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Annexus announces new indexes for Athene, Transamerica annuities

Posted on March 28, 2019 by -

Athene USA, a top fixed index annuity (FIA) issuer, and Annexus, a prominent independent FIA product designer, have enhanced the Athene BCA suite of FIAs, according to a release this week.

In other news, Transamerica and Annexus said this week that they have enhanced their existing fixed index annuities and will partner to distribute the Transamerica Secure Retirement Index II Annuity, a product suite with a lifetime income benefit option.

Regarding the Athene contract: The updated BCA 2.0 FIA includes new indices designed by Nobel-winning economist Robert Shiller of Yale and Jeremy (“Stocks for the Long Run”) Siegel of the Wharton School of Finance at Penn.

BCA 2.0 also includes optional lifetime income and legacy growth riders, for an annual fee. Athene and Annexus also intend to launch a new FIA, called Athene Velocity, with a free built-in income rider.

“We believe the complex challenge of retirement planning demands unconventional thinking, and BCA 2.0 reflects our commitment to innovative solutions,” said Grant Kvalheim, CEO of Athene USA.

The Shiller Barclays Global Index uses Shiller’s CAPE ratio to look for undervalued equities in the United States, Eurozone and Japanese markets, using principles of value and momentum investing. Each month it rebalances between the undervalued equities, bonds and commodities to help stabilize returns in a variety of market environments.

“Our index looks for lower price components among globally diversified major asset classes with positive momentum to pursue opportunities and manage risk,” Shiller said in the release.

The WisdomTree Siegel Strategic Value Index, developed by Siegel with CIBC Capital Markets and consultation by WisdomTree Investments, Inc., offers a value strategy focused on U.S. equities.

“Each quarter, the index evaluates the 500 largest U.S. publicly traded companies for operating earnings relative to their valuation and selects the four most undervalued market sectors. The index also includes a tactical market trend response designed to make daily strategic allocations with the aim to generate returns even when the broader market is declining,” the release said.

“Traditional value indexes often lead to persistently overweighting specific sector allocations,” said Siegel in a prepared statement.

Athene USA, an Iowa-domiciled corporation, is the U.S. holding company for Athene’s annuity operations in the United States. It is headquartered in West Des Moines, IA.

Transamerica index annuity adds NYSE Expanded Opportunities Index

The new Transamerica Secure Retirement Index II Annuity offers performance linked to the NYSE Expanded Opportunities Index, which mimics the advanced quantitative finance techniques used by Morgan Stanley Investment Management to manage assets for large pension funds, endowments and other institutional investors worldwide, Transamerica and Annexus said in a release.

The NYSE Expanded Opportunities Index is administered by ICE Data Indices, part of the Intercontinental Exchange, which is the parent company of the New York Stock Exchange.

Enhancements were also made to the Transamerica Income Plus living benefit. It now offers a lifetime income guaranteed that grows during the first 10 policy years at a 10% simple annual rate in each policy year without a withdrawal. Once withdrawals begin, the annual income will be paid for life.

Transamerica Income Plus is available with both Transamerica Secure Retirement Index Annuity and Transamerica Secure Retirement Index II Annuity for a 1% annual fee based on the withdrawal base. The fee is deducted from the policy value.

The guaranteed lifetime withdrawal benefit will not increase in any given year in which a withdrawal is taken, if it is after the 10th living benefit anniversary or prior to age 50.

© 2019 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on March 28, 2019 by -

Ubiquity raising $19 million to finance small plan recordkeeping software

Ubiquity Retirement + Savings, a fintech provider of flat-fee retirement plans to small businesses, is nearing $19 million in Series D funding led by existing investors who have invested in the firm since its beginnings 20 years ago, the company announced this week.

The fresh capital will financed the development of Paradigm RKS, Ubiquity’s proprietary, cloud-based, automated recordkeeping system for the historically underserved small business market. The founder and CEO of San Francisco-based Ubiquity is Chad Parks.

Third-party administrators, recordkeepers and financial institutions serving the small business market will soon be able to license Paradigm on a business process outsourcing (BPO) and Software as a Service (SaaS) basis. It can be useful to providers that lack the infrastructure to serve the small plan market, or have less efficient legacy systems and processes.

Gen-Xers are a lost generation in the workplace: MetLife

The retirement plight of Gen X—a group now ages 38 to 53, who accounts for a third of the U.S. workforce, or 53 million people—has been upstaged by that of Boomers and Millennials, according to MetLife’s 17th Annual U.S. Employee Benefit Trends Study (EBTS).

“The impacts of this neglect are real: Gen X employees not only feel significantly underappreciated at work and engage at lower rates than Millennials, they also lag both Boomers and Millennials in key financial security indicators,” MetLife said in a release.

The research, like other studies of this type, helps make a case for “financial wellness” plans. These optional services, now seen by many big plan recordkeepers as a competitive necessity, typically help employees cope with debt, improve financial literacy, and deal other challenges that might hinder saving for retirement.

According to the survey:

  • 59% of Gen X workers are confident in their finances, compared to 67% of Millennials and 65% of boomers, the release said. Only 53% of Gen X workers have at least three months of salary on hand for emergencies, compared to 58% of Millennials and 60% of Boomers.
  • 68% of Gen X workers report being happy at work, compared with 75% of Millennials and 74% of Boomers. Only 54% of Gen X workers feel empowered at work and 62% feel respected in the workplace, the MetLife research found.
  • More Gen X workers than Millennials believe “employers are not providing timely promotions, exposure to senior leadership, and meaningful work projects,” the survey showed. But only 18% of employers believe it a priority to create an inclusive environment for all generations.
  • 18% of Gen X employees do not plan to retire, compared to 14% of Millennials and 12% of boomers. More Gen X workers (55%) are behind on their retirement savings than Millennials (49%).
  • When asked to decide between “better benefits or more flexibility,” 57% of Gen X workers chose better benefits such as paid leave, financial wellness programs, legal plans, supplementary health and disability insurance provide resources, compared with 48% of Millennials.

“Eighty percent of all employees want financial wellness programs available to them through work, yet just 20% of employers offer this benefit,” MetLife said.

Roughly two-thirds of Gen X workers say their employers do not provide people management and development skills training or learning opportunities to adapt to technology innovations, yet only 29% of employers consider “up-skilling” current workers.

Engine, a market research firm, conducted MetLife’s 17th Annual U.S. Employee Benefit Trends Study (EBTS) in October 2018. The survey covered companies with at least two employees and included 2,500 interviews with human resource decision makers and influencers and 2,675 interviews with full-time employees, ages 21 and over.

Betsy Palmer takes top communications job at AIG

American International Group has appointed Betsy Palmer has been appointed senior vice president and Chief Marketing Strategy, Communications and Industry Leadership Officer of the insurer’s Life & Retirement division, AIG announced this week.

Palmer will be based in New York, join the Life & Retirement Executive Team, and report to Kevin Hogan, CEO, Life & Retirement. She will lead marketing, communications, stakeholder management, industry thought-leadership, sponsorship and brand positioning activities across Life & Retirement. She will also serve as the Life & Retirement organization’s primary spokesperson.

Palmer joins AIG from TIAA, where she was senior vice president and chief communications officer since 2010. Her previous experience also includes senior marketing and communications roles with EY, BearingPoint and AT&T.

Earlier, Palmer served in communications roles at the U.S. Department of Energy and the White House. She holds a Bachelor of Arts in foreign affairs from the University of Virginia.

New 3.05% fixed income option for retirement plans from Principal

Principal Financial Group has launched the Principal Guaranteed Option (PGO), a new fixed income investment option with a current (March 1 to May 31, 2019) guaranteed crediting rate of 3.05% that will be available to advisors and sponsors of retirement plans.

According a release, PGO offers:

Capital preservation: Seeks to preserve capital and provide a compelling guaranteed credit rate over a full interest rate cycle.

Portability: Customers can maintain interest in PGO even if the plan moves to a new recordkeeper.

Accessibility: Available for 401(k), 401(a)-DC, 403(b) and governmental 457(b) plans.

Guaranteed rates: Crediting rates reset every 6 months.

Solid backing: The guarantees are supported by the multi-billion dollar general account of Principal Life Insurance Company

Rate level flexibility: 14 rate levels available

Regarding rate levels, “As a general account backed guaranteed product, PGO does not have expense ratios,” a Principal spokesperson told RIJ. “The 14 rate levels are available service fee selections that a plan fiduciary can select as part of their overall fee arrangement for the plan to pay for recordkeeping and administrative services provided to the plan.

“The rate level service fee the plan fiduciary selects is deducted from the overall crediting rate for the product, resulting in a net crediting rate that will apply to the plan. For example, the overall crediting rate for the product is 3.05%. If a plan fiduciary elected 0.25% to be deducted to pay for administrative and recordkeeping services to the plan, the resulting net crediting rate for the plan would be 2.8%.”

Principal has developed a new online resource hub for advisors to support their conversations with plan sponsors about fixed income investment options. Features include videos, fact sheets, articles and client-ready materials. Advisors are encouraged to visit principal.com/fixedincome.

MassMutual launches new investment platform for DB plans

MassMutual is launching a “new, expanded and more flexible” investment platform developed with Matrix Financial Solutions, Broadridge company, and designed for defined benefit (DB) pension plans, the mutual life insurer announced.

Financial advisors and plan sponsors can use the platform to access enhanced reporting and on-line functionality, find additional registered investment options, and customize investment offerings, a release said.

The platform is “the latest installment of MassMutual’s longer-term strategy to… support larger pension plans of $200 million or more,” said Michael O’Connor, head of MassMutual’s DB business. MassMutual serves more than 2,600 DB plans totaling more than $20 billion in assets under administration as of Dec. 31, 2018.

The new platform offers self-service reporting capabilities for simplified administration.  Sponsors and advisors can generate reports on trusts, measure investment performance against benchmarks, and create custom reports on individual plans.

The company recently launched its PensionSmart Analysis tool, which examines the plan’s current status, funding level, and service structure. MassMutual’s pension experts can then assess the pension plan’s health. MassMutual has also introduced customized pension yield curves to help plan sponsors measure their pension obligations.

Matrix Financial Solutions is a leading provider of TrueOpen retirement products and services for third party administrators, financial advisors, banks and other financial professionals. It servs more than 400 financial institutions with over $300 billion in customer assets processed through its trading platform.

Stephen Grourke to lead fund-raising at The American College

Stephen J. Grourke, CAP, CFRE, has been named as senior vice present for advancement and alumni relations at The American College of Financial Services, effective April 1, 2019, college president and CEO George Nichols III announced this week.

Grourke will lead the Advancement team, charged with raising funds for the college, and will oversee The College’s current $17.5 million fundraising campaign projected to successfully conclude in 2020. Grourke was most recently executive director for the Office of Estate and Gift Planning at Villanova University.

Prior to Villanova, Grourke spent over a decade at The Nature Conservancy, the world’s leading conservation organization, where he served in a variety of capacities around the country, including associate director of philanthropy in Idaho and director of philanthropy operations in Pennsylvania.

Grourke earned a bachelor of arts degree from Gwynedd-Mercy University and a master of public administration from Eastern Washington University. He holds the Chartered Advisor in Philanthropy designation from The American College of Financial Services, and is a Certified Fund Raising Executive.

NFP to acquire Bronfman Rothschild, merge it with Sontag Advisory LLC

NFP Corp., the large insurance broker and consultant and provider of wealth management, retirement and estate planning to high-net-worth individual clients, said it intends to acquire wealth advisory firm Bronfman E.L. Rothschild, LP.

Upon completion of the acquisition, NFP will integrate Bronfman Rothschild with Sontag Advisory LLC (Sontag), its New York-based wealth management subsidiary. Subject to satisfying closing conditions [and receiving regulatory approval], the transaction is expected to close in the second quarter of 2019.

The combined entity will manage about $10 billion for individual and institutional clients. Howard Sontag, chairman of Sontag, will become chairman of the combined entity; Mike LaMena, president and chief operating officer of Bronfman Rothschild, will become chief executive officer; and Eric Sontag will become president and chief operating officer. A new brand strategy for the combined firms will launch later in 2019.

Bronfman Rothschild is an independent Registered Investment Advisor based in Rockville, Maryland, with offices throughout the Midwest and East Coast.

Sontag Advisory, an NFP Corp. subsidiary, is a New York City based, independent registered investment advisory firm that serves clients in more than 30 states. Recently NFP was named the second largest retirement plan aggregator firm, as ranked by Investment News and the fifth largest US-based privately owned broker.

Ascensus continues to expand by acquisition

Ascensus, the retirement plan recordkeeping and administration specialist, has agreed to acquire Wrangle, the Junction City, OR-based provider of health and welfare Form 5500 filing services to employee benefits brokers and plan sponsors. The services include collecting information from carriers, managing schedules and deadlines, and e-filing information with the Department of Labor.

ERISA compliance, plan documentation, filing, and related services have been among Ascensus’ Retirement, Health, and TPA Solutions business segments have historically provided ERISA compliance, plan documentation, filing and related services.

Ascensus expanded its benefit administration offerings in 2018 by acquiring Chard Snyder and Benefit Planning Consultants, Inc., which provide consumer-directed healthcare administration (e.g., health savings accounts, flexible spending accounts, and health reimbursement accounts) and benefit continuation services (e.g., Consolidated Omnibus Budget Reconciliation Act and retiree billing administration).

“Wrangle owns an almost 25% market share in providing health & welfare Form 5500 solutions and has long-standing relationships with the nation’s largest employee benefits brokers,” says Raghav Nandagopal, Ascensus’ executive vice president of corporate development and M&A., in a release.

© 2019 RIJ Publishing LLC. All rights reserved.

Lessons from a Living (DC) Experiment

Posted on March 28, 2019 by -

Much of the retirement debate in the US today swirls around the “coverage gap.” That’s shorthand for the fact that, at any given time, as many as half of the full time employees in the US don’t have access to an employer-sponsored retirement plan at work. Low-income and minority workers are most likely to fall into that gap.

To shrink the gap, some states have moved to require companies without plans to enable their workers to enroll in state-sponsored IRAs. At the federal level, some large 401(k) service providers want to bundle dozens or even hundreds of small companies and their workers into low-cost “open multiple employer plans.”

Israel has addressed the coverage problem since 2008 with a nationwide mandatory defined contribution (DC) program. All employers and employees must contribute a combined 12.5% of the employee’s pay to a tax-favored savings vehicle of the employee’s own choosing. Employers must also contribute an additional 5% of pay to an unemployment fund that, if unused, can supplement pension savings. Self-employed workers must now contribute too.

Israel and the US are very different, of course. In population, Israel is only a shade larger than New York City. Its fertility rate, fueled by large orthodox Jewish and Arab families with stay-at-home moms, is higher, so as a nation Israel is demographically younger than the US. Its basic old age pension is relatively skimpy when compared with Social Security.

But, in terms of retirement challenges, Israel resembles the US. Ten years ago, a large percentage of its workforce, especially low-income and minority employees at small companies, weren’t participating in a formal tax-deferred plan. With life expectancies rising and the danger that large numbers of elderly would need public assistance, the government had to decide whether to enhance its tax-funded pension or require more private saving. It chose the latter option.

With a Social Security funding shortfall looming in 2034, the US will find itself at a similar crossroads relatively soon. Could some of the lessons that Israel has learned from its decade-long experiment with mandatory DC apply here in the US? As RIJ learned from talking with several of Israel’s retirement experts, mandatory DC is no panacea. A savings mandate can’t magically resolve all of the behavioral, economic, or administrative issues that prevent low-income and minority workers from saving. For some workers, it could make life worse.

Are Israel’s reforms a success?

One of the original advocates of mandatory DC in Israel was Avia Spivak, a now-retired pension specialist at Ben Gurion University of the Negev in Beer Sheva, the largest city in Israel’s arid south. His research for the Bank of Israel showed that poor people in Israel weren’t saving. RIJ asked Spivak if he thought mandatory DC in Israel has been a success.

Avia Spivak

“It’s a mixed bag,” Spivak said in a recent phone interview. “From a coverage standpoint, yes. On the one hand, 70% or more of Israeli employees are now covered by a plan. This is compared to 35% to 40% before 2008.

“Coverage, as you might expect, is associated with higher socioeconomic status. In the first [lowest] quintile of wealth, fewer people are covered. If you’re in the lower quintiles, you don’t get the income tax benefit from saving because you’re below the tax floor. The first problem for defined contribution systems is enrollment. We solved that with the mandatory pension,” he said.

Coverage and participation rates are just half of the story, however. Savings at retirement will, ideally, support a retiree’s pre-retirement lifestyle. RIJ asked Spivak if Israelis are now saving enough to retire on.

“It’s not clear whether [mandatory DC has been] successful in that way or not,” he said. “The amount saved so far in the new pension funds is not what we expected. That’s a real problem. The newness or immaturity of the system explains part of that, but there are still specific people, age 40 or more, who haven’t saved enough. Given the number of years that have passed [since 2008], the size of the funds is less than you’d expect. Money may have gone into other forms of long-term saving. But we don’t have data on that.”

The mandatory DC program, which also includes mandatory minimum contributions, target-date default funds, and mandatory partial annuitization of money saved under the program since 2008, was introduced gradually and has been embraced in Israel, according to Spivak.

“Some economists criticized [mandatory DC at the beginning],” he said, “but it has been very popular. When I run satisfaction surveys, 75% to 80% of the people surveyed say they are satisfied or very satisfied with the system. In the same surveys, we asked people if they would prefer to manage their retirement funds themselves. Only 20% said they would.”

For low earners, the system can backfire

By all accounts, the mandatory system is working well for well-paid, well-educated employees, many of whom had defined benefit pensions coverage before 2008. The system hasn’t necessarily been as effective among low-income and minority workers at small companies.

Research shows that mandatory savings can backfire on workers, especially on those who earn just above than minimum wage. Like low-income workers in the US, they benefit little or not at all from the tax incentives that Israel offers savers. Economic analyses also suggest that all of the mandatory contributions (17.5%), including the employer contribution, come out of their pay, unless they already earn the minimum wage. At retirement, they may receive a lower safety-net pension than if they hadn’t saved at all.

Adi Brender

These have been among the research findings of Adi Brender, an analyst at the Bank of Israel who spoke with RIJ recently. In a 2011 paper, he wrote: “The mandatory pension arrangement has a particular negative effect on workers whose income is below the tax threshold and those whose spouses do not work.”

“There is a large group of workers whose income remains low for most of their working lives and their spouses do not work,” Brender found. “Since the NII pensions [the universal means-tested old age insurance] provide a reasonable solution for these workers during retirement, saving for retirement is not desirable for them. These workers are the vast majority of the mandatory pension’s target group.”

Maya Rosen

Nadav Steinberg, another economist at the Bank of Israel, told RIJ, “Everyone agrees that for people with low salaries, mandatory defined contribution might be problematic. Statistically, there are two populations who are relatively low income, the ultra-religious Jewish men and Arab women, because they have a lower rate of employment relative to the rest of the population.”

Two other aspects of Israel’s retirement program have also encountered difficulty. In Israel, participants are free to choose from a range of savings vehicles and providers. These include (roughly in order of risk, expense and sophistication) pension funds (which allow investment in guaranteed-return government bonds), “provident funds” (similar to mutual funds) and “manager’s insurance” (a more expensive, more personalized bundle of life, retirement and disability insurance). As in the US, target date funds, chosen by the employer, may be used as a default investment for employees who don’t choose an investment.

Reports on the success of this policy are mixed. Competition among providers is said to have brought fees down, but at least one source claimed that fees are reported to have rebounded a bit as providers compete on brand strength rather than price. One source claims that it’s easy for employers to send salary deferrals to many different investment providers, but another says that small employers might simplify their payroll chores by encouraging workers to use a target-date fund chosen by the employer.

Employers might even avoid participation in the mandatory program,  Brender’s research suggested, because they recognize that saving may not be in the best interest of low-paid employees who are already living hand-to-mouth. In short, mandating DC doesn’t magically eliminate or solve every administrative, economic or behavioral issue that stands in the way of full pension coverage and the achievement of an adequate retirement income.

Nadav Steinberg

“There’s the law and then there’s what actually happens,” said Maya Haran Rosen of the Bank of Israel. “The law says that the employee chooses his or her investments and the employer can’t influence their choices.

“But the employer can choose certain funds as the default fund, and people tend to take the default,” she added. “Conflicts of interest can also occur and the employer might prefer it if the employees choose a specific fund where there are less operational costs for him. There are now new default funds for the general public with very low administrative fees that are open for everyone, including low earners, and we can see a reduction of the average fees for all the population.”

Room for improvement

Every prudent-sounding rule seems to create winners and losers. Recognizing that mandatory saving would have little impact on longevity risk without mandatory annuitization, Israel insists that participants annuitize at least enough of their post-2008 tax-favored savings to produce a monthly income of 4,400 shekels or about $1,200. The rest of savings can be taken as a lump sum (with different tax treatment of annuitized wealth and lump-sum payouts).

This seemingly prudent policy will effectively require most of Israel’s low-income retirees to annuitize all of their post-2008 savings. For high-earners, it may counter-productively create a problem known in behavioral finance as “anchoring.”

Orly Sade

“Once regulators impose a minimum level for the annuitization amount, individuals may ‘anchor’ to that number. They may view that as an educated suggestion,” said Orly Sade, a pension specialist at Hebrew University in Jerusalem. “If you set the standard amount too low, then people who were considering taking higher percentage of their savings in an annuity prior to that law, might anchor to that value and take a smaller percentage of annuity, after the initiation of the law.

“Eventually this may be lower than what they need,” she told RIJ. “My research with Abigail Hurwitz and Eyal Winter from the Hebrew University suggests that the public views the constraint as a message. If you put in a low constraint, annuitization will converge on it. We aren’t sure why they set the annuitization amount at about 4,000 shekels. Maybe it was relatively close to the minimum wage.”

Interestingly, the reluctance to annuitize retirement savings that researchers have found in the US and other countries—the “annuity puzzle”—barely exists in Israel, Avia Spivak has written. “Withdrawal preferences in Israel differ from those documented in other countries, as expressed by the tendency to prefer annuitization over receipt of a lump sum,” he and his co-authors wrote in a 2015 paper.

“Israelis seem to trust the system,” Spivak told RIJ in an interview. “That may seem a little odd, but this is Israel.” Israelis, despite their internal political divisions, are unified by external military threats and quite literally rely on the government for their security. “We trust the system because we have to trust the system,” he said. “This system is the lesser of all evils. But there’s room for improvement.”

© 2019 RIJ Publishing LLC. All rights reserved.

Symetra Trek: The Latest Structured (or RILA) Annuity

Posted on March 28, 2019 by -

Symetra Life has become the latest US annuity issuer to bring to market a registered index-linked annuity (RILA), also known as a “buffered” annuity. The product offers five distinct index options, one-year performance caps as high as 15.0%, and protection against either up to or beyond a 10% annual loss.

The product is called “Symetra Trek.” According to the issuer, it offers significant free withdrawals during the six-year surrender charge period, and a one-year point-to-point interest crediting method with either a “buffer” (where the issuer absorbs an annual index drop of up to 10%, but no more) or a “floor” (where the contract owner absorbs an annual index drop of up to 10%, but no more).

Or, as the Symetra Trek product rate sheet explains, “The Buffer provides protection against the first 10% of index losses for each interest term. Losses beyond 10% will reduce the indexed account value. The Floor limits index losses to a maximum of 10% for each interest term. Losses of less than or equal to 10% will reduce the indexed account value.” A product prospectus is available.

The five indices are: S&P500, Russell 2000, NASDAQ-100, MSCI Emerging Markets, and PIMCO Equity Fusion Index. The current one-year cap rates for the performance of those indices are higher for the buffer option, at 12.75%, 12.75%, 13.0%, 15.0% and 13.75%, respectively. The index caps on the floor option are 10.25%, 10.25%, 10.25%, 12.50% and 11.25%, respectively. The guaranteed fixed account rate is 1.60%.

Symetra is touting the availability PIMCO Equity Fusion Index as one of the special features of this contract. As of the end of February, this index was composed of technology-focused equities (30%), US large cap equities (25%), US small cap equities (25%) and emerging market equities (20%).

Since 2011, several life insurers have issued RILAs, including AXA, the product pioneer and category sales leader; Brighthouse (formerly part of MetLife), issuer of the top-selling RILA contract (advertised on TV during this month’s NCAA basketball tournament); Allianz Life, CUNA Mutual, Lincoln Financial, and Great American.

Some RILAs are available with three-year, five-year or six-year terms, in addition to the one-year term, but Symetra, a subsidiary of Sumitomo Life based in Bellevue, Washington, offers only a one-year term on the Trek contract.

“We always measure performance one year at a time,” said Kevin Rabin, vice president of Retirement Products, in an interview. “Certain of our bank and broker-dealer partners require that products have no more than a one-year term. The client gets 10% buffer or floor protection each year. He or she can rebalance every year.

“There are no fees embedded in the product, which capitalizes on our commitment to transparency. There’s an attractive liquidity feature. It gives the contract owner the ability to take out up to 15% of the contract value each year [during the six-year surrender charge period] or all the interest earned in the previous year, penalty-free. That’s a first in this category.

“There’s a clear need in the marketplace for both the buffer and floor strategies. In the beginning [2011], the product category was focused on the buffer. But we heard loud and clear that it was important to offer both floor and buffer protection options,” Rabin told RIJ. While the buffer option exposes the client to severe equity market drops, those drops are relatively rare, and the buffer’s performance caps are about 2.5 percentage points higher than the floor option’s.

“The demand for [Symetra Trek] isn’t coming from the ‘safe money’ people,” he said. “It’s coming from people who have a higher risk tolerance profile. This product is primarily for equity investors who want to manage their downside risk, not people who want a safe investment that has more return potential than bonds.

“Those folks can live with downside risk,” Rabin added. “They can even live with the ‘tail risk.’ They understand that the market has rarely been down more than 10% in a 365-day period. They know that the 10% buffer has covered many downside situations. This product offers a natural transition for someone who wants to dial down his or her equity risk rather than dial it up. It doesn’t replace a diversified portfolio. It’s one more sleeve, with a different risk profile, within a diversified portfolio.”

© 2019 RIJ Publishing LLC. All rights reserved.

AIG tops annuity sales for first time since 2007: LIMRA

Posted on March 21, 2019 by -

For the first time since 2007, AIG Companies has taken over as the top seller of annuities, according to a report released today by LIMRA Secure Retirement Institute (LIMRA SRI). Aside from a new sales leader, there are two new companies in this year’s top five compared to 2017 sales.

[Read an interview with AIG’s individual retirement chief Todd Solash in the March 14 issue of RIJ.]

The top five sellers of total annuities in 2018 representing 32% of market share were AIG Companies, Jackson National Life, New York Life, Lincoln Financial Group and Allianz Life of North America. The top 10 companies held a 53% market share in 2018.

Kevin Hogan, CEO, AIG Life & Retirement, said in a statement, “I am really proud of our entire team, who do an outstanding job leveraging our broad product expertise and diversified distribution network to meet the evolving needs of our customers.

“Our strategy is not about market share but instead to be in a position to compete at scale in each of our businesses. We have a strong presence across fixed, index and variable annuities, and we’re pleased the market has responded so positively to our offerings. I am also very proud of our distribution partners, and look forward to continuing to work closely with them to advance our mission to help people achieve financial and retirement security.”

 

 

 

 

 

 

 

 

Fixed annuities not only had a record breaking sales year, but they also have a new sales leader. According to LIMRA SRI research, this is the fourth consecutive year that annual fixed annuity sales surpassed $100 billion.

The top three sellers of fixed annuities in 2018 were: AIG Companies, New York Life and Allianz Life of North America, representing a combined 24% market share. The top 10 companies held 55% of the market.

This was the first time in six years total variable annuity (VA) sales grew. The three top sellers of variable annuities were: Jackson National Life, AXA US and TIAA, representing a 38% market share. The top 10 companies held a 78% market share in 2018.

To view the entire list of rankings, please visit LIMRA’s Data Bank.

© 2019 RIJ Publishing LLC. All rights reserved.

Fixed Annuities, Unchained!

Posted on March 21, 2019 by -

Fixed deferred annuities, which were once eclipsed by variable deferred annuities, confined to the insurance agent channel, and threatened by federal regulation, have emerged as the chief bread-winners for many life insurers.

And American International Group (AIG), stuck in the morass of the financial crisis for years, emerged as the top issuer of fixed annuities at the end of 2018.

Total fourth quarter 2018 non-variable (fixed and structured) deferred annuity sales were $32.6 billion; up more than 10.1% from the previous quarter and up more than 54.4% from the same period last year, according to the latest edition of Wink’s Sales & Market Report.

Total non-variable deferred annuities sales for 2018 were $113.6 billion, up 29.1% over the previous year, according to Wink Inc.

The non-variable deferred annuities in the study included indexed annuities from 68 issuers, traditional fixed annuities from 54 issuers, and multi-year-guaranteed annuity (MYGA) contracts from 68 issuers and structured (buffered or index-linked) annuities from 10 companies. Wink did not report sales of single premium immediate annuities or deferred income annuities.

AIG ranked as the top carrier overall for non-variable deferred annuity sales in the fourth quarter of 2018, with a 9.8% market share. Allianz Life, Global Atlantic Financial Group, Athene USA, and Massachusetts Mutual Life Companies followed.

Allianz Life’s Allianz 222 Annuity, an indexed annuity, was the top-selling non-variable deferred annuity in the fourth quarter. It was also the top-selling indexed annuity in overall sales for all channels combined for the eighteenth consecutive quarter.

Indexed annuities

Indexed annuity sales for the fourth quarter were $19.2 billion; up more than 8.4% from the previous quarter and up 40.9% from the same period in 2018. Total indexed annuity sales for 2018 were $68.4 billion, an increase of over 26.8% from the previous year. Indexed annuities have a floor of no less than zero percent and limited excess interest that is determined by the performance of an external index, such as the S&P500.

“While sales were down for 2017 because of the Department of Labor [fiduciary rule], 2018’s sales have more than made-up for 2017’s loss,” said Sheryl J. Moore, president and CEO of both Moore Market Intelligence and Wink, Inc., in a release.

Allianz Life once again sold the most indexed annuities, with a market share of 13.6%. Athene USA, AIG, Pacific Life Companies, and Nationwide followed.

Multi-year guaranteed annuity (MYGA) sales

Multi-year guaranteed annuity (MYGA) sales in the fourth quarter were $12.2 billion; up over 12.3% from the previous quarter and up more than 81.3 % from the same period last year. Total MYGA sales for 2018 were $41.3 billion, up 36.1% from the previous year. MYGAs have a fixed rate that is guaranteed for more than one year.

“Every company in the top 15 experienced increases in MYGA sales; that is unprecedented,” Moore said.

New York Life sold the most MYGA contracts, with a 13.0% market share. Global Atlantic Financial Group, AIG, Massachusetts Mutual Life Companies and Symetra Financial followed. Massachusetts Mutual Life Stable Voyage 3-Year contract was the top-selling MYGA for the quarter, for all channels combined.

Traditional fixed annuities

Traditional fixed annuity sales in the fourth quarter were $1.1 billion; up 15.9% from the previous quarter, and up more than 56.8% from the same period in 2017. Total traditional fixed annuity sales for 2018 were $3.8 billion, up 5.1% from the previous year. Traditional fixed annuities have a fixed rate that is guaranteed for one year only.

AIG sold the most traditional fixed annuities in the fourth quarter, for a 13.1% market share. Jackson National Life ranked second, followed by Modern Woodmen of America, Global Atlantic Financial Group, and Great American Insurance Group. Forethought Life’s ForeCare fixed annuity was the top-selling fixed annuity for the quarter, for all channels combined, for the eleventh consecutive quarter.

Structured annuity sales

Sales of structured annuities, which have wider range of risk and return than conventional index annuities, were $4.1 billion in the fourth quarter of 2018, up more than 19.4% as from the previous quarter. Total structured annuity sales for 2018 were $12.2 billion. This is the first year that Wink has reported on structured annuity sales.

Noteworthy highlights for structured annuities in the fourth quarter include AXA US ranking as the top carrier in structured annuities, with a market share of 40.8%. Brighthouse Life Shield Level Select 6-Year was the top-selling structured annuity for the quarter, for all channels combined for the fourth consecutive quarter.

Wink will add a variable annuity sales report to its fixed annuity report beginning in the first quarter of 2019. The firm intends to issue sales reports on additional product lines in the future.

© 2019 RIJ Publishing LLC. All rights reserved.

Side-by-Side Comparison: A VA Minimum Accumulation Benefit Rider vs. an Index Annuity

Posted on March 21, 2019 by -

Let’s imagine that one of your advisory clients is nearing retirement and wants protection against sequence-of-returns risk, a danger as treacherous to 60-something investors as, say, the cataracts of the Nile were to 19th-century British explorers like John Speke and Richard Burton.

In less adventurous terms, those clients simply want to protect their nest eggs against the potential impact of a major market downturn as they pass through what one life insurer has dubbed the “Retirement Red Zone.” As a rule of thumb, the zone of peril begins about five years before the start of retirement and ends about five years afterwards.

Variable annuities (VAs) with guaranteed minimum accumulation benefits (GMABs) and fixed indexed annuities are two competing types of annuities that can protect a client’s principal from loss during the red zone decade, while still allowing a chance for growth—more growth, potentially, than a plain-vanilla fixed-rate annuity could offer.

The upside potential of these products comes from their direct or indirect links to the equity markets. A variable annuity with GMAB offers direct investment of principal in trusts that closely resemble mutual funds but with different tax treatment. Typically, the GMAB rider restricts the degree of equity exposure, however.

A fixed indexed annuity works very differently. Premium is invested mainly in the insurer’s general account but also in options on the equity market. If the stock market goes up, the options appreciate and generate gains. If the market goes down, contract owners can rely on the yield of the bonds in the general account to at least keep them whole.

Which of the two types of annuity contracts was better able to offer both downside protection and upside potential across 10,000 randomly generated market scenarios? [Editor’s note: Insurance-licensed agents can sell FIAs but the sale of variable annuities also requires a securities license. Many, but not all, intermediaries have both licenses and can sell either product.]

To find out, CANNEX, the Toronto-based annuity data shop that has added product-comparison capabilities to its toolbox, recently compared-and-contrasted the performance of the two product types under hypothetical market conditions over a 10-year holding period. New York Life sponsored the study, in which its Premier Variable Annuity II with Investment Preservation Rider 3.0 was compared with several FIAs.

Here’s a summary of what CANNEX found:

  • A VA with a guaranteed minimum accumulation benefit (GMAB) can provide a competitive guarantee relative to an FIA with the added benefit of certainty of the pricing structure for the guarantee term and the possibility of higher upside.
  • The VA had an average annualized return of 4.99% over the 10-year period. One of the FIA strategies, using a 45% participation rate [i.e., could return up to 45% of the index return over 10 years], had an average annualized return of 5.10%, and the rest had lower returns, ranging between 2.45% and 4.54%.
  • When the VA with GMAB outperformed the FIA, the average return was at least 25% greater than the FIA in the same scenario. When the VA with GMAB underperformed the FIA, the average return was no more than 19% less than that of the FIA.
  • Compared against FIA designs with an annual point-to-point crediting strategy [where gains are credited to the account on each contract anniversary], the downside protection of the VA with GMAB does not have the same smoothing effects because the performance is measured once in the same period. This creates a cluster of results where the guarantee would be triggered and the client would receive the return of premium after 10 years. By contrast, the FIA very rarely has returns close to zero.
  • Compared with an FIA crediting strategy using a rate cap [a limit on the gain that will be credited to the account in a given period], the VA with GMAB is more likely to have higher upside. The rate cap creates a tight banding of results with less variance but also a strict limitation on upside. The VA with GMAB outperformed the FIA most of the time and, when it did, generally did so with a high margin.
  • Compared with an FIA crediting strategy using a participation rate [the maximum portion of the market gain that will be credited to the account in a given period], the VA with GMAB is not as likely to out-perform. But when it does outperform, it has the potential for greater upside.
  • To out-perform the VA with GMAB (i.e., to produce better results more than 50% of the time), an FIA strategy using a rate cap must have a cap greater than 8.25%. For a strategy using a participation rate, the participation rate must be greater than 42.30%.
  • GMAB terms are typically static for the full 10-year term, whereas an FIA issuer might change its rates during the life of the contract. In this study, it was assumed that FIA rates did not change. During poor market conditions, an FIA rate change might be to the disadvantage of the contract owner.

© 2019 RIJ Publishing LLC. All rights reserved.

Understanding the Fed’s Dovish Turn

Posted on March 21, 2019 by -

The US Federal Reserve surprised markets recently with a large and unexpected policy change. When the Federal Open Market Committee (FOMC) met in December 2018, it hiked the Fed’s policy rate to 2.25-2.5%, and signaled that it would raise the benchmark rate another three times, to 3%-3.25%, before stopping. It also signaled that it would continue to unwind its balance sheet of Treasury bonds and mortgage-backed securities indefinitely, by up to $50 billion per month.

But just six weeks later, at the FOMC meeting in late January, the Fed indicated that it would pause its rate hikes for the foreseeable future and suspend its balance-sheet unwinding sometime this year. Several factors drove the Fed’s volte-face.

First and foremost, policymakers were rattled by the sharp tightening in financial conditions after the FOMC’s December meeting, which hastened a rout in global equity markets that had begun in October 2018. And these fears were exacerbated by an appreciating US dollar and the possibility of an effective shutdown of certain credit markets, particularly those for high-yield and leveraged loans.

Second, in the latter half of 2018, US core inflation unexpectedly stopped rising toward the Fed’s 2% target, and even started falling toward 1.8%. With inflation expectations weakening, the Fed was forced to reconsider its rate-hike plan, which was based on the belief that structurally low unemployment would drive inflation above 2%.

Third, US President Donald Trump’s trade wars and slowing growth in Europe, China, Japan, and emerging markets have raised concerns about the United States’ own growth prospects, particularly after the protracted federal government shutdown with which the US met the New Year.

Fourth, the Fed has had to demonstrate its independence in the face of political pressures. In December, when it signaled further rate hikes, Trump had been calling for a pause. But since then, the Fed has had to worry about being blamed in the event of an economic stall.

Fifth, Richard Clarida, a well-respected economist and market expert, joined the Fed Board as vice chair in the fall of 2018, tipping the balance of the FOMC in a more dovish direction. Before then, Fed Chair Jerome Powell’s own dovish tendencies had been kept in check by a slightly less dovish staff and the third member of the Fed’s leadership troika, New York Fed President John Williams, who expected inflation to rise gradually above target as the labor market tightened.

The addition of Clarida amid stalling inflation and tightening financial conditions no doubt proved decisive in the Fed’s decision to hit the pause button. But Clarida also seems to have pushed the Fed toward renewed dovishness in more subtle ways. For starters, his presence lends support to Powell’s view that the flattening of the Phillips curve (which asserts an inverse relationship between inflation and unemployment) may be more structural than temporary.

Some Fed researchers disagree, and have published a paper arguing that uncertainty with respect to the Phillips curve should not stop the Fed from normalizing US monetary policy. But with Clarida’s input, the Fed will be more inclined to focus on actual inflation trends, rather than on the official unemployment rate and its implications under traditional models.

Moreover, while Fed staff members tend to believe that the US economy’s rate of potential growth is very low (around 1.75-2%), Clarida, like Powell, seems open to the idea that Trump’s tax cuts and deregulatory policies, combined with the next wave of technological innovation, will allow for somewhat stronger non-inflationary growth.

Finally, Clarida is spearheading an internal strategy review to determine whether the Fed should start making up for below-target inflation during recessions and slow recoveries by allowing for above-target inflation during expansionary periods. And though the review is still in its early stages, the Fed already seems to have embraced the idea that inflation should be allowed to exceed 2% without immediately triggering a tightening.

Taken together, these factors suggest that the Fed could remain in pause mode for the rest of 2019. After all, even a recent modest acceleration of wage growth does not seem to have produced higher inflation, implying that the Phillips curve may stay flatter for longer. And, given the Fed’s new de facto policy of targeting average inflation over the course of the business cycle, a modest, temporary increase in core inflation above 2% would not necessarily be met with policy action.

But while the Fed is most likely to remain in a holding pattern for the bulk of 2019, another rate hike toward the end of the year or in 2020 cannot be ruled out. China’s growth slowdown seems to be bottoming out, and recovery there could start to strengthen in the coming months, especially if the current Sino-American negotiations lead to a de-escalation of trade tensions.

Likewise, a deal to avert an economically disastrous “hard Brexit” could still be in the offing, and it is possible that the eurozone’s slowdown – especially Germany’s – will prove temporary. Moreover, global financial conditions are easing as a result of the Fed and other central banks’ renewed dovishness, and this could translate into stronger US domestic growth. Much will depend on whether Trump abstains from launching a separate trade war against the European auto industry, which would rattle equity markets again.

Yet, barring more fights over the US federal budget and the debt ceiling – not to mention possible impeachment proceedings against Trump – the US could be spared serious domestic political and policy shocks in the months ahead. If US GDP growth does remain resilient this year, some acceleration of wage growth and price inflation could follow, and core inflation may even rise above target in the second half of the year or 2020.

And while the Fed seems willing to tolerate a period of temporary above-target inflation, it cannot allow that to become the new status quo. Should this scenario arise later in the year, or next year, the Fed could hike its baseline rate by another 25 basis points before settling into a protracted pause. Either way, the new normal will be a US policy rate close to or just below 3%.

© 2019 Project Syndicate.

Honorable Mention

Posted on March 21, 2019 by -

Global Atlantic and RiverSource complete reinsurance deal

Global Atlantic Financial Group has executed a $1.7 billion fixed annuity reinsurance transaction with RiverSource Life Insurance Company, an affiliate of Ameriprise Financial. With the deal, Global Atlantic has reinsured $27 billion of assets since its founding in 2004.

In its Institutional business, Global Atlantic offers custom reinsurance products solutions for U.S. life and annuity insurance companies. The company was founded at Goldman Sachs in 2004 and separated as an independent company in 2013. It has $75 billion in GAAP assets as of December 31, 2018.

Global Atlantic Financial Group is the marketing name for Global Atlantic Financial Group Limited and its subsidiaries: Accordia Life and Annuity Co., Commonwealth Annuity and Life Insurance Co., Forethought Life Insurance Co., and Global Atlantic Re Ltd. Each subsidiary is responsible for its own financial and contractual obligations.

Empower Retirement partners with advisory firms on 401(k) managed accounts

Empower Retirement this week announced a new means of delivering customized advisory services to workers saving for retirement through close collaboration with the skills and expertise of financial advisors. The new program is called Advisor Managed Accounts.

Advisor Managed Accounts (AMA) drive integration between advisor firms and Empower. They combine advisors’ portfolio construction and plan design expertise with Empower’s newly redesigned technology platform.

Empower serves approximately nine million Americans participating in some 39,000 retirement plans. The provision of advice to those individuals typically occurs through retirement managed accounts, which provide personalized retirement planning through an analysis of an individual’s goals, demographic data and full financial picture.

AMA allows advisor firms to offer managed account services to their Empower Retirement clients, leveraging Empower’s advisory services infrastructure. Advisor firms serve as the registered investment advisor for the service and provide the investment expertise as well as pricing and branding.

AMA is offered through Advised Assets Group, LLC (AAG), which also provides Empower Retirement Advisory Services.

Empower launched AMA in partnership with advisory firms SageView Advisory Group, LLC, Mesirow Financial Retirement Planning and Advisory and Resources Investment Advisors, LLC, none of which are affiliated with Empower. Empower has invited other advisory firms to offer AMA to their clients.

A white paper published by the Empower Institute last year lays out the fundamental value of using a managed account for retirement savings purposes. The paper, “Made to Measure: Evaluating the Impact of a Retirement Managed Account,” contains further details.

AMA is Empower’s latest initiative involving managed account services. In 2017, the firm launched “Empower Dynamic Retirement Manager,” which integrates target date funds with managed accounts.

Last year, Empower introduced “My Total Retirement,” which can guide plan participants from goal-setting at the start of their careers through a withdrawal strategy at the end. The AMA offering is geared toward advisor-sold plans of any size. The program is available to advisors serving any employer-sponsored retirement plan.

Among women, good intentions about retirement go unfulfilled: Lincoln

Women want to plan for retirement and their family’s future, but certain obstacles “keep them from reaching the positive outcomes they seek,” according to a recent survey by Lincoln Financial Group.

Lincoln Financial’s “Love and Responsibility Survey” shows that most women say planning for their retirement is a priority (90%) and their family’s future is important (84%). But over seven in 10 feel they are not acting on those priorities. Seventy percent of women say they are worried they will run out of money in retirement. Of those, only 20% say they have a plan in place.

Women also cited the following barriers to the financial planning process:

  • Current expenses make it hard to set aside money for the future (58%)
  • Lack of time for financial planning (44%)
  • Feeling less educated about retirement planning (52%) and personal financial planning (55%) than they should be

Women’s knowledge of certain financial products and solutions is lower than men’s, the study showed. Women acknowledged knowing little about annuities (61% versus 45% men) or long-term care (50% versus 41% men).

While women rank their partners/spouses (42%) as their main sources of financial information, men rely on financial professionals (37%). Both women and men prefer not to discuss finances with others, but 72% are open to working with a financial advisor.

Lincoln Financial will be hosting a live Twitter chat on this topic, moderated by Anita Grossman, a registered representative of Lincoln Financial Advisors. Tweet questions live on March 27, 2019 at 1:00 p.m. ET using the hashtag #LFGWomen.

The 2018 Lincoln Love & Responsibility Survey is based on responses from 2,393 Americans ages 18+ from June 28 to July 3, 2018. The survey was conducted by Whitman Insight Strategies on behalf of Lincoln Financial Group.

Life/annuity industry income rises 8.5% in 2018: AM Best

The U.S. life/annuity industry’s total income for year-end 2018 increased 8.5% from the prior year, thanks to a $54.1 billion increase in other income that offset modest increases in premium and annuity considerations and net investment income, according to an AM Best analysis.

These preliminary financial results are detailed in “First Look – 2018 U.S. Life/Annuity Financial Results,” a new Best’s Special Report. The data is derived from companies’ annual statutory statements that were received by Mar. 14, 2019, representing an estimated 93% of total industry premiums and annuity considerations.

The boost in total income was due to $50 billion of reserve adjustments on reinsurance ceded at American General Life Insurance Company, Voya Insurance, Delaware Life Insurance Company and Hannover Life Reassurance Company of America (related to the execution of Modified Coinsurance Agreements and the recapture of retrocessions from foreign affiliates), the report said.

Total incurred benefits rose 12.3% from the prior year due to a $76 billion increase in surrender and other benefits. Pretax net operating gain for the industry declined to $44.3 billion in 2018, down 19.7% from the prior year.

An $8.1 billion reduction in federal and foreign taxes and a $2.4 billion reduction in realized capital losses resulted in total industry net income of $36.7 billion remaining relatively flat with the prior year.

© 2019 RIJ Publishing LLC. All rights reserved.

A Chronicle of ‘NARIA,’ Nationwide’s Income-Generating VA for RIAs

Posted on March 21, 2019 by -

Nationwide has added a no-commission deferred variable annuity (VA) with a lifetime withdrawal rider to Nationwide Advisory Solutions, its annuity sales platform for RIAs (registered investment advisors). Nationwide acquired the platform when it purchased Jefferson National in March 2017.

The new offering is called NARIA, for Nationwide Advisory Retirement Income Annuity. It lets RIAs offer their clients a source of tax-deferred savings and guaranteed lifetime income with considerable investment flexibility. It also allows RIAs to deduct up to 1.5% a year in advisory fees from the contract without reducing the income guarantee.

Craig Hawley

“Our research shows that nearly two-thirds of RIAs and fee-based advisors say their clients are more likely to seek guaranteed income since the financial crisis,” said Craig Hawley, the head of Nationwide Advisory Solutions, in an interview this week. “That’s a disconnect for them, and we have a great solution for it. The tech integrations we’ve built are also an enormous advantage.

“We know that a lot of fee-based advisors are not insurance experts, so we provide a licensed agent desk for free. In the past, advisors have been referring insurance to others, but this is something we do for them as part of our offering. There’s no additional platform fee. Access to the licensed agent desk is part of the product offering.”

The “Retirement Income Developer” income rider costs 0.80% (capped at 1.25% or 0.95% for joint-life contracts, capped at 1.40%). The payout rate starts at 4.50% of the benefit base when the youngest contract owner is 59½ to 64 and rises to 5.50 when he or she reaches age 75. If the owner defers income for at least five years, the payout rates bump up by 50 basis points. There’s a 0.15% administration fee and a 0.05% mortality and expense risk fee. Investment option fees range from 0.16% to 3.01%.

There are some investment restrictions for rider-users. The advisor can choose from 130 different investment options from Nationwide and other mutual fund companies, but the overall equity allocation can’t exceed 70% (Nationwide rebalances the account quarterly). Alternately, the advisor can rely on a dozen or so Nationwide asset allocation portfolios.

By adding annuities with insurance features to an RIA platform, Nationwide is pushing into territory where Jefferson National didn’t tread. Jefferson National limited its business to helping RIAs buy and manage a flat-fee ($20 per month) variable annuity (Monument Advisor) strictly for the purpose of tax deferred trading and growth, Nationwide is using the same platform to offer no-commission annuities with income and death benefit features.

Like many other annuity issuers, Nationwide hopes that RIAs, who typically don’t use insurance products, will recognize the need for guaranteed income among their boomer clients and start recommending annuities–but only if the issuers simplify the contracts, strip out the commissions, lower the fees and integrate annuities into their existing wealth management process.

“It’s not a ‘product conversation’ with RIAs,” Hawley told RIJ. “Advisors view the world through a planning lens, and they want to know how to achieve outcomes. We have to ask, ‘What are the solutions you need?’ Then we can show them a solution that meets that need.

“If RIAs say, ‘I have customers who want to save now and who want a certain amount of income later,’ and we can show them how they can build the benefit base over time and how their client can turn on income down the road, then our story will resonate with them,” he added.

There are now three annuities on the Nationwide Advisory Solutions platform. Aside from NARIA, there’s a Nationwide no-commission single premium immediate annuity as well as Monument Advisor, the investment-only variable annuity contract originally issued by Jefferson National.

Nationwide faces potential competition in this space from RetireOne, DPL Financial, and the forthcoming Envestnet Insurance Exchange. One difference is that the Nationwide platform is for Nationwide products only. Nationwide also has the advantage of a head start. With its acquisition of Jefferson National, it inherited some 4,000 individual RIA relationships and has added about 1,600 more.

The CEO of DPL Financial is David Lau, one of the founders of Jefferson National. Lau told RIJ in an email this week, “I had a non-compete [with Nationwide] which expired prior to launching the distribution aspect of DPL. While we both compete for RIAs, our business model is different — we represent a variety of carriers whereas they only have proprietary products.”

© 2019 RIJ Publishing LLC. All rights reserved.

What Advisors Want from Annuity Issuers

Posted on March 21, 2019 by -

Starting more than two decades ago, many of the major life insurance companies switched to distributing their products through independent intermediaries instead of through captive sales forces. The change forced insurers to compete against each other for advisors’ loyalty—by paying attractive commissions and/or issuing appealing products.

More recently, many investment advisors’ revenue models evolved from selling products for a commission to selling advice for a fee. As a result, the power of manufacturer-paid commissions to drive annuity sales has been diluted. For future sales growth, annuity issuers must convince more fee-based investment advisors that annuities are worth buying.

So far, life insurers aren’t doing too badly. Annuities are designated hitters, so to speak, in the financial instrument lineups of most investment advisors, not everyday players. Relative to reasonable expectations, annuity issuers can point to progress in penetrating the advisor market, especially in the independent broker-dealer channel. RIAs (registered investment advisors) remain resistant, however.

Howard Schneider

What do advisors say about insurers? RIJ recently received a copy of “What Advisors Want from Annuity and Insurer Providers-2019,” a study by Practical Perspectives, the Boston-area financial services market research firm.

Over some 120 pages of text and charts, the survey provides both statistical data and anecdotal responses to questions regarding annuities and annuity issuers from advisors in three distribution channels: full-service broker-dealers (wirehouses), independent broker-dealers, and RIAs (registered investment advisors).

Howard Schneider, the president of Practical Perspectives, spoke with RIJ this week about his study. He shared some of the impressions he received while talking directly to advisors, including many RIAs. While upbeat about the potential for life insurers to persuade RIAs in particular to recommend annuities to their clients, he did not downplay the obstacles.

Annuity issuers are having their greatest success with the one-in-four advisors whom Schneider describes as annuity “enthusiasts.” Members of this group are most likely to be found at independent broker-dealers and to accept commissions on annuity sales. But a couple of factors are eroding the numbers of annuity enthusiasts.

Some of these advisors, too new to have large enough books-of-business for a fee-based practice, rely on commissions temporarily, and it’s not clear if they’ll continue to sell annuities in the future. Enthusiasts also tend to be older than the average advisor, Schneider found. As they retire, it’s not clear who will replace them.

There is of also a fundamental obstacle to expanding annuity sales among investment advisors: insurance products are peripheral to what they do. “One of the conclusions of our study is that, even for advisors in the independent channel, who often use annuities and insurance, it’s not core to their relationship with their clients. It’s an add-on,” Schneider said. “It’s an important add-on to some of them, but not the foundation of their relationships. That relationship is based on investment planning, which leads however to risk management, which raises the subject of insurance.”

From the Practical Perspectives study.

The study confirmed the axiom that annuities are typically discussed at a milestone in the client’s life, such as a retirement. “We asked advisors to describe the circumstances in which they recommended annuities, and the second most frequent answer was ‘changing circumstances,’” Schneider said. The most frequent answer was, “When preparing a comprehensive financial plan.”

“They don’t bring up insurance or annuities on an ad hoc basis,” he added. “They’re willing to suggest annuities when the needs arise, but not at every opportunity. The topic is usually driven by the planning cycle, when they’re addressing an issue that requires insurance.”

RIA clients are likely to be wealthier and not as risk-averse as most Americans, so they’re less receptive to products, like index annuities, that promise no investment loss if held to term, Schneider told RIJ. Investment advisors and their clients tend to be risk-takers; buying an annuity means transferring risk to a life insurance company and, in most cases, paying the insurer to take it.

“RIAs tend to deal with clients who have less need for insurance solutions like, for instance, principal-protected products,” he said. “RIAs have told me, ‘I understand the value of an indexed annuity over the short-term, but our firm has a strategy that we think will provide better returns over the long-term.’ There’s some risk involved but most of their clients are willing to accept risk. Their clients will accept more risk than, say, clients of advisors at banks [who tend to have less savings than RIA clients].”

The sheer newness and scarcity of no-commission annuities is also limiting the pace of annuity sales to RIAs. “Another challenge, obviously, is that RIAs are fee-based. While no-commission annuities are available today, the products are relatively new and many have limited functionality. Many RIAs have come up through the securities industry, where insurance product sales are one-off events. A high percentage of them are pure RIAs; half are not insurance licensed,” Schneider said.

“Many of them will discuss insurance with clients but then they’ll say, ‘Go see your insurance agent about that,’ or ‘Go to a provider of low-cost insurance. Some have insurance affiliates. Their model for engaging with insurance and annuities is different, and that’s going to limit demand.”

Annuity issuers also face a potential communication disconnect when they send sales-trained wholesalers to talk to RIAs. Brain-wise, life product sales pitches historically appeal, at least in part, to the limbic system, and RIAs tend to operate from the cerebrum.

“RIAs are very analytical. They might look at the internal rate of return on an insurance product and say, ‘It doesn’t measure up to what I can do.’ But in doing that, they may not consider the value of the insurance. It’s hard to put a value on insurance; at the same time, you can’t compare annuities with investments without ascribing some value to the insurance component,” Schneider told RIJ.

In general—and investment advisors have voiced this complaint for years—RIAs aren’t hearing what they want to hear from life insurer reps. They want better quantification of the value of annuities, such as mortality credits or the ability to create more risk capacity in another part of the portfolio. They also want to hear the truth, preferably without varnish.

“RIAs tend to say that the information they get from insurance companies is biased and not objective. They want to know exactly what type of client in what type of situation will be helped by a particular product. They want a clear understanding of the benefits. They want to be educated, not sold. In terms of understanding the RIA mindset, the asset management firms are up to speed but the insurance firms are still behind the curve,” Schneider said.

“They also want to understand how the product will perform in certain situations,” he added. “Some of the ways in which these products have performed have surprised people, and they don’t like to be surprised. They say, ‘If I don’t understand something, I won’t offer it to my clients.’ RIAs do not want an over-hyped sales approach. Many of them became RIAs to get away from pushing products.”

© 2019 RIJ Publishing LLC. All rights reserved.

Trade Tantrum

Posted on March 13, 2019 by -

The latest piece of news to rattle the market was the revelation that the trade deficit for goods widened to a record $900 billion last year. We believe that the focus on the magnitude of the trade deficit is misplaced.

First of all, we strongly believe that trade is good. When countries trade with each other there is a wider variety of goods and services available at lower prices than there would be in the absence of trade. Both countries win. A trade deficit simply means that one country bought more goods from other countries than those countries bought from it.

Thus, trade deficits are not necessarily bad. The problem with trade is that all countries do not play by the same rules. Some countries cheat. The Chinese, for example, steal trade secrets, they do not respect copyright or patent laws, and they require foreign firms that want to do business in China to share their technology.

Furthermore, the yawning trade gap perhaps indicates that current trade agreements like NAFTA, as well as trade agreements with Europe and Japan, were not well negotiated and allowed other countries to take advantage of the U.S. One can make a case that the U.S. has been subsiding growth in other countries at its own expense for years. So, while the magnitude of the trade deficit is not a concern, there are fairness issues that must be addressed.

The trade deficit for goods widened to a record $900 billion in 2018. But so what? The wider deficit reflects the fact that our economy was growing faster than others and, as a result, imports rose sharply. It also means that foreigners now have $900 billion dollars to invest in the U.S. Those foreign firms could start businesses here, hire American workers, and/or invest in our stock and bond markets. What is so bad about that?

Trade is a relatively small segment of the U.S. economy and accounts for a mere 10% of GDP. Thus, the rather impressive widening of the trade gap last year subtracted a mere 0.2% from GDP growth. It is hard to conclude that the wider trade gap had any major negative impact on the U.S. economy.

Nevertheless, Trump initiated a trade war because he was concerned about the size of the trade deficit. His goal was to shrink the trade deficit and bring back jobs to the U.S. But nearly one-half of the U.S. trade deficit is with one country—China. We do not have a trade deficit problem with Canada, Mexico, Europe, Japan, or OPEC. Just China. If Trump was truly concerned about the magnitude of the trade deficit, we believe that he should have targeted those countries where the trade gap is largest.

But Trump didn’t do that. He chose to impose tariffs across the board, which impacted our neighbors, friends and allies alike. Not surprisingly, the imposition of tariffs by the U.S. generated retaliation by many other countries and a trade war was underway.

While trade is a relatively small portion of the U.S. economy, it is roughly 50% elsewhere. Once the trade war began, investors scoured the globe to figure out which country might perform best. The answer they came up with was the U.S., because trade is such a small part of the U.S. economy. As a result, money flowed into the U.S. stock and bond markets and the dollar jumped 10% last year.

There are no winners in a trade war. Everybody loses. But not everybody loses equally. GDP growth in the U.S. was reduced by about 0.2% last year. But, given that trade plays a major role in everybody else’s economy, their growth rates have been reduced more sharply. In the past six months, for example, the IMF has cut its forecast for growth in emerging economies this year by 0.5%. Growth rates for developed countries have also been negatively impacted.

Given that growth rates everywhere around the globe are slowing, their currencies are weakening, and their stock markets have declined, the pain of tariffs is intense. As a result, many countries are rushing to complete trade deals with the U.S. New deals have already happened with Mexico and Canada. Deals with the E.U. and the U.K. seem to be relatively close (though Brexit may delay their completion). A deal with China seems imminent.

We expect to see all of these deals completed soon simply because it is in the best interest of both sides. If that happens, we could end up with freer trade and a more level playing field that what we had initially. The process was ugly, and it may not have been the optimal way to achieve the goal but, in our view, progress was made.

If, as part of those negotiations, there is an agreement for other countries to purchase more U.S. products, the trade deficit may well shrink in the months and quarters ahead.

Sit back. Breathe. The world did not end just because the trade deficit widened to a record level last year.

© 2019 RIJ Publishing LLC. All rights reserved.

Concord Coalition blasts Trump budget proposal

Posted on March 13, 2019 by -

President Trump’s proposed 2020 budget “does not provide a realistic plan for the coming fiscal year and—even worse—fails to lay out a credible path to fiscal sustainability,” the Concord Coalition said in a statement released this week.

“The combination of deep spending cuts for non-defense programs and a large increase in defense spending, assisted by a blatant gimmick to avoid existing budget caps, has the potential to induce congressional gridlock on Fiscal Year 2020 appropriations,” said Robert L. Bixby, the Concord Coalition’s executive director, in the release.

“Over the longer term, the budget’s purported success at reining in the growing debt relies upon very rosy economic assumptions and improbable spending cuts, mostly targeted at portions of the budget that are not projected to see the fastest growth. Even with all of its favorable assumptions, the president’s plan would not produce a balanced budget until 2034.”

The budget is based on economic growth assumptions that are considerably higher than most other forecasts, with the administration projecting inflation-adjusted GDP growth at 3% or above through 2024. This substantially boosts assumed revenue. The administration is projecting individual income tax revenues higher than the Congressional Budget Office (CBO) baseline, which assumes that the individual income tax cuts from 2017 expire, the release said.

Non-defense appropriations, which make up roughly 16% of the budget, would be reduced by more than $1 trillion over 10 years. Nothing in recent experience would suggest that cuts of this magnitude are anywhere near likely to be enacted.

Trump’s budget calls for a boost in defense spending via the Overseas Contingency Operations (OCO) funding. The budget proposes to spend above defense spending caps over the next two years by increasing OCO funding from $69 billion this year to $165 billion in 2020 and $156 billion in 2021.

Such funding, which does not count against current spending caps, is supposed to be used for conflicts abroad. “OCO funding has long been used as a way to slip some extra money into the Pentagon, but Trump’s new budget plan takes this to an entirely new level. It is over the top. The administration’s bizarre explanation is that the ‘only fiscally responsible way’ to avoid ‘unaffordable’ increases in spending caps is to circumvent them,” Bixby wrote.

© 2019 RIJ Publishing LLC. All rights reserved.

Financial industry mobile apps don’t measure up: JD Power

Posted on March 13, 2019 by -

Mobile phone applications for wealth management aren’t being used much by older, high net worth investors, according a preview of the J.D. Power 2019 U.S. Wealth Management Mobile App Satisfaction Study, released today.

“Concerns about security are likely affecting usage rates and result in negative influences on satisfaction and customer advocacy,” said a J.D. Power release.

Fifteen mobile apps, produced by the following 15 companies, were evaluated in the study:

  • Ameriprise Financial
  • myAXA
  • Schwab Mobile
  • P. Morgan Mobile
  • E*TRADE Mobile
  • Edward Jones Mobile
  • Fidelity Investments
  • Merrill Edge
  • MyMerrill
  • Morgan Stanley Wealth Management
  • Rowe Price Personal
  • TD Ameritrade Mobile
  • USAA Mobile
  • Vanguard
  • Wells Fargo Mobile

Key findings of the study preview include:

High net worth hold-ups: High net worth customers (those with $1 million or more in investable assets) are significantly less satisfied with their wealth mobile apps than other customer segments. Wealth management firms, more than other industries, need to ensure their mobile experience meets the needs of the high net worth segment as well as younger customers.

What, me worry?: Security matters. While more than half (55%) of respondents indicate they perceive the information on their mobile app is “very secure,” anything less than that rating is seen as failure in the eyes of customers. Notably, 45% of customers effectively give their app a failing grade. Satisfaction among customers who say their app is “very secure” averages 895 vs. 788 (on a 1,000-point scale) among those who say it is less than very secure. Among customers who perceive the app is very secure, 71% say they “definitely will” recommend it. Among customers who have any doubts, that percentage drops to 29%.

User interface is a stumbling block: Wealth management app users say that the apps are too text-heavy, lack visuals and look dated. Challenges with basic tasks materially reduce satisfaction and are likely contributors to reduced usage. By contrast, top-performing banking and credit card apps frequently update their interfaces updates and have clearer designs.

Advice still matters: A mobile app is a self-service experience, but customers who have a personal relationship with an advisors report average satisfaction levels of 857, while those who have no advisor relationship report lower overall satisfaction (817).

The full study will be released in November. It evaluates customer satisfaction with wealth management mobile apps based on five factors (in order of importance): range of services/activities; clarity of the information provided; ease of navigating; appearance; and speed of screens loading.

The preview of the 2019 U.S. Wealth Management Mobile App Satisfaction Study is based on responses from 2,478 full-service and self-directed wealth management firm customers. It was fielded in November-December 2018.

© 2019 RIJ Publishing LLC. All rights reserved.

https://www.jdpower.com/business/resource/us-wealth-mobile-app-study

Why So Many Blacks in Financial Ads?

Posted on March 13, 2019 by -

Considering how frequently black actors and biracial couples appear in television and print advertising for financial products and services, a visitor to Earth from a distant galaxy might conclude that black Americans account for a significant portion of America’s moneyed class.

To cite one recent example: the Alliance for Lifetime Income, which mainly promotes deferred variable annuities with lifetime income riders, recently sent me an email illustrated by a photo of a young black advisor working at a desk in a New York office tower. There’s nothing wrong with referencing black advisors, but they represent less than four percent of America’s advisor corps and the Alliance’s target market is presumably affluent older whites. (See below.)

Since black Americans are, on average, worse-off financially than white Americans, you have to wonder why they’re overrepresented in ads. Despite ample reporting on the emergency in savings rates among blacks in recent years, the number of black actors appearing in financial ads seems to have increased. Casting decisions for major ads are never accidental, so there must be an explanation. So far, I haven’t found it.

It bears repeating: There’s a Grand Canyon-sized gap between image and reality with respect to finances of black people in the US. According to the Federal Reserve’s Survey of Consumer Finances (SCF), median income in 2016 was $61,200 for white households but only $35,400 for blacks. Black families’ median net worth was less than 15% that of whites ($17,600 vs. $138,200).

In 2016, median non-Hispanic white net worth ($171,000) was ten times median black net worth ($17,000), according to the Tax Policy Center. According to the book, Financial Capability and Asset Holding in Later Life: A Life Course Perspective (Oxford, 2012), 70% of African Americans had saved less than $25,000 (compared to about 50% for all workers) and only 4% had saved more than $250,000, compared to 14% for all savers.

Only 9.4% of non-Hispanic African Americans had assets in an annuity or IRA, compared to 46% for non-Hispanic whites, according to the same source. In 2009, data showed that African Americans had median net worth of $37,100 if a home was included in the calculation and $5,000 if it was not. (From a chapter by Trina R. Williams Shanks and Wilhelmina A. Leigh.)

Industry studies

Two recent surveys by members of the retirement industry, one by New York Life and the other by LIMRA Secure Retirement Institute (SRI), approach the black/white differential through factors other than income or wealth and present their own pictures of the situation. (Prudential has also studied the African American retirement experience in depth.)

New York Life’s Life Insurance Gap study, reported a week ago, shows that African Americans report “more financial stress than the overall population.” According to the study, half of African Americans say that planning for the future causes a “high degree of stress,” versus 44% of all US adults. Three in 10 (31%) African Americans report not feeling financially secure, versus two in 10 (21%) overall.

Half of African Americans say “having enough saved” is a stressor, versus 42% of all adults; 42% of African Americans are concerned about debt levels versus 30% of all adults; 46% of African Americans report being concerned about maintaining their current income versus 34% of all adults.

Despite higher financial stress, African Americans are more likely to seek out expert guidance, with nearly 80% saying they would consider seeking professional help from a financial advisor. Of those who already work with an advisor, 65% say they meet with their advisors more than once per year, versus 49% of all US adults.

LIMRA SRI

LIMRA SRI’s recent survey of black American showed that black Americans are less likely than the general U.S. population to work with a financial advisor (33% versus 37%), and that black Americans who do have financial advisors are less likely to consult their advisors before making financial decisions about retirement.

In general, according to LIMRA SRI, black Americans are more likely to consult immediate family members for financial advice. Financial advisors who want to increase their ethnic clientele should therefore include the entire household in the formal planning process for retirement.

LIMRA’s report, “Black Americans and Retirement Planning: Bridging the Advice Gap,” shows that black Americans prefer working with financial advisors who are involved in their communities and who have worked with ethnic minorities. Four in ten black Americans feel they don’t have enough money to work with a financial advisor.

Black American pre-retirees are less likely than other pre-retirees to have completed key retirement planning activities, such as calculating the amount of assets they’d have available to spend in retirement (29% versus 44% for the general population) or developing a specific plan or strategy for generating income from retirement savings (15% versus 28%). Prior LIMRA SRI research has found that pre-retirees who complete these activities are more confident in their retirement outcomes.

Sixty percent of black Americans own life insurance versus 59% of all Americans, according to the 2018 Barometer Insurance study. That study found that there was no difference (both 68%) between black Americans and all Americans when identifying with the sentence, “I personally need life insurance.”

LIMRA data also shows that black Americans own life insurance for the same top three reasons that all Americans do: to cover burial and other final expenses, to replace lost wages of a deceased wage earner, or to transfer wealth at death.

According to the New York Life study, nearly 80% of African Americans rank having life insurance as a priority financial goal, versus just 63% of all adults, and 93% say it helps future generations succeed.

African Americans told New York Life they purchase life insurance for these reasons:

  • 83% view it as a key way to take care of their families
  • 68% want their life insurance proceeds to pay for a child’s college education
  • 37% percent intend to leave a legacy
  • 28% use life insurance to transfer wealth

Many whites, anecdotally and in the media, blame low incomes and low wealth accumulation among blacks on a lack of saving or frugality—that is, on personal rather than social factors. A retirement industry executive once told me that if poor people paid more in taxes, instead of simply “taking” from tax-paying “makers,” then they might feel more of a stake in American society and would work harder.

From a Northwestern Mutual ad

That’s easy to assume, especially if you don’t know any poor Americans. It’s a lot than easier than trying to understand why blacks have so little income or wealth. A presentation by University of Georgia Law School professor Mehrsa Baradaran at last December’s “Money as a Democratic Medium” conference at Harvard Law School, shed a lot of sunshine on that topic.

Black Americans as a group, she demonstrated with ample documentation, have since 1865 been systematically denied access to mortgage loans and low-cost credit, to union jobs (outside of public services), to good schools, to infrastructure spending in their neighborhoods, to the ballot box and to equal treatment in the criminal justice system.

So, if all or even most of this research is true, then why do we see such a predominance of black actors (and biracial couples and families) in financial services ads—and in most TV ads? Maybe, as some have suggested, advertisers believe that white audiences will infer that where blacks can succeed, whites can succeed. Or maybe advertisers are sincerely trying to reach an untapped black audience. Or perhaps advertisers simply intend to reflect a changing world, one in which an event like the marriage of Meghan Markle and Prince Harry is commonplace.

Based on the incongruity between appearance and reality (in terms of wealth), I suspect that placing black actors in financial ads is an inoculation against the inquiries or accusations of racism that would likely follow if blacks were represented in ads only in proportion to their actual numbers within the financial services target market. The presence of blacks in financial ads may be increasing because news coverage of the financial gap between the races has increased. Only the people who commission or create the ads would know for sure.

© 2019 RIJ Publishing LLC. All rights reserved.

Talking Annuities with AIG’s Todd Solash

Posted on March 13, 2019 by -

Although American International Group’s (AIG) property-casualty division withstood a big financial hit from natural disasters over the past year, the individual annuity segment of the global insurance company’s life and retirement business has continued to post strong sales. AIG has been pursuing a balanced product strategy, with competitive entries in the variable, fixed and index annuity categories.

For the fourth quarter of 2018, AIG’s Individual Retirement business reported $3.8 billion in total individual annuity sales (variable sales of $700 million, fixed sales of $1.7 billion and index sales of $1.4 billion). For all of 2018, the division reported $3.1 billion, $4.8 billion and $4.3 billion in those categories, respectively, for a total of $12.2 billion (See chart below right).

AIG’s entire Life and Retirement group, including Individual Retirement, Group Retirement, Life Insurance, and Institutional Markets, posted industry-leading combined sales of $18.4 billion, according to data released last week by the National Association of Insurance Commissioners (See chart at far right).

[AIG Life and Retirement encompasses American General Life; The Variable Annuity Life Insurance Company (VALIC); The United States Life Insurance Company in the City of New York (U.S. Life); Laya Healthcare Limited and AIG Life Limited.]

Even for AIG’s Life and Retirement business, last year wasn’t easy. It was buffeted by the slump in equity values last fall, industry-wide declines in variable annuity sales, lower reinvestment yields, and a high rate of surrenders and withdrawals, especially in its retail mutual fund business, according to AIG’s 10-K form for 2018. These factors led to a 17% decline in adjusted pre-tax income from Life and Retirement businesses in 2018, to $3.19 billion, compared to $3.83 billion in 2017.

For a closer look at AIG’s annuity business, RIJ spoke with Todd Solash, president of Individual Retirement at AIG. Solash joined AIG in February 2017 after serving as head of Individual Annuities at AXA for six and a half years—a period prior to AXA’s 2017 reorganization as AXA Equitable Holdings, when the firm pioneered the successful index-linked or “buffer” category of deferred variable annuities.

RIJ: What did you come over to AIG to do?

Solash: I came to AIG because of their extraordinary business and the exceptional people. I’ve known Jana Greer [president and CEO, Retirement at AIG] and Rob Scheinerman [president, Group Retirement at AIG] for a long time. I already had a sense of the team and the environment. But what was—and is— most exciting for me is that AIG has such a huge breadth of products and footprint. Being able to spread across all of those businesses is a powerful advantage. My mission is to drive AIG’s Individual Retirement business forward with a focus on serving customers, expanding market leadership and building for more profitable growth.

RIJ: Yes, it’s noteworthy that AIG is a market leader in annuity sales with strong positions across all three product lines. Lincoln Financial is also broad-based. Jackson National, Prudential, and Allianz Life tend to specialize a bit more.

Todd Solash

Solash: Our strategy is to work closely with our partners, listen to our customers and stay flexible with the products we offer. We think having that breadth of products is essential. We’re not beholden to any single product category. If ‘x’ category drops, we still have categories ‘y’ and ‘z’. For our distribution partners, it’s a form of differentiation. We’re a one-stop shop. That’s a service that we provide. It also requires a real commitment. We need to have staff development across all three categories—variable, index and fixed—and that has a higher degree of complexity than being a monoline company. We have to be great in all three areas. We make decisions around where to prioritize, how to sequence product choices, how to staff.

RIJ: AXA revived its annuity business with a registered index-linked annuity (RILA). Did you bring RILA expertise to AIG?

Solash: RILA has become a more competitive space with the arrival of Brighthouse and Allianz Life. The timing right now is interesting. AXA started growing the buffer business about the time when the people here at AIG got into the index business.

RIJ: But with buffered product selling so well, why not get into that game?

Solash: We don’t need to race in and be the sixth or seventh product on that shelf. It’s an interesting space but not having it isn’t a massive hole in our lineup. Many of AIG’s distributors have told us, ‘If you have a buffer product, we’d be really interested in it.’ But they haven’t said they need another product in that space. Besides, with higher rates, the relative value of an index to a buffered product changes. When interest rates are really low and the index caps are really low, the buffer caps look a lot better. But as rates go up, the gap between the two types of products narrows. The conventional index product becomes a more viable competitor.

RIJ: What about variable annuities?

Solash: In our world, there’s been a lot of convergence. Where variable annuity and fixed index annuity businesses used to be separate, the two products are now substitutes for one another in the minds of advisors and clients. The index products tend to be a little more differentiated, a little less comparable to each other. We can ‘pick our spots’ in the index business. The variable annuity space has become much more specific. We were constantly saying, ‘What’s your percentage payout at age 65?’ We went down that road in 2008. You’re really looking at very few variables with which you can differentiate yourself. Still, AIG is very much in the variable business, and we have been very successful.

RIJ: What other product areas is AIG exploring?

Solash: One of the products we are really excited about is a fixed annuity with a living benefit, Assured Edge, and it has done well. The product has the flexibility and the value proposition for guaranteed income that you would historically associate with Index and Variable annuities in a simpler, more streamlined package. This simplicity of the product appeals to the traditional fixed annuity buyer, and allows for a robust income guarantee. We wouldn’t have built the product if we weren’t in all three categories. We wouldn’t have had the expertise or the awareness.

RIJ: AIG has also made some significant organizational changes, hasn’t it?

Solash: After the financial crisis, AIG brought its annuity products together. That has worked really well. AIG has also moved from a set of businesses with a product-driven focus to a set of businesses built around customer needs.

RIJ: Some people have praised your distribution strategy.

Solash: In distribution, we went out and talked to customers. They said they wanted one relationship manager from AIG. They said, ‘You can bring in specialists, but we want one person who can serve as the face of the company.’ Our distribution strategy is built around serving our distribution partners the way they would like to be served. I already mentioned our product breadth, and we have that same flexibility with our sales support model. We have centralized distribution under AIG Financial Distributors, which means no matter what set of products a partner chooses to sell, there is a unified distribution strategy. We’ve also had proprietary bank products where we distribute white label fixed annuities. We have a proprietary fixed index annuity. That’s been really successful. We’re willing to offer a proprietary product under the right circumstances, where and if it makes sense.

RIJ: What about no-commission annuities for registered investment advisors, or RIAs?

Solash: We’re out with a couple of no-commission products on both VA and FIA. We view RIAs as a growth market. But it hasn’t happened in size yet. We don’t know which product will crack the code. The way you deliver it will mean as much as whether you have the dollar-best product. Process matters a lot for RIAs. You can have a good product. But you also have to fit the annuity purchase into their business process. We’re focusing on it and tailoring the product for RIAs. RIAs operate in a different ecosystem, and it is our job to find a way to integrate seamlessly with them, not the other way around. Our goal as a manufacturer is to be on any platform where there is an opportunity for scale. The RIA market checks that box, and we see the opportunity with RIAs as an exciting one in the years ahead.

RIJ: Thank you for speaking with us about AIG’s annuity business. Any final thoughts you’d like to add?

Solash: We’re in a space we really like. We’ve heavily invested in it, and the results have been positive. Our modus operandi is about balance, and about learning how to manage a network of high-quality distribution partners. As the environment becomes more chaotic—with regulatory uncertainty and stock market volatility—and where consumer needs shift, our ability to go across product will be an advantage.

© 2019 RIJ Publishing LLC. All rights reserved.

Risky Retirement Business

Posted on March 7, 2019 by -

The challenges posed by an aging population are manifold, and they are neither new nor unique. The populations of Italy and Japan have been declining for some time, and in the US, numerous state governments’ large unfunded pension liabilities are a chronic problem.

While low interest rates in most advanced economies have held down governments’ borrowing costs, they pose significant challenges for pension asset management. In real (inflation-adjusted) terms, returns on Japanese, German, and other European sovereign bonds have been negative for some time.

Short-term interest rates on US Treasuries may have drifted higher as the Federal Reserve began to unwind its post-crisis stimulus policies (and may edge higher still after the Fed’s current pause), but longer-term US interest rates remain low by historical standards.

The two decades after World War II, as one of us has documented, were also characterized by low real returns on government bonds in both the US and elsewhere. Unlike now, however, that era boasted a much younger and faster-growing population. Furthermore, households had trivial debt levels by modern standards. The solvency of pension plans was not yet a concern.

Regardless of whether yields in advanced economies rise, fall, or stay the same, core demographic trends are unlikely to change in the coming years, implying that pension costs will continue to balloon. Since the creation of the US Social Security system in 1935, Americans’ life expectancy has risen by almost 17 years, while the retirement age has risen by less than two years. In 1946, the assets of pensions amounted to about 29% of US GDP; they have almost quadrupled since then.

Understandably, the search for higher yields has become a higher priority, even for fully-funded pension plans. When unfunded liabilities (which represent the assets that pension funds will have to purchase in the future to meet their obligations) are included, the magnitudes soar even higher.

The search for higher returns has led US pension plans (excluding that of the federal government) to tilt toward equity markets in recent years. This trend has been evident among other investors as well, including some of the world’s largest sovereign wealth funds.

But our recent work with Josefin Meyer suggests that another asset class can provide real long-term returns above those of “risk-free” US government securities. In our study, we focus on external sovereign bonds and compile a new database of 220,000 monthly prices of foreign-currency government bonds, covering 91 countries, traded in London and New York between 1815 and 2016.

Our main insight is that, as in equity markets, the returns on external sovereign bonds (largely bonds issued by emerging market countries and now-advanced economies) have been sufficiently high to compensate investors for risk.

Real ex post returns on external sovereign bonds averaged 7% annually across two centuries, including default episodes, major wars, and global crises. An investor entering this market in any given year received an average excess yearly return of around 4% above US or British government bonds, which is comparable to stocks and higher than corporate bonds.

The observed returns are difficult to reconcile with the degree of credit risk in this market, as measured by historical default and recovery rates. Based on our archive of more than 300 sovereign debt restructurings since 1815, we show that cases of full repudiation of sovereign debt are relatively rare and mostly connected with major revolutions (Russia in the early twentieth century, China’s Maoist regime, Cuba, and the European countries that fell under Soviet control following World War II).

For the full asset class over two centuries, the typical haircut investors suffer in debt crises is below 50% – a smaller haircut than Moody’s estimates for US corporate bonds over the past century.

The main driver of the higher ex post real returns is the comparatively high coupon these sovereign bonds offer. Beyond the return history itself, there is the fact that emerging and developing economies now account for about two-thirds of global GDP, compared to just one-third 50 years ago, when portfolio diversification was almost entirely a domestic affair.

Adding to the attractiveness of a portfolio of emerging-market sovereign securities, its returns are not perfectly correlated with equity returns. Moreover, there is evidence that creditor rights and enforcement powers in external sovereign debt markets have increased in the wake of recent US court judgments.

These findings are not an invitation to embrace indiscriminate risk taking. Another wave of sovereign defaults may be ahead of us, and sovereign bonds can become highly illiquid in distress. Nonetheless, our results highlight the long-term gains from diversification into a growing but relatively under-studied asset class. And for pensions, the risks of relying on assets that offer negative or only very low long-term real returns are no less serious, especially as they compound over time.

Carmen Reinhart teaches at the Kennedy School of Government at Harvard. Christoph Trebesch is a macroeconomist at the Kiel Institute for the World Economy.

© 2019 Project-Syndicate.

Retail investors reach for income when interest rates fall

Posted on March 7, 2019 by -

Standard theories in financial economics hold that Investors shouldn’t care whether they receive income from dividends or from capital gains, assuming that there are no tax differences and or capital market frictions that favor one over the other.

But that’s not how real people—retirees in particular—actually behave, according to “Monetary Policy and Reaching for Income,” a recent working paper from the National Bureau of Economic Research (NBER Working Paper No. 25344).

The paper shows that when interest rates fall, as they might after a relaxation I the federal funds rates, some interest-and-dividend investors adjust the amount of high dividend paying stocks in their portfolios.
Authors Kent Daniel and Kairong Xiao of Columbia and Lorenzo Garlappi of the University of British Columbia analyzed individual portfolio holdings at a large discount broker over the period 1991-96 for 19,394 households.

They merge the portfolio data with the CRSP (Center for Research in Security Prices) stock database, and determine income and pricing for the stocks in each individual portfolio. The average dividend yield of the stocks in the sample was 2.1%. “High income yield” stocks were defined as those with dividend yields above the 90th percentile, or 5.7%.

Using the CRSP Survivor-Bias-Free US Mutual Fund Database, which provides mutual fund income yields, asset flows, returns, size, expenses, and volatility from January 1991 to December 2016, the authors analyze rotations of fund flows following a decrease in the federal funds rate. The average yield of equity mutual funds was 1.3% and the yield at the 90th percentile was 2.8%.

In the six months after a one percentage point drop in the federal funds rate associated with accommodative monetary policy, households raise the share of their portfolio in stocks paying high dividends by 0.95 percentage points.

Over the following three years, the researchers find a 5.2 percentage point increase in inflows to equity mutual funds with high income-yields. An accommodative monetary policy appears to reduce portfolio diversification and increase the value of high dividend stocks relative to low dividend stocks.
To disentangle monetary policy changes from other economic changes, the researchers compare changes in holdings of individual stocks by households in different Metropolitan Statistical Areas. The demand for dividends was negatively related to local area bank deposit rates, suggesting that local bank deposit rates “provide a more accurate measure of available sources of income for local investors than the Fed Funds rate.”
The researchers suggest that reaching for income can be an optimal investment strategy if investors try to discipline themselves by restricting their spending to the income from their portfolios. The investors who reach for income are disproportionately those with low labor income, such as retirees.

© 2019 RIJ Publishing LLC. All rights reserved.