Archives: Articles

IssueM Articles

USAA inked a pair of reinsurance deals in 2021

Posted on May 4, 2022 by -

USAA Life Insurance Company entered into two reinsurance arrangements in 2021, with a combined value of about $6 billion, according the Texas-domiciled mutual insurer’s 2021 Annual Statement, filed with the Texas Department of Insurance on February 10, 2022. 

USAA “entered into a coinsurance arrangement with Commonwealth Annuity and Life Insurance Company (CALIC) to reinsure its closed block of fixed rate annuity business representing approximately $3 billion in ceded annuity reserves,” the statement said. The deal with effective July 1, 2021.

USAA also “entered into a coinsurance agreement with Fortitude Re to reinsure 100% of its legacy annuity closed block of business on a funds withheld basis. This reinsurance agreement represents approximately about $3 billion in ceded reserves.” The deal was effective October 1, 2021.

USAA is a “reciprocal” insurance company, which is similar to a mutual insurance company. In July 2019, Charles Schwab announced that it would acquire the assets of USAA’s Investment Management Co., including brokerage and managed portfolio accounts, for $1.8 billion in cash. The companies agreed to a long-term referral agreement, effective at closing of the acquisition, that would make Schwab the exclusive wealth management and brokerage provider for USAA members.

For 2021, USAA, which is headquartered in San Antonio, reported $2.72 billion in new annuity premiums, $743 million in individual life insurance premium, and $1.11 billion in net investment income. USAA markets insurance products and services primarily to current and former members of the US military and their families.

Because of “reinsurance ceded” of $7.6 billion, however, the company reported a negative $3.7 billion in life and annuity premium and a $4.9 billion reduction in aggregate reserves. USAA reported about $26.4 billion in assets, $23.6 billion in liabilities, and a surplus of about $2.8 billion (10.6% of assets), according to the annual statement.

CALIC is a Massachusetts-based subsidiary of Global Atlantic Financial Group, which is a Bermuda-based, US-focused annuity life insurance and reinsurance company owned by KKR, the global asset manager, and by Goldman Sachs. CALIC executed a coinsurance deal with USAA.

In a coinsurance deal, “the ceding insurer transfers a proportionate share of all the policy risks and cash flows. The reinsurer receives its share of premiums, pays its share of benefits, sets up its share of reserves, and pays an allowance to the ceding insurer to cover its share of the costs of administering the policy,” according to the American Council of Life Insurers.

Fortitude Re and USAA have a “funds withheld” reinsurance deal. USAA received a reserve credit from Fortitude Re of $2.84 billion for business ceded to Fortitude Re. USAA included that $2.84 billion among its liabilities as “funds withheld.” 

Like many other life insurers, USAA used funds-withheld reinsurance to transfer away the risk associated with certain contracts while keeping the corresponding assets under its own management.  

Fortitude Re is a Bermuda-based multi-line reinsurance company “specializing in transactional solutions for legacy life, annuity and property and casualty line of business.” The Carlyle Group and other investors created and financed Fortitude Re over a period of several years after 2018 to acquire or reinsure AIG annuity contracts. 

© 2022 RIJ Publishing LLC. All rights reserved.

Annuity sales on pace for another $250bn year

Posted on May 4, 2022 by -

Total US annuity sales increased to $63.6 billion in the first quarter of 2022, up  4% from the first quarter of 2021, according to preliminary results from the LIMRA Secure Retirement Institute (SRI) US Individual Annuity Sales Survey. 

At their current quarterly sales pace, annuities would post 2022 full-year sales of $254.4 billion, or just shy of the all-time record sales of $254.6 billion in 2021.

“First quarter annuity sales tend to be a bit slower,” said Todd Giesing, assistant vice president, SRI Annuity Research. “While sales in the first two months of 2022 were a bit sluggish, annuity sales in March were at record-high levels. Rising interest rates and increased market volatility shifted the product mix this quarter with fixed annuity products driving the overall growth.” SRI has tracked monthly annuity sales since 2014.

Total fixed annuity sales were $35.2 billion in 1Q2022, up 14% over first quarter 2021. Double-digit growth for fixed indexed annuities and fixed-rate deferred annuities returned the overall fixed annuity sales to pre-pandemic levels.

$ in billions. Source: Secure Retirement Institute, May 3, 2022.

Fixed indexed annuity (FIA) sales were $16.3 billion, 21% higher than in prior year quarter but down 2% from 4Q2021. Fixed-rate deferred annuity sales increased 10% in the first quarter, year-over-year to $16 billion. They were up 45% from 4Q2022.

“Both FIAs and fixed-rate deferred products benefited from the significant interest rate increases in the first quarter,” said Giesing. “Coupled with a nearly 5% equity market decline, investors sought out principal protection and steady growth, which these products offer.”

Sales of fixed-rate annuities and FIAs were $32.3 billion in 1Q2022, compared to $28.4 billion for all variable annuities. Combined sales of indexed products—FIAs and registered index-linked annuities, or RILAs—were $25.6 billion. 

Index-linked annuities are, from that perspective, the single best-selling class of annuity products. The two occupy very different niches: FIAs are distributed through insurance marketing organizations and require an insurance license to sell, while RILAs are distributed through broker-dealers and require a securities license to sell. 

Both are distinct from all other annuities, however, in that they are structured products. That is, their performance is tied to the performance of options on equity market indexes or hybrid indexes.  

FAs and FIAs, especially those with longer contract terms, are the products favored by life/annuity companies that have close partnerships with alternative asset managers. The annuity companies are stoking their profitability by reducing exposure to capital intensive products like variable annuities with living benefits, investing in higher-yield private assets, and making strategic use of reinsurance in havens like Bermuda.

Traditional variable annuity (VA) sales were $19.1 billion in the first quarter, down 8% year-over-year. Registered index-linked annuity (RILA) sales were $9.3 billion. While this is 2% higher than first quarter 2021, it reflects a 10% drop from the fourth quarter of 2021. 

“Market conditions in the first quarter have made FIAs more attractive than RILAs. As a result, the remarkable growth RILAs experienced over the past three years has leveled off,” Giesing said in a release.

Immediate income annuity sales were $1.5 billion in the first quarter, level with first quarter 2021. Deferred income annuity sales fell 18% to $300 million in the first quarter.

“We finally are beginning to see payout rate increases for income annuities as interest rates improve,” said Giesing. “However, because the Fed has signaled additional rate hikes later this year, we expect investors to wait to lock in rates so sales will likely remain muted in the second and third quarters.”

Preliminary first quarter 2022 annuity industry estimates are based on monthly reporting, representing 85% of the total market. A summary of the results can be found in LIMRA’s Fact Tank.

The 2021 top 20 rankings of total, variable and fixed annuity writers will be available in May, following the last of the earnings calls for the participating carriers.

© 2022 RIJ Publishing LLC. 

New York’s ‘shot-across-the-bow’ to PE firms

Posted on April 29, 2022 by -

In a message that may have been inspired by Blackstone’s 2021 purchase of a 9.9% equity stake in AIG Life & Retirement, the New York Department of Financial Services issued Insurance Circular Letter No. 5 (2022) on April 19.

“People are paying attention to this,” Tim Zawacki of S&P Global Intelligence told RIJ this week. “It appears the NY superintendent intends to exercise wide latitude to determine what constitutes a ‘change in control’ of a life insurance company. My reading of letter is that the superintendent can subjectively determine whether even so little as a board appointment constitutes a change in control.”

Zawacki called the letter a possible “shot across the bow” to PE firms that are forming strategic relationships with life/annuity companies. “I think that’s a fair characterization in light of this statement in the letter: ‘The Department wishes to remind industry participants of the requirements of the Insurance Law and the Department’s expectations given the apparent misconception in the marketplace and the recent increase in insurance company transactions,'” he said.

A change in control would subject a transaction to “filing and approval requirements imposed under New York Insurance Law (“Insurance Law”) §1506,” the circular said. 

Besides Blackstone’s equity stake, its deal with AIG included an agreement that Blackstone would manage $50 billion of AIG Life & Retirement’s assets immediately and the right to manage up to $92.5 billion for the company over the next six years. In addition, Blackstone president and chief operating officer Jon Gray joined the AIG Life & Retirement board. AIG intends to spin off its Life & Retirement business as an independent company later this year.

Here’s the text of the circular:

STATUTORY REFERENCES:  N.Y. Insurance Law §§ 1501, 1505, 1506 and 1510

The New York State Department of Financial Services (“Department”) has become aware that several potential investors in New York domestic insurers have structured their investments as an acquisition of less than 10% of the insurers’ voting securities, at least in part, based on the expectation that an investment below that level would avoid filing and approval requirements imposed under New York Insurance Law (“Insurance Law”) § 1506.

Similarly, transactions have been structured to limit an investor’s board representation to a single board seat, which, by itself, does not create a presumption of control.  As discussed below, an acquiror of less than 10% of an insurer’s voting securities, or with the right to appoint a single board member, may still be deemed to control the insurer based on all the facts and circumstances, including the terms and conditions of the proposed transaction.

The Department wishes to remind industry participants of the requirements of the Insurance Law and the Department’s expectations given the apparent misconception in the marketplace and the recent increase in insurance company transactions.

A determination of “control” under Insurance Law § 1501(a)(2) depends on all the facts and circumstances.  Control is presumed under § 1501(a)(2) if a person, directly or indirectly, owns, controls, or holds with the power to vote, 10% or more of an insurer’s voting securities.  However, this presumption does not create a safe harbor for acquisitions below the 10% threshold, which may still result in a control determination.  In addition, while § 1501(a)(2) makes clear that any director of an insurer, or any person with the right to appoint such a director, is not presumed to control the insurer, these facts may, in combination with other factors, lead to a control determination.

The statute makes clear that a control relationship can arise from a contract or other factors, in the absence of any ownership of voting securities of an insurer.  Section 1501(a)(2) defines “control” in relevant part as “the possession direct or indirect of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract (except a commercial contract for goods or non-management services) or otherwise…”.  Furthermore, § 1501(b) provides that the Superintendent of Financial Services (the “Superintendent”) may find a controlling relationship if a person “exercises directly or indirectly either alone or pursuant to an agreement with one or more other persons such a controlling influence over the management or policies of an authorized insurer as to make it necessary or appropriate in the public interest or for the protection of the insurer’s policyholders or shareholders that the person be deemed to control the insurer.”

The Department urges parties contemplating a transaction that raises potential control issues (including, but not limited to, transactions involving the acquisition of an insurer’s voting securities by, the grant of a board seat to, or a new contractual relationship with, a transaction counterparty, or any combination of these factors) to engage with the Department as early in the transaction structuring process as practicable, even if the parties believe that such transaction will not give rise to a control relationship, to give the Department a reasonable opportunity to review the transaction and the parties’ position.  The Department encourages this informal engagement to avoid delay and other adverse consequences (including penalties under Insurance Law § 1510(a)) should the Superintendent reach a different conclusion.  If, notwithstanding the parties’ position, the Superintendent determines that the transaction would result in a change of control, the parties must either submit an application under § 1506 or request a determination of non-control pursuant to § 1501(c).

Please direct questions regarding this circular letter to [email protected].

On April 26, lawyers at the firm of Locke Lord offered the following opinion:

Under NY Ins. Code § 1501, “control” is defined as “the possession direct or indirect of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract…or otherwise; but no person shall be deemed to control another person solely by reason of his being an officer or director of such person…control shall be presumed to exist if any person directly or indirectly owns, controls or holds with the power to vote ten percent or more of the voting securities of any other person.”  NY Ins. Code § 1501(a)(2).  Under NY Ins. Code § 1506, no person “other than an authorized insurer, shall acquire control of any domestic insurer, whether by purchase of its securities or otherwise, unless: it receives the superintendent’s prior approval.”  NY Ins. Code § 1506(a)(2).

The Letter addresses what the NY DFS views as a recent trend of investors seeking to avoid such filing and approval requirements by acquiring less than 10% of an insurer’s voting securities.  The Letter emphasizes that “‘control’ under Insurance Law § 1506(a)(2) depends on all the facts and circumstances” and that there is no “safe harbor for acquisitions below the 10% threshold, which may still result in a control determination.”  The Letter further cautions that “a control relationship can arise from a contract or other factors, in the absence of any ownership of voting securities of an insurer.”

The Letter urges parties contemplating investments or other transactions which might result in control of a New York insurer to informally engage with the NY DFS as early in the process as possible so that the NY DFS can review the transaction and the parties’ position.  If the NY DFS determines that a change in control has occurred, the parties must either submit an application to the NY DFS for approval or attempt to disclaim control pursuant to NY Ins. Code § 1501(c).  The NY DFS advises a lack of engagement could result in delays, and even adverse consequences, if the NY DFS determines that the parties have not complied with the requirements of Article 15 of the NY Ins. Code.

© 2022 RIJ Publishing LLC.

Private Equity in the Life/Annuity Biz

Posted on April 29, 2022 by -

Private equity (PE) firms or “alt-asset managers,” in the opinions of many, have bestowed heavenly manna on the life/annuity industry during the past decade’s yield-famine. 

In addition to buying several large and small life insurers outright, PE firms have relieved other life companies of capital-intensive blocks of annuity and life business, “released” surplus capital through reinsurance, used their loan origination skills to boost general account yields, and perked up crediting rates of indexed annuity contracts.

But the PE disruption of the staid life/annuity industry has also raised the interest of regulators, legislators, life/annuity executives and actuaries—enough so that LIMRA, the life/annuity industry’s market research arm, included a break-out session on “Private Equity and the Life Insurance Industry” at its 2022 Life Insurance Conference in Tampa this week. 

Expert panelists included Tim Zawacki, research analyst at S&P Global Market Intelligence; Rosemarie Mirabella, a director at ratings agency AM Best, and Jason Kehrberg, an actuary at PolySystems Actuarial Software and Services and chair of the American Academy of Actuary’s Asset Modeling and Risk Task Force.

My takeaway: Few observers believe that PE-owned life insurers (or the life insurers that hire PE firms to run their money) are putting themselves or their policyholders at risk; on the contrary, most of those companies sport “A” ratings from AM Best. Most close observers also believe that current regulatory frameworks—though fragmented and playing catch-up with a fast-changing industry sector—are working. 

But private investments now account for some $800 billion of life company general account assets —10% of the industry total—and are rising, AM Best shows. Private assets like CLOs (collateralized loan obligations) tend to be opaque, complex and hard to price. 

PE-led reinsurance arrangements use complicated “modified coinsurance” or “funds withheld” structures. Fixed indexed annuities, the raw material of private assets, are hard to understand. Transactions between subsidiaries of  the same holding company can lack transparency or the equipoise that unrelated counterparties can bring to transactions.  

Regulators and legislators (most recently New York’s Department of Financial Services and Sen. Sherrod Brown, D-OH) have joined the National Association of Insurance Commissioners in looking closely and asking questions about PE penetration of the life/annuity business. PE firms, after all, are now handling almost a trillion dollars worth of annuities, much of which represents the retirement savings of middle-class Americans.  

US-domiciled insurers with the highest book value of private equity investments in their general accounts.

‘Surprising’ risk-based capital levels

Mirabella

In her presentation, Rosemarie Mirabella of AM Best showed the acceleration of PE’s presence in insurance. “PE companies controlled only 1.2% of industry assets in 2011, now its up to $800 billion or about 10% of the life/annuity industry’s assets,” Mirabella said.

Why do investment companies like insurance assets so much? “They like the [fixed] annuity space because the embedded guarantees are modest relative to what they can earn on the asset management side,” Mirabella added. “Private equity is a duration asset class [with specific initiation dates and ending dates]. That gives companies ability to match liability to assets.”

“These companies have other advantages besides investment skills. They don’t have the pressure of legacy systems. They’re good on the digital side. They understand what it takes to leverage their business model.  They have a lot of capability to support good returns.”

PE company purchases of insurance assets started slowly after the Great Financial Crisis, and then accelerated. “In the early years, from 2011 to 2016, we saw the ramping up and re-engineering of the investment portfolio by the PE firms,” she said. Yields and profits didn’t show much change until 2016. Then they started to climb—above the life industry, above the individual annuity composite, above stock companies overall.”

Mirabella said she first expected life insurers under PE control to run minimal RBC ratios (Risk-based capital). Instead, she watched their ratios climb and, by 2017, exceed the overall industry’s. “That was a surprise to me,” she confessed. “A lot of [PE] companies were coming in and buying capital-impaired insurers. I expected it to take them awhile to reengineer the business and increase the capital base.”  

Source: AM Best.

‘Little choice but to optimize balance sheets’

In his slides, Tim Zawacki of S&P Global Intelligence also tracked the growth of PE firms in life insurance. Mergers and acquisitions involving US and Bermuda-based life-sector firms were close to $30 billion in 2021, the highest level in 16-years.

PE-linked entities accounted for 64% of the reserve credits taken for reinsurance in 2020 and 56% in 2021. The 2021 figure didn’t count Global Atlantic’s deal with Ameriprise, in the which the KKR subsidiary reinsured $8 billion in Ameriprise. The deal allowed Ameriprise to release $700 million in excess capital. 

Zawacki cited these supply and demand factors in driving PE/annuity reinsurance activity in 2021 and 2022: 

  • A continued push by traditional carriers to reinsure their legacy liabilities
  • An interest in acquiring or reinsuring variable annuities and universal life with secondary guarantees, in addition to fixed/indexed annuity business
  • Organic growth from primary business [i.e., new fixed/fixed-indexed annuity sales] and flow reinsurance [instant reinsurance of newly issued annuity contracts]
  • Demand from traditional life/annuity reinsurers for new business 
  • Demand among private equity-affiliated investment funds for a source of permanent capital

Zawacki

In an interview, Zawacki explained the growing demand for reinsurance. “From a competitive standpoint, for public companies to achieve the kinds of returns that equity investors expect, they have little choice but to optimize their balance sheets by engaging in these [reinsurance] structures.”

But today’s “modco” or “funds withheld” reinsurance arrangements, where an Iowa-domiciled life insurer might get credit for reinsuring annuities in Bermuda without giving up control of the assets, can be obscure. “If you have funds withheld, the deals become more difficult to analyze. It’s impossible for an outside observer to distinguish what is in a ‘funds withheld’ account and what is part of the general account investments. That’s one challenge with that structure.”

Are ASOPs up to the task?

Reinsurance isn’t the only complex piece of the PE/insurance phenomenon. The high-yield private equity and private credit assets that PE firms originate, including securitized bundles of leveraged loans, are difficult for actuaries to analyze and evaluate. 

Jason Kehrberg, of PolySystems, said that members of the NAIC’s Life Actuarial Task Force have “potential concerns,” as described in the slide below.  

Actuaries do have tools for analyzing high-yield products, such as the Actuarial Standards of Practice (ASOPs). Kehrberg shared a deep-in-the-weeds review of the ASOPs that might apply to actuaries’ analyses of CLOs and other complex investments. Whether those practices are sufficient for the challenge presented by today’s bespoke assets remains to be seen.  

Kehrberg

The NAIC’s Life Actuarial Task Force has proposed a new Actuarial Guideline for Asset Adequacy Testing, he said. If adopted, this guideline would apply to “reserves reported this year-end to life insurers with general account actuarial reserves [i.e., liabilities] of $500 million or more and at least  5% of supporting assets composed of projected high net yield assets.” 

Kehrberg defined a projected high net yield asset as a “fixed income asset whose spread over a comparable Treasury is greater than a prescribed BBB spread less a prescribed BBB- default rate” or “equity-like assets in the category of common stock for purposes of risk-based capital C-1 reporting.”  

Lots of runway left 

Driven by the almost universal demand for higher yields, higher fee revenue, and higher profits, the convergence of insurance and investments will likely continue, analysts say. Mergers, acquisitions and strategic partnerships between life/annuity companies and alt-asset managers will likely continue to be formed—though perhaps at a slower pace if US and world economy goes into an anti-inflation, post-stimulus recession.

Would a rise in prevailing interest rates slow down this trend, perhaps causing a shift by investors from indexed annuities to bonds or bond funds? Barring a steep economic downturn in 2022 or 2023, Mirabella didn’t think so.

“The PE-owned companies have been positioning themselves for years to take advantage of the eventual uptick in interest rates,” she said.“This trend will continue unless there are major, fundamental economic shocks that change the risk profile of private equity.”

Zawacki told RIJ that he looks forward to seeing the Federal Insurance Office’s (FIO) response to Sen. Sherrod Brown’s March 16 request for more information on PE ventures in insurance, to be delivered by May 31. There are many different aspects to those ventures, and the future of regulation in this area may depend on which aspect the FIO focuses its energy and attention on, he noted.

Will it focus, for instance, on the adequacy of the existing state-based regulatory framework? On the perceived arbitrage with offshore domiciles? Or at the pension risk transfer business? “There are a number of different ways this could go,” Zawacki said. “We would like to see them update the regulatory framework to the realities of the market.”

© 2022 RIJ Publishing. All rights reserved.

‘Bermuda Triangle’ news

Posted on April 29, 2022 by -

FNF ‘dividends’ 15% of F&G Annuities & Life stock to shareholders

Fidelity National Financial, Inc., a provider of title insurance and transaction services to the real estate and mortgage industries, said last month that it will “dividend” to FNF shareholders, on a pro rata basis, 15% of the common stock of its F&G Annuities & Life, Inc., its annuity and life insurance subsidiary. 

FNF, which will retain control of F&G through an 85% ownership stake, said it “remains committed to F&G’s growth and long-term success.”   

In a statement, FNF chairman William P. Foley II, said, ”F&G has exceeded all of our expectations having grown assets under management by 38% to $36.5 billion since our acquisition in June of 2020 and proving our strategic rationale for the deal. FNF’s balance sheet allowed a credit ratings upgrade of F&G and accelerated its growth by entering new distribution channels. 

“While this has played out much better than we had expected, the market has not recognized the value creation that has taken place at F&G. We believe that the best way to unlock this value is to publicly list F&G through a dividend to our shareholders.”

The distribution was approved by FNF’s Board of Directors on March 14, 2022. The Board of Directors believes that the public listing of F&G shares through a dividend to FNF shareholders will unlock the value of both industry leading businesses, a release said. The separation is intended to be structured as a taxable dividend to FNF shareholders and is targeted to be completed in the third quarter of 2022.

FNF will convert its $400 million intercompany loan to F&G into F&G equity prior to the distribution. FNF will maintain 85% of F&G’s common stock, continuing to hold control and primary ownership. FNF intends to distribute 15% of F&G’s common stock to FNF shareholders in order to reinforce the standalone value of F&G, as well as to allow investors to invest directly in F&G.

Chris Blunt, President and Chief Executive Officer of F&G, will remain in his role leading F&G. No change is expected to FNF or F&G’s strategy, operations or management teams. F&G said it will continue to benefit from FNF’s majority ownership, expect sales growth to remain robust through the expansion into new distribution channels, and have access to public markets over time, as needed.

Blunt said in a statement, “We’ve gone from a $4 billion annual sales retail annuity carrier offering one product through one channel, to a more than $10 billion annual sales insurer offering life, annuities, and institutional solutions across five different channels. This transition to being a publicly traded company is a vote of confidence for our business.”  

Ares Management announces $40 billion in lending commitments

Ares Management, the private equity firm that, with life insurance subsidiary Aspida Financial and Bermuda-based reinsurer Aspida Re, gathers annuity liabilities, reinsurers them, and manages the associated assets, announced about $5.0 billion in US direct lending commitments across 54 transactions during the first quarter of 2022 and about $35 billion in direct lending commitments across 287 transactions in the last twelve-month period ended March 31, 2022.

The lending figures improve on the $3.6 billion in commitments that Ares closed on 45 transactions during the 1Q2021 and approximately $14.5 billion in commitments for 168 transactions in the twelve-month period ended March 31, 2021. Below are descriptions of selected transactions and expansions that Ares supported and closed during the first quarter of 2022:

3E / New Mountain Capital. New Mountain Capital acquired 3E, a global provider of data-driven intelligent compliance solutions in the Environmental, Health, Safety & Sustainability space.

AirX Climate Solutions / Catterton Partners. AirX Climate Solutions (ACS). ACS provides cooling and ventilation solutions in the telecommunications, data centers, educational, residential and industrial and commercial markets.

Community Brands / Insight Partners. Insight Partner has growth plans for Community Brands, a provider of cloud-based software and payment solutions for association, education, and non-profit organizations.

Convera / The Baupost Group & Goldfinch Partners. The Baupost Group and Goldfinch Partners acquired Convera, a large non-bank provider of cross-border business payment and foreign exchange solutions processing.

Covaris / New Mountain Capital. New Mountain Capital acquired Covaris, a provider of instruments, consumables and reagents associated with the pre-analytical sample preparation process.

Cranial Technologies / Eurazeo. Euraze acquired Cranial Technologies (CT), a provider of custom helmet orthotics for patients diagnosed with plagiocephaly or brachycephaly.

High Street Insurance Partners / ABRY Partners. Ares supported the growth of High Street Insurance Partners, a full-service independent insurance brokerage firm providing business insurance & risk management, employee benefits & human capital management, financial & retirement services and personal insurance solutions.

The Mather Group / The Vistria Group. The Vistria Group acquired The Mather Group (TMG), an independent wealth management firm serving high net worth individuals, families, corporate retirement plans and other institutions.

New Era Cap / ACON Investments. Ares served as the joint lead arranger and joint bookrunner for a senior secured credit facility in New Era Cap, a portfolio company of ACON Investments. New Era is a large authentic licensed headwear and lifestyle brand in the US and globally.

SageSure. Ares served as the administrative agent for a senior secured credit facility to support SageSure’s strategic growth initiatives. SageSure is a managing general underwriter and insurance technology innovator specializing in coastal residential property markets.

As of March 31, 2022, Ares Management Corporation’s global platform had approximately $325 billion of assets under management, with approximately 2,100 employees operating across North America, Europe, Asia Pacific and the Middle East.  

Athene gets ‘Excellent’ strength rating from AM Best

AM Best has affirmed the Financial Strength Rating (FSR) of A (Excellent) and the Long-Term Issuer Credit Ratings (Long-Term ICRs) of “a+” (Excellent) of the members of Athene Group (Athene). 

Athene, which is focused on the pension group annuity, funding agreement, fixed indexed and fixed annuity market segments, is the consolidation of the organization’s US operating companies, along with its affiliated reinsurance companies domiciled in Bermuda. 

Additionally, AM Best has affirmed the Long-Term ICR of “bbb+” (Good), the existing Long-Term Issue Credit Ratings (Long-Term IRs) and the indicative Long-Term IRs of Athene Holding Ltd. (Bermuda). Athene Holding Ltd. operates as the holding company for the U.S. and Bermuda operations. The outlook of these Credit Ratings (ratings) is stable. (See below for a detailed listing of the companies and ratings.)

Concurrently, AM Best has assigned an FSR of A (Excellent) and the Long-Term ICR of “a+” (Excellent) to Athene Annuity Re Ltd. (Bermuda). The outlook assigned to this rating is stable.

The ratings reflect Athene’s balance sheet strength, which AM Best assesses as very strong, as well as its strong operating performance, favorable business profile and appropriate enterprise risk management.

AM Best views Athene’s consolidated risk-adjusted capitalization as strongest, as measured by Best’s Capital Adequacy Ratio (BCAR), and supported by favorable financial flexibility. Athene has demonstrated its ability to access capital markets and maintains additional access to capital and liquidity through a revolving credit facility, Federal Home Loan Bank borrowing capacity, and a shelf registration statement, as well as uncalled capital commitments from Athene Co-Invest Reinsurance Affiliates (ACRA) investors. The completed merger with Apollo Global Management, Inc. is expected to increase Athene’s financial flexibility.

Financial leverage metrics have improved in the past year as capital growth has outstripped debt issuances. However, AM Best notes that Athene holds elevated allocations to more complex and less-liquid investments, which could be impacted materially under adverse market conditions.

Athene has a track record of strong earnings driven by favorable earning spreads and operating profitability, despite the challenges related to the persistent low interest rate environment and high competitive pressures.

Athene’s favorable business profile reflects continued enhancements through additional distribution channels in its retail markets, and expansion of its pension risk transfer business in the United States and United Kingdom, its increased issuances of funding agreements and of its flow reinsurance channel in Japan in recent years. Furthermore, ACRA and the recent fixed annuity reinsurance agreement with Jackson National Life Insurance Company have been accretive to earnings.

KKR closes ‘over-subscribed’ $19 billion private equity fund

KKR, the asset manager that owns Global Atlantic, today announced the final closing of KKR North America Fund XIII, an over-subscribed $19 billion fund focused on pursuing opportunistic private equity investments in North America. KKR will be investing $2.0 billion of capital in the fund alongside investors through the firm’s balance sheet, affiliates, and employee commitments. A KKR release said:

Over the past decade and across NAX3’s two predecessor funds, KKR North America Fund XI and KKR Americas XII Fund, KKR has delivered an average gross IRR of 30.1% (25.1% net) and a gross multiple on invested capital of 2.6x (2.2x net). In comparison to the S&P 500, this has resulted in net outperformance of more than 850bps, against the backdrop of near-unprecedented performance of the index over that decade. 

KKR Americas XII Fund, which began investing in 2017, is now fully deployed. It has generated a gross IRR of 50.1% (41.9% net), with a gross multiple of 2.6x (net 2.2x), as of December 31, 2021. With the closing of NAX3, KKR’s Americas Private Equity platform has more than $90 billion in assets under management across flagship, growth and core investment vehicles.

NAX3 received strong support from a diverse group of both new and existing investors globally, including public and private pension plans, sovereign wealth funds, insurance companies, endowments and foundations, private wealth platforms, family offices, high-net-worth individual investors and other institutional investors.

The Fund intends to implement KKR’s broad-based employee ownership program at majority-owned companies in which it invests. Since 2011, KKR has focused on employee ownership and engagement as a key driver in building stronger companies and driving greater financial inclusion.

The firm is committed to deploying the model in all control investments across its entire Americas Private Equity platform. To date, KKR has awarded billions of total equity value to over 45,000 non-senior employees across over 25 companies.

Earlier this month, KKR joined more than 60 organizations in becoming a founding partner of Ownership Works, a nonprofit created to support public and private companies transitioning to shared ownership models.

© 2022 RIJ Publishing LLC.

Finke report touts benefits of ‘contingent deferred annuities’

Posted on April 29, 2022 by -

A new report, written by retirement researcher Michael Finke and sponsored by RetireOne, the retirement income solutions platform, assesses the potential the benefits of a “a novel, pure insurance solution” for the retirement drawdown challenge, RetireOne said in a release.

Finke’s research paper, entitled, “Portfolio Income Insurance: Understanding the Benefits of a Contingent Deferred Annuity,” focuses on the Contingent Deferred Annuity or CDA (sometimes known as a SALB or stand-alone living benefit). SALBs allow Registered Investment Advisors (RIAs) to wrap an income benefit around a client’s investment portfolio.  

“It is possible for an institution to guarantee that a retiree will always be able to spend a fixed amount in retirement no matter what happens in financial markets,” wrote Finke, an authority on retirement income at The American College of Financial Services. “Portfolio insurance through a CDA provides the freedom to spend within one’s financial planning boundaries, without the fear of running out of money due to events out of one’s control.”

A CDA “unbundles” the two main components of a variable annuity. The first component is a portfolio of mutual fund-like variable subaccounts offered by a life insurance company. The second is an insurance rider that guarantees the contract owner a floor income for life (with upside potential) while allowing the investor to tap the portfolio for liquidity (at the cost of proportionately reducing the income rate). 

Finke’s research showed that “the certainty of lifetime income provided by a CDA may give individual investors the assurance to not only spend confidently, but to continue to invest in equities without the fear that a market downturn will force them to spend much less than planned in retirement,” the RetireOne release said.

“If stocks outperform bonds, the retiree will accumulate a larger nest egg over time,” wrote Finke. “Greater retirement wealth can result in higher spending or a more substantial legacy as a reward for accepting investment risk. However, if investments underperform early in retirement, a retiree can continue to spend the same guaranteed amount despite a much higher risk of outliving savings.”

With Midland National Life Insurance Company, RetireOne recently launched a Contingent Deferred Annuity called Constance. Constance costs a flat certificate fee instead of an expense ratio, allows the policyholder to begin taking income at any time, hold a portfolio with up to 75% equities, and cancel the contract at any time.

“Portfolio Income Insurance: Understanding the Benefits of a Contingent Deferred Annuity” is a free download on RetireOne’s website. Advisors who would like to learn more about Constance can schedule a meeting or call their RetireOne Relationship Manager at (877) 575-2742. For additional information, please visit retireone.com.

© 2022 RIJ Publishing LLC. 

Holy satoshi! Fidelity blesses bitcoin for 401(k)s

Posted on April 29, 2022 by -

Though the ~$39,000 price of a single bitcoin is almost double the annual limit on individual, under-age-50 contributions to 401(k) plans, Fidelity Investments will soon enable its thousands of plan sponsors to offer the crypto-currency to their participants. 

The Boston-based privately held retirement giant said Tuesday that, through its “Digital Assets Accounts” (DAAs), participants will be able—if sponsors allow it—to allocate part of their retirement savings to bitcoin through the core 401(k) plan investment lineup. 

The service will start later this year, apparently despite warnings from the Department of Labor about the speculative nature of bitcoin (see below). Bitcoin’s smallest unit is the satoshi, which represents one hundred millionths of a Bitcoin or 0.00000001 BTC.

In 2020, Fidelity launched a private bitcoin fund, currently available to accredited investors. In 2018, the company introduced Fidelity Digital Assets, which offers custody and trade execution for digital assets to institutional investors. Fidelity manages employee benefits for almost 23,000 businesses with more than 32 million participants.

Fidelity appears to be acceding to popular demand. Americans have “an appetite to incorporate cryptocurrencies into their long-term investment strategies,” said Dave Gray, head of Workplace Retirement Offerings and Platforms at Fidelity, in a release.

Thirty percent of US institutional investors surveyed would prefer to buy an investment product containing digital assets, according to the Fidelity Digital Assets 2021 Institutional Investor Digital Assets Study. Roughly 80 million US individual investors currently own or have invested in digital currencies, Fidelity said.

But when the Plan Sponsor Council of America recently asked its members if they are or are considering adding crypto to their menu of investment choices, only about 2% said yes. “Plan sponsors are overwhelmingly not considering, and will not consider, cryptocurrency a prudent investment option in a retirement plan,” the organization said.

The Department of Labor, which is still awaiting the confirmation of Lisa Gomez as chief of the Employee Benefit Security Administration, frowns on the move. “We have grave concerns with what Fidelity has done,” Ali Khawar, acting assistant secretary of EBSA, told The Wall Street Journal.

How ‘Workplace Digital Assets Accounts’ will work 

The DAA is a custom plan account that holds bitcoin and short-term money market investments to provide the liquidity needed for the account to facilitate daily transactions on behalf of the investor, Fidelity said. Bitcoin in the DAA will be held on the Fidelity Digital Assets custody platform, which has “institutional-grade security.”

Plan sponsors that offer the DAA will establish their own employee contribution and exchange limits into the account. Employees will benefit from a fully integrated retirement plan, digital experience and education to help them make informed decisions.

“Fidelity’s move comes a month after the Labor Department expressed concerns about including cryptocurrencies in retirement plans. It is also an uneasy time for the stock market, with the S&P 500 down almost 10% this year in part due to rising interest rates. Bitcoin is notoriously volatile and has lost more than 40% of its value since its November high,” the Wall Street Journal reported this week.

Under the plan, the Journal said, Fidelity would let savers allocate as much as 20% of their nest eggs to bitcoin, though that threshold could be lowered by plan sponsors. Mr. Gray said it would be limited to bitcoin initially, but he expects other digital assets to be made available in the future. 

News reports did not mention any possibility of cryptocurrency mutual funds in 401(k) plans. According to a recent report at Motleyfool.com, there is one cryptocurrency mutual fund available to US investors. Bitcoin Strategy ProFund (NASDAQMUTFUND:BTCF.X) was launched in July 2021 to follow the results of Bitcoin (CRYPTO:BTC). The fund, which invests in Bitcoin futures contracts, requires a minimum investment of $1,000 and charges a 1.15% annual expense ratio.

Regulatory headwind?

On March 10, the DOL’s Employee Benefits Security Administration (EBSA) published Compliance Assistance Release No. 2022-01, which said, “EBSA expects to conduct an investigative program aimed at plans that offer participant investments in cryptocurrencies and related products, and to take appropriate action to protect the interests of plan participants and beneficiaries with respect to these investments. 

“The plan fiduciaries responsible for overseeing such investment options or allowing such investments through brokerage windows should expect to be questioned about how they can square their actions with their duties of prudence and loyalty in light of the risks described above.”

Under US tax law, bitcoin is classified as property, not currency. Distribution of the proceeds of the sale of bitcoin held in 401(k) accounts (or rollover IRAs) would be taxable as ordinary income when withdrawn, typically during retirement. Federal income taxes would be payable in dollars, not bitcoin. 

MicroStrategy, a major bitcoin buyer, said it plans to be the first employer to offer Fidelity DAA in its own retirement plan. According to the crypto trade publication Coindesk, MicroStrategy is known in the “cryptosphere” for its aggressive bitcoin acquisition strategy. Earlier this month, it purchased 4,157 BTC for about $190.5 million, bringing its holdings to 129,218 bitcoins, or $5.1 billion.

A small player in the 401(k) provider universe — ForUsAll — said it will be launching a cryptocurrency investment option for clients in the second quarter of this year.

According to an April 1 report by CNN, ForUsAll, which primarily services small-to-mid size employers, said that over 120 of its 400 clients have signed up for the new option, which participants can access through a self-directed account on Coinbase.

ForUSAll participants may only invest 5% of their current 401(k) balance and 5% of their contributions going forward (as well as 5% of their employer matches) to their crypto account. Participants will get automatic notices whenever the value of their crypto investments exceeds 5% of their total 401(k) portfolio. But it will be up to them to decide whether to reallocate.

Before opening an account, participants must go through ForUsAll’s educational materials about crypto investing and take an interactive quiz to demonstrate that they understand its risks and the importance of not taking excessive bets on crypto with their retirement savings, ForUsAll Chief Investment Officer David Ramirez said in an interview.

© 2022 RIJ Publishing LLC.

Investors play wait-and-see: Morningstar

Posted on April 21, 2022 by -

Investors appear cautious, according to Morningstar’s Flow of Funds Report for March 2022. They added only $30 billion to long-term mutual funds and exchange-traded funds during the month—completing the weakest quarter since 1Q2020, when COVID was raging.  

Most equity and fixed-income markets are in negative territory so far in 2022, the report said. Four fund families saw impressive flows into their passive funds: iShares, Vanguard, SPDR State Street Global Advisors, and Invesco (in that order). 

In March, US equity funds collected an industry-leading $41 billion, down from $50 billion in February. International-equity funds collected just $7.2 billion, their weakest inflow since December 2020. S&P 500 Index funds and other large-blend funds took in $26.5 billion to lead all Morningstar Categories. 

Large-growth funds, rebounding, gathered $9.3 billion in March, their fourth-highest monthly organic growth rate in 10 years. Passive funds gained $15.3 billion and while active funds shed $6.0 billion. 

Although investors took a net $20.9 billion out of taxable-bond funds in March, the long-government category enjoyed a 9.8% one-month organic growth rate—its best since February 2016—and gained $8.7 billion. In government-only and diversified funds, investors preferred longer-term bond offerings in the first quarter. 

High-yield bond funds saw a $27.8 billion exodus in March. The category suffered a worst-ever organic growth rate (or decline, in this case) of negative 7% in the first quarter. The bank-loan category, a source of inflation protection, pulled in $19.2 billion in the first quarter.

In other highlights of the Morningstar report: 

  • Commodities funds’ 12.5% first-quarter organic growth rate was the second-highest of any category group. 
  • Alternative and nontraditional equity funds stayed hot in March. Alternative funds have seen inflows in 16 consecutive months, while nontraditional equity funds’ streak stands at 15 months. 
  • iShares’ $25.1 billion March haul led all fund families, and Invesco shook off a slow start to the year and collected $10.6 billion. 

© 2022 RIJ Publishing LLC.

Breaking news

Posted on April 21, 2022 by -

‘Bermuda Triangle’ on LIMRA conference agenda

AM Best will participate in a panel discussion focused on the increasing role of private equity in the insurance industry during the upcoming 2022 Life Insurance Conference hosted in part by LIMRA, which will take place April 25-27, in Tampa, FL.

Rosemarie Mirabella, director, will participate in the discussion titled, “Private Equity and the Life Insurance Industry,” which is scheduled from 1-2 p.m. EDT on Tuesday, April 26, at the JW Marriott, 510 Water St., Tampa, FL. Recent years have seen a growing increase in the prominence of private equity firms involved in insurance merger and acquisition activity and reinsurance transactions.

Mirabella oversees a team of AM Best analysts who are responsible for monitoring and evaluating a myriad of insurance companies that operate in the personal lines, commercial lines and life/annuity segments in the United States and Canada.

In addition to LIMRA, the event is also being hosted by the Life Office Management Association (LOMA), the Society of Actuaries (SOA) and the American Council of Life Insurers (ACLI). For more information on the 2022 Life Insurance Conference, please visit the event page and agenda.

AIG issues new five-year FIA for New York

AIG Life & Retirement, which AIG intends to spin off this year as an independent public company, has extended its Power Series of Index Annuities with a new five-year index annuity for New York only. 

The Power Index 5 NY is issued by The United States Life Insurance Company in the City of New York (US Life), a member company of American International Group, Inc (NYSE: AIG).

With inflation rising at its fastest pace in 40 years, consumers may be looking for a retirement product that guarantees growth to help offset increasing costs. Power Index 5 NY combines tax-deferred growth potential and protection guarantees backed by the claims-paying ability of US Life.

The new index annuity is guaranteed to increase in value—either by capturing the upside potential of three leading equity market indices or by locking in a fixed growth rate even when the market is flat or down. At the end of five years, investors get access to their money without withdrawal fees.

The new 5-year index annuity gives consumers the opportunity to grow their assets with interest earned based on the performance of the S&P 500, Russell 2000 and MSCI EAFE. Like all fixed indexed annuities, Power Index 5 NY does not directly invest in these indices. There is no market risk to principal, and the account balance will never decline due to market fluctuations.

“The product includes a Minimum Accumulation Value (MAV) that is separate from the account balance and increases by 1% per year, regardless of index performance,” an AIG release said. “Should index returns remain flat or down, Power Index 5 NY locks in the guaranteed growth from the MAV after 5 years and then every year thereafter. If interest earned through the performance of the equity market indices is greater than the MAV, consumers will benefit from this upside potential.”

“Index annuities like Power Index 5 NY can protect assets from interest rate risk and market fluctuations, while providing the opportunity to generate more income,” said Pinsky. “We are working with many financial professionals who are using index annuities to look beyond traditional fixed income assets to help generate growth and income for their clients.”

Falling sales prompt Pacific Life to discontinue LTC products

Effective May 2, 2022, Pacific Life’s Pacific PremierCare suite of life insurance products will no longer be available for new sales, the mutual insurer announced this week.

The discontinued products include Pacific PremierCare Choice one-year, five-year, 10-year, and lifetime premium whole life insurance products with long-term care (LTC) benefits and Pacific PremierCare Advantage Universal Life Insurance with Long-Term Care Benefits in California.

“Pacific Life remains committed to the long-term care market as we continue to recognize US consumers’ large, unmet need in this area,” said Greg Reber, Pacific Life senior vice president and chief distribution officer, life insurance business, in a release. 

“We conducted a thorough strategic review of the LTC marketplace and see great potential in the market for chronic health (CHR) and LTC riders on cash value life insurance policies.”

Pacific Life said it has seen sales of hybrid LTC products decline as the current environment has made it difficult to be both competitive and profitable. “By focusing solely on riders for our cash value products to meet the LTC need, the company can prioritize and utilize resources more effectively,” the release said.

Pacific Life will continue to service all in-force Pacific PremierCare policies. For existing policyowners, there will be no change.   

DeSanto takes CEO reins at New York Life

Craig DeSanto has assumed New York Life’s chief executive officer (CEO) position, the large mutual company announced. DeSanto was named CEO-elect in November 2021 after serving as a member of New York Life’s Board of Directors since February 2021 and as New York Life’s president since July 2020. As CEO, he will remain president.

DeSanto succeeds Ted Mathas, who served as CEO for nearly fourteen years. Mathas will remain chairman of the board in a non-executive capacity. New York Life has $760 billion in assets under management and a workforce of more than 23,000 agents and employees.

DeSanto joined New York Life in 1997 as an actuarial summer intern and was promoted into roles of increasing responsibility across the company’s finance and business operations, which included leading the institutional and individual life insurance businesses. In 2015, he diversified a portfolio of businesses that generate roughly half of New York Life’s earnings and contribute significantly to dividends paid.

In 2018, DeSanto assumed oversight for New York Life’s retail annuity business line. In 2019, he took charge of New York Life Investment Management (NYLIM), New York Life’s multi-boutique third-party asset management business serving institutions and individuals around the world with more than $432 billion in assets under management. In 2020, he led the effort to close the acquisition of Cigna’s Group Life and Disability business, now New York Life Group Benefit Solutions. 

Retirement age investors love income, neglect annuities, another study shows

Three out of five retirement-age investors (61%) believe that low interest rates, combined with rising inflation, will make it harder to create a retirement income stream that will last their lifetimes, a study by Global Financial Atlantic Group found. 

A quarter of participants in the survey (24%) said they are extremely or very concerned about the impact of inflation on their ability to live comfortably in retirement.

The survey of retirement-age investors (ages 55 to 70) with between $250,000 and $2 million in assets and no pension, reached conclusions that were similar to conclusions reached by many annuity issuer-sponsored surveys of the past 15 to 20 years.  

Nearly all (96%) believe protected, guaranteed monthly income in retirement is important (35% said it was extremely important). But less than a quarter currently use annuities (24%) or bonds (23%) to protect their assets. 

Most cited a mixed portfolio of stocks and mutual funds (73%). Two-thirds (67%) cited cash equivalents as their ways to protect assets, in contradiction to fears of a stock market correction (66%) and continued inflation (57%) this year.

Among those surveyed, about two-thirds (68%) work with financial professionals. Nearly nine in ten (88%) of those advised by financial professionals have discussed ways to minimize the risk in their investment portfolio, just 28% say annuities were part of the conversation.

The study also revealed that annuity owners are more confident about retirement security than non-owners. Three in five of those with an annuity (62%) say the amount of money they have saved for retirement will last the rest of their life, versus less than half (48%) of those without an annuity. 

A full 40% of those without an annuity say they “don’t know” if the money they have saved will last the rest of their lives. Half (48%) of annuity owners are extremely or very comfortable with their investment asset and retirement protection strategy, compared to only one-third (33%) of those without an annuity.

© 2022 RIJ Publishing LLC. All rights reserved.

Who snagged the best investment results in 2021? Dalbar knows

Posted on April 21, 2022 by -

Buy-and-hold investors in equity index funds, equity value funds and real estate sector funds earned the highest average returns in 2021. Investors in bond funds fared poorly, according to Dalbar’s Quantitative Analysis of Investor Behavior (QAIB) for the period ending December 31, 2021.

The average investor has maintained an approximate 70% equity to 30% fixed income allocation since 2017, Dalbar said. Inflation for calendar 2021 was 7.04%. The highlights of the latest QAIB survey are below.

The average equity fund investor:

  • Outperformed the S&P 500 in the first two months of 2021 but in only two of the remaining 10 months. 
  • Experienced an investor gap [difference between indices and average investor performance] in 2020 (1.31%) despite an epic market meltdown in March 2020 due to COVID.
  • Was a net withdrawer of assets in 2021 for the sixth consecutive year.
  • Finished the year with a return of 18.39% versus an S&P 500 return of 28.71%; an investor return gap of 1,032 basis points (bps)—the third largest annual gap since 1985, when QAIB analysis began. 
  • Would have earned $17, 950 in 2021 on a portfolio with a balance of $100,000 at the beginning the year. A buy-and-hold strategy of $100,000, earning S&P returns, would have earned $28,705.
  • Performed best in value funds, with the average small-cap value fund investor being the top performing size and style investor (30.38%)
  • Had retention rates averaging 4.36 years in 2021. This was a rebound from a 2020 low of 3.51 years
  • Experienced an annual return of 23.44% if invested in equity index funds versus an annual return of 18.18% if invested in actively managed equity funds

The average fixed income fund investor:

  • Finished 2021 with a negative return (1.55%) versus a BloombergBarclays Aggregate Bond Index negative return (1.54%)  
  • Was a heavy contributor of assets in 2021  

The average real estate fund investor was the top performing sector fund investor, earning 38.89% in 2021.

Retention rates increased for the average fixed income fund investor and average asset allocation fund investor in 2021. For bond investors, retention rates jumped to 3.44 years from 3.12 years. For asset allocation investors, retention rates increased from to 5.45 years from 4.38 years.

The aggregate outflow of equity assets and inflow of fixed income assets over the past several years suggest a rebalancing on the part of investors after significant appreciation of the equities within the portfolio.

The equity markets have shown an ability to recover from major declines within five years. Since 1940, the S&P experienced a drop of 10% or more in eight years. In those eight years, the S&P recovered within a year, and it recovered from every decline of greater than 10% within the subsequent five years.

Prudent Assett Allocation is an investment strategy, created by Dalbar, that sets aside the cash needs for five years into preservation investments. The remainder of the portfolio is invested in growth assets that maximize return.

QAIB uses data from the Investment Company Institute (ICI), Standard & Poor’s, Bloomberg Barclays Indices and proprietary sources to compare mutual fund investor returns to an appropriate set of benchmarks. Covering the period from January 1, 1985 to December 31, 2021, the study utilizes mutual fund sales, redemptions and exchanges each month as the measure of investor behavior.

These behaviors reflect the “Average Investor.” Based on this behavior, the analysis calculates the “average investor return” for various periods. These results are then compared to the returns of respective indices. 

DALBAR, Inc., based in Marlborough, MA, is a leading independent expert for evaluating, auditing and rating business practices, customer performance, product quality and service. Launched in 1976, DALBAR evaluates investment companies, registered investment advisers, insurance companies, broker/dealers, retirement plan providers and financial professionals. Its awards are recognized as marks of excellence in the financial community.

© 2022 RIJ Publishing LLC. 

It’s Inflation or Recession: Larry Summers

Posted on April 21, 2022 by -

Larry Summers, former US Treasury secretary, former chief economist of the World Bank, president emeritus of Harvard, and predictor of a looming era of “secular stagnation,” is playing the role of Cassandra again.  

The US won’t be able to chill inflationary trends in 2023 without a recession, say Summers and colleague Alex Domash of the Harvard Kennedy School of Government in a recent paper, “A labor market view on the risks of a US hard landing.” (NBER Working Paper No. 29910.) And the Federal Reserve, they say, shouldn’t soft-pedal the situation by predicting a “soft” economic “landing” after a few brake-tapping rate hikes. 

Larry Summers

The authors cite economic precedent as their guide. “The empirical evidence supports the view that taming accelerating inflation requires a substantial increase in economic slack. Since 1955, there has never been a quarter with price inflation above 4% and unemployment below 5% that was not followed by a recession within the next two years,” the authors write.

The root of the problem, in their view, is that too many Americans have jobs and are earning more. Where more sanguine economists have pointed to supply-chain bottlenecks and high petroleum prices as the drivers of the current inflation, Summers and Domash see high wages.

Today’s labor market “is significantly tighter than implied by the unemployment rate,” they write. “The vacancy and quit rates currently experienced in the United States correspond to a degree of labor market tightness previously associated with sub-2% unemployment rates.” 

They link the tight labor market to wage inflation of 6.5% in the past year—the highest level experienced in the past 40 years—and point to data showing that high levels of wage inflation have historically been associated with a substantial risk of a recession over the next one to two years.

“There have also only been two periods where wage inflation fell by more than one percentage point in a year—in 1973 and 1982—and both times coincided with a recession. We show that periods that historically have been hailed as successful soft landings—including 1965, 1984, and 1994—all had labor markets that were substantially less tight than the present moment,” the paper says.

Summers and Domash take the sobering position that workers only benefit from rising wages to a limited degree, and then begin to lose their subsequent wage gains to inflation.  

“Historically, when wage growth reaches such high levels, inflation tends to accelerate and erodes workers’ real wages. Labor costs represent more than two-thirds of all business costs across the economy, which means that wage inflation contributes significantly to underlying inflation and drastically increases the risk of a wage-price spiral. Using quarterly data going back to 1965, we document how real [inflation-adjusted] wages increase with nominal wages up until nominal wage growth reaches about 4.3%, and fall thereafter,” the authors write.

“While some have argued that the Fed has successfully engineered soft landings in the past, we note that these periods had significantly lower inflation and higher levels of labor market slack than the current moment. Our results suggest that it is unlikely that we are going to have wage inflation come down with a level consistent with low product price inflation without a significant increase in economic slack.” 

In other recent research:

“Trends in Retirement and Retirement Income Choices by TIAA Participants: 2000–2018,” by Jeffrey R. Brown, Gies College of Business, University of Illinois at Urbana- Champaign; James M. Poterba, MIT, and David P. Richardson, TIAA-CREF Institute. NBER Working Paper No. 29946, April 2022.

This paper reveals how thousands of retirees from TIAA 403(b) plans withdrew their savings after entering retirement over the past 20 years. The authors found that a rising percentage of TIAA retirees don’t withdraw from their accounts until the IRS forces them to take required minimum distributions, or RMDs. (Until 2019, the RMD age was 70½; it is now 72.) A falling percentage of retirees take income as a life-contingent annuity.

“The fraction of retirees taking no income until the RMD age of 70.5 rose from 10% in 2000 to 52% in 2018,” write authors Brown, Poterba and Richardson. Over the same time period, shrinking numbers of TIAA retirees took income in the form of life-contingent annuities. “The percentage of all TIAA beneficiaries with life annuities… declined from 52% to 31% between 2008 and 2018,” the paper said.

Distribution choices depended on the retirement age of the participant and the size of the account balance, the authors found. As might be expected, those who postponed retirement until after age 70 were more inclined, relative to those who retired before age 70, not to take any distributions of their TIAA savings until the RMD age. Participants in the middle 60% of the account balance spectrum were more likely to choose a life annuity than were those with the highest or lowest balances. 

“The Savings Glut of the Old: Population Aging, the Risk Premium, and the Murder-Suicide of the Rentier,”  by Joseph Kopecky, Trinity College, Dublin, and Alan M. Taylor, University of California at Davis. NBER Working Paper No. 29944, April 2022.

The authors of this paper tie the demographic changes that followed World War II—the 1946-1964 “baby boom” and the subsequent aging of the boomer generation—to the bull markets in stocks and the decline in safe interest rates over that time. 

“A large mass of aging households—the boomers—drive a savings glut which, as they near retirement, especially depresses real interest rates on safe assets,” Kopecky and Taylor write. “As they age, they reduce portfolio allocations to equity, so they do not have the same effect on risky equity returns, widening the equity risk premium.”

Aging households “accumulate more wealth, but then they also tend to shift its composition towards safe and away from risky assets (i.e., into bonds and out of equities). Household assets by age peak in the 70s in the 2016 Survey of Consumer Finance, but the equity share peaks at a much younger age, in the 50s.”

The authors predict that there won’t be a sequel to the boomer-driven shock wave of the past and present. “The current weight of demographic forces on asset returns appear to be much closer to a return to an old normal rather than a new normal that some have described… the boomer-driven demographic forces from the 1960s to the 2010s were a truly abnormal feature by historical standards,” they write.

“A Sustainable, Variable Lifetime Retirement Income Solution for the Chilean Pension System,” by Olga M. Fuentes, Pension Regulator Chile, Richard K. Fullmer, Nuova Longevita Research, and Manuel García-Huitrón, Nuovalo Ltd. March, 2022. 

Chile is one of the few countries in the world, along with Canada and the US, to have a “deep and efficiently functioning annuity market,” according to this paper. But because the country’s existing retirement system faces the same stresses as elsewhere—a rising elderly population and low interest rates—the government is looking at new ways to finance Chileans’ retirement.

The number of old age dependents per 100 working-age Chileans is expected to rise from 27 in 2020 to 59 by 2050 and to 86 by 2100. The proportion of the population aged 60+ is on track to more than double, to 40% in 2100 from 17% in 2020. In 2050, the ratio of individuals aged 80 and over to the working-age population is expected to be three times larger than it is today. 

Fullmer, a tontine entrepreneur, actuary and former senior executive at Russell Investments and T. Rowe Price, and his co-authors suggest that Chile adopt tontines. Their paper includes descriptions of the Chilean retirement system (the typical three-legged stool: a modest basic pension, a mandatory defined contribution plan with optional annuitization, and private savings). It follows with a description of tontines and their potential role in the future of retirement financing—in Chile and elsewhere, including the US. 

Tontines, for the uninitiated, are a type of life annuity; participants make an irrevocable investment and later receive an income from a chosen inception date until they die. But they are cheaper than annuities because they eliminate the middleman: No life insurance company guarantees the income stream or adds its overhead to the cost. Instead, participants bear the investment risk (i.e., income can fluctuate) and longevity risk (the risk that their investment pool might be exhausted before all of them have died). 

One of the main benefits of this paper is its detailed description of tontines and its demonstration that tontines can be adapted to almost any situation that might call for an annuity. Tontines, in short, have come a long way since they were invented in the mid-17th century.

“A Comparative Perspective on Long-Term Care Systems,” by Rainer Kotschy and David E. Bloom. NBER Working Paper No. 29951, April 2022 

Even if demand for long-term care insurance (LTCI) rises, there may not be an adequate supply of caregivers for the rising numbers of elderly men and women—insured or not—who can’t feed, bathe, or dress themselves, according to new research.

The authors look at the trends in rates of partial disability among the elderly—as reflected in data on deficits in activities of daily living (ADL)—in European Union countries, Switzerland, Israel, the UK, and the US. 

“Our results predict an average increase in care demand of 47%, with the largest increases in Southern and Eastern Europe,” they write. But many countries will lack a sufficient number of well-trained caregivers. To relieve that anticipated shortage, wages for caregivers may need to rise, or immigration rates increase, or licenses be required of caregivers.

Unlike the US, Germany, the Netherlands, Israel, Japan and South Korea have compulsory public long-term care insurance. The coverage is financed variously through payroll taxes, copayments, and subsidies from taxing authorities.  

The authors suggest that old-fashioned preventive health maintenance through a healthy diet and regular exercise may be the best way for individuals and societies to reduce their needs for long-term care services. 

“Good population health—in terms of a low disability share among the elderly—can moderate growth in care demand,” they conclude. But “only a few countries explicitly target disability prevention in their long-term care strategy.”

Bloomberg’s Ideas for Overhauling 401(k)s

Posted on April 21, 2022 by -

Bloomberg, the respected online business news source, has been publishing  a series of editorials on America’s “retirement crisis.” They’re arriving late to the discussion, which started in the 1980s. 

But no one has solved the crisis—generally measured by the percentage of Americans on track for downward mobility in retirement—so Bloomberg is still early.  

In the most recent installment, the Bloomberg editors call the existing 401(k) program “dysfunctional” and a “morass.” The program, they say: 

  • Costs hundreds of billions of dollars a year in foregone income taxes
  • Bestows most of its tax benefits on the highest-paid workers 
  • Fails to cover tens of millions of low-paid US workers  
  • Fails to help many participants accumulate enough savings
  • Often charges high fees to participants

“The US can do much better, at no extra cost,” the Bloomberg editors say.

Their solution, put simply, would give all US workers access to the kind of low-cost, high-match defined contribution plan (e.g., 401(k), 403(b)) that workers at many large corporations enjoy today, but government-sponsored. It would be:

Universal. Everyone with a Social Security number would be auto-enrolled, with an opt-out opportunity.

Simple. Participants would automatically start contributing 3% of pay per year to “lifecycle” (target-date funds) unless they prefer to pick from a curated list of actively managed funds.   

Portable. Participants would own their accounts, which would follow them automatically from job to job.  

Progressive. Contributions by the lowest earners would receive an annual government match of $1,000 or more. 

Flexible. Participants could dip into their accounts for emergencies.

Income-oriented. At retirement age, “account holders are offered a small selection of simple annuities, which provide regular payments for as long as they live — a conversion that could be made automatic, with payments adjusted for inflation.”

According to Bloomberg, such plans already exist, in the form of the federal Thrift Savings Plan and the UK’s National Employment Savings Trust  (NEST). They might also have included TIAA and perhaps Australia’s Superannuation Fund.

The tax expenditure

Some of the issues Bloomberg raises have already been addressed, if not necessarily resolved, by policymakers. Many large employer-sponsored plans already have auto-enrollment, auto-investment in target date funds, and some have adopted auto-escalation of contribution rates. Congress has approved Pooled Employer Plans, which could expand coverage and take pressure off employers, and lower barriers to annuities in DC plans. State-sponsored auto-IRAs in California and Illinois are also helping expand coverage to workers at small firms.

The tax expenditure seems to be Bloomberg’s prime target. The US Treasury forgoes more than $200 billion a year in income taxes. Bloomberg is not the first to ask: 

  • Is this tax break a subsidy? 
  • Is it unfair that most of the tax breaks accrue to those at the highest marginal tax rates? 
  • Would Americans save as much if they were required to pay income taxes on their contributions (that is, if the Roth IRA and Roth 401(k) were universal)? 
  • Do taxes on 401(k) and IRA distributions in retirement adequately recompense the US Treasury for the massive implied cost of tax deferral?   

Bloomberg seems to underestimate the resistance to tinkering with this tax expenditure. A multi-trillion dollar retirement industry has grown up around the tax expenditure. The Obama Administration tried to cap the subsidy on savings and redistribute the tax expenditure more equitably, but industry lobbyists turned it back. If Social Security is the third-rail of American politics, the existing IRA/401(k) subsidy is the third-rail of retirement policy. 

Speaking of Social Security, Bloomberg didn’t explain how its DC vision would be integrated with the popular Old Age and Survivors Insurance program. Social Security is nearly universal, simple, portable, progressive, flexible (in its start date) and income-oriented. Employers provide a 6.2% match. All but the top earners rely on it for a big chunk of their retirement income. 

The Bloomberg plan reminds me of plans in countries where the governments have replaced pay-as-you-go public pensions with a two part system consisting of a means-tested minimal pension (paid for by general tax revenue) and a workplace defined contribution plan to which employers must contribute but do not control. 

Bloomberg appears to overlook the problems that these plans often encounter as they try to manage the transition from accumulation to decumulation; they typically need “smoothing” mechanisms to reduce disparities in individual outcomes.

If Bloomberg would like to such a system replace Social Security, I’m against their idea. Social Security works. It needs tinkering, to be sure. There should probably be a minimum basic pension, and an increase in the level of income subject to payroll taxes might offset the tax-break imbalance. But it’s not yet time to retire the Old Age and Survivors Insurance program and replace it with a shiny new object.

Social Security should remain popular, even after a modest tax hike, because it does so many things that investments can’t do. As I’ve written before: You may be able to invest your money better than the government can. But you can’t insure yourself retirement against market risk, interest rate risk, sequence risk and longevity risk as efficiently as the government does via Social Security. 

Each of Social Security’s protections has under-appreciated financial value. DC accounts offer only risk exposure, to varying degrees; they can’t provide protection from risk. And life insurance company balance sheets can’t support an entire nation’s longevity risk indefinitely. Uncle Sam can; that’s why we have Social Security. Demographic change may make the program more or less expensive, but it’s worth the price. 

Though not fresh, Bloomberg’s views are reasonable. Tax loopholes tend to widen with time, and the subsidy for retirement savings has grown from the size of a needle’s eye to a freeway as wide as Southern California’s I-5. A case can be made that tax deferral has become a bloated and unbalanced subsidy. And the complexities of tax deferral only add to the DC system’s cost.

But Bloomberg’s editors don’t acknowledge the time (and frustration) that others have spent on these same issues, and they ignore the remaining obstacles to change. In the end, your position on DC policy will probably depend on whether you’ve benefited from the 401(k)/403(b) system. My household had the good fortune to participate in low-cost plans with generous matching contributions. Everyone should be so lucky.

© 2022 RIJ Publishing LLC. All rights reserved.

Breaking News

Posted on April 14, 2022 by -

MetLife launches ‘private equity fund’ platform

MetLife Investment Management (MIM), the institutional asset management business of MetLife, Inc. (NYSE: MET), announced the launch of a private equity fund investment platform for institutional clients in concert with the closing of approximately $1.6 billion in commitments to a new MIM-managed fund-of-funds.

The new fund purchased a portfolio of approximately $1.2 billion of private equity and venture capital assets with funded and unfunded commitments totaling $1.2 billion from MetLife affiliates as part of a managed secondary sale transaction anchored by funds managed by HarbourVest Partners L.P., which served as lead investor.

MIM syndicated a portion of the transaction to other unaffiliated institutional clients. Following the closing, MIM intends to deploy approximately $400 million on behalf of the fund on new private equity opportunities.

“This new platform and secondary transaction speak to MetLife’s 30-year track record as a leading private markets investor and MIM’s ability to generate strong results in alternative asset classes,” said Steven Goulart, president of MIM and executive vice president and chief investment officer for MetLife. “This initial transaction provides us the opportunity to demonstrate the strength of our investment capabilities in private equity and venture capital and provide this offering to unaffiliated institutional investors, while also adjusting MetLife’s alternatives exposure.”

The portfolio of assets acquired by the fund consists of nearly 80 high quality private equity and venture capital fund investments diversified globally and across a range of sectors. The sale follows strong returns for the MetLife general account’s private equity portfolio, which held $14.0 billion in private equity assets at the end of 2021.

MIM’s private equity team consists of 12 professionals and has deployed nearly $18.0 billion of alternative investments on behalf of MetLife between 2007 and 2021. MIM had $669.0 billion in total assets under management as of December 31, 2021. Campbell Lutyens & Co. served as advisor to MetLife for this transaction.

S investors nationwide ages 45–75 from February 17 – February 28. 2022. The survey included 317 respondents with employer-provided defined contribution retirement plans.

Inflation, war affect asset allocations at pension funds: bfinance

Some 84% of respondents at 162 pension funds are at least moderately concerned inflation will erode their ability to reach their investment objectives, and 48% plan to increase the inflation sensitivity of their portfolio in 2022, according to an IPE.com report on a poll by investment consultancy bfinance.

Pension funds plan to hedge inflation by increasing exposure to infrastructure, private debt and real estate, the research found. Private debt (39%) and real estate (36%) were highly popular. Alternatives were a more popular inflation hedge than equities (18%) or inflation-linked bonds (12%). 

“These asset allocation changes represent a continuation of longer-term shifts in favor of illiquid strategies and real assets,” said a bfinance spokesperson. “Investors’ concerns about inflation and rising rates are giving greater impetus to these trends.” 

Only 8% of respondents plan to increase exposure to commodities as an inflation hedge. Only 9% of pension funds indicated they had increased exposure to commodities over the past 12 months. Half of the pension funds surveyed were from Europe, with the rest from North America, Asia Pacific and the Middle East & Africa.

Four in 10 pension funds said that Russia’s invasion of Ukraine and other recent geopolitical developments will or already have changed their ESG approach, either in-house or via changes made by their external asset manager partners.

Others said the conflict had not itself affected what they are doing, but it reinforced the need for a sophisticated ESG approach. “Emerging market country exposures, controversial weapons and fossil fuel firms are coming under particular scrutiny,” bfinance’s Kathryn Saklatvala said.

A Dutch pension fund told bfinance that the war in Ukraine caused it to rethink its weapons exclusion list, saying: “We will also place more scrutiny on role of state-owned companies and companies that otherwise act as extensions of the state, where the state was blacklisted under our ESG policy, even though Russia wasn’t blacklisted under our criteria prior to the invasion.”

Eagle Life enhances index annuities

Eagle Life Insurance Co., a subsidiary of American Equity Investment Life, has announced enhancements to Select Focus Series and Eagle Select Income Focus fixed index annuities. 

Those products will gain two new index options and a Performance Rate Rider, adding to existing index options: the S&P 500 Index and the S&P 500 Dividend Aristocrats Daily Risk Control 5% Excess Return Index. The new options are:

Franklin Global Trends Index. This multi-asset index adds a global option to the Eagle Life portfolio. Comprised of both national and global asset classes, it “dynamically allocates across 10 global asset classes,” including equities, fixed income and alternatives.

Invesco Dynamic Growth Index. This index combines US equities and bonds, matching allocation strategies to one of four economic cycles — recovery, expansion, slowdown or contraction. It addresses risk by monitoring market performance and making intra-day allocation adjustments as needed.

Performance Rate Rider. This optional rider allows contract owners to increase participation rates on the annuity’s crediting strategy, which could potentially boost the amount of interest credited to it. The cost for applying the PRR to selected crediting strategies will not change for the length of the annuity’s surrender charge period.

Elizabeth Heffernan joins Micruity

Micruity Inc., has appointed Elizabeth Heffernan as Head of Partnerships and Consulting Strategy. A long-time Fidelity executive, she will “work closely with Micruity platform partners to optimize their product design for the data-connectivity of the Micruity annuity ecosystem,” according to a release this week.

Heffernan spent 24 years at Fidelity Investments in a variety of roles including marketing, sales and product, most recently working Investment Strategies. She also spent two years as the Managing Director of Business Development with Hueler Companies. 

Elizabeth has spent the last 14 years working closely with asset managers and insurers on the design and connectivity of income products to the record keeping system, including significant work with Plan Sponsors and Participants to understand their goals and objectives in the Retirement Income space.

Elizabeth Heffernan is an active member of the Defined Contribution Institutional Investment Association (DCIIA) and is currently serving as Chair of the Retirement Income committee.

The Micruity Advanced Routing System (MARS) facilitates frictionless data sharing between insurers, asset managers, and record keepers through a single point of service that lowers the administrative burden for plan sponsors and enables them to turn retirement savings plans into retirement income plans at scale.

© 2022 RIJ Publishing LLC.

Net income of stock life/annuity firms tripled in 2021: AM Best

Posted on April 14, 2022 by -

Publicly traded US life/annuity insurance companies saw a strong recovery in 2021, with net income more than tripling to $32.5 billion in 2021 from the previous year, driven largely by a 13% boost in revenue, according to a new AM Best report.

The industry saw a $35 billion increase in revenue to $297.5 billion in 2021, coming on the back of a modest increase in premiums, as well as increases in net investment income and realized gains, according to the report.

Companies continue to perform relatively well despite volatility in mortality from COVID-19 and still consider COVID-19 mortality as having an earnings impact rather than a balance sheet impact, suggesting no significant changes to reserves. Most carriers continue to experience higher mortality rates than usual; in 2021, mortality was higher for working-age populations, which affected individual and group life claims.

Other report highlights include:

Net investment income rose by roughly $11.9 billion to $85.7 billion. The persistent drag from the low interest rate environment continues to impact margins, but ongoing growth in general account invested assets, aided by premium growth and assets under management, has pushed investment income higher.

Of the 17 publicly traded companies in the analysis, 13 experienced a decline in capital, amounting to an overall 5% decrease. Share buybacks, which were halted during the pandemic, resumed in 2021; the return of share repurchases, as well as a modest increase in dividends paid, contributed to the decline in capital.

Total debt among publicly traded life/annuity insurers remained essentially flat in 2021 at $85.7 billion. Most of the companies that have been able to take advantage of the low interest rate environment and issue long-term debt have already done so, either to fund business growth or for upcoming maturities.

Investors continue to shift to indexed products from fixed-rate ones to seek protection from rising inflation. Traditional variable annuities experienced very strong growth, bolstered by favorable equity markets—while registered indexed-linked annuities continued the rapid growth of prior years.

© 2022 RIJ Publishing LLC. 

How to Interpret the Proposed RMD Regs: Wagner Law

Posted on April 14, 2022 by -

The SECURE Act (the “Act”) made two major changes to the required minimum distribution rules under Internal Revenue Code (“Code”) Section 401(a)(9):

1.  It extended the required beginning date for distributions from age 70-1/2 to age 72, other than distributions from tax-qualified plans which can be deferred until retirement except in the case of 5% owners, and

2.  Except for a limited category of beneficiaries, it substantially reduced the period over which post-death distributions can be made, the latter element of which is sometimes referred to as eliminating the stretch IRA.

The IRS recently issued proposed regulations implementing these statutory changes, which apply to tax-qualified retirement plans, 403(b) plans, IRAs, and eligible deferred compensation plans under Code Section 457.  

Compliance with the proposed regulations constitutes a reasonable, good faith interpretation of the amendments made by the SECURE Act. The proposed regulations would apply for purposes of determining required minimum distributions for calendar years beginning on or after January 1, 2022.  For a 2021 calendar year distribution paid in 2022, taxpayers must apply the existing Code Section 401(a)(9) regulations.

The proposed regulations address the effective date for both of the SECURE Act statutory modifications.  With respect to the new required beginning date of age 72, the SECURE Act provided that this change applied to individuals who attain age 72 on or after January 1, 2020. The statutory language could have been read as providing that if the individual died prior to January 1, 2020 and before attaining age 70-1/2, then the existing rule would apply.  However, IRS took the position that the new rule should apply to any individual who would have attained age 72 on or after January 1, 2022 had he or she survived, which includes those born on or after July 1, 1949.

With respect to the new distribution rules, the relevant date for determining which set of regulations should apply to a trust providing for multiple beneficiaries depends upon the date of death of the oldest beneficiary.

As amended, Code Section 401(a)(9) retains the existing distribution periods for five (5) categories of beneficiaries, referred to as “eligible designated beneficiaries” or “EDBs”—surviving spouses, minor children of the individual, disabled persons, chronically ill persons, and beneficiaries who are not more than 10 years younger than the individual. With respect to this latter requirement, the proposed regulations take the position that there must actually be a 10-year age difference between the participant and the beneficiary. These EDBs can continue to receive payments based on life expectancy payments and are not required to receive the balance after 10 years.

For designated beneficiaries who are not eligible designated beneficiaries, all distributions must be completed by the end of the tenth year following the date of the death of the plan participant or the owner of an IRA. If the individual had already begun receiving payments, payments must continue to the designated beneficiary based on the designated beneficiary’s life expectancy, but if the individual had not already begun receiving payments, i.e., the individual died before his required beginning date, the designated beneficiary can defer all distributions until the end of the tenth year following the date of death of the plan participant or the owner of an IRA.

From the perspective of a defined contribution plan sponsor, the proposed regulations provide that, if the employee has an eligible designated beneficiary, the plan may provide either that the life expectancy rule applies or the 10-year rule applies. Alternatively, the plan may provide the employee or EDB with an election between the 10-year rule and the life expectancy rule. However, if the defined contribution plan does not include either of these options, the default option is the life expectancy rule. As a result, it is first necessary to determine which individuals qualify as eligible designated beneficiaries, and the proposed regulations provided this additional guidance:

1.  Children. For defined contribution plans, the age of majority for a child is age 21, the age of majority in most jurisdictions (a few jurisdictions have younger ages, but none have older ages). However, defined benefit plans that were applying the definition of age of majority in the existing regulations may continue to do so. The proposed regulations do not define “child,” but as the SECURE Act commentary indicates that the intention was to limit it and certainly to exclude grandchildren, it appears that “child” means biological or adopted children of the participant. 

2.  Disability.  With respect to disability, if the beneficiary is under the age of 18, the definition of disability is modified to be a “medically determinable physical or mental impairment that results in marked and severe functional limits, and can be expected to result in death or be of long-continued and indefinite duration.” A determination of Social Security disability is a safe harbor.

a.  Date of Determination. The date of disability is determined as of the employee’s death. As a result, if the beneficiary is a minor child and the child becomes disabled after the date of the employee’s death, the child will cease to be an eligible designated beneficiary when the child attains age 21.

b.  Documentation. The documentation requirements for disabled and chronically ill individuals, including the required certifications by licensed health care practitioners, must be provided by October 31 of the calendar year following the calendar year of the employee’s death.

3.  Multiple Beneficiaries. Naming more than one designated beneficiary can be especially problematic. If just one of the group is not an eligible designated beneficiary, that preferred status is lost for the entire group. All must be eligible designated beneficiaries, or all must be treated as designated beneficiaries. There are two exceptions to this general rule.  An eligible designed beneficiary who is appointed with one or more others who are simply designated beneficiaries may extend distributions over his or her life expectancy if:

a.  The eligible designated beneficiary is a child. If the beneficiary is the child of the employee and had not reached the age of majority (age 21) at the time of the employee’s death, then that child will be treated as an eligible designated beneficiary.

b.  The eligible designated beneficiary is such because he or she is disabled or chronically ill and is entitled to lifetime benefits in a multi-beneficiary trust which will not pay benefits to others prior to that individual’s death.

Separate accounting rules are applied to the individual interests of the beneficiaries in trusts with multiple beneficiaries.

A variety of issues arise in determining whether an individual is an eligible designated beneficiary, particularly where the nominal beneficiary is a trust.  Without special “see-through” trust provisions, a retirement asset with a trust as beneficiary may need to be distributed by the end of the 5th year following the year the participant dies.  The proposed regulations provide numerous examples, and the preamble to the proposed regulations discusses this issue in detail. We encourage all individuals to seek competent tax counsel for their unique situations.

As with most IRS regulations, the regulation package is lengthy – 275 pages.  A great deal of guidance is presented in the preamble and the proposed regulations, which is relevant from both an employee benefit perspective and an estate planning perspective. This client alert is the first in a series of client alerts that will discuss different aspects of the proposed regulations.

© 2022 Wagner Law Group.

To Make the Economy Better, Let’s Not Make It Worse

Posted on April 14, 2022 by -

Inflation is the obsession du jour, so on Tuesday I spent my lunch hour listening to economists discuss the “I” word in a live panel discussion broadcast on Twitter. Their main concern: That the Fed’s response to inflation might cause a recession.  

The Bipartisan Policy Center (BPC) in Washington sponsored the one-hour colloquy. Its expert guests included Justin Wolfers, an economist at the University of Michigan, Diane Swonk, chief economist at Grant Thornton, and Xan Fishman, director of Energy Policy and Carbon Management at the BPC. Shai Akabas, the BPC’s Director of Economic Policy, moderated.

The broadcast coincided with this week’s release of the March 2022 Consumer Price Index (CPI) report. As you’ve probably read, the annualized “headline” inflation rate, which includes groceries and gasoline, was a fairly shocking 8.5%, with a 1.2% rise in March alone. 

The “core” inflation rate, which excludes the cost of food and energy prices, was 6.5% year over year. It rose a mere 30 basis points in March. The near 50% increase in gasoline prices over the past year, and its effect on the cost of transporting food, presumably accounted for at least part the 2% gap between the headline and core inflation rates. But let’s not presume.

Irony is the currency of journalism, and the BPC’s Akabas initiated the conversation by invoking one. The general public appears to have interpreted the steady tattoo of news about inflation as an indicator that the US economy is sick, he has noticed. “Inflation is on everyone’s mind. People think the economy must be losing jobs, and that things must be bad overall,” he said.

But they’re getting it backwards, he added. Higher inflation is symptomatic of a strong economy—as measured by today’s low unemployment rates. People are working and spending. Job openings are going unfilled because so many people have jobs. The economy, therefore, is so good that it’s bad. To make it better, we must make it worse.

The experts discussed possible causes of the high inflation rate, and tried to weight them. Among the culprits:

  • High oil and gas prices. The price of oil rose 32% over the past year, the panelists agreed. The average price of gasoline in the US was $2.86 per gallon in March 2021 and $4.10 in March 2022, for a 43% rise. Xan Fishman said that China’s latest COVID-related lockdown could slow its economy enough to weaken its appetite for petroleum, thus removing some of the demand-driven upward pressure on oil prices.
  • Russia’s invasion of Ukraine. “Whats happening in Ukraine is not a fundamental underlying pressure” driving inflation, Wolfers said. “Russia won’t reinvade Ukraine.” He expects no further Russia-related energy shocks. They noted that gasoline prices tend to stay elevated even after oil prices decline; they didn’t explain why.
  • Congress’ big stimulus bill, passed last summer. Policymakers “had two choices,” Wolfers said. “A, they could under-do a stimulus or B, they could over-do a stimulus.” He said he would have recommended Path B “in a heartbeat,” but he might not have released so much of it in so short a time. “We could have made those investments more slowly and it would have worked just as well,” he said. Swonk agreed: “I’d rather we do too much than not enough.”
  • Release of pent-up consumer demand. Swonk said she has seen “hotel room prices going up from suppressed levels a year ago.” At airports, she said, the number of people passing through Transportation Security Administration check points has recovered almost to 2019 levels. Some restaurants remain closed because they lack adequate staff, not customers.  
  • ‘Shelter’ inflation. This is more a symptom than a cause, but with inflation there’s not necessarily a difference between the two; hence its ambiguity. Swonk noted the “surge in rents,” which tend to lag surges in home prices by about a year. “Even after some of the steam comes off overall inflation numbers, we probably won’t see an abatement in shelter costs,” she said. 

Neither economist suggested any danger of “runaway” inflation. Neither invoked high government spending, high budget deficits or high long-term federal debt as possible sources of   inflation. All of those factors were true during the Great Moderation, when headline inflation was regarded as sublimely low. 

So what should the Fed do? No one seems to recommend Milton Friedman’s advice anymore, which was to reduce the money supply; it’s almost impossible to measure the “money supply.”

“The right answer is for the Fed to move closer to a ‘neutral’ interest rate, but that’s still some distance from where we are,” said Wolfers. [The neutral rate is the mythical Goldilocks rate at which the economy is neither shrinking or growing.] “Right now, the Fed is raising the nominal rate just to keep up with inflation. It’s not tightening, it’s just becoming less expansionary.”  

As for the likelihood of a recession, Wolfers was less pessimistic than Swonk. “I’ve been surprised by the frequency of the use of the word ‘recession’ lately,” he said. “It puzzles the heck out of me. We’re creating 400,000 jobs a month. The economy is going gangbusters. So I don’t know where the recession talk is coming from.”

But Swonk worries that aggressive anti-inflation tactics by the Fed could tip the US economy from too hot to too cold by early 2023—especially if the Fed simultaneously raises the Fed Funds Rate and sells a bunch of the mortgage back securities (MBS) that it bought during past crises as a way to put a floor under falling bond prices. That purchasing process was known as quantitative easing; its reverse is called quantitative tightening. (Selling the MBS will increase their supply, putting downward pressure on their prices and, ipso facto, upward pressure on their yields.)

“The Fed would like to get the Fed funds rate to 2%,” said Swonk. (The Fed funds rate is the rate that banks pay to borrow reserves from each other. It was 2.43% in April 2019, after having been close to zero from December 2008 to December 2015.) 

“But then there’s the economic quagmire of the Fed’s balance sheet.” She noted that quantitative tightening—a term-of-art for the sale of financial assets that are on the Fed’s balance sheet—“can amplify the effects of rate hikes in ways not necessarily well known. I’m afraid that the monetary policy could cause a recession or even a contraction in growth by the end of this year.”

No one mentioned the potential impact of rising interest rates on the stock market. Rising rates trigger instant mark-downs in the market prices of bonds. But the effect on stocks isn’t as direct. The stock market seems more like a JENGA tower: after an indeterminable series of quarter-point rate hikes, it will collapse. Nor did they mention that higher rates could make investments in new bonds more attractive for savers (and insurance companies). 

During the past 20 years, neither Fed chairs Alan Greenspan, Ben Bernanke, Janet Yellen or Jay Powell figured out a way to raise interests rates from zero back to neutral without triggering some kind of economic calamity. Some fresh thinking may be required. Raising interest rates, driving down asset prices, and sparking layoffs can’t be the best way to neutralize a petroleum-driven inflation.

Note: My understanding is that the Fed doesn’t exactly “raise” rates. Instead, the Federal Open Market Committee, through its purchases and sales of bonds, reduces its “accommodation” of the banks’ demand for reserves–which banks need in order to cover the checks written by their customers. Banks then have to compete a little harder for Fed Funds, which they accomplish by bidding up the Fed Funds Rate.

Accommodation can become too much of a good thing. “Current US monetary policy is set at peak accommodation, which is putting upward pressure on inflation,” said St. Louis Fed President Jim Bullard in a recent statement. In his opinion, “This situation calls for rapid withdrawal of policy accommodation in order to preserve the best chance for a long and durable expansion.”

© 2022 RIJ Publishing LLC. All rights reserved.