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Securian to offer “unitized model portfolios” to 401k plans

Posted on September 13, 2018 by -

Securian Financial is partnering with Mid Atlantic Capital Group to add “unitized model portfolios” to its 401(k) plan services menu as an alternative to third-party target date funds and to distinguish itself in today’s “commoditized retirement plan marketplace,” according to a Securian release.

The program will use unitized model portfolios designed by and held at Mid Atlantic Trust Company, a unit of Pittsburgh-based Mid Atlantic Capital Group. The program integrates the investment models with Securian’s recordkeeping services. Plans of any asset size can use it.

Unitized model portfolios, a relatively new development, have been described as diversified pooled investment whose value can be expressed daily in units. They enable a plan’s investment advisors to create QDIAs that are customized for a particular plan.

“Unitized model portfolios are for professionals interested in taking target-date funds to the next level by building customized risk-based solutions for participant usage,” said Kent Peterson, a retirement solutions vice president with Securian Financial, in the release.

“They provide a value proposition and competitive differentiator to retirement plan specialist advisors who focus on investments as part of their practice. Wealth management firms that, in addition to working with individual investors, offer retirement plan consulting to small businesses find unitized model portfolios particularly appealing and highly efficient.”

According to TD Ameritrade’s Unitized Managed Account publication, “The unitization process translates the value of multiple securities into a single daily unit value… UMAs allow independent Registered Investment Advisors (RIAs) to offer custom portfolio solutions to corporate retirement plan clients. By leveraging the power of model portfolios that are unitized daily, UMAs enable RIAs to deploy customized investment strategies on behalf of their plan sponsors and participants.”

© 2018 RIJ Publishing LLC. All rights reserved.

Trump’s Policies Will Displace the Dollar

Posted on September 6, 2018 by -

Back in 1965, Valéry Giscard d’Estaing, then France’s Minister of Finance, famously called the benefits that the United States reaped from the dollar’s role as the world’s main reserve currency an “exorbitant privilege.” The benefits are diminishing with the rise of the euro and China’s renminbi as competing reserve currencies. And now US President Donald Trump’s misguided trade wars and anti-Iran sanctions will accelerate the move away from the dollar.

The dollar leads all other currencies in supplying the functions of money for international transactions. It is the most important unit of account (or unit of invoicing) for international trade. It is the main medium of exchange for settling international transactions. It is the principal store of value for the world’s central banks. The Federal Reserve acts as the world’s lender of last resort, as in the 2008 financial panic, though we should recognize too that the Fed’s blunders helped to provoke the 2008 crisis. And the dollar is the key funding currency, being the major denomination for overseas borrowing by businesses and governments.

In each of these areas, the dollar punches far above America’s weight in the world economy. The US currently produces around 22% of world output measured at market prices, and around 15% in purchasing-power-parity terms. Yet the dollar accounts for half or more of cross-border invoicing, reserves, settlements, liquidity, and funding. The euro is the dollar’s main competitor, with the renminbi coming in a distant third.

The US gains three important economic benefits from the dollar’s key currency role. The first is the ability to borrow abroad in dollars. When a government borrows in a foreign currency, it can go bankrupt; that is not the case when it borrows in its own currency. More generally, the dollar’s international role enables the US Treasury to borrow with greater liquidity and lower interest rates than it otherwise could.

A second advantage lies in the business of banking: The US, and more precisely Wall Street, reaps significant income from selling banking services to the rest of the world. A third advantage lies in regulatory control: The US either directly manages or co-manages the world’s most important settlements systems, giving it an important way to monitor and limit the flow of funds related to terrorism, narco-trafficking, illegal weapons sales, tax evasion, and other illicit activities.

Yet these benefits depend on the US providing high-quality monetary services to the world. The dollar is widely used because it has been the most convenient, lowest-cost, and safest unit of account, medium of exchange, and store of value. But it is not irreplaceable. America’s monetary stewardship has stumbled badly over the years, and Trump’s misrule could hasten the end of the dollar’s predominance. Already back in the late 1960s, America’s fiscal and monetary mismanagement led to the breakdown of the dollar-based Bretton Woods pegged-exchange rate system in August 1971, when President Richard Nixon’s administration unilaterally renounced the right of foreign central banks to redeem their dollars in gold. The breakdown of the dollar-based system was followed by a decade of high inflation in the US and Europe, and then an abrupt and costly disinflation in the US in the early 1980s. The dollar turmoil was a key factor motivating Europe to embark on the path toward monetary unification in 1993, culminating in the launch of the euro in 1999.

Likewise, America’s mishandling of the Asian financial crisis in 1997 helped to convince China to begin internationalizing the renminbi. The global financial crisis in 2008, which began on Wall Street and was quickly transmitted throughout the world as interbank liquidity dried up, again nudged the world away from the dollar and toward competing currencies.

Now Trump’s misbegotten trade wars and sanctions policies will almost surely reinforce the trend. Just as Brexit is undermining the City of London, Trump’s “America First” trade and financial policies will weaken the dollar’s role and that of New York’s role as the global financial hub.

The most consequential and ill-conceived of Trump’s international economic policies are the growing trade war with China and the reimposition of sanctions vis-à-vis Iran. The trade war is a ham-fisted and nearly incoherent attempt by the Trump administration to stall China’s economic ascent by trying to stifle the country’s exports and access to Western technology. But while US tariffs and non-tariff trade barriers may dent China’s growth in the short term, they will not decisively change its long-term upward trajectory. More likely, they will bolster China’s determination to escape from its continued partial dependency on US finances and trade, and lead the Chinese authorities to double down on a military build-up, heavy investments in cutting-edge technologies, and the creation of a renminbi-based global payments system as an alternative to the dollar system.

Trump’s withdrawal from the 2015 Iran nuclear deal and the re-imposition of sanctions against the Islamic Republic could prove just as consequential in undermining the dollar’s international role. Sanctioning Iran runs directly counter to global policies toward the country. The UN Security Council voted unanimously to support the nuclear deal and restore economic relations with Iran. Other countries, led by China and the EU, will now actively pursue ways to circumvent the US sanctions, notably by working around the dollar payments system.

For example, Germany’s foreign minister, Heiko Maas, recently declared Germany’s interest in establishing a European payments system independent of the US. It is “indispensable that we strengthen European autonomy by creating payment channels that are independent of the United States, a European Monetary Fund, and an independent SWIFT system,” according to Maas. (SWIFT is the organization that manages the global messaging system for interbank transfers.)

So far, US business leaders have sided with Trump, who has showered them with corporate tax cuts and deregulation. Despite soaring budget deficits, the dollar remains strong in the short term, as the tax cuts have fueled US consumption and rising interest rates, which in turn pull in capital from abroad. Yet in a matter of several years, Trump’s profligate fiscal policies and reckless trade and sanctions policies will undermine America’s economy and the role of the dollar in global finance. How long will it be before the world’s businesses and governments are running to Shanghai rather than Wall Street to float their renminbi bonds?

© 2018 Project Syndicate.

A bit of recovery in variable annuity sales

Posted on September 6, 2018 by -

New sales of variable annuities reached $23.6 billion in the second quarter of 2018, compared with $22.4 billion in Q1 and $23.2 billion in Q2 2017. This marks the first period of positive year-on-year sales growth in nearly four years and only the second in the past six years.

Still, the pace of VA sales growth (1.6% year on year) paled in comparison to fixed-index annuities: According to LIMRA, FIA sales reached $17.6 billion in Q2 2018, up 17% from the year prior. Moreover, VAs continued to experience net outflows as policyholders continued to take withdrawals and/or annuitize their contracts.

The top three carriers in terms of sales volume—Jackson National, AXA Equitable, and TIAA-CREF—all saw sales growth slow in Q2, continuing a trend of slowing sales growth that began in mid-2017 (only Jackson has posted a quarter of positive year-on-year sales growth in the past year).

However, five of the seven remaining firms in the top 10 by sales saw double-digit sales growth in Q2, led by Prudential, which posted an impressive 35% increase in new sales year on year. These results have led to a notable shift in market share, with the top three companies accounting for 40% of VA sales versus 44% a year ago, while the next seven now account for 41% (versus 37% a year ago).

Given the heterogeneity of VA products, it is difficult to identify characteristics that may be driving sales in one direction or the other within the industry. However, there are a few patterns to note.

First, contracts that recorded positive sales growth in Q2 tended to have lower minimum fees than contracts recording negative sales growth year on year by around 5 to 15 basis points on average, depending on which subset of the universe one looks at. This appears to hold true when comparing only contract fees, contract fees plus subaccount fees, as well as living benefit fees.

Second, there is a significant difference in the number and type of optional benefits offered among the best-selling contracts, suggesting that the market for VAs (and their various benefit options) remains diverse.

Furthermore, 2012- and 2013-vintage contracts remain the best-sellers both by average sales volume and total sales volume by year. Of the top 100 selling VAs in Q2 2018, 25 were first issued in 2012 or 2013, while more than 40% of total sales volume in Q2 came from contracts of these vintages. Also, 2015 and 2016-vintage contracts sold well in Q2, while 2017-18 vintages were somewhat less popular.

That somewhat older vintages are dominating VA sales may reflect changes in how VAs are sold. Independent advisors accounted for more than 42% of all VA sales in Q2 2018, up from 36% a year earlier and 38% in Q1.

Meanwhile, captive agency sales have declined to less than 30% from 37% in the past year. Independent advisors may be more comfortable offering established products to their clients, possibly explaining the popularity of 2012-13 vintage VAs.

© 2018 Morningstar, Inc.

Personal Capital launches tax-efficient drawdown tool

Posted on September 6, 2018 by -

Personal Capital, the hybrid digital wealth management company, has introduced “Retirement Paycheck,” a service that shows retirees how to draw an income from their qualified and non-qualified savings accounts in the most tax-efficient ways while avoiding potential penalties.

The service is accessible through Personal Capital’s Retirement Planner, a Monte Carlo forecasting tool that projects a client’s future retirement savings levels based on estimates of portfolio return and volatility, annual savings, income and spending goals.

To arrive at personalized recommendations, the service integrates account level tax status, household tax filing status, and the latest state-by-state and federal tax date with a goal of extending the life client portfolios.

“How you withdraw money in retirement is just as important as how much you save,” said Amin Dabit, Personal Capital’s director of advisory services, in a press release. “There is a lot of complexity about how retirees should pay themselves from taxable, tax-deferred and tax-free accounts. Retirement Paycheck helps provide clients with the clarity needed to withdraw confidently.”

With Retirement Paycheck, Personal Capital clients can:

  • See taxable, tax-deferred, and tax-free accounts and get guidance on which to withdraw from, in what amounts, for each year of retirement.
  • Potentially increase their chances of having enough money throughout retirement.
  • See an indicator to reach out to their advisor if a Roth Conversion or Tax Gain Harvesting strategy is appropriate for the client’s situation to save money on taxes.

Personal Capital is a hybrid digital wealth management company based in San Carlos, California, with more than $7.5B in assets under management. The company offers free financial planning tools for investors and fee-based wealth management services, with hubs in San Francisco, Denver, Dallas, and Atlanta. Personal Capital has fiduciary financial advisors across the U.S.

© 2018 RIJ Publishing LLC. All rights reserved.

With new pension policy, California links retirement income to global warming

Posted on September 6, 2018 by -

Climate change is literally a burning issue in the tinderbox that is California, with wildfires costing the state a fortune and little doubt in the Democratic-controlled legislature that human-made global warming is one of the causes.

To incentive large companies to become part of the solution to the problem, legislators in the Golden State have passed a law requiring the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) to consider “climate-related financial risk” when making investment decisions.

The two funds, which oversee a combined $590 billion, recently slipped down a ranking of investors’ climate risk management by the Asset Owners Disclosure Project. In 2017, CalPERS was ranked 28th out of more than 300 pension funds, 19 places lower than a year before.

The bill must get the approval of California governor Jerry Brown before it can become law. IPE.com reported the news on Monday.

Senate Bill 964, which was passed last week, requires CalPERS and CalSTRS to identify climate risk in their portfolios and report on that risk to the public and to the legislature every three years. The first report is due before 2020.

The two funds must also report their portfolios’ carbon footprints, and their progress towards meeting California’s climate policy goals and the goals of the 2015 Paris agreement on climate change.

They should also provide a summary of activities undertaken by the pension funds in connection with climate-related financial risks.

Fossil Free California, a group co-sponsoring the bill, said it the first of its kind passed in the US and provides a statutory definition of climate-related financial risks that are posed to the funds by intense storms, rising sea levels, higher global temperatures, and economic damages from carbon emissions. Environment California, an advocacy group, also co-sponsored the bill.

The bill also covered other financial and transition risks emanating from public policies to address climate change, shifting consumer attitudes, and the changing economics of traditional carbon-intense industries.

CalPERS and CalSTRS are actively involved in a number of climate change initiatives, including Ceres and the Investor Network on Climate Risk.

Most recently, both funds were part of a coalition of investors voting for improved governance at Rio Tinto’s annual general meeting, relating to the company’s membership of lobbying organizations in relation to climate change – although this resolution was defeated.

© 2018 RIJ Publishing LLC.

Asset managers focus on advisor behavior: Cerulli

Posted on September 6, 2018 by -

The pool of advisors that wholesalers can influence is shrinking and becoming more sophisticated and a number of firms have chosen to re-evaluate the way their wholesaler maps are drawn because of the blurring of channel lines, according to new research from Cerulli Associates.

More than two-thirds (69%) of asset managers now operate with a primarily de-channelized sales force. “Just 53% of practices with assets under management (AUM) between $50 million and $100 million in-source their investment decision making,” said Ed Louis, a senior analyst at Cerulli, in a release. “However, this number jumps to more than 70% for those with $250 million or more in AUM.”

“These practices are increasingly made up of advisor teams with specialized roles, a systematic investment process, and a focus on providing holistic financial planning and wealth management services,” Louis added. “Additionally, the lines that historically divided the broker/dealer (B/D) channel are blurring as these trends around teaming and planning move downmarket. While these advisor teams offer their own unique value proposition to clients, the biggest difference can often lie in how they leverage home-office infrastructure.”

Cerulli believes that for many asset managers, especially those with a focused lineup or limited resources, if top clients and prospects all exhibit similar behavior, it is more efficient to invest in a single sophisticated professional to manage those relationships in a region.

“The ability that asset managers now possess to leverage data analytics makes it easier to identify and focus wholesalers’ efforts on those key opportunities of advisors who insource portfolio construction and away from less productive opportunities,” explains Louis. “The majority (74%) of asset managers currently employ dedicated data analytics staff.”

Cerulli’s latest report, “U.S. Intermediary Distribution 2018: A Holistic Approach to Wholesaling,” examines how asset managers are adapting to the changing points of influence over advisor portfolio construction decisions, the effects that platform rationalization and fee pressure have had on relationships between asset managers and broker/dealers, and the importance of effective coordination between the different arms of distribution to maximize opportunities at focus partner firms.

© 2018 Cerulli Associates.

Honorable Mention

Posted on September 6, 2018 by -

New Jackson National campaign depicts aging as beginning, not an end

Jackson National Life Insurance Company has released “Second Stories,” a photo essay book capturing stories from ten older individuals who, instead of retiring after career changes or health setbacks, decided to do something new and exciting.

Second Stories is a component of Jackson’s larger “Retire on Purpose” platform, which depicts retirement as a new and exciting chapter in life. The program is designed to help advisors build more holistic practices through “purpose-driven” financial plans.

In addition to Second Stories, Jackson’s Purpose program has these components:

Advisor and consumer-facing marketing collateral, including a workbook, presentations, conversation starter cards, flip book, promotional items and seminar invitations. The resources are available to Jackson-appointed advisors.

“Second Stories is a fascinating depiction of how the traditional idea of retirement is evolving,” said Dan Starishevsky, senior vice president, Distribution & Advisory Marketing for Jackson National Life Distributors LLC (JNLD), the distribution and marketing arm of Jackson.

“These 10 stories point to a new, exciting opportunity during life after work — while the typical ‘9-to-5’ was largely about paying bills, the second story is about pursuing passions and engaging in meaningful activities. It really makes you think, what’s next for me?”

Videos featuring purpose and academic experts Richard Leider and Christine Whelan: https://www.youtube.com/user/JacksonNationalTV.

T. Rowe Price’s new ad campaign explains its active management philosophy

T. Rowe Price has launched a new U.S. mass media advertising campaign, “The Full Story,” showcasing its strategic investing approach. The campaign is designed to dispel some of the inherent complexity in investing by demonstrating how the firm’s investment professionals conduct research and analyze investment opportunities for its mutual funds and other investment products.

The campaign is now running nationally in digital and print properties, social media channels, and select local TV markets. T. Rowe Price plans to launch its national TV spots in September. T. Rowe Price worked with marketing communications agency J. Walter Thompson New York to develop the campaign.

More information is available at www.troweprice.com/fullstory.

The campaign articulates T. Rowe Price’s approach through examples ranging from advancements in bio-technology to the impact of e-commerce on cardboard demand.

The advertisements illustrate T. Rowe Price’s active approach to investing. Robert Higginbotham, head of global investment management services for T. Rowe Price, said, “High-quality active management can make a real difference to investors’ future financial lives.”

Rowe Price is also creating a series of videosto capture some of the stories its hundreds of investment professionals encounter when they explore opportunities and analyze the markets and the companies within them. The company plans to post additional videos to its website over the next few months.

Baltimore-based T. Rowe Price Group, Inc. is a global investment management organization with $1.07 trillion in assets under management as of July 31, 2018. The organization provides mutual funds, subadvisory services, and separate account management for individual and institutional investors, retirement plans, and financial intermediaries.

Global Atlantic announces annuity product ‘overhaul’

Global Atlantic Financial Group said this week that it “overhauled its entire suite of fixed index annuities, enhancing both income and death benefit options for those planning for retirement. Options offer guaranteed growth of benefits and are immune to market volatility.”

The products now offer additional options and indices among the interest crediting strategies, covering more risk profiles and growth objectives, a Global Atlantic release said.

Additional features available within the updated annuity suite include a feature that can create greater access to income if required for certain healthcare needs, as well as new death benefit features that create a more substantive legacy.

The new fixed index annuities are available through broker-dealers, banks and independent agents across the U.S. The products are issued by Forethought Life Insurance Company, a Global Atlantic subsidiary. Benefit availability may vary by product, state and firm, the release said.

Citing LIMRA data, the company said it is ranked eighth in U.S. fixed indexed annuity sales as of June 30, 2018, up from thirteenth a year earlier. Global Atlantic was also the third-ranked seller of traditional fixed annuities and Forethought Life’s ForeCare contract was the top selling traditional fixed annuity in the second quarter of 2018, according to Wink, Inc.

Global Atlantic was originally the Goldman Sachs Reinsurance Group before it was spun off as an independent company in 2013. It acquired the Aviva USA life insurance business from Athene in 2013, and in 2014 acquired Forethought Financial Group, which had The Hartford’s annuity business the year before.

Bankruptcies among those age 65 and older have tripled since 1991, the Global Atlantic release said, citing a study published by the Social Science Research Network. Factors contributing to the increase include the shift of financial responsibility in retirement away from employers and the government, as well as the escalating cost of healthcare.

© 2018 RIJ Publishing LLC. All rights reserved.

Making Annuities Easier for RIAs

Posted on September 6, 2018 by -

Several technology companies have set up platforms this year to make it easier for investment advisors, particularly those in the registered investment advisor (RIA) channel, to integrate annuities and other insurance products into their financial plans for pre-retirees and retirees.

The firms are Envestnet, the big Chicago-based turnkey asset management platform, which just launched Envestnet Insurance Exchange; DPL Financial, a creation of one the founders of Jefferson National, which sold variable annuities to RIAs; and ARIA Retirement Solutions, whose RetireOne platform, created in 2011 to sell stand-alone living benefits, has been repurposed as an annuity back office for RIAs. Orion Advisor Services, which competes with Envestnet, is also in this space.

These platforms would give RIA advisors whatever they need—vetted annuity and insurance products from participating carriers, insurance-licensed support desks, retirement income planning tools—to become “holistic” advisors, stop sending business to insurance agents, and differentiate themselves from robo-advisors.

Are we seeing the long-awaited inflection point where the mass of advisors (in addition to existing dually-licensed or hybrid advisors) becomes more “ambidextrous” in the use of investment and insurance products for retirement planning? Given the complexity of the advisory world, it’s hard to generalize or make predictions.

Taking it as a given that Boomers need principal-protection and guaranteed income products along with investments, a few things are clear: The RIA space continues to grow; integrated technology platforms (either in-house or third-party) are replacing traditional distribution; if your products or services aren’t on the platforms, you’ll be left out. One wild card factor: With the disappearance of the Obama fiduciary rule, which discouraged the sale of indexed or variable annuities on commission to IRA owners, no-commission annuities may lose some of their momentum.

DPL Financial

David Lau

David Lau, a co-founder of Jefferson National’s low-cost investment-only variable annuity business for RIAs (since sold to Nationwide), created this platform, which is intended to serve as an “outsourced insurance department” for RIAs. It brings together non-insurance licensed RIAs and no-commission insurance products. DPL Financial charges RIA firms an annual, asset-based membership fee that Lau told RIJ will amount to “75 to 100 basis points over the life of the product.”

Insurance products on the platform, according to a DPL fact sheet, include investment-only variable annuities (from AXA, TIAA, Security Benefit and Great-West), fixed indexed annuities (from Allianz Life and Great American), “buffer” annuities from Allianz Life, AXA and Great-West), fixed annuities from Integrity Life, single-premium immediate annuities from TIAA and Integrity Life, and term life insurance from TIAA.

In a recent interview, RIJ asked Lau if DPL Financial was mainly more about helping RIAs capture 1035 exchanges, where the advisor gains new assets by helping clients get out of existing annuities, than about selling new annuities to people. He said that while about 60% of the business has been 1035 exchanges, he expects that ratio to drop.

“This is about bringing commission-free insurance products to the RIA market,” Lau said. “1035 exchanges are part of it. The clients of RIAs may already own expensive insurance products. But the bigger idea is that insurance is a big component in financial plans.

“For instance, there’s a need for principal protection. RIAs often plan for that need, but they’ve been hamstrung in offering insurance solutions. In the past, the paradigm for the RIA has been to identify clients’ insurance needs and then send the clients away to an insurance-licensed competitor who may or may not fill the RIA’s prescription. It doesn’t make for a great client experience, because the client will get put into expensive, commission-driven insurance products.”

ARIA’s RetireOne

RetireOne, created seven years ago by ARIA Retirement Solutions, which was and is led by former Charles Schwab executive David Stone, was first intended to sell unbundled guaranteed lifetime withdrawal benefits (aka stand-alone living benefits) to RIAs, who would attach them to fee-based investment accounts.

Now RetireOne, like DPL Financial, is betting that non-insurance licensed independent RIAs will feel compelled to respond to the Boomers’ retirement needs by adding an insurance component to their practices. Instead of charging advisors a fee, like DPL, RetireOne will receive compensation from the carriers on its platform. Those carriers currently include Allianz Life, Ameritas, Great American, Great-West, Transamerica, and TIAA.

Mark Forman

“We call ourselves the Insurance and Annuity back office,” said Mark Forman, senior managing director at RetireOne, who came to ARIA from Jefferson National. “The real opportunity, as David Lau has pointed out, comes from the fact that RIAs can’t do insurance and have to outsource it. It’s not about pushing products and getting commissions. It’s about thinking long-term and being a partner. When I talk to RIAs, they see the value in the model. The ones we talk to are open to annuities. And once you can win them over, you have a fan for life.”

While insurance companies will pay RetireOne, Forman doesn’t want his firm to be equated with insurance marketing organizations, or IMOs. “I don’t like the notion that we’re an IMO. I’ve dealt with IMOs in the past. The commissions have driven so much of that business that the term IMO has come to mean questionable sales practices. They wear grey hats. We’re not doing marketing for the insurance companies. We’re trying to educate advisors about these solutions. There are no product-centric conversations.”

RetireOne RIA Platform Scenario

 

Envestnet Insurance Exchange

Envestnet started out as the first cloud-based turnkey asset management program (TAMP) for independent broker-dealers and has been on a decade-long growth tear. It moved into the RIA space with its acquisition of Tamarac in 2012. Now it’s partnering with Fiduciary Exchange LLC (FIDx) to offer Envestnet Insurance Exchange. The first annuity issuer to jump on board was Global Atlantic, which owns Forethought Life, on June 28.

“Our purpose is to enable advisors to go from being investment advisors to being wealth advisors, to being the expert in the middle of a complex technological and economic eco-system,” Envestnet co-founder Judson Bergman told RIJ in a 2017 interview.

The Exchange will include a “curated” selection of fiduciary-focused insurance products, insurance solutions “tailored to the investor’s needs,” fee-based and commission-based insurance offerings, and a workflow that integrates insurance and investments. The Exchange will include a service called Guidance Desk that will allow unlicensed RIAs access to the consulting and fiduciary services that lets them use the Exchange.

“Envestnet has partnered with FIDx to launch our new Insurance Exchange,” Bill Crager, president of Envestnet, told RIJ in a recent email. “While accommodation services can assist RIAs with annuity sales, our Insurance Exchange is designed with expectations to modernize the current distribution model by fully integrating the annuity ecosystem into the advisory process.

“When completed, the home office and advisor experience will be identical to what our clients currently enjoy with investment products. As part of this offering, we are partnering with industry-leading carriers to deliver commissioned and fee-based products for both fixed and variable annuities. To date, we’ve received significant interest from our clients across all channels including RIAs.”

The life insurer point of view

Corey Walther

Allianz Life will have products on several of the insurance platforms, according to Corey Walther, head of business development and distribution at the insurer, which has dominated the fixed indexed annuity business in the US since buying Life USA almost 20 years ago. It sold $831.6 million worth of the structured variable annuity, Index Advantage annuity, which comes in commissioned and non-commissioned versions, in the first half of 2018, according to Morningstar, Inc.

Walther notes that the new insurance platforms resolve the technical barriers that hinder advisors from combining insurance and investment products. “The Envestment Insurance Exchange is less about supporting RIAs without a license than about having the technology that integrates annuities and risk management tools into the wealth management platform and producing better client outcomes,” Walther told RIJ. “Advisors won’t have to swivel their chairs from one platform to another to bring annuities into the process. They can do it seamlessly. The technology brings the whole ecosystem together.”

Independent RIAs have been under a lot of stress. With the arrival of robo-advisors, asset allocation has been commoditized. RIAs, including the independents, are becoming better educated about the complexities of risk management, which helps their value proposition. They can ask, ‘How can I help you manage your risks?’ Large RIAs, with $20 to $30 billion under management, are approaching us. They’re interested in learning more about insurance products.”

Trend drivers

Given the asset growth of the RIA channel—18% year-over-year and an 11% compound annual growth rate over the past five years, according to Cerulli Associates—annuity issuers can’t afford to ignore it. An analyst at Aite Group, Denise Valentine, also believes that, because RIAs are fiduciaries, there’s a certain burden on them to provide pension-less Boomers with the risk management tools that they’re going to need in retirement.

Although RIAs without insurance license don’t currently often recommend annuities, Valentine told RIJ, “there is a growing awareness of the shortfall in retirement planning to date and growing recognition of the role of some type of annuity.”

Demand from consumers for protection, she believes, is going to shape the habits of advisors. The development of these platforms, she said, “is a preparation move. More people are going to be asking about some kind of annuity. And if you’re an independent RIA with a fiduciary hat, you have an obligation to do what’s best for them.”

What do RIAs themselves think about all this? “I would agree that RIAs were, and many still are, not appreciative of annuities, but I do think they’re coming around,” said Heather Kelly, vice president, risk management at United Capital, an Irving, Texas RIA, which built its own internal platform for combining investments and annuities. “At United Capital, we recognized that it was important to have true integrated planning.”

Retirees and near-retirees are also starting to demand principal-protection and guaranteed income products. “The markets are really high,” Kelly said. “Anybody over 65 is old enough to remember the 2008 financial crisis. I know advisors who have been in situations where clients have said, ‘I want to move half a million dollars out of the market and put it into an annuity.’”

© 2018 RIJ Publishing LLC. All rights reserved.

Ascensus’ TPA empire continues to grow

Posted on August 30, 2018 by -

Ascensus has entered into an agreement to acquire PenSys, a third-party administration (TPA) firm based in Roseville, CA. It will immediately become part of Ascensus’ TPA Solutions division.

So far in 2018, Ascensus has also purchased Continental Benefits Group, 401kPlus, INTAC, and ASPERIA.

PenSys is a nationally recognized TPA that specializes in the design, implementation, and administration of defined contribution, defined benefit, and cash balance retirement plans. The firm, which also offers 3(16) fiduciary services, has established a strong reputation for providing creative plan design and high quality service, Ascensus said.

Jerry Bramlett, head of TPA Solutions, said, “This addition to Ascensus TPA Solutions goes a long way toward helping us build a national TPA that offers a broad set of services and resources to financial professionals, employers, and employees.”

Raghav Nandagopal, Ascensus’ executive vice president of corporate development and M&A, said in a release, “This acquisition expands our California footprint significantly and adds to our capabilities to service clients nationally.”

© 2018 RIJ Publishing LLC. All rights reserved.

Allianz Life leads in total sales of fixed deferred annuities: Wink

Posted on August 30, 2018 by -

Allianz Life ranked as the top issuer of non-variable deferred annuity sales, with a market share of 7.8%, followed by AIG, Athene USA, Global Atlantic Financial Group, and New York Life, according to the latest edition of Wink’s Sales and Market Report for the second quarter of 2018.

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

Indexed annuity sales for the second quarter were $17.3 billion; up nearly 22.0% when compared to the previous quarter, and up more than 18.4% when compared with the same period last 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 Standard and Poor’s 500.

Allianz Life was the top issuer of indexed annuities, with a market share of 12.7%, followed by Athene USA, Nationwide, Great American Insurance Group, and American Equity Companies. Allianz Life’s Allianz 222 Annuity.

Traditional fixed annuity sales in the second quarter were $875.0 million; up 19.9% from the previous quarter, and down 12.5% from the same period last year. Traditional fixed annuities have a fixed rate that is guaranteed for one year only.

Jackson National Life ranked as the top issuer of traditional fixed annuities, with a market share of 11.9%, followed by Modern Woodmen of America, Global Atlantic Financial Group, AIG, and Great American Insurance Group. Forethought Life’s ForeCare Fixed Annuity was the top-selling fixed annuity for the quarter, for all channels combined.

Multi-year guaranteed annuity (MYGA) sales in the second quarter were $10.0 billion; up 23.4% when compared to the previous quarter, and up 27.2 % when compared to the same period last year. MYGAs have a fixed rate that is guaranteed for more than one year.

New York Life ranked as the top issuer of MYGA contracts, with a market share of 18.1%, followed by Global Atlantic Financial Group, AIG, Protective Life, and Delaware Life. Forethought’s SecureFore 5 Fixed Annuity was the top-selling multi-year guaranteed annuity for the quarter, for all channels combined.

Structured annuity sales in the second quarter were $2.4 billion; up 12.6% from the previous quarter. AXA US ranked as the top issuer of structured annuities, with a market share of 40.2%. Brighthouse Life Shield Level Select 6-Year was the top-selling structured annuity contract for the quarter, for all channels combined.

© 2018 RIJ Publishing LLC. All rights reserved.

Net income of U.S. life/annuity industry drops in first-half 2018: A.M. Best

Posted on August 30, 2018 by -

The U.S. life/annuity industry’s net income dropped nearly 13% in first-half 2018, according to a Best’s Special Report published this week. That decline, along with an increase in stockholder dividend payments, drove industry capital and surplus down by 1.8% compared with the prior year-end.

The report, “A.M. Best First Look—First Half 2018 Life/Annuity Financial Results,” is based on data from companies’ six-month 2018 interim statutory statements received as of Aug. 21, 2018, representing about 85% of total industry premiums and annuity considerations.

During the first half of 2018, the U.S. life/annuity industry experienced:

  • A $6.0 billion decline in premiums and annuity considerations.
  • A $5.9 billion increase in net investment income.
  • A 9.5% decline, to $24.9 billion, in pretax net operating gains from the prior year period.
  • A $3.5 billion reduction in federal and foreign taxes.
  • Net realized capital losses of $3.3 billion.
  • $17.0 billion in total net income, down from $19.5 billion in the same period of 2017.
  • A drop in capital and surplus to $371.4 billion in first-half 2018 from $378.3 billion at the start of the year.

The trend of reduced cash and bond positions in the industry continued during the first half of 2018, with further increases to mortgage loans and other invested assets. Mortgage loans constituted 12.4% of total invested assets in the first half of 2018, up 41% from the first half of 2014.

© 2018 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on August 30, 2018 by -

Allianz Life annuities join Envestnet platform

In a new partnership between Envestnet and Allianz Life’s entire portfolio of annuity products, including both advisory and commission-based products, will be available on the Envestnet Insurance Exchange, the two companies have announced.

The Envestnet Insurance Exchange, announced this past May, integrates insurance solutions into the wealth management process on the Envestnet platform. It is intended to streamline the annuity sales process.

With the new partnership, “advisors at banks, broker-dealers, independent insurance agencies and registered investment advisors (RIAs) throughout the United States will be able to research and potentially recommend Allianz Life annuity solutions as an option for their clients,” the release said.

“We have consistently heard from advisors that they want to offer more holistic solutions to help their clients achieve their financial goals,” said Tom Burns, chief distribution officer, Allianz Life.

The Envestnet Insurance Exchange can be accessed through various tools and features on Envestnet’s Advisor Portal. Envestnet has partnered with Fiduciary Exchange LLC (FIDx), a firm specializing in integrating advisory and insurance ecosystems, to develop and manage its Insurance Exchange, and the platform additions are scheduled to be available at the end of the year.

Financial advisors will need an insurance license to introduce insurance products. For those advisors who are not licensed, Envestnet will be offering a service called Guidance Desk that will allow unlicensed RIAs access to the consulting and fiduciary services that would enable them to use the Insurance Exchange. This service is still in development.

Aviva (U.K.) transfers pension risk to Prudential

The Prudential Insurance Company of America, a unit of Prudential Financial, Inc., has assumed the longevity risk for about £1 billion (nearly $1.4 billion) in pension liabilities from Aviva Life and Pensions U.K. Ltd, in the first longevity reinsurance transaction between the two firms.

Prudential has executed more than $50 billion in international reinsurance transactions since 2011, including the largest longevity risk transfer transaction on record, a $27.7 billion transaction involving the BT Pension Scheme.

With the increasing affordability of pension risk transfer—a reflection of attractive pricing, enhanced capacity of insurers, and the improved funding ratio of U.K. pensions—many U.K. pension insurers are seeking longevity reinsurance arrangements, a Prudential release said.

Market activity in 2018 is building toward a very strong second half. Rising rates and equities, combined with lower-than-expected longevity improvements, mean that pension schemes are very well-funded and that de-risking is more affordable than ever. Leading pension schemes are taking advantage of this favorable environment by locking in gains and transferring risk,” said Amy Kessler, head of longevity risk transfer at Prudential, in the release.

The agreement follows at least 10 others in the market during the last 12 months that have exceeded $1 billion in size. Collectively, these U.K. longevity reinsurance and longevity swap agreements signify a noticeable market surge, driven by pension schemes eager to capitalize on their improved funded status, and take risk off the table.

Funding levels of U.K. pension schemes have improved markedly since the Brexit vote of 2016, boosted by fresh contributions, strong investment performance and higher gilt yields (which lower the present value of future liabilities).

Millennium Trust notes growth milestones

Millennium Trust Company, LLC, a provider of retirement and institutional custody services to advisors, financial institutions, businesses and individuals, reported a strong quarter of performance in the second quarter of 2018. The firm also was recognized in the Crain’s Chicago Business Fast 50 as one of the top companies in the Chicago metropolitan area for outstanding revenue growth over the past five years.

In early July Millennium Trust announced an agreement with The Bancorp Bank (Bancorp) to acquire approximately 160,000 automatic rollover IRAs. After the transfer of accounts from that acquisition, Millennium Trust will have more than $24.5 Billion in assets under custody.

The acquisition builds on a successful quarter for Millennium Trust’s Retirement Services team that promotes retirement readiness in America. The firm now has more than 86,000 agreements with plan sponsors and more than 1 million individual retirement accounts.

Millennium Trust’s Institutional Custody Services team introduced a refreshed Millennium Alternative Investment Network (MAIN) in the second quarter. MAIN is a free research, education and alternative investment resource that informs investors and advisors about alternative assets, and provides access to streamlined investing processes.

Institutional Custody Services ended the second quarter with over $12.8 Billion in assets under custody in more than 450 private and public funds. The team reported almost 15,000 unique alternative assets under custody at the end of the quarter.

EY announces technology investment, leadership moves

EY (Ernst & Young) will invest US$1 billion in new technology solutions, client services, innovation and the EY ecosystem over the next two financial years, commencing from July. In a release, EY described the outlay “as part of an ongoing strategy to provide clients and people with innovative offerings using the latest disruptive technologies.”

The investment, which augments an ongoing technology spend, will be used to develop new technology-based services and solutions in areas such as financial services, cyber, risk management, managed services, software services as well as digital tax and audit services, the release said.

In personnel matters, Nicola Morini Bianzino joined EY as Global Chief Client Technology Officer (CCTO), with Steve George as EY Global Chief Information Officer (CIO) and Barbara O’Neill, EY Global Chief Information & Security Officer (CISO). These appointments complement our existing investments in innovation including our global artificial intelligence (AI) and Blockchain labs, the EY release said.

Bianzino joined EY from Accenture, where he led AI and AI strategy. He also led Growth and Strategy for Accenture’s technology, innovation and ecosystems, which included new ventures, acquisitions and investments. Based in Silicon Valley, he will focus on bringing digital capabilities to clients so that technology is at the heart of the EY services.

Steve George was CIO for Citigroup’s North American retail banking, mortgage and global commercial banking teams. He has also worked at Accenture as well as Chase and Huntington Bank. He is based in New York and will focus on embedding digital technologies across EY teams globally.

Joe Celentano succeeds Dewey Bushaw at Pacific Life

Pacific Life has named Joe Celentano to the post of senior vice president and chief finance and risk officer of the company’s Retirement Solutions Division (RSD), effective January 1, 2019. He will succeed Dewey Bushaw, who is retiring after a 24-year career at Pacific Life.

Celentano, who joined Pacific Life in 1992, previously served as Pacific Life’s chief risk officer from 2012 to 2017 before joining RSD as the division’s financial and risk management operations. In his new role as executive vice president, he will focus on growth and innovation, while also continuing the expansion of product offerings and distribution channels. He will transition into his new role over the course of the fourth quarter in 2018.

Bushaw is retiring after a 24-year career with Pacific Life with many significant contributions, most notably his strong leadership in stewarding the division through a period of unprecedented growth and industry changes.

DC plan participants ‘stay the course,’ ICI survey shows

Only 1.1% of defined contribution plan participants stopped contributing during the first quarter of 2018, according to the Investment Company Institute’s “Defined Contribution Plan Participants’ Activities, First Quarter 2018” study, which tracks data on more than 30 million participant accounts in employer-based DC plans.

Other findings from the first quarter of 2018 include:

  • 1% of DC plan participants changed the asset allocation of their account balances and 3.5% changed the asset allocation of their contributions.
  • 3% of DC plan participants took withdrawals, the same share as in the first quarter of 2017.
  • 5% of DC plan participants took hardship withdrawals, about the same share as in the first quarter of 2017.
  • 4% of DC plan participants had loans outstanding at the end of March 2018, compared with 16.7% at the end of 2017.

SEC orders Transamerica entities to pay $97 million

The Securities and Exchange Commission (SEC) has charged four Transamerica entities with misconduct involving faulty investment models and ordered them to refund $97 million to misled retail investors.

Investors put billions of dollars into mutual funds and strategies using faulty models developed by AEGON USA Investment Management LLC (AUIM) and used by Transamerica Asset Management Inc. (TAM), Transamerica Financial Advisors Inc., and Transamerica Capital Inc., the SEC said in a release.

“The models, which were developed solely by an inexperienced junior AUIM analyst, contained numerous errors and did not work as promised,” the SEC’s order said. “When AUIM and TAM learned about the errors, they stopped using the models without telling investors or disclosing the errors”

Without admitting or denying the charges, the four Transamerica entities agreed to pay nearly $53.3 million in disgorgement, $8 million in interest, and a $36.3 million penalty, and will create and administer a fair fund to distribute the entire $97.6 million to affected investors.

In separate orders, the SEC also found that Bradley Beman, AUIM’s former Global Chief Investment Officer, and Kevin Giles, AUIM’s former Director of New Initiatives, each caused certain AUIM’s violations. The two men agreed to settle the SEC’s charges without admitting or denying the findings and pay, respectively, $65,000 and $25,000 to affected investors.

David Benson, Anne Graber Blazek, and Paul Montoya of the Enforcement Division’s Asset Management Unit in the Chicago Regional Office, and Michael Cohn of the Asset Management Unit in the New York Regional Office conducted the SEC’s investigation.

© 2018 RIJ Publishing LLC. All rights reserved.

Allianz Life adds living benefit to structured index annuity

Posted on August 30, 2018 by -

The idea of tacking a lifetime income benefit rider onto a buffered or structured indexed annuity is relatively new. Since AXA invented the buffered concept eight years ago, this type of product has been designed for accumulation and for investors who haven’t started thinking about retirement income per se.

But last May, Lincoln Financial’s new “Level Advantage” structured index annuity featured Lincoln’s patented i4Life variable income annuity as a option. Now Allianz Life has fitted a living benefit rider to its existing Index Advantage structured index annuity. The earlier version had an annuitization option but no living benefit.

The new product is called Allianz Index Advantage Income Variable Annuity. Other companies in this space can be expected to follow suit. [See today’s covered story on an ETF version of a buffered product.]

Structured annuity sales in the second quarter were $2.4 billion; up 12.6% from the previous quarter, according to Wink, Inc.’s latest survey. While AXA US is still the top issuer of structured annuities, with a 40% market share, the Brighthouse Life Shield Level Select 6-Year was the top-selling structured annuity contract for the quarter across all channels.

In terms of risk and return, structured index annuities occupy a middle ground fixed indexed annuities (FIA) and variable annuities (VA) in the annuity product spectrum. They offer more upside potential but less protection than an FIA. Conversely, they offer less upside potential than a VA but a measure of protection against loss that VAs don’t offer (except indirectly, through volatility-controlled funds).

The new Allianz product is loaded with options, which makes it flexible (which advisors like) but complex (which advisors say they don’t like). It offers four index options, two death benefit options, five combinations of performance caps and downside buffers and an income rider as standard equipment. There’s no deferral bonus (aka “roll-up”) on the income rider, but contract owners receive a modest hike in the annual payout percentage for every year they delay taking income after the initial purchase.

The product’s minimum purchase premium is just $5,000. It has a six-year surrender penalty schedule starting at 8.5%. There’s a 1.25% annual product fee (most of which reimburses Allianz Life for the commission it pays the agent) and a 0.70% annual fee for the income rider. The product currently comes only in a commissioned version.

Matt Gray

Matt Gray, senior vice president for Product Innovation at Allianz Life, told RIJ that Index Advantage is designed to compare favorably on price with variable annuities that have income riders.

“In looking at the traditional VA marketplace, we saw that advisors and broker-dealers don’t like the all-in fees of 330 to 350 basis points. We also saw, based on our ‘Chasing Retirement’ study, that there’s a large population of consumers who feel behind in their savings and want to catch up.”

Gray said that Allianz Life is emphasizing “the power of and” in the product. Where a traditional VA with living benefit offers income based on the higher of the benefit base or the account value, Index Advantage Income offers retirees a chance for higher payouts if they delay income and upside potential over the entire life of the product—even after income begins.

Contract owners get potential for gain through the ownership of options on any of these equity indexes:

  • S&P500
  • Russell 2000
  • NASDAQ 100
  • EURO STOXX 50

The product also offers five combinations of upside potential and downside protection:

  • Index Performance Strategy. This option offers the highest caps (14% on the S&P500 Index). The issuer absorbs initial losses up to 10%, with the owner responsible for net losses beyond 10%.
  • Index Precision Strategy. This option offers a fixed rate (8% on the S&P500 Index) whenever the return of the index is zero or positive. The issuer absorbs initial losses up to 10%, with the owner responsible for net losses beyond 10%.
  • Index Guard Strategy. This option offers somewhat lower caps than the Performance Strategy (10.25% on the S&P500). The owner absorbs the initial losses up to a floor of -10%.
  • Index Protection Strategy with a Cap. Like a traditional fixed indexed annuity, this option protects the owner from any loss (assuming no early surrenders) and has relatively low caps (4.50% on the S&P500).
  • Index Protection Strategy with DPSC (Declared Protection Strategy Credit). This option also protects the owner from any loss. It offers a fixed payout (4.10% on the S&P500) whenever the return of the index is zero or positive.

Once income starts, the client uses only the last two strategies above.

While gains from these strategies can boost annual income levels for contract owners, it’s important to remember that the product’s biggest benefits accrue to contract owners who live the longest and collect income for the highest number of years. The insurer doesn’t pay out any of its own money until after the client’s own money has been exhausted by income or fees.

By the same token, the longer the contract owner waits before taking a monthly income, the greater the annual income level. That’s based on the assumption that the income will be paid out for fewer years. The advantage of this type of product over a conventional fixed income annuity is greater liquidity and the chance (under one of the options) for rising income in retirement.

Here’s a hypothetical example of how this product would work, suggested by an example that Allianz Life uses in the brochure for this product:

A 55-year-old single woman puts $300,000 into the Index Advantage product. If she retires immediately, she can take out 4.50% or $13,500 per year. But the payout percentage rises by 30 basis points for every year she defers income. If she retires at age 60, she can take out 6% of her accumulation. If she retires at 65, she can take out 7.5% and if she waits until age 70, she can take out 9% per year.

In Allianz Life’s example, the woman waits 10 years, until she turns 65, to begin taking income. By then, she has accumulated a hypothetical $500,000. She then has two ways of taking income: a fixed income or a reduced initial income that can increase when one of the available market indexes goes up.

For instance, she can take the “level income” option and receive $37,500 per year for life (0.075 x $500,000). Or, if she can choose the “increasing income” option and take a lower initial payout of $32,500 but maintain exposure throughout retirement to one of the four market indexes. After the $32,500 income begins, she must use one of the two Index Protection Strategies for future growth.

Gray said that the income from Index Advantage Income should compare favorably with the income from a traditional VA with a guaranteed lifetime withdrawal benefit.

“In back-test studies we’ve done, 61% of the time the contract owner had a starting income that was at least 10% more than the income produced by a traditional variable annuity,” he told RIJ. “The average starting income was 34% higher than a VA’s. Fourteen percent of the time, a variable annuity would produce a starting income at least 10% higher than Index Advantage, with an average starting income that was 18% higher.”

© 2018 RIJ Publishing LLC. All rights reserved.

Annuity sales jump 10% percent in 2Q2018: LIMRA SRI

Posted on August 30, 2018 by -

Higher interest rates and relief from regulatory pressure helped drive up sales of most types of annuities in the second quarter of 2018. Fixed indexed annuity (FIA) posted record sales of $17.6 billion in the quarter, according to LIMRA Secure Retirement Institute’s latest survey.

“This quarter’s FIA sales topped the record set in the fourth quarter 2015 by 12%,” said Todd Giesing, annuity research director, LIMRA Secure Retirement Institute. FIA sales were 17% higher than second quarter 2017 and 21% percent higher than first quarter 2018 sales results.

“All of the top 10 manufacturers reported double-digit growth from the first quarter 2018. With the Department of Labor’s (DOL) fiduciary rule vacated and the prospect of continued rising interest rates, demand for this product is high,” Giesing said.

FIA sales were 32.1 billion in the first half of 2018, up 14% from the first half of 2017.

Sales of fee-based (no commission) FIAs, which represent about one-half of one percent the total FIA market, were $67 million in the second quarter.

Before the Trump administrator and the federal court of appeals eliminated the Obama Department of Labor’s fiduciary rule, the rule had put a chill on sales of FIAs and VAs. It required commission-paid sellers of those products to pledge to act in the best interests of IRA-owning clients and not their own. That requirement has vanished, and with it the potential for lawsuits against agents who put self-interest first.

More FIA growth predicted

LIMRA SRI expects FIA sales to grow 5% to 10% in 2018 and to exceed the prior annual sales record of $59.1 billion. It also expects FIA sales to keep growing in 2019 and 2020.

Total annuity sales were $59.5 billion, 10% percent above the second quarter 2017 results and 15% higher than the first quarter. Sales last reached this level in the first quarter of 2015. Fixed annuity sales drove most of this quarter’s growth; they have outperformed variable annuity (VA) sales in eight of the last 10 quarters.

 

Year-to-date, total annuity sales were $111.3 billion, five percent higher than in the first half of 2017. LIMRA SRI expects a five to ten percent increase for annuity sales this year and zero to five percent growth in 2019.

After 17 consecutive quarters of declines, VA sales improved two percent to $25.8 billion in the second quarter. VA sales were $50.4 billion in the first two quarters of 2018, level with prior year results.

“Despite introducing new products and making changes to enhance their existing products to make them more competitive, companies are not having the same success with VAs as they are with fixed annuities,” noted Giesing. “However, the new and enhanced VAs, combined with the vacated DOL rule and better economic conditions, have led to slightly improved sales.”

Fee-based VAs sales, which represent only 3.3% of the total VA market, rose 49% from the second quarter of 2017, to $850 million.

In the second quarter, sales of registered indexed-linked annuities increased 6% from the prior year, to $2.5 billion. Sales growth has slowed as rising interest rates made competing products more attractive. These products represent about 10% of the retail VA market.

LIMRA SRI predicts total VA sales to increase less than five percent in 2018.

Total fixed annuity sales were $33.7 billion in the second quarter, up 18% from the second quarter of 2017. Year-to-date, total fixed annuity sales were $60.9 billion, up nine percent from the first half of 2017.

Sales of fixed-rate deferred annuities (book value and market value adjusted or MVA) benefited from the higher interest rates, rising 23% in the second quarter to $11.4 billion. Quarterly sales have not been this high since the first quarter 2016. Year-to-date, fixed rate deferred annuity sales were $20.1 billion, four percent higher than the same period of 2017.

“We believe fixed-rate deferred sales will have a strong second half of the year, based on the prospect of continued interest rate increases,” Giesing said. LIMRA SRI predicts fixed-rate deferred annuity sales to increase 15% to 20% percent this year and by as much as 25% in 2019.

Immediate income annuity sales jumped 14% in the second quarter, to $2.5 billion. This represented the highest quarterly sales in two years. In the first half of 2018, immediate income annuity sales were $4.6 billion, 10% higher than the prior year.

The only annuity product without positive sales growth was deferred income annuities (DIA). DIA sales fell four percent in the second quarter, to $575 million. DIA sales were $1.1 billion in the first half of 2018, down five percent from prior year.

“Rising interest rates will benefit income annuity sales. LIMRA SRI is forecasting five to ten percent growth in 2018,” said Giesing. “These products offer a unique value for retirees and pre-retirees seeking protected accumulation and guaranteed lifetime income features.”

Second quarter 2018 Annuities Industry Estimates and the ten-year annuity sales trends are located in LIMRA’s Data Bank. LIMRA Secure Retirement Institute’s Second Quarter U.S. Individual Annuities Sales Survey represents data from 95% of the market.

© 2018 RIJ Publishing LLC. All rights reserved.

Meet the First ‘Structured Outcome’ ETF

Posted on August 30, 2018 by -

Ever since “buffered” (or “structured” or variable) indexed products appeared in 2010, life insurers have had this growing market virtually to themselves. Starting with AXA’s Structured Capital Strategies, each product has been built on an annuity chassis. In the 2Q2018, category sales reached $2.4 billion, up 12.6% year-over-year.

Now an asset management firm has entered the field. Earlier this month, Innovator Capital Management launched what it claims are the first products of this type to be built on an ETF (exchange-traded fund) chassis. Milliman Financial Risk Management LLC is the subadvisor.

The three Innovator ETFs invest in multiple options on the S&P500. Investors purchasing shares of the ETFs earn gains up to a cap and have limited or buffered exposure to losses, over an outcome period of approximately one year. In the past, the only non-annuities to offer similar performance were structured notes.

This month Innovator rolled out a suite of related ETFs, each with a different range of possible gains or losses:

  • Innovator S&P 500 Buffer ETF (Cboe: BJUL). This ETF is designed to track the return of the S&P 500 up to a cap of 10.85% while buffering investors against the first 9% of losses over a one-year “outcome period,” before fees and expenses.
  • Innovator S&P 500 Power Buffer ETF (Cboe: PJUL): This ETF is designed to track the return of the S&P 500 up a cap of 8.11% while buffering investors against the first 15% of losses over the outcome period, before fees and expenses.
  • Innovator S&P 500 Ultra Buffer ETF (Cboe: UJUL): This ETF is designed to track the return of the S&P 500 up to a cap of 8.77% while buffering investors against 30% of losses (from -5% to -35%) before fees and expenses.

The initial outcome period for PJUL and UJUL runs from August 8, 2018 to June 30, 2019. BJUL was listed on August 29, 2018 and also runs through June 30, 2019. At the conclusion of the outcome period the ETFs will not expire or terminate. Instead, they will roll into a new set of options positions, and the cap and buffer will “reset.” Investors who jump into the funds mid-term will receive adjusted caps and buffers, which can be viewed real-time via a pricing tool on Innovator’s website.

Bruce Bond

“These types of payouts were originally available as structured notes, and many people are familiar with those products and how they work,” said Bruce Bond, co-founder and CEO of Innovator Capital Management, based in Wheaton, IL. “Our goal is to deliver that type of payout in the most efficient, low-cost way possible, and have it qualify for all the fiduciary accounts.”

Innovator is the ETF sponsor and will be selling the product, Bond told RIJ. “Our first effort will be to work with advisors who are fiduciaries who wouldn’t ordinarily use a structured product or an annuity. They currently have no access to this type of product in ETF form,” he said.

Investors in these products buy shares, just as they would any other ETF. Their investments are applied to the purchase of customized options on the S&P 500 Index. Investors in the ETFs own the options directly and bear the investment risk. The products involve no bond underwriter or insurance company, which makes them cheaper and more transparent than structured notes or annuities.

“When we talk to financial advisors, they often ask, ‘how else can I access structured outcomes? What do we do for the portion of our clients who might not want annuities or structured notes? This gives them a similar strategy in a liquid, transparent manner, and at a lower cost,” added Matt Kaufman, Principal and Senior Director, Product Development at Milliman.

“When you look at the structured outcome marketplace,” he added, “the sales process often involves a major decision about tying up a large portion of someone’s wealth for a considerable period of time, often with relatively low transparency and liquidity during the holding period,” he said.

“We find placing structured outcome strategies in the ETF wrapper provides a more transparent, liquid and accessible option for many people needing to access the growth of the equity markets, in a more defined or risk-managed way.”

Here’s how Innovator describes the ETFs:
“Each Fund will hold a portfolio of custom exchange-traded Flexible exchange options (FLEX options) that have varying strike prices (the price at which the option purchaser may buy or sell the security, at the expiration date), and the same expiration date (approximately one year). The layering of these FLEX Options with varying strike prices provides the mechanism for producing a Fund’s desired outcome (i.e. Cap or buffer). Each Fund intends to roll options components annually, on the last business day of the month associated with each Fund.”

Cboe describes FLEX options as the only listed options that allow users to select option contract terms. The underlying index, option type, exercise date, strike price, and settlement date are all customizable. These options also give investors the opportunity to trade on a larger scale with expanded or eliminated position limits.

Though the defined outcome parameters are set at yearly intervals, the products have all the liquidity associated with owning an ETF. Investors can trade them intra-day, and each ETF’s share price fluctuates based on the performance of the underlying options positions, which in effect should move at some ratio (or delta) relative to the S&P 500. That ratio will be closer to 1:1 as the outcome period draws closer to its conclusion.

“As a result, the upside cap and buffer levels will be different for each investor who buys shares of an Innovator Defined Outcome ETF during the outcome period, but these outcome values can all be known prior to investing,” Kaufman said.

Each of the ETFs has an expense ratio of 79 basis points a year. If the gains on the product were capped at 10% of the S&P500 Index, for instance, the investor would face an effective cap of 9.21%. Assuming that an advisor charges an annual management fee on the market value of the investor’s entire portfolio, that too would reduce an investor’s overall portfolio returns.

Innovator conceived these products at a time when it appeared that the DOL fiduciary rule would soon take effect, and that it would become more difficult for advisors to sell commissioned products to owners of rollover IRAs, which now have a collective value of about $9 trillion. ETFs do not have sales loads or commissions.

In choosing a subadvisor for its new product, Innovator logically picked Milliman, which had worked with Cboe and Standard & Poor’s to create four series of Cboe S&P500 Target Outcome Indexes, which are the benchmarks for the Innovator series. Cboe owns the indexes and licenses them exclusively to Innovator. Terms of the exclusivity were not made public, but other product structures outside of the ETF may be able to build products based on target outcome indexes.

“As the structured annuity, indexed annuity and ETF spaces develop, the appetite for structured outcomes that are built directly into the index methodology may increase,” Kaufman said.

© 2018 RIJ Publishing LLC. All rights reserved.

The Science (Not Sci-Fi) of Social Security

Posted on August 9, 2018 by -

Millennials believe as much in space aliens as in the long-term viability of Social Security, surveys show. Economists, fortunately, tend to have more faith in the national pension program than in ETs, and some them—economists, that is—spend a lot of time looking for ways to fix it by 2034, when its reserves run dry.

The question is not whether it’s possible to recharge Social Security’s finances within the next 16 years, but how to do it. Some economists believe that if more Americans worked a couple of years longer and claimed benefits later, the system might recover solvency without politically ugly tax hikes or benefit cuts.

If no action is taken, Social Security will be able to pay only 75% of its promised benefits after 2034. To solve that problem today, the government would have to raise payroll taxes (to about 15% from 12.4%), cut benefits across-the-board by 17%, or some combination of the two. It could also generate more revenues by raising the cap on the amount of earned income—currently the first $128,400—on which the payroll is levied.

The overlap of Social Security policy and behavioral finance was the subject of several papers aired at the Retirement Research Consortium’s 20th annual meeting last week. The National Bureau of Economic Research and the Centers for Retirement Research at Boston College and the University of Michigan produced the meeting at the National Press Club in Washington, D.C.

Academic proposals for improving Social Security’s finances tend to be math-heavy and wonkish. But they contain the seeds of potential policy solutions. In a paper he presented at the meeting, John Laitner of the University of Michigan suggested tweaking the arcane calculation of Social Security benefits so that claiming benefits at age 63 would yield significantly more income than claiming at age 62. (In 2013, 48% of women and 42% of men claimed at age 62, according to the Center for Retirement Research at Boston College.

The lure of higher benefits, Laitner’s calculations showed, could motivate Americans to work an average of 1.2 to 1.8 years longer before filing for benefits. That modest increase, he said, could provide enough new revenues from payroll taxes and federal income taxes to offset 20% to 30% of the Social Security shortfall.

Economists in other countries, including Italy and Germany, have also been working on ways to force or nudge people who are near retirement to keep working for a while. For instance, after the 2008 financial crisis, the Italian government abruptly raised the full public pension age for men to age 66 from age 65 and began gradually raising the full pension age for women from age 60 to age 66. Starting in 2021, no workers will be able to receive a full pension before age 67.

This somewhat desperate move was driven by Italy’s flirtation with national bankruptcy, and it backfired, at least in the short run. According to a paper presented at the meeting by Matteo Paradisi of Harvard, delays in the retirement dates of older workers caused employers at small to mid-sized companies to lay off middle-aged workers.

Some of those laid-off workers turned to tax-financed social services, thereby offsetting some of the fiscal benefit of the higher retirement age. “One-half to two thirds of revenues generated by the reform are lost in the short-run due to the behavioral responses of firms and workers,” wrote Paradisi and his co-author, Giulia Bovini of the London School of Economics and the Bank of Italy.

Other interventions can encourage people to retire earlier. A quarter-century ago, through the Pension Reform Act of 1992, Germany began paying bonuses to workers whose expected public pension benefits were depressed because, despite long work histories, their incomes had never been high. The program didn’t apply to people who began contributing to the pension after 1992.

At the conference, researcher Han Ye of the University of Mannheim (Germany) shared the results of her investigation of the effects of that program. She found that, because the bonuses caused women to claim pensions and leave the workforce earlier, the program was a fiscal failure.

According to her study, an offer of 100 euros in additional monthly pension benefits induced women to claim old age pensions about 10 months earlier than before. The subsidy also raised the rate at which women claimed a pension at age 60 by 17%. “In order to raise the lifetime income of the low-income pensions by one euro, 1.3 euros have to be raised by the government, either via taxes or pension contributions,” Ye wrote.

Other research papers presented at the meeting showed:

Fears that the 2010 Affordable Care Act (ACA) would hurt the American economy by reducing the supply of workers are not justified by research data, according to a study by Helen Levy and Tom Buchmueller of the University of Michigan and Sayeh Nikpay of Vanderbilt University.

When the ACA, also known as Obamacare, went into effect in 2014, the media carried many reports that the ability to obtain health insurance outside the workplace would cause many workers to leave benefits-paying jobs. But, after analyzing trends in health insurance coverage and labor market outcomes for Americans ages 50 through 64, the researchers found “no discernible break” in the labor market participation rate in 2014, either in states that expanded their Medicaid programs or in those that did not.

Another team of researchers studied the correlation between the growing use of factory robots and on rising imports from China from 1994 to 2015 on U.S. earnings that are subject to the payroll tax, which generates Social Security program revenues.

Rising use of robotics in manufacturing was correlated with a drop of more than 3% in earnings subject to the payroll tax for Americans in the upper 60% of the income spectrum. Rising imports from China coincided with reductions in the earnings of those in the bottom half of the income spectrum by at least three percent, and reduced the earnings of lowest-earning Americans by as much as 12%.

Matthew Rutledge, Gal Wettstein and Wenliang Hou of the Center for Retirement Research at Boston College and Patrick J. Purcell of the Social Security Administration wrote the study.

© 2018 RIJ Publishing LLC. All rights reserved.

Inside new target date funds, Lincoln offers risk-adjustment options

Posted on August 9, 2018 by -

Lincoln Financial Group has introduced YourPath portfolios, a series of target date portfolios for employer-sponsored retirement plans that use investments offered by American Funds, American Century Investments, BlackRock and State Street Global Advisors.

The portfolios “will be managed along multiple risk-based paths to support a more personalized investment approach based upon financial circumstances and risk tolerance,” a Lincoln press release said. The three available paths are Conservative, Moderate and Growth.

“When selecting YourPath as the QDIA, the default criteria will be selected by the plan sponsor,” a Lincoln spokesperson told RIJ. “The participant age will default the participants into the correct target date vintage, then the plan sponsor can select the default risk path they find most prudent for their participant population.  The participant individually would have the ability to opt into another risk path after reviewing their appropriate risk tolerance.”

The funds in the YourPath program will be institutionally priced, Lincoln said. The YourPath American Funds Portfolios will range in annual expense ratio from 0.33% to 0.46%, YourPath iShares Portfolios will range in price from 0.12% to 0.15%, and YourPath American Century/State Street Global Advisors will range in price from 0.44% to 0.55%.

“Unlike standard target date funds driven by retirement age, Lincoln Financial’s YourPath portfolios are a more customized solution,” said Ralph Ferraro, senior vice president, head of Product for the company’s Retirement Plan Services business, in the release.

YourPath portfolios will offer an active, passive or hybrid portfolio investment strategy with a stable value asset class to help reduce market volatility. Morningstar Investment Management LLC will provide the glide path, portfolio construction and ongoing management for each of the portfolio strategies, delivering fiduciary support as an investment manager under ERISA 3(38), the release said.

© 2018 RIJ Publishing LLC. All rights reserved.

New 5-year indexed annuity contract from Eagle Life

Posted on August 9, 2018 by -

Eagle Life Insurance Company, a wholly owned subsidiary of American Equity Investment Life Insurance Co., has added a five-year fixed index annuity (FIA) product to its indexed product lineup: Eagle Select Focus 5.

The contract allows clients the ability to take penalty-free withdrawals of either 5% or 10% per year during the five-year surrender charge period, beginning with the start of the second contract year. The 5% withdrawal option requires election of a market value adjustment rider.

Eagle Select Focus 5 also offers flexible premiums that don’t extend the surrender period, a five year surrender charge schedule, terminal illness and nursing care riders included at no cost and transparent crediting methods, said Kirby Wood, Chief Distribution Officer of Eagle Life, in a release.

Eagle Select Focus 5 offers a new allocation option: the “S&P 500 Dividend Aristocrats Daily Risk Control 5% Excess Return with Participation Rate.” There is no upper limit on the potential rate of return the owner can receive when allocating premium to this index option, but the internal design of the index automatically dampens the owner’s upside potential.

According to an Eagle Life product brochure, this is “a volatility control index that consists of the S&P 500 Dividend Aristocrats Index and a cash component accruing interest at three Month LIBOR.

“The Index is dynamically adjusted between the two components to target a 5% level of volatility. The S&P 500 Dividend Aristocrats Index is made up of S&P 500 members that have followed a policy of consistently increasing dividends every year for at least 25 consecutive years. This Index is well diversified across all market sectors.”

© 2018 RIJ Publishing LLC. All rights reserved.