

The “InsureSight In-Force Service powered by Atidot” software will help insurers in North America predict customer insurance and financial needs, lapse patterns and profitability, iPipeline said. The in-force service is available as a module for InsureSight, iPipeline’s data analytics and benchmarking product.

As part of the service, information about customer behavior, based on machine learning, AI and actuarial models, will be used to build target-qualified opportunities for proactive customer retention and up-sell and cross-sell efforts for life and annuity products.

“We expect carriers and financial institutions to experience a 25% improvement in revenue from the up-sell and cross-sell activity,” said Tim Wallace, iPipeline’s CEO.

Atidot CEO Dror Katzav added that the software can “predict premium persistency, lapse rates, up-sell, conversion rates, the probability to be under-insured, and more.”

“If you know your data, you can simulate buying scenarios, use the projections to manage your capital better, get better re-insurance prices, focus on desirable customer segments with specific behavior, and better navigate your business decisions,” he added.

Fidelity and asset manager to finance RIA M&A

Fidelity Clearing & Custody Solutions, Fidelity Investments’ clearing and custody business, this week announced a partnership with Merchant Investment Management to arrange loans with discounted origination fees for firms that custody assets with Fidelity.

“Lending solutions like this one are a game-changer for firms looking to make strategic acquisitions to create long-term, sustainable value,” said David Canter, head of the RIA segment at Fidelity Clearing & Custody Solutions, in a release.

“Today’s most competitive firms are achieving scale through M&A. By our count, there are over 700 RIAs that manage over $1 billion, and they’re often doing so with national footprints. But it takes capital to create scale—and with the average deal size increasing three-fold in the past five years, access to that capital can sometimes be a roadblock,” he said.

Merchant will also offer Fidelity’s custody clients reduced rates to services of Merchant’s family of companies, including Advisor Assist, which offers compliance solutions, and Compass, which provides outsourced CFO and accounting services for advisory firms.

Though the number of deals in the RIA channel was down slightly in 2018, the size of those transactions grew significantly. Out of 88 transactions, the 10 largest RIA deals by assets accounted for 59% of the total transaction AUM in 2018. Compared to April 2018, April 2019 RIA transactions increased by 83%, with total assets in transition up 201 percent, Fidelity said.

Help (but not more money) is available for workers feeling financial stress

Employee financial wellness programs are an “opportunity for employers to reduce employee stress, improve retention and engagement and set themselves apart in the marketplace,” according to new research commissioned by “Morgan Stanley at Work.”

The research consisted of a survey by the Financial Health Network of 1,000 full-time employees of mid- to large-sized companies. It found that many employees are struggling financially and that financial stress has an impact on employees’ productivity at work.

The findings of the study include:

Financial wellness is an opportunity for employers. The financial stress experienced by employees is affecting their productivity at work. Employees are looking to employers for solutions and are open to financial advice, including when offered at work.

In fact, financial stress has spillover effects on employees’ productivity: nearly four in five employees (78%) who report high financial stress say that they are distracted by stress at work.

Finances are the greatest source of stress for employees. Almost 60% say their finances cause them stress; that’s more than the number who say their work situation (51%), health issues (45%) or family issues (44%) cause stress. This applies even to higher wage-earners; 52% of employees with household income of more than $100,000 per year said that finances cause them stress.

Three out of four employees (74%) say that financial wellness benefits are an important workplace offering, while 60% of employees surveyed say they’d be more likely to stay at a job if their employer offered services that help them better manage their finances.

Employees have diverse financial needs. Employees need help with short-term goals like budgeting, managing debt and building emergency savings, in addition to long-term goals like retirement planning.

Half of employees spend more than they earn each month, while 37% say they have more debt than they can manage, and 41% said that they do not have enough savings to cover three months of living expenses.

Even among higher-income employees, more than half report debt and unexpected expenses as sources of stress (52% and 55%, respectively), while 43% report stress from having inadequate savings.

Employers can compete by offering holistic solutions. Fewer than one-third of employees reported that their employers offer financial wellness benefits beyond retirement plans. Yet when these benefits are offered, uptake and employee satisfaction is high.

Between 40% and 60% of employees whose employers offer financial wellness benefits that help with financial needs such as emergency savings, student loan repayment tools or access to financial coaching, say they have used them in the past three years.

Among employees who use at least one financial wellness benefit, 56% say that the benefits cause them to feel positively about their employer.

Clear communication and ease-of-use foster uptake of financial wellness solutions. Employees report that making it easier to find and understand their benefits is more important even than incentives in encouraging them to use the benefits they are offered. Nearly half (42%) of employees say that they do not feel adequately informed about the benefits and programs their employer offers.

Online calculations and live meetings with a financial advisor are preferred ways to learn about benefits, with 66% and 62% saying they prefer those methods, respectively.

Walker to succeed Rasmussen as Nationwide CEO

Kirt Walker has been selected to serve CEO of Nationwide, according to a release from the Ohio-based insurance and financial services company. He assumes his new role on October 1, 2019, succeeding incumbent CEO Steve Rasmussen, who announced his retirement earlier this spring.

Walker joined Nationwide in 1986. He was most recently president and chief operating officer of Nationwide’s financial services business lines and spent 23 years in a variety of leadership roles, including president and chief operating officer of Nationwide’s property and casualty business, as well as president of Allied Insurance (Nationwide’s former independent agency subsidiary).

A release said that the company board of directors selected Walker after an extensive search process. Walker will report to both Rasmussen and Corcoran until October, when Rasmussen steps down.

© 2019 RIJ Publishing LLC. All rights reserved.

Annuities Need More Positive ‘Positioning’

The “positioning” of retirement income products can determine the public’s level of interest in them, according to the fifth annual Guaranteed Lifetime Income Study by Greenwald & Associates and CANNEX.

The study, based on a survey of 1,005 Americans ages 55 to 75 with at least $100,000 in investable assets along with 302 financial advisers, showed that the individual appeal of annuities may depends on whether they are framed as part of:

  • A source of retirement income
  • A hedge against poor stock market performance
  • A way to meet long-term care and other medical expenses in old age
  • A hedge against outliving one’s savings (longevity insurance)
Drivers of Interest in Guaranteed Lifetime Income Products

“Perceptions around annuities, how the products are positioned, and whether they are discussed by advisors, all significantly affect whether and how consumers consider them,” said study director, Doug Kincaid of Greenwald & Associates.

The Top 10 Key Findings & Data from the Guaranteed Lifetime Income Study report summary shows:

Two-thirds (67%) of near-retirees or the recently-retired surveyed say they “highly value” guaranteed income to supplement Social Security. When guaranteed lifetime income (GLI) products are positioned as a way to cover essential expenses along with Social Security, 71% believed this would be a good strategy for their own retirements.

Consumer sentiment about annuities also appears to fluctuate based on the prevailing market environment, dropping as stocks rise and increasing when the market experiences sharp volatility.

Positive vs. Negative Perceptions of Annuities

The products’ perceived negatives have not significantly changed over the last few years. About half of consumers (46%) believe annuities:

  • Have too many terms and conditions
  • Hinder their access to their money
  • Are difficult to understand

More than a third of consumers (35%) expressed less interest in an annuity that offers guaranteed lifetime income than in an unnamed product with identical features.

Annuity Owners Satisfied

Of respondents who own a GLI product, six of 10 are satisfied and three-quarters would recommend them. The respondents are:

  • Less concerned about day-to-day expenses in retirement
  • Can budget more effectively
  • Spend more on discretionary items
  • Take greater investment risk with their other assets
  • Worry less about losing savings during a downturn (19% vs. 28%)

“Women, in particular, are interested in these products as a means to avoid running out of money in retirement,” said Tamiko Toland, head of Annuity Research at CANNEX.

Gaps between advisors and clients

Advisors say that they discuss income strategies with an average of 79% of their clients, but only 55% of clients report having discussed income strategies with their advisor. Advisors also consistently underestimate client interest in guaranteed lifetime income products.

“The research reveals a disconnect between what advisors think clients want and what clients say they want, but it also highlights opportunities to discuss retirement income strategies and products,” Toland said.

For a copy of the 2019 Guaranteed Lifetime Income Study’s supplemental data charts and additional information about the findings of the study, go to Greenwald & Associates or CANNEX.

© 2019 RIJ Publishing LLC. All rights reserved.

Part II: Allianz Life’s Marketing and Distribution Strategy

Owning the distribution

One challenge for FIAs back in 1997 was that insurance agents knew nothing about them. It would take higher-than-usual commissions and other incentives to motivate agents to start selling them. MacDonald created a lavish incentive plan that, for several years, involved giving agents part of their compensation in shares of LifeUSA stock. According to a LifeUSA’s 1997 SEC filings:

“Since its inception, [LifeUSA] has issued its common stock or granted options to purchase its common stock to… agents as production bonuses… These forms of equity participation provided agents in the early years with additional incentives to place profitable business with LifeUSA, to encourage policyholder persistency and to seek good underwriting risks for LifeUSA.”

“That was a key way to recruit,” Brad Barks of RGA told RIJ. “We said, ‘Hey, do you want to be an owner in the company?’” It was the same for LifeUSA employees. “Ten percent of my salary was in stock,” he said. Agents who met sales goals also received “Producer Perks Certificates.” These were points that agents could redeem for Rolex watches, automobiles and, according to one report, even airplanes.

MacDonald also invested in the insurance product wholesalers, called field marketing organizations (FMOs) that worked directly with the independent insurance agents on whose loyalty LifeUSA depended. According to its 10-K filing:

During 1996, [we] developed a strategy to generate additional premium production from LifeUSA’s existing agents and from new production sources by making loans to or investing in FMOs and by recruiting new FMOs to sell its products.

The loans include incentives for achieving increased production. In addition, in August 1996, LifeUSA Marketing acquired Tax Planning Seminars, a national FMO that had been contracted with LifeUSA for seven years and in November 1996, acquired an equity interest in Creative Marketing International Corporation, another national FMO.” [Creative Marketing, now known as CreativeOne, is no longer part-owned by Allianz Life.]

Owning FMOs is not a common practice in the annuity industry, but Allianz Life continues to do so. It recently brought five of its wholesalers—American Financial, Ann Arbor Annuity Exchange, GamePlan Financial Marketing, INFORCE Solutions, and The Annuity Store—under an umbrella firm called TruChoice Financial Group.

According to a pitch to independent agents on the TruChoice website, “In 2018, our founding-member firms helped producers like you close over $2.85 billion in fixed index annuity sales and $25 million of life insurance business.”

“Bob Mac created the foundation of a strong distribution,” Allianz’ Gray said. “There’s been consolidation and growth since then, but the principles are still there. LifeUSA had strong distributional relationships and that provided some of the appeal for the acquisition [of LifeUSA by Allianz].

“TruChoice is an independent distribution firm so they can sell any product they want,” he added. “Sales of Allianz Life product represent over 50% of its index annuity sales, and it accounts for less than 25% of Allianz Life’s index annuity sales.” Instead of having captive agents (employees of an insurer), Allianz Life has captive wholesalers.

In addition, the company launched an agent loyalty program called Allianz Preferred in 2011. Agents must be registered with a broker-dealer and a registered investment advisor (RIA) and hold one or more accepted professional designations to be accepted into the program. Members get exclusive access to certain Allianz products and support services. They also agree not to accept any cash compensation on the sale of Preferred products in excess of what Allianz Life pays them.

Another indication of Allianz Life’s inclination to control its own fate: It creates and produces its own media, advertising, marketing, and product collateral. In 2015, the company’s in-house Brand and Marketing Department won more than 45 awards from industry associations.

“They appear to dedicate more resources to marketing a crediting method than other companies dedicate to an entire product,” said Moore. “They may do brochures and PowerPoint presentations on how a new index works. They may create a whole suite of marketing collateral to go with a strategy, where other companies might produce a one-page flier.”

Though it does produce TV commercials, Allianz Life doesn’t have the $20 million to $25 million budget for television advertising to consumers like a Pacific Life, Nationwide or a Northwestern Mutual evidently does. Instead, it tries to “surround” producers with polished collateral, including explanatory videos that they can show clients, Wayne Hechanova, the distribution marketing senior director, told RIJ.

During the finals of the 2019 NCAA basketball tournament, held in Minneapolis this year, Allianz Life saturated local airport kiosks and baggage carousels with print displays. If the company has a prevailing marketing attitude or philosophy, it’s that “we don’t do ‘FUD,’” said creative marketing director Rick Gibson. “You won’t see Fear, Uncertainty or Doubt in what we produce. We try to characterize everything in a way that’s true to the brand. It’s about a brighter, more positive future… about what’s possible.”

Regulatory headwinds

But annuities are not as innocuous as corn flakes, and the pressure for higher FIA sales was bound to collide with state regulations against “unsuitable” sales of insurance products. By 2007, complaints from old and fragile senior citizens about predatory annuity sales practices were reaching watchdogs in Allianz Life’s home state of Minnesota and elsewhere.

In 2007 and 2008, Minnesota’s state attorney general, Lori Swanson, sued Allianz Life, Midland National, American Equity Investment Life, Aviva (now Athene) and other FIA issuers on the basis of those complaints. Without admitting guilt, Allianz Life agreed to refund the contract premiums, plus interest, to people who wanted their money back, and to appoint a “chief suitability officer” to police its sales going forward. Swanson claimed to have recovered “hundreds of millions of dollars” from the insurers.

FIA issuers came under fire in September 2007, when the U.S. Senate Special Committee on Aging held a hearing entitled “Advising Seniors About Their Money: Who is Qualified and Who Is Not?” That was a point that even fans of FIAs had made privately.

In 2008, the SEC tried and failed to reclassify index annuities as securities, a move that could have stopped thousands of insurance agents without securities licenses from selling them. Wink’s Sheryl Moore, along with members of the National Association for Fixed Annuities, suspected the brokerage industry of trying to pull the lucrative FIA business into its orbit. The FIA industry’s lobbying efforts succeeded in thwarting what they considered a turf grab.

Most recently, the life insurance industry and its allies fought against a 2016 initiative by the Obama Department of Labor to hold advisors and agents to a fiduciary standard of conduct—instead of the weaker “suitability” or caveat emptor standard—when offering deferred index annuities or variable annuities to people who would be paying for their contracts with tax-deferred retirement savings. The rule passed late in the Obama administration, but was suspended by the Trump administration and defeated in the courts.

Any one of these regulatory forays might have decimated the FIA business. But, in each case, the insurance lobby prevailed. Given rising sales of FIAs, many older Americans do respond to the product’s promises of downside protection, upside potential and chance for lifetime income. It is designed, after all, to tell them what they want to hear as well as give them what they need for retirement.

As FIA author and consultant Jack Marrion told RIJ recently, “There are still some damned opaque contracts out there. That hasn’t changed. But I’ve always liked the index annuity concept. The commissions on the products are getting lower. And it’s hard to kill somebody with an index annuity. The worst-case scenario is that the client will walk away with about 90 cents on the dollar.”

© 2019 RIJ Publishing LLC. All rights reserved.

Allianz Life’s Index Annuity Winning Streak

There was a shaky moment in 2007 when it looked as if Allianz SE’s bet on the U.S. insurance market might backfire on the German financial services giant. American regulators had placed the company’s Minneapolis-based subsidiary, Allianz Life of North America, in their crosshairs.

As part of a nationwide investigation into sales of complex “equity index annuities” (EIAs) to senior citizens, a state attorney general and a U.S. Senate Aging committee were scrutinizing Allianz Life’s notably successful but allegedly deceptive “two-tier” deferred index annuity contracts.

“The Allianz MasterDex 10 product [has] features that are never explained to the customer, and they wouldn’t understand it anyway,” said an official from the North American Securities Administrators Association told senators. “Half the time, the agents who sell it don’t understand it,”

But the company survived the crisis. The German parent replaced the U.S. management team, settled the lawsuits, and got back to business. Although Allianz Life was second in sales of EIAs (now called fixed index annuities or FIAs) in 2008, it has ranked first in 18 of the last 19 years—in a product category whose annual sales have more than doubled since then, to almost $70 billion last year.

In this second segment of RIJ’s four-part series on the FIA industry, we take a closer look at the industry’s perennial sales leader. We talked to the founder of the predecessor of Allianz Life in the U.S., to the actuary who worked on its first index annuity, to Allianz Life’s current head of product innovation, its marketing team, and industry experts who’ve watched the life insurer’s business evolve.

The LifeUSA backstory

Allianz Life’s success with FIAs grew from the business developed by Robert “Bob Mac” MacDonald, the irreverent insurance man (“Cheat to Win” was the title of his first book) who started a life insurance company called LifeUSA in the 1980s, took it public, and sold it to Allianz SE for $540 million in 1999.

LifeUSA’s 1990s product and distribution strategy survives remarkably intact at Allianz Life today. LifeUSA’s SEC filings from 1996 and 1997 reveal MacDonald’s recognition of the Boomer retirement opportunity and grasp of the impact of a topsy-turvy interest rate climate for issuers of fixed annuities.

Twenty-five years ago, rates gyrated. After falling from almost 10% in March 1989 to 2.66% in December 1993, the Fed funds rate shot up to 6% by March 1995. When official rates were low, fixed annuity issuers could (by buying longer-maturity bonds) offer investors higher yields than bank certificates of deposit (CDs). When the interest rates rose, however, fixed annuity owners wanted to break their contracts and chase yields.

“It was difficult for insurers to establish a credited interest rate on a fixed deferred annuity and retain the policy if interest rates changed,” MacDonald told RIJ in a recent interview. To make its FIA contracts stickier and more adaptive to fluctuating rates, LifeUSA indexed its crediting rates to the LIBOR (London Interbank Offered Rate).

“The actuaries and investment people were looking for a way to confront that volatility. The simple answer was, ‘Let’s index the interest rate. We’ll just credit one percent over LIBOR. If LIBOR goes down, we’ll still pay one percent more.’ Then we said, ‘If LIBOR goes up we’ll pay 50% of the increase. If it goes up by 3%, we’ll go up by 1.5%.’

“The whole idea was transparency. If these rates moved, you’ll be tied to that. That protected the company from disintermediation [premature surrender of contracts]. So we started out very simple. Other people started doing the same thing. Eventually you get to indexing the S&P500. So we said, ‘We’ll give the client 50% of the increase in the S&P up to 3%.”

LifeUSA wasn’t the first life insurer to bring an index annuity to market; that distinction goes to Keyport Life, with product design help from actuaries at Milliman, the global consulting firm. LifeUSA’s actuary, Brad Barks, had learned about indexing deferred fixed annuities to the S&P500 at a professional seminar and brought the idea back to MacDonald.

“The way the structure worked,” Barks, now an executive at RGA Reinsurance, told RIJ this week, “you’d start with $1,000 and promise to pay the policyholder x-amount at the end of five years. Ninety-percent of the premium accumulated at three percent [in the general account]. You then had 5% to 10% to spend on the option. Bob wanted to keep it simple. He always wanted to have levers to manage the profitability, and he didn’t want to offer guarantees that he didn’t know he could support.”

In 1996, LifeUSA introduced its first FIA contract, the Annu-A-Dex, which offered an initial 7% bonus on the premium and credited interest over a seven-year term. According to LifeUSA’s SEC filings, “The appeal of the product is that one can buy a competitive fixed annuity, with principal and interest guaranteed, and should the S&P 500 Index outperform the annuity over a seven-year period, one-half of the incremental growth is added to the value of the annuity.”

In its first year, Annu-a-Dex accounted for less than one percent of LifeUSA’s annual annuity premiums. Three years later, in 1999, “LifeUSA was doing $3 billion to $4 billion of annuity premium. That was a significant amount at the time. We were reinsuring half of that with Allianz Life, as coinsurance,” MacDonald told RIJ. At the time, LifeUSA was rated B++ (Very Good) by A.M. Best.

“Now Allianz SE is saying to themselves, ‘We’re making a lot money reinsuring this little company; why make only half of that money? We’re a trillion dollar company; why not get it all? MacDonald’s wild and crazy, but he’s created something.’ At the time they were criticized for paying a 100% premium for LifeUSA shares. But they will tell you today that it was dirt-cheap in the long run.”

Today’s top-selling FIA

Allianz Life’s best-selling fixed index annuity contract today is the Allianz 222, which was introduced in January 2013. The product offers a complex array of benefits and options, including eight index choices, three crediting methods, a 22% bonus on the PIV (protected income value), a crediting rate bonus, and guaranteed annual income starting at 5% (4.5% for joint contracts) of the PIV at age 65.

The contract epitomizes the FIA product category: It’s bewildering to ordinary people. It even resembles the two-tier products that got Allianz Life in trouble in 2007, except that, instead of having to annuitize to enjoy the bonuses, contract owners have to exercise the lifetime income rider. It has penalties and a market value adjustment on excess withdrawals during the first 10 years. Yet insurance agents have made it the hottest seller in the hottest annuity product category.

Matt Gray

We asked Matt Gray, the firm’s senior vice president for product innovation, to describe the product’s appeal to prospects. “The appeal comes from its income focus,” he told RIJ. “The income feature is built in; there’s no additional fee for it. There’s a ten-year wait on income, so it’s geared for 55-to-60-year-olds. Income starts at five percent of the PIV at age 65, goes up by 150% of the crediting interest each year, and can never go down.

“There are additional features that people love,” Gray said. “The Protected Income Value can be distributed as a death benefit over five years. There’s an Income Doubler feature for people who can’t perform at least two activities of daily living. Increasing income is perhaps the biggest feature. This contract is for someone who is looking for income and likes the flexibility of the other features.”

“Allianz Life has very innovative product development,” said Sheryl Moore, CEO of Wink, Inc., the life insurance and annuity market research firm in Des Moines, IA. “Their products have a ‘blue ocean’ aspect: they’ve developed stuff that people never heard of before.”

As the top-seller, Allianz 222 naturally has a target on its back. Bryan Anderson, a Northwest Montana insurance agent and direct seller of FIAs through his website, AnnuityStraightTalk.com, believes that the contract is over-sold and, in some cases, mis-sold to older people who may not realize that they have to wait 10 years to enjoy the product’s full value.

“There’s nothing wrong with the product itself,” Anderson told RIJ. “But it’s often sold in situations where another product—maybe a narrower product or a product where the client can’t afford to wait ten years for income to begin—would be more appropriate.”

Anderson has published a critique of the Allianz 222. He believes that it’s a favorite of agents who have no expertise in creating personalized income strategies for retirees.

“A lot of advisors don’t understand the decumulation game,” he said. “If you have an advisor who has been selling only life insurance and mutual funds for 30 years and you show him a glossy Allianz Life product brochure, and if he sees only that, he will sell it. I see advisors do that all the time.”

To read the second part of this article, click here.

Integrity Life issues flexible-premium longevity annuity

Integrity Life, a unit of Western & Southern Financial Group, has issued a flexible-premium deferred income annuity, or “longevity annuity” for young people who want to pre-fund a personal pension or for older people who want mitigate their risk of running out of money in their final years.

The contract, called IncomeSource Select, has the following features:

Flexible premiums. The owner chooses the premium amount (minimum $10,000 initial and $1,000 additional).

Emergency liquidity. Contract owners can receive a lump sum of six monthly payments at once (five monthly payments with the next scheduled payment for a total of six). Available up to two times. Restrictions apply.

Flexible income start date. Income payments can be deferred for anywhere from 13 months to 40 years. The income date can be changed up to two times over the life of the contract, within five years before or after the date originally selected.

QLAC (Qualified Longevity Annuity Contract). Traditional IRA owners can choose a QLAC, allowing them to extend the start of their income past the required minimum distribution (RMD) age of 70½.

Single-life and joint life contracts are available, and contracts can be purchased with either after-tax or pre-tax savings. See product fact sheets here and here.

According to Integrity Life, a 25-year-old who purchased this contract today with a single payment of $10,000 could expect a lifetime income of $2,377 a year for life starting at age 65.

A cash refund payout option is available if the annuitant(s) live to the income date. During the period before income begins, an optional return-of-premium (ROP) death benefit is available with any payout option (including cash refund). The election of the ROP death benefit reduces the income amount associated with that particular payout option.

The Western and Southern Life Insurance Company, Integrity Life Insurance Company and National Integrity Life Insurance Company, are member companies of Western & Southern Financial Group, Inc.

© 2019 RIJ Publishing LLC. All rights reserved.

SEC Sides with the Brokers

The Securities and Exchange Commission yesterday voted along party lines to adopt the so-called Regulation Best Interest that it first proposed in April 2018, as well as a new Form CRS Relationship Summary for advisors to share with new clients and two separate interpretations under the Investment Advisors Act of 1940.

A fact sheet about the new rule is available here.

In a prepared statement, the SEC said its actions bring “legal requirements and mandated disclosures in line with reasonable investor expectations, while preserving access (in terms of choice and cost) to a variety of investment services and products.”

With qualifications, the Commission effectively maintained the special dispensation enjoyed by broker-dealers and their representative brokers to recommend products to clients while accepting indirect compensation from product manufacturers.

[In discussions about conflicts-of-interest, a distinction is seldom made between sales commissions paid directly by the client to the brokerage, on the one hand, and sales commissions paid to the brokerage by product manufacturers—payments of which the clients are often not aware. Understanding that distinction is essential for understanding the need for broker disclosures and other regulations.]

During the live webcast Wednesday morning, SEC chairman Jay Clayton said, “A one-size-fits-all approach won’t work,” and went on to echo the talking points of the brokerage industry lobby. “There will be no uniform rule set for both broker-dealers and advisors. It would be a loss for Main Street investors.

“The initial implementation of the DOL fiduciary rule showed that our concerns about choice are not theoretical. There was a significant reduction of access to brokerage solutions and a shift to more expensive options. Our recommendations are consistent with the key goals of a uniform standard. We incorporate fiduciary principles, but adapt them to the broker-dealer model.”

Nonetheless, Clayton maintained that brokers, like advisors, will have to act in the best interests of clients. Second, although there will be no higher standard of conduct for advice on tax-deferred retirement accounts—the essence of the Obama DOL fiduciary rule—the new best-interest standard will apply to rollover recommendations.

Judging by press reports today, the final rule did not define “best interest” to the satisfaction of all observers. But the SEC, in its statement, asserted that “broker-dealers will be required to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer” and “a broker-dealer may not put its financial interests ahead of the interests of a retail customer when making recommendations.”

The new Form CRS Relationship Summary disclosure will require registered investment advisers and brokers to provide retail investors with “simple, easy-to-understand information about the nature of their relationship with their financial professional. While facilitating layered disclosure, the format of the relationship summary allows for comparability among the two different types of firms in a way that is distinct from other required disclosures.”

Regulation Best Interest and Form CRS will become effective 60 days after they are published in the Federal Register, and will include a transition period until June 30, 2020 to give firms sufficient time to come into compliance.

© 2019 RIJ Publishing LLC. All rights reserved.

Variable annuity client behavior revealed in Ruark survey

Ruark Consulting, LLC today released the results of its 2019 industry studies of variable annuity (VA) policyholder behavior, which include surrenders, income utilization and partial withdrawals, and annuitizations.

“Data exposures in key areas have increased considerably since last year’s studies, allowing for more detailed analysis and higher credibility of results,” said Timothy Paris, Ruark’s CEO, in a press release.

Among the notable increases in data exposure:

  • Nearly double the exposure in years 11 and later, including income commencement behavior after common 10-year deferral incentives for guaranteed lifetime withdrawal benefits (GLWB).
  • 12% increase in exposure for in-the-money GLWBs, following equity market declines during the fourth quarter of 2018.
  • 29% increase in exposure for guaranteed minimum income benefits (GMIB) past their waiting period.
  • Total data comprises 85 million years of exposure and 14 million policyholders from 24 participating companies spanning the 11-year period from 2008-2018, with $795 billion in account value as of the end of the study period.

Highlights of the study include:

  • GLWB deferral incentives appear to be effective. Income commencement rates are low overall, but double in year 11 with the expiration of common 10-year bonuses for deferring income, before falling to an ultimate rate.
  • Annual withdrawal frequency rates for GLWB and GMIB have continued to increase and have become more efficient with approximately 60% of recent experience at the full guaranteed income amount.
  • “Moneyness” (account value relative to the guarantee) affects partial withdrawal behavior. Income commencement rates increase when GLWBs are more in-the-money. When guarantees move out-of-the-money, withdrawals in excess of the maximum amount are more common, which is suggestive of policyholders taking investment gains out of the contract.
  • On contracts without GLWB or GMIB, free partial withdrawal amounts increase after the end of the surrender charge period, similar to the familiar “shock” in surrender rates.
  • Surrender rates have not returned to 2008 levels, even as strong equity market performance has boosted account values in recent years.
  • Three surrender regimes are evident during the study period: Surrenders at the shock duration were nearly 30% at the onset of the 2008 economic crisis, and in a range of 12-16% subsequently except for 2016 when they reached their nadir below 10%.
  • Contracts with GLWB and GMIB have much lower surrender rates, and this is even more pronounced for those limiting their partial withdrawals to the guaranteed income amount via systematic withdrawal programs.
  • Surrenders exhibit a dynamic relationship to moneyness, whether measured on a nominal (account value relative to the GLWB benefit base) or actuarial (reflecting interest and mortality) basis. On a nominal basis 81% of GLWB exposure is in-the-money, whereas on an actuarial basis only 11% is in-the-money.
  • Annuitization rates for GMIBs are in the low single digits and continue to decline. “Hybrid” versions that allow partial dollar-for-dollar withdrawals have much lower rates than traditional versions. Factors influencing annuitization rates include age, duration, last year of eligibility, death benefit type, contract size, and moneyness.

Detailed study results, including company-level analytics, benchmarking, and customized behavioral assumption models calibrated to the study data, are available for purchase by participating companies.

© 2019 RIJ Publishing LLC. All rights reserved.

Protective pays $1.2bn for Great-West’s individual life and annuity business

Protective Life Corp, a U.S. subsidiary of Dai-ichi Life Holdings, Inc. announced this week that its principal subsidiary, Protective Life Insurance Co., and Protective Life & Annuity Insurance Co., will acquire via reinsurance “substantially all” of Great-West Life & Annuity Insurance Co.’s individual life and annuity business.

The $1.2 billion transaction, announced last January 24, is Protective’s largest acquisition to date. The business being transferred, which has been marketed under the Great-West Financial brand, includes bank-owned and corporate-owned life insurance, single premium life insurance, individual annuities, and a portion of Great-West’s closed block life insurance and annuities. GWL&A is retaining a block of participating policies, which Protective will administer.

“This is the fourth acquisition completed since Protective became part of Dai-ichi in 2015. Dai-ichi considers Protective to be its North American growth platform and continues to aim for further expansion in the region, through both acquisitions and organic growth in Protective’s retail sales,” a Protective release said.

Morgan Stanley & Co. LLC acted as financial advisor to Protective for the transaction and Willkie Farr & Gallagher LLP acted as legal counsel.

© 2019 RIJ Publishing LLC. All rights reserved.

The Index Annuity Story, Part I

At its heart, the fixed index annuity is a simple product. About 96% of premiums go into a life insurer’s general account, which earns about 4% a year. The rest is split between the cost of overhead and the cost of put and call options on the performance of an equity index or exchange-traded fund. Over the long run, FIAs can be expected to yield about two percentage points more per year than bonds.

But the indexed products themselves, and their distribution through insurance agents, brokerages and banks, and their regulatory controversies over the past quarter-century is much more complicated than that. Given the product’s rising success—and its record sales in 2018—we thought it was time for a close, sustained look at the FIA phenomenon.

Retirement Income Journal and Wink, Inc., the Des Moines-based independent life insurance and annuity market research firm, are recognizing FIA’s steady rise in sales with a four-week series of articles about them. Over the next month, we’ll look at the leading issuers of FIAs, at the mechanics of the products, and, finally, at their potential role, relative to other solutions, in Boomers’ retirement income strategies.

This week we’ll take a deep dive into the latest FIA sales numbers, as reported in Wink’s Sales & Market Report, 1st Quarter, 2019. The numbers show a new group of life insurers, relatively new to the FIA business, challenging the long-time leaders. On the distribution side, half of all sales still go through the insurance agent channel, but a big chunk of the flow has shifted to the brokerage and bank channels in recent years.

The FIA products themselves have gradually gotten a bit less flamboyant over the past two decades. Their design depends on the business model of the issuer, the channel through which they’re sold, and how that channel is regulated. Products for the big state-regulated agent pipeline tend to have longer surrender periods and a carnival of features. Products for brokerage and bank distribution, which come under federal supervision, tend to be a little more conservative in terms of compensation and surrender period.

Over the past few years, life insurers have been dangling no-commission FIAs (with more upside potential than commission products) in front of registered investment advisors (RIAs), hoping to break into that still-skeptical fee-based market. The future of the FIA industry may well depend on whether that foray is successful. (In two weeks, we’ll look under the hood at the design of the simplest as well as the most complex FIA contracts.)

Sales by life insurer

The FIA market has had remarkably stable leadership, with Allianz Life the consistent leader, followed by Athene (which leapfrogged to the first rank by buying Aviva in 2013), the AIG companies and American Equity Investment Life at the top of the leader board.

Led by Allianz Life (having purchased the FIA pioneer Life USA in 1999), which has held at least a 10% market share for 17 of the last 18 years, these four firms accounted for 36.7% of sales in 1Q2019. Just as the life insurance business overall is concentrated, so is the FIA business, with the top 10 companies (out of 68 FIA manufacturers) accounting for about two-thirds of sales.

Recently, however, the composition of the peloton behind them has changed, as major variable annuity (VA) issuers have shifted some of their production to FIAs. These include Nationwide, Pacific Life, and Lincoln National, which have climbed to the 5, 6, and 7 spots in sales. Great American, Midland National, and Fidelity & Guaranty appear to have moved down to make room for them. (Although still far behind the leaders, other VA veterans like Transamerica, Jackson National, and Prudential showed triple-digit sales growth in the first quarter of 2019 from the first quarter of 2018).

Overall, the FIA industry saw an 8% drop in first quarter 2019 sales (to $17.7 billion from a record $19.2 billion in 4Q2018), mainly because December’s flight to safety (in response to the Fed-inspired equity sell-off) ebbed in 1Q2019. But the past three quarters have been the three best in the history of FIAs. Last year also enjoyed a rebound from 2017 sales, when the threat of regulation by the Department of Labor temporarily chilled sales.

As noted above, however, the FIA market has grown in part because of retooling by VA manufacturers. The chart below shows that trend within the annuity market from VA sales to fixed annuity sales began long ago, in 2011. The overall annuity market has not been growing, despite Boomer aging.

“Are there agents who are registered reps who used to sell VAs but are now selling FIAs? Absolutely,” said Sheryl Moore, CEO of Wink, Inc. “That’s because the VAs were totally de-risked,” which took away much of their upside potential. “But I doubt that there’s a ton of 1035 transfers from FIAs,” she added, because many in-force VAs are too valuable to justify a transfer.

Sales by distribution channel

Until not long ago, the independent agent channel accounted for more than 90% of FIA sales. But the agent channel’s share has fallen to about 54%, in part because of regulation, as we’ll explain below. Much of its sales flow now passes through registered reps in independent brokerages (16.6%) and bank advisors (17.1%).

The wirehouse (also registered reps) and career agent have 5.9% and 6.6% of sales, respectively. The newest channel, which consists of online platforms that distribute no-commission FIAs and other insurance products to RIAs, is just getting started.

Some of the major FIA issuers, such as AIG, Lincoln National, American Equity, Pacific Life, sell across multiple channels. Others tend to specialize. While it also sells through banks, Athene sends most of its sales through (and currently leads) the independent agent channel, while Allianz Life is always a dominant factor, if not the leader, in both of the two largest channels (independent agents and broker-dealers). Global Atlantic (Forethought) focuses on the bank and wirehouse channels. MassMutual leads the career agent channel.

In the first quarter of 2019, AIG led in the bank channel, and was #2 or #3 in the independent broker/dealers, wirehouse and among career agents; it is not a leader, however, in the largest channel (independent agents).

Global Atlantic Financial Group (it owns Forethought, which acquired Hartford’s annuity business in 2013) leads the wirehouse (national full-service broker dealers) channel. Massachusetts Mutual leads in the career agent channel.

Regulatory pressures account for much of the shift in sales flow out of the independent agent channel to the independent broker-dealer channel. Many of the agents who sold FIAs also had securities licenses and were registered with broker-dealers. But they identified their FIA sales as “outside business activity” and didn’t submit the transactions to their broker-dealers for review and approval.

In 2007, the Securities & Exchange Commission tried to reclassify FIAs as securities, in what was seen by some in the insurance industry as a grab for FIA businesses by the brokerages. The SEC failed in its attempt, but brokerages began insisting on reviewing FIA sales. As a result, the amount of flow reported through the agent channel began to be reported through the independent brokerage channel.

“Independent broker-dealer sales of FIAs have gone from zero to 17%,” said Jeremy Alexander, CEO of Beacon Research, an annuity data aggregator. “That’s the regulatory impact. It may be that the same guys are selling FIAs, except now they’re selling them through the IBD channel instead of through their FMO.”

“Most independent broker-dealers are taking FIA sales through the grid,” said Moore. “But I wouldn’t say that there’s no absolute growth in the FIA market. The percentage of total sales through the independent B/D channel is growing, but so is the absolute dollar amount. The whole pie is growing.”

Sales by product

The five best-selling FIAs in the first quarter of 2019 were the Allianz 222 Annuity; the Nationwide New Heights 9; Forethought Life’s ForeAccumulation II FIA 5-Year 4, the American Equity IncomeShield 10; and the Allianz Core Income 7 Annuity.

The Allianz 222, a big, all-in-one product with tempting bonuses and a built-in (non-optional) rider that provide lifetime income ten years after purchase, is the leading product in the independent agent and the independent broker/dealer channels. Two other Allianz Life products were among the top ten sellers in the independent broker/dealer channel: Allianz Core Income 7 and Allianz 360.

ForeAccumulation II 5-year (the #3 seller overall) was the top seller in the bank and wirehouse channels. The 7-year version of the product was among the top ten best-selling products in both of those channels. The C.M. Life Index Horizons contract, which is issued and distributed by MassMutual was the most popular product in the career agent channel.

Consumers will see different types of products in different distribution channels. In the independent agent channel, products with 10-year surrender periods dominate. That’s partly because competition in those spaces demands (and mild state regulation allows) products with high incentives for agents and alluring premium bonuses. Ten-year deferral periods give the insurers time to cover the costs of commissions and bonuses.

It’s precisely those products, with their complex designs, overwhelming number of choices, sensational claims and long waiting-periods for benefits that may never fully materialize, that drew the attention of regulators. And that’s why FIAs sold through banks and broker-dealers are more likely to have five-year to seven-year terms, which are considered more client-friendly.

Conclusion

Regulation may be shaping FIA product design and distribution channels, but consumer demand for FIAs ultimately depends on two factors outside of the control of both the life insurers and the agents or advisors: Interest rates and stock market volatility.

Historically low interest rates, beginning with the plunge in the Fed funds rate to 1% in 2003 and back to almost zero in 2008, foster the sale of FIAs because the insurers’ long-date assets out-yield money market funds and certificates of deposits. At the same time, tremors in the equity markets send investors in search of low-risk or guaranteed assets.

Boomer retirement, and the mountain of savings that it entails, has helped drive the purchase of all kinds of financial assets. But it does not seem to have delivered the bonanza that the annuity industry once anticipated. That may disappoint distributors, but it’s not clear if the life insurance companies disturbed by that or not.

The leaders of the industry may have acquired as much risk as they want right now. “It’s not like there’s not enough demand,” said Alexander, who points to the annuity sales plateau of about $220 billion a year. “It’s not like the carriers are saying, ‘How can we break $240 billion?’ The carriers know how much they will sell and they have levers to control it.”

Next week: A closer look at Allianz Life, the perennial leader of the FIA space.

© 2019 RIJ Publishing LLC. All rights reserved.

 

A New Flavor of Variable Indexed Annuity

 

Acting on a product design idea suggested by a Raymond James brokerage executive, Great American Life has launched a registered structured variable index annuity contract where the issuer splits any index losses 50-50 with the contract owner and uses the extra risk budget to boost caps and participation rates.

The new six-year product, the Index Summit 6, will be distributed through banks and independent broker-dealers by securities-registered advisors. Great American is currently the third biggest seller in each of those channels, according to Wink, Inc.

Distribution will not be exclusive to Raymond James and Raymond James has no proprietary claim on the product, executives at both companies told RIJ this week.

“Raymond James saw an opportunity in the marketplace, as we did in reviewing their analysis. The participation structure on both the downside and the upside is new to the marketplace,” said Joe Maringer, national sales vice president for Cincinnati-based Great American, in an interview.

The product offers crediting formulas linked to the S&P500 Index, the iShares MSCI EAFE exchange traded fund (ETF), and the iShares US Real Estate ETF through options. (In the second two choices, Great American uses options on the performances of the ETFs themselves, not on the performance of the indices they track.)

To achieve the strategy, “we sell a put and buy a call. That gives you a bigger lift from the index strategies,” Maringer added. The product has caps and participation rates on upside performance. Those will be reset every two weeks in response to changes in volatility and interest rates.

For the S&P500 Index, there are two crediting periods (at the end of which, interest is credited to the client and locked in), one-year and two-year. For each of those crediting periods, there’s a choice of cap rates (the most interest the contract owner can earn in a single term) or participation rates (the percentage of the positive index return to which the contract owner is entitled). There are one-year and two-year participation rates on the two ETFs, but no caps. There are slightly more generous sets of rates for premiums over $100,000 than under $100,000.

Since the contract owner accepts half of the downside risk, the insurer can offer attractive crediting rates. For premiums under $100,000, the current cap on the S&P500 is 10% for one-year terms and 18% for two-year terms. The participation rates on the S&P500 are currently 80% for both terms. There’s also a fixed rate option, with current rates of 1.85% (over $100,000 premium) and 1.75% (under $100,000).

On the other two indexes, participation rates vary from 95% to 120%, depending on the crediting period and the premium value. Regardless of the crediting period, the client commits to holding the product for six years or paying a surrender penalty for withdrawals of more than 10% of the account value of the contract.

“GAIG [Great American Insurance Group] believes in keeping things simple, Maringer said. “There are no contract fees, no mortality and expense risk fees, no subaccounts and a return-of-principal death benefit. You need a security license to sell it and it can only be sold through a broker-dealer contract with Great American.”

“You can write this concept out on a cocktail napkin, and ask someone, ‘Are you comfortable with half the downside and more of the upside?’,” said Thomas Layton, vice president of product management for Raymond James. Great American solicited ideas for new products from Raymond James, and Layton, a specialist in alternatives and structured products, came up with this one.

“The same concept has been used in the ETF space, where a common structure has been, ‘You get 130% of the upside and 30% of the downside.’ My background is in alternatives, so I’m familiar with the less common, more structurally sophisticated concepts,” Layton added.

Raymond James was looking for another six-year variable index product that would fit in with the six-year structured variable index products already on its shelf, one that would offer something new while having the same compensation levels so that advisors could make unconflicted recommendations among similar products, Layton told RIJ.

“Our top sellers tend to be seven-year or five-year products. Index Summit at six years was targeted to align with other providers in this market,” Maringer said. “AXA, Allianz Life and Brighthouse, the three core tenured providers, all have six-year products at brokerages. We’re new to the index variable annuity market. We’ve only been doing this for about 15 months.”

Other structured variable index annuity contracts have generally offered downside buffers (where the insurer might absorb any index loss up to five percent or 10%) or downside floors (where the insurer absorbs any index loss in excess of five percent or 10%). These structures distinguish them from conventional fixed index annuities, which can insure the contract owner from any index loss.

Like other variable index annuities, the Index Summit 6 is an accumulation-oriented product with no optional or built-in income rider. “With the first generation of the product we wanted to focus on accumulation. If simplicity is important, you don’t want to layer on an income rider to a product that’s already complex. You can always annuitize it, though that option is seldom used,” Maringer said.

Great American has simulated the performance of the Index Summit 6 (linked to the S&P500 and with a participation rate of 75%) over hundreds of one-year periods between 2001 and 2018 and found that it would have produced average one-year returns of 6.78%, with a high of 51% and a low of -24%. For the bull market years of 2009 to 2018 (inclusive), the same contract would have produced an average annual return of 8.62%, according to Great American documents.

© 2019 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Bank of America offers new hybrid advice model

Bank of America has launched a hybrid human/digital advisory service that merges access to a Merrill Financial Solutions Advisor to users of Merrill Guided Investing, an online investment advice platform, the bank said in a release this week.

The new service is called, “Merrill Guided Investing with an advisor.” It “expands the continuum of services that Merrill offers to investors,” a Bank of America spokesperson told RIJ.” Merrill Edge Self Directed, Merrill Guided Investing, the new Merrill Guided Investing with an advisor, and Merrill Lynch Wealth Management are all part of the continuum and of the Merrill umbrella. Our goal is to serve investors at every stage of wealth accumulation.”

Clients of the new service will work with a Merrill advisor to identify priorities, define financial goals, and track progress toward those goals. Costs and benefits of the hybrid program include:

  • Access to 25 investment strategies built and managed by Merrill’s Chief Investment Office (CIO). Only 15 strategies are offered through the digital-only version of Merrill Guided Investing.
  • A minimum initial deposit of $20,000. The account minimum for Merrill Guided Investing is $5,000.
  • An annual service fee of 0.85%, plus fund expenses, compared to 0.45% for Merrill Guided Investing.

The hybrid services will be offered through FSAs in Bank of America financial centers, Merrill Advisory Centers, and Merrill offices in the U.S. In April, the company announced plans to hire over 300 FSAs to be located in Merrill offices this year, adding to the 2,700 FSAs currently on staff. Clients with more assets will be referred to one of Merrill Lynch Wealth Management’s nearly 15,000 financial advisors.

Clients of the Merrill Guided Investing offerings are eligible for an annual program fee discount of up to 0.15% if they are members of Bank of America’s Preferred Rewards program.

Launched in February 2017, Merrill Guided Investing was enhanced in March 2019 with features that allow clients to create financial plans based on all their assets. Late last year, the service added “impact portfolios” as an investment option so that clients could align investments with their values. Since then, 20% of new clients have selected that option.

Combined client balances for the company’s guided investing and self-directed platforms were about $211 billion on March 31, 2019.

Fidelity adds 150 new ETFs to its no-load ETF supermarket

Fidelity Investments, the $7.6 trillion, family-owned Boston-based financial services giant, said this week that it will add nearly 150 exchange-traded funds (ETFs) from 11 ETF manufacturers to its menu of proprietary ETFs and hundreds of BlackRock iShare funds.

Fidelity now offers more than 500 high-quality ETFs for online purchase with no sales commission through some 28 million brokerage accounts at Fidelity. The new ETF manufacturers include: American Century, First Trust, Franklin Templeton, Goldman Sachs Asset Management, Invesco, Janus Henderson, John Hancock Investments, J.P. Morgan Asset Management, Legg Mason Global Asset Management, PIMCO and State Street Global Advisors SPDR ETFs.

The ETFs in the lineup have an average expense ratio of 0.36% and represent 69 Morningstar categories. Industry assets under management in Fidelity’s available commission-free ETFs account for 40% of the overall U.S. ETF market, and Fidelity has more than $450 billion in ETF client assets under administration, the release said.

The free-commission offer applies only to online purchases of select ETFs in a Fidelity brokerage account. The sale of ETFs is subject to an activity assessment fee (from $0.01 to $0.03 per $1,000 of principal).

The Fidelity ZERO Total Market Index Fund (FZROX), Fidelity ZERO International Index Fund (FZILX), Fidelity ZERO Large Cap Index Fund (FNILX), and Fidelity ZERO Extended Market Index Fund (FZIPX) are now available to individual retail investors who purchase their shares through a Fidelity brokerage account.

Pacific Life taps Salesforce for CRM services

Pacific Life has selected Salesforce, the customer relationship management (CRM) software firm, as one of its strategic technology partners “to get a 360-degree customer view and deliver seamless and integrated experiences across its entire U.S. retail businesses,” Salesforce announced this week.

More specifically, Pacific Life partnered with Salesforce on “the NextGen CRM Program,” which is designed to bridge the gap between Pacific Life’s sales, service and marketing teams and “reimagine how they engage with financial professionals.”

Pacific Life is deploying Salesforce as its enterprise-wide, integrated CRM platform to streamline customer engagement and connect with customers through traditional call centers or through digital channels such as email, social chat and text.

Pacific Life is also “tapping into an ecosystem of distribution partners using APIs” or application programming interfaces. A network of reusable APIs will enable Pacific Life to integrate with digital platforms like Blueprint Income.

Pacific Life will use Salesforce’s Financial Services Cloud, Einstein Analytics, Einstein Data Discovery, Marketing Cloud, MuleSoft, Quip, the Salesforce Lightning Platform and Success Cloud advisory services.

RetireUp can now model Great American annuities

Retirement income planning software provider RetireUp announced this week that it will add Great American Life’s fixed-indexed annuities (FIAs) to the lineup of modeled products available on its client-advisor platform, RetireUp Pro.

The Great American contracts include the American Landmark 5, American Legend 7, AssuranceSelect 5 Plus, AssuranceSelect 7 Plus, Premier Bonus and Premier Income Bonus.

The RetireUp Pro platform enables advisors to model insurance products within a client’s portfolio, allowing them to demonstrate the potential benefits of adding an annuity to a retirement plan.

Dynamic Wealth Advisors to use RetireOne’s RIA insurance platform

RetireOne, the no-commission annuity sales platform, has agreed to provide insurance and annuity back office services for clients of Dynamic Wealth Advisors, a turnkey wealth management platform for fee-based registered investment advisors (RIAs), the firms said in a release this week.

Under the agreement, RetireOne will provide an online platform for the purchase of no-load insurance and annuity products, along with distribution, education, and ongoing support services through RetireOne’s Advisor Solutions Desk.

“This is significant for our wealth managers who develop holistic financial plans incorporating solutions that optimize tax efficiency, and manage longevity risk, sequence of returns risk, and other risks,” said Dynamic Wealth Advisors COO, Craig Morningstar, in the release.

A part of Aria Retirement Solutions, RetireOne provides over 900 RIAs and fee-based advisors access to fee-based insurance products from multiple A-rated companies through its independent online platform. Dynamic Wealth Advisors produces myVirtualPractice, a virtual office and wealth management practice with staff, back/middle office, accounting/billing, compliance services and a Virtual Assistant.

Lincoln to expand broker education, use Goldman Sachs securities lending service

Lincoln Financial Group has launched a Broker Development Institute to further enhance its broker education and training program, which includes Continuing Education and non-CE courses. The Institute is a two-day educational event, including best practices, case studies and industry trends on a particular industry topic or trend.

The first Broker Development Institute took place on April 23 in Atlanta, Ga., and was focused on the employee leave landscape and absence management trends, a Lincoln release said. The Institute will continue throughout the country this year, and will expand to include other market topics.

Lincoln’s group benefits business offers employee benefits products and solutions, including disability and leave management, as well as life, dental, accident, critical illness and vision insurance coverages.

In other news, Lincoln Financial Network (LFN), the retail wealth management affiliate of Lincoln Financial Group, agreed to offer the Goldman Sachs Private Bank Select securities-based lending solution to LFN advisors and their clients.

GS Select is an online loan origination and servicing program that combines digital technology with personalized support to provide clients access to liquidity for tuition, home purchases and renovations, bridge financing and start-up funding. GS Select uses diversified, non-retirement investment assets in a client’s pledged account as collateral.

© 2019 RIJ Publishing LLC. All rights reserved.

U.S. life/annuity insurers see higher net income in 1Q2019

The U.S. life/annuity (L/A) industry’s net income in the first quarter of 2019 rose sharply over the prior-year period, to $14.9 billion from $3.2 billion, due mainly to a significant decline in total expenses, according to A.M. Best, the ratings agency.

Those preliminary financial results are detailed in a new Best’s Special Report, titled, “First Look – Three Month 2019 Life/Annuity Financial Results.” The data comes from companies’ three-month 2019 interim period statutory statements, which were received by May 29, 2019 and represent an estimated 93% of total industry premiums and annuity considerations.

The L/A industry’s total income for the first three months of 2019 declined slightly by 1.3% from the prior-year period, as net investment income remained unchanged and a $37.7 billion increase in premiums and annuity considerations was negated by a $40.7 billion decline in other income, the report said.

However, a $12.8 billion decrease in incurred benefits, coupled with a $9.8 billion reduction in general insurance and other expenses, and an $8.5 billion reduction in net transfers to separate accounts drove a $13.6 billion reduction in total expenses.

Despite relatively flat income, the decline in expenses resulted in pre-tax net operating gain doubling from the prior-year period to $21.9 billion. A $2.0 billion increase in federal and foreign taxes was offset by a $2.8 billion reduction in net realized capital losses, boosting the total industry’s net income.

© 2019 RIJ Publishing LLC.

Honorable Mention

Generational views of retirement differ: TIAA

The one-in-four Americans (27%) who lack confidence in their parents’ financial security in retirement are likely to lack confidence in their own retirement security, according to a new survey from TIAA. They are half as likely to feel confident about their own retirement as people who are confident in their parents’ retirement (36% vs. 72%).

More than half of respondents (57%) said that their parents’ financial planning for retirement affected their own. Almost half (44%) avoiding taking on significant debt, and 38% said they spend more conservatively and limit their spending on non-essentials.

The TIAA survey shows that Generation X and baby boomers are significantly less optimistic than Millennials about their parents’ financial outlook. Just over one-third of Gen X adults (35%) and only one in four baby boomers (26%) described their parents’ financial outlook as very good or excellent, compared to more than half (52%) of Millennials.

Only 47% of Gen X and 34% of baby boomers say they are confident in their parents’ current or future financial security, compared to 60% of Millennials. While nearly four in ten Gen X (39%) and baby boomers (35%) don’t find their parents’ approach to saving and investing to be “admirable and one to emulate,” only 25% of Millennials don’t.

Among the one-in-five adults who are confident in their retired parents’ long-term financial security, 21% indicate that they have some or a lot of concern about their parents running out of money during retirement.

People may overestimate their parents’ preparedness for retirement. Seven in ten Millennials rate their parents’ financial outlook as good to excellent (72%). But among the Gen X and boomers who are the same age as Millennials’ parents, only 57% and 58%, respectively, rate their own financial outlook as good to excellent.

KRC Research conducted the online survey from February 19-21, 2019 of 1,003 adults, ages 18 and older living in the United States. Results have been weighted to be demographically representative of the U.S. population based on age, sex, geographic region, race and education.

Stress on the ‘Bank of Mom and Dad’

Of the $41 billion lent by the Bank of Mom and Dad to help younger generations buy a first home in the US in 2018, 54% came out of their retirement savings, according to new research sponsored by Legal & General Group.

The recently released study found that 29% of U.S. parents and grandparents surveyed have provided financial assistance to children and grandchildren purchasing property. However, 15% believe they are financially worse off as a result; and 14% also said they feel their financial future is less secure.

In addition, seven percent of these Bank-of-Mom-and-Dad lenders postponed retirement after helping family or friends get onto the housing ladder, 39% of these by more than three years.

The number of ‘lenders’ accepting a lower standard of living was higher among those in the Mid-Atlantic states, with over a quarter of respondents from this region also feeling less financially secure. Despite this, BoMaD lenders still help younger family members navigate the property market with savings or, as 15% of respondents reported, taking out loans to do so.

Other sources of funding that BoMaD lenders have used, or would consider using to assist family members, include raiding either their IRAs or their 401(k)s (8% each). Seven percent refinanced their homes, and 6% downsized to a smaller property themselves. Five percent came out of retirement to help their kids toward a lifestyle they may have come to expect growing up in the relatively greater affluence of previous decades.

The BoMaD study also found that lenders—operating on an emotional basis—were unlikely to take professional advice when helping their kids and grandkids financially. Before gifting or loaning the money, nearly half of respondents (48%) didn’t or wouldn’t seek any professional advice about their choices.

“Whatever the source of funds, only a quarter of BoMaD lenders sought advice before they helped their kids financially. That number is surprisingly low—as an industry, we should encourage more people to seek advice to make sure helping younger family members won’t leave them short of money in later life or concerned about their own financial future,” L&G’s Nigel Wilson noted.

© 2019 RIJ Publishing LLC. All rights reserved.

 

Auto-enrollees don’t ‘borrow to save,’ researchers say

Middle- and low-income American workers often say that they can’t afford to save, so questions have arisen about the effects of auto-enrolling them into defined contribution and defaulting them into saving 3% or more of their pre-tax pay.

Would they reduce their spending by 3% to offset the new savings? Or would they maintain the same standard of living by borrowing money through credit cards, home equity loans or other forms of credit? In other words, could auto-enrollment leave certain people worse off than they were without it?

A group of Ivy League university researchers has been studying the savings and borrowing habits of a group of participants in the federal Thrift Savings Plan (TSP) workers for several years, in hopes of answering those questions. Their most recent report shows “that automatic enrollment has no impact on the probability of financial distress.”

The authors took advantage of a natural experiment, made possible by the adoption of auto-enrollment in the TSP program for civilian employees of the U.S. Army in 2010. They compared the savings and debt outcomes of participants hired in the year before the inception of auto-enrollment with the outcomes of participants hired in the first year of auto-enrollment. The participants’ average annual salary was about $55,000.

“Automatic enrollment in the TSP at a 3% of income default contribution rate is successful at increasing contributions to the TSP,” the authors write. “At 43-48 months of tenure, this policy raises cumulative contributions to the TSP by 4.1% of first-year annualized salary. We find that little of this accumulation is offset by increased debt excluding first mortgages and auto debt, and there is no impact on credit scores or debt in third-party collections.”

The paper, “Borrowing to Save? The Impact of Auto-Enrollment on Debt,” was written by John Beshears (Harvard Business School), James J. Choi (Yale School of Management), Brigitte C. Madrian (Brigham Young University), David Laibson (Harvard), and William L. Skimmyhorn (College of William & Mary).

These new results update the results reported in an October 2016 version of the same paper. At that time, they wrote, “Automatic enrollment in the TSP at a 3% of income default contribution rate is extremely successful at increasing contributions to the TSP at the left tail of the distribution while leaving the middle and right of the distribution unchanged.” By “left tail,” they meant lower-income participants.

“At four years of tenure,” they added, “this policy raises cumulative contributions to the TSP as a percent of first-year annualized income by 5.2% at the mean, 13.9% at the 25th percentile, and 21.5% at the 10th percentile. However, once crowd-out along debt margins is considered, the effect of automatic enrollment is considerably more modest.”

© 2019 RIJ Publishing LLC. All rights reserved.

 

Modern Monetary Inevitabilities

In a recent Project Syndicate commentary, James K. Galbraith of the University of Texas at Austin defends Modern Monetary Theory and corrects some misunderstandings about the relationships among MMT, federal deficits, and central-bank independence. But Galbraith does not explore what is perhaps the most important issue of all: the political conditions needed to implement MMT effectively.
MMT owes its newfound relevance to the fact that deflation, rather than inflation, is becoming central banks’ main concern. For a high-debt, high-deficit economy like the United States, deflation is an especially serious threat, because it delays consumption and increases debtor anxiety. Consumers forego major purchases on the assumption that future prices will be lower. Homeowners with mortgages cut back their spending when they see home prices falling and the equity in their homes declining. These cutbacks worry the Federal Reserve, because they add to deflationary pressures and could trigger deeper spending cuts, stock-market declines, and widespread deleveraging.

The Fed’s inability so far to reach its 2% target for annual inflation suggests that it lacks the means to overcome persistent disinflationary forces in the economy. These forces include increased US market concentration, which diminishes aggregate demand by weakening employee bargaining power and increasing income inequality; population aging; inadequate investment in infrastructure and climate- change abatement; and technology-driven labor displacement.

Making matters worse, US political gridlock assures continued commitment to economically exhausted strategies such as tax cuts for the rich, at the expense of investment in education and other sources of long-term growth. These conditions cry out for significant changes in US government spending and tax policies.

MMT is seen as a way to accomplish the needed changes. It holds that a government can spend as much as it wants if it borrows in its own currency and its central bank can buy as much of the government’s debt as necessary—as long as doing so doesn’t generate unacceptably high inflation. Both tax-cut advocates and supporters of public investment find little not to like.

MMT has been roundly criticized by economists across the political spectrum, from Kenneth Rogoff and Lawrence H. Summers of Harvard University to Paul Krugman of the City University of New York. All contend that it is a political argument masquerading as economic theory. But Galbraith and Ray Dalio of Bridgewater Associates see MMT differently. Dalio argues that MMT is real and, more to the point, it is an inevitable policy step in historically recurring debt-cycle downturns.

In his book Principles for Navigating Big Debt Crises, Dalio documents the steps that central banks have historically taken when faced with a booming economy that suddenly crumples under the weight of debt. The first step (Monetary Policy 1, or MP1) is to cut overnight official rates to stimulate credit and investment expansion. The second (MP2) is to buy government debt (quantitative easing) to support asset prices and prevent uncontrollable waves of deleveraging. If MP1 and MP2 are insufficient to halt a downturn, central banks take step three (MMT, which Dalio calls MP3) and proceed to finance the spending priorities that political leaders deem most essential. The priorities can range from financing major national projects to “helicopter money” transfers directly to consumers.

Achieving political agreement on what to finance and how is essential for implementing MP3 effectively. In a financial meltdown or other national emergency, political unity and prompt action are essential. Unity requires a strong consensus on what should be financed. Speed requires the existence of a trusted institution to direct the spending.

In the early 1940s, when the US entered World War II and winning the war became the government’s top priority, the Fed entered full MP3 mode. It not only set short- and long-term rates for Treasury bonds, but also bought as much government debt as necessary to finance the war effort. MP3 was possible because the war united the country politically and gave the Roosevelt administration near-authoritarian rule over the economy.

The core weakness of MP3/MMT advocacy is the absence of an explanation of how to achieve political unity on what to finance and how. This absence is inexcusable. Total US debt (as a share of GDP) is approaching levels associated with past financial meltdowns, and that doesn’t even account for the hidden debts associated with infrastructure maintenance, rising sea levels, and unfunded pensions. For the reasons Dalio lays out, a US debt crisis requiring some form of MP3 is all but inevitable.

The crucial question that any effort to achieve political unity must answer is what constitutes justifiable spending. Alexander Hamilton, America’s first Secretary of the Treasury, offered an answer in 1781: “A national debt,” he wrote, “if it is not excessive will be to us a national blessing.” A government’s debt is “excessive” if it cannot be repaid because its proceeds were spent in ways that did not increase national wealth enough to do so. Debt resulting from tax cuts that are spent on mega-yachts would almost certainly be excessive; debt incurred to improve educational outcomes, maintain essential infrastructure, or address climate change would probably not be. Accordingly, it will be easier to achieve political unity if MP3 proceeds are spent on priorities such as education, infrastructure, or climate.

The political test for justifying MP3-financed government spending, is clear: Will future generations judge that the borrowing was not “excessive”? Most Americans born well after WWII would say that the debt incurred to win that war was justified, as was the debt that financed the construction of the Interstate Highway System, which literally paved the way for stronger growth.

As the 1930s and 1940s show, MP3 is a natural component of government responses to major debt downturns and the political crises they trigger. We know much more about what contributes to economic growth and sustainability than we did in the first half of the twentieth century. To speed recovery from the next downturn, we need to identify now the types of spending that will contribute most to sustainable recovery and that in hindsight will be viewed as most justified by future Americans. We need also to design the institutions that will direct the spending. These are the keys to building the political unity that MMT requires. To know what to finance and how, future Americans can show us the way; we need only put ourselves in their shoes.

© 2019 Project Syndicate.