Category: Annuities

A Conversation With Benny Goodman

Mary Pat Campbell

Link: https://www.lifehealth.com/a-conversation-with-benny-goodman/

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PEK: Your research reveals a conundrum when comparing a variable annuity with systematic withdrawals from investment accounts (assuming similar investment returns): the annuity will generally outperform. How do we convey this very basic equivalency to our clients? 

BG: In my experience, I’ve seen that when some people get to retirement, they may have upwards of a half a million dollars in their accounts. Financial planners owe their clients more than just plans to help them accumulate assets and some well-wishes. Most people do not understand how to generate income from their savings that will last the rest of their lives.

Savings are exposed to market risk that can erode account balances before or in retirement, as we saw in The Great Recession of 2009 and the economic contraction during the coronavirus pandemic. And fifty percent of the population can expect to live beyond the average life expectancy in retirement, exposing them to longevity risk.

The practical reality is that most individuals cannot insulate themselves from risk on their own. Annuitizing a portion of a portfolio’s assets can help mitigate these issues.

PEK: You demonstrate that delaying the start of an annuity by five years may cost 5% in future income, which delaying ten years may cost 15%. Please talk about the time factor and the cost of delay.  

BG: The concept is based on something called “mortality credits.” When buying an annuity, you join an annuity pool. Every time someone dies early (before he spent all the money he contributed) the leftover money stays in the pool and is shared by all those still in the pool. The money becomes a mortality ‘credit’ for those who did not die. These mortality credits allow the former to get lifetime income. They start adding value from the day someone enters the pool. Those who purchase the annuity at a later time were not in that pool and do not get that credit. Purchasers only receive mortality credits for those people who died after the purchasers joined the pool. Lower mortality credit means lower lifetime income. Mortality credits have value by adding to income.

….

PEK: Likewise, how real is the prospect of outliving one’s assets today?

BG: It’s very real. Data from EBRI indicates that about 40% of Americans face the risk of running out of money in retirement.

Now, not many people continuously spend and then one day look at their account and say, “Oh no! There is no money left!” But well before that day, they will start adjusting their spending downward so as to make sure they don’t outlive their money. And some have to make drastic and painful decisions, like choosing between paying for rent or healthcare; to pay for the electric bill or for medicine. Some retirees will even take half the dosage of their prescribed medicine to conserve it. It may even require that retirees move in with a child rather than live in poverty. In certain family dynamics, living with elderly parents is expected, but it may not be ideal for many.

Author(s): P.E. Kelley, Benjamin Goodman

Publication Date: 30 Oct 2023

Publication Site: Advisor Magazine

How an insurer in Iowa became the most coveted asset on Wall Street

Mary Pat Campbell

Link: https://www.ft.com/content/b4261b75-f0cd-4d23-9253-8c392a5e0ba9

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American Equity Investment Life last week rebuffed an unsolicited $4bn offer from a rival controlled by Paul Singer’s Elliott Management, capping a tumultuous year during which Bhalla also antagonised his company’s largest shareholder, Canada’s Brookfield Asset Management.

Underpinning the boardroom drama is Bhalla’s determination to keep AEL, one of the few independent annuities operators left, out of the wave of consolidation sweeping through the industry as private equity groups hoover up insurance assets.

The bad blood between Bhalla and Brookfield is a product of a deal that AEL entered into in November with start-up fund manager 26North, founded by the former longtime Apollo Global executive Josh Harris.

Bhalla had first turned to Brookfield in 2020 as it sought a white knight to fend off an earlier hostile bid from Apollo, where Harris worked at the time. Now with the Elliott bid out in the open, AEL and its $70bn of assets are in the crosshairs as a clutch of Wall Street investment titans circle the company.

Apollo, Brookfield, KKR, Carlyle Group, Ares and Sixth Street are among the many groups that could be bidders in a potentially frenzied auction next year.

Author(s): Sujeet Indap and Mark Vandevelde

Publication Date: 29 Dec 2022

Publication Site: Financial Times

2022 Mortality Improvement Survey Report

Mary Pat Campbell

Link: https://www.soa.org/resources/research-reports/2022/mort-improve-survey/

Report PDF: https://www.soa.org/4ad811/globalassets/assets/files/resources/research-report/2022/mort-improve-survey.pdf

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The Committee on Life Insurance Mortality and Underwriting Surveys of the Society of Actuaries sent
companies a survey in May of 2019 on mortality improvement practices as of year-end 2018. The survey
results were released in January 2022. The survey was completed by respondents prior to the onset of
COVID-19. The present report provides an opportunity to update the results for pandemic-based changes
and compare the before and after surveys.
The 2022 survey was opened in March 2022 and closed by the end of April. Thirty-five respondent
companies participated in this survey, with 29 from the U.S. and six from Canada. This group was further
divided between direct writers (26) and reinsurers (nine).
This survey focused on the use of mortality improvement and how it has changed for financial projection
and pricing modeling following the initial stages of COVID-19. Details regarding assumptions and opinions
on mortality improvement in general were asked of the respondents.
National Association of Insurance Commissioners discussions on mortality improvement factors due to
COVID-19 for reserving purposes have taken place, but this survey was conducted before any adjustments
reacting to them.
Seventy-four percent (26 of 35) of respondents indicated using durational mortality improvement
assumptions in their life and annuity pricing and/or financial projections. Moreover, of those that used
durational mortality improvement assumptions, attained age and gender were the top two characteristics
in which assumptions varied.
Respondents were asked to indicate the different limitations when applying durational mortality
improvement assumptions. The Survey found that the most common lowest and highest attained age to
which durational mortality improvement was applied were 0 and about 100, respectively. The lowest and
highest durational mortality improvement rate ranged from -1.50% (deterioration) to 2.80%
(improvement). The time period in which the mortality improvement rates were applied ranged from 10 to
120 years, but this varied between life (10/120) and annuities (30/120). The most common time period was
20 to 30 years for life; less consensus was seen for annuities. Analysis is provided in Appendix C for
instances when highlights are shared in the body of the report.

Author(s): Ronora Stryker, Max Rudolph

Publication Date: December 2022

Publication Site: SOA Research Institute

2021 Milliman Variable Annuity Mortality Study

Mary Pat Campbell

Link: https://www.milliman.com/en/insight/2021-Milliman-Variable-Annuity-Mortality-Study

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Milliman Variable Annuity Mortality Study shows mortality increases of 11% as a result of COVID-19 pandemic

Life insurers and annuity writers are now beginning to understand the impact of the COVID-19 pandemic on their lines of business, as mortality data for the year 2020 is reported and analyzed. While the pandemic has affected different carriers in different ways, future mortality rates are a key assumption for annuity writers.

With Milliman’s acquisition of Ruark Consulting in December 2021, the industry’s leading variable annuity mortality study has been rebranded as the Milliman Variable Annuity Mortality Study. The study is based on data from 2008 through 2020, totaling $674 billion in account value as of the end of the study period, with over 1 million deaths across 19 companies.

Author(s): Timothy Paris

Publication Date: 14 Mar 2022

Publication Site: Milliman

5 Ways the New Stock Market Rollercoaster Could Affect Life Insurers

Mary Pat Campbell

Link: https://www.thinkadvisor.com/2022/06/16/5-ways-the-new-stock-market-rollercoaster-could-affect-life-insurers/

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1. Clients could swarm on life and annuity products with benefits guarantees like ants on a candy bar that fell under the picnic table.

Sales of products such as non-variable indexed annuities and non-variable indexed universal life insurance policies soar, as clients flocks to arrangements that can protect them against further drops in stock prices but help them share in gains if and when prices go back up.

Author(s): Allison Bell

Publication Date: 16 June 2022

Publication Site: Think Advisor

Bermuda: Living life (insurance) in paradise

Mary Pat Campbell

Link: https://www.milliman.com/en/insight/bermuda-living-life-insurance-in-paradise/?utm_source=linkedin&utm_medium=social-global-company-page&utm_campaign=life

PDF: https://www.milliman.com/-/media/milliman/pdfs/2022-articles/3-28-22-bermuda.ashx

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We review the history of life insurance in Bermuda, reflect on how we have gotten to where we are today, and look forward to what may be ahead. We present a hypothetical—yet realistic—case study to illustrate some of the factors that can lead to a strategic decision do business Bermuda. From an embedded-value perspective, we highlight potentially considerable benefits from a move from a U.S. statutory basis to a Bermudian economic balance sheet.

Author(s): Tony Dardis, William C. Hines, and Su Meng Lee

Publication Date: 28 March 2022

Publication Site: Milliman

Why private equity sees life and annuities as an enticing form of permanent capital

Mary Pat Campbell

Link: https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/why-private-equity-sees-life-and-annuities-as-an-enticing-form-of-permanent-capital

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Permanent capital—investment funds that do not have to be returned to investors on a timetable, or at all—is, according to some, the “holy grail” of private investing.1 Permanent capital owes its exalted status to the time and effort that managers can save on fundraising, and the flexibility it provides to invest at times, like a crisis, when other forms of capital can become scarce.

….

The trend is not new: private investing in insurance dates back more than 50 years to Berkshire Hathaway’s acquisition of National Indemnity in 1967. As that example shows, many forms of insurance beyond life and annuities can serve as permanent capital, including specialty and property and casualty (P&C). In this article, however, we’ll focus on the reasons why many PE firms have concluded that life insurance and annuities represent a once-in-a-generation opportunity. We’ll also look at the requirements for PE firms on the sidelines that want to enter the market, discuss some overlooked ways that PE owners can create value, and highlight some implications for life insurers as they consider either selling a portion of their book of business or emulating and competing with this potent new industry force.

Author(s): Ramnath Balasubramanian, Alex D’Amico, Rajiv Dattani, and Diego Mattone

Publication Date: 2 Feb 2022

Publication Site: McKinsey

New reinsurer “Martello Re” launches with backing of MassMutual, Centerbridge Partners and Brown Brothers Harriman

Mary Pat Campbell

Link:https://www.massmutual.com/about-us/news-and-press-releases/press-releases/2022/01/new-reinsurer-martello-re-launches-with-backing-of-massmutual-centerbridge-partners-and-brown-brothers-harriman

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Martello Re Limited (“Martello Re”), a licensed Class E Bermuda-based life and annuity reinsurance company with initial equity of $1.65 billion, has been launched with the financial support of Massachusetts Mutual Life Insurance Company (“MassMutual”), Centerbridge Partners, Brown Brothers Harriman, and a pre-eminent group of institutional investors and family offices, including Hudson Structured Capital Management Ltd. (doing its re/insurance business as HSCM Bermuda). Barings and Centerbridge will act as asset managers for Martello Re.

Through a commitment to long-term financial strength, creative solutions, and unique investment capabilities, Martello Re plans to offer a differentiated value proposition to its counterparties. The company will initially focus on providing MassMutual and its subsidiaries with reinsurance capacity on current product offerings, after which it will offer its services selectively to other top insurers in the life and annuity space.

MassMutual and its subsidiaries will initially reinsure approximately $14 billion of general account liabilities to Martello Re and also enter into a flow arrangement to reinsure new business. Both transactions are expected to close in February 2022 and have received regulatory approval.

Publication Date: 12 Jan 2022

Publication Site: MassMutual

Pacific Life Fined for Unlicensed Pension Risk Transfers in New York

Mary Pat Campbell

Link: https://www.ai-cio.com/news/pacific-life-fined-for-unlicensed-pension-risk-transfers-in-new-york/

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Pacific Life Insurance Co. has agreed to pay a $3 million fine after a New York Department of Financial Services (DFS) investigation found that the firm had conducted pension risk transfer (PRT) business in the state without a license.

It is the third enforcement action by the DFS against a major insurance company for unlicensed PRT business. In April 2020, the regulator fined Athene $45 million, and in February it fined AIG $12 million, both for conducting unauthorized pension risk transfer transactions in New York.

Author(s): Michael Katz

Publication Date: 14 Jan 2022

Publication Site: ai-CIO

Is life insurance a human capital derivatives business?

Mary Pat Campbell

Link: https://math.illinoisstate.edu/Krzysio/KO-JII-Invited.pdf

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Life and disability insurance, as well as annuities, traditionally have been analyzed as products providing protection against random losses. This article proposed that these products can be viewed as derivative instruments created to address the uncertainties and inadequacies of an individual’s human capital, if human capital is viewed as a financial instrument. In short, life insurance (including disability insurance and annuities) is the business of human capital securitization.

Author(s): Krzysztof M. Ostaszewski, PhD, MAAA, FSA, CFA

Publication Date: 2003 — vol 26, pp. 1-14

Publication Site: Journal of Insurance Issues

Do You Get Your Money’s Worth From Buying An Annuity?

Mary Pat Campbell

Link: https://www.forbes.com/sites/ebauer/2021/07/08/do-you-get-your-moneys-worth-from-buying-an-annuity/?sh=380f33612082&fbclid=IwAR1dlxEjlWlmPSetMplHWU6BdPjzzo7ju983c73QKr5KKKn29PjurCq_YmA

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But measuring the value of annuities, generally speaking, does tell us whether consumers are getting a fair deal from their purchases, and here, a recent working paper by two economists, James Poterba and Adam Solomon, “Discount Rates, Mortality Projections, and Money’s Worth Calculations for US Individual Annuities,” lends some insight.

Here’s some good news: using the costs of actual annuities available for consumers to purchase in June 2020, and comparing them to bond rates which were similar to the investment portfolios those insurance companies hold, the authors calculated “money’s worth ratios” that show that, for annuities purchased immediately at retirement, the value of the annuities was between 92% – 94% (give-or-take, depending on type) of its cost. That means that the value of the insurance protection is a comparatively modest 6 – 8% of the total investment.

But there’s a catch — or, rather, two of them.

In the first place, the authors calculate their ratios based on a standard mortality table for annuity purchasers — which makes sense if the goal is to judge the “fairness” of an annuity for the healthy retirees most likely to purchase one. But this doesn’t tell us whether an annuity is a smart purchase for someone who thinks of themselves as being in comparatively poorer health, or with a spottier family health history, and folks in these categories would benefit considerably from analysis that’s targeted at them, that evaluates, realistically, whether annuities are the right call and whether their prediction of their life expectancy is likely to be right or wrong.

Author(s): Elizabeth Bauer

Publication Date: 9 July 2021

Publication Site: Forbes

Ruark Consulting Releases 2021 Variable Annuity Studies

Mary Pat Campbell
Ruark Consulting Releases 2021 Variable Annuity Studies

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Pandemic-related factors dampened VA policyholder behavior in 2020. Extreme market activity in the first half of the year, disruption to policyholders’ usual communication patterns with advisors and agents by COVID-related social distancing, and the suspension of required minimum distributions under the CARES Act all served to depress surrender and income commencement behavior; however, the effects were not uniform, instead manifesting in specific market sectors as described below.

In the first half of 2020, declines in account values made guarantees relatively more valuable, leading to greater persistency.

As annuity sales volumes fell in 2020, VA surrender rates fell as well. However, the declines in surrender rates were concentrated among ultimate contract durations, where rates fell 1-2 percentage points independent of rider type or benefit value. Evidence suggests producers focused their attention on contracts at the shock duration (immediately following the expiration of surrender charges), leading to less turnover among the longest-dated contracts. The decline in surrenders is suggestive of a new, unique surrender regime, distinct from the regimes we observe before and after the 2008 financial crisis.

Author(s): Eric Halpern

Publication Date: 25 June 2021

Publication Site: Ruark Consulting