#180 | AIG Max Accumulator+ 2019 – Part 1

Since the publication of this post, which references the AIG Max Accumulator+ 2019 cap at 13%, AIG has dropped the cap to 10.2%. The participation rates and maximum illustrated rates for the proprietary indices have largely not changed.

These days, it’s rare that I write a review for a new life insurance product that has delivered clear, quantifiable and unmitigated benefits to consumers. Virtually every new life insurance product has tradeoffs – and for good reason. Theoretically, new life insurance products are almost always the result of a zero-sum game. They simply reshuffle the deck to make the results more appealing than the outgoing product for the specific market (or illustration game or sales scenario) targeted by the life insurer. For example, the usual playbook for IUL products these days is to use an index credit multiplier to juice illustrated performance without making any real structural changes to the product or even, in some cases, making the product slightly worse and papering over it with illustrated multiplier performance. With virtually every new product introduction, there are obvious and well-marketed upsides coupled with not-so-obvious and not-so-well-marketed downsides. It’s my job, in writing for this site, to look for both. When I can’t see one side of the equation, it’s a little bit unsettling.

That’s the way I felt when I first looked at AIG Max Accumulator+ 2019. The skin of the product is largely the same as the previous version. MA+ 2019 sports the same indexed account options with the same aggressive caps (a whopping 13% for the point-to-point S&P 500 account) and the same Merrill Lynch and PIMCO proprietary index accounts. MA 2019+ doesn’t have a new, complex and weird persistency credit like other products are increasingly introducing. Instead, it maintains the old product’s structure of having current and guaranteed fixed interest bonuses for each account beginning in year 6. Max Accum+ was and is a throwback to the good ‘ol days of straightforward Indexed UL products but manages to hold its own against its more modern competitors with high caps and illustrated rates – a simple, effective but extremely expensive solution that other carriers are increasingly abandoning in favor of “free” illustrated performance courtesy of multipliers.

For those of you who pay attention to what’s going on in cars, this business about multipliers is not so different than what’s going on in engine technology. Automakers are sandwiched between EPA requirements for better gas mileage and consumers’ desire for better performance, especially in the luxury car segment. The solution, it seems, is forced induction engines – typically turbocharging. The old way of increasing performance with more cylinders and bigger displacement is gone. Now, automakers just strap two turbochargers onto a 2.0 liter 4 banger and crank out over 400 horsepower, which was almost exclusively V8 territory just a decade ago. But for the EPA testing cycle, these maniacal little gremlins manage tame their urges and produce stellar gas mileage. In the real world, though, the gremlins’ manners aren’t quite so pristine. Actual gas mileage tends to significantly lag the EPA estimate (here’s why) and power delivery often seems to be finnicky and non-linear. I don’t have to stretch to make the analogy work. Both forced induction and index credit multipliers look like “free” benefits with no tradeoffs, although the former actually does deliver tangible, quantifiable benefits (I’m a fan – my last two cars have had V8s with forced induction) whereas the benefits of index credit multipliers are purely theoretical. AIG Max Accumulator+ doesn’t play the theoretical multiplier game. Instead, it delivers the goods the old-fashioned way. If it were a car, it’d be a Lamborghini Aventador – gracefully aging but sporting an absolute sledgehammer of a naturally aspirated 6.5 liter V12. More cylinders. More displacement. Massive power. It’s something glorious to behold, maybe because just because you know it’s the last of a dying breed.

But AIG isn’t going quietly into the night. Far from it. Max Accumulator+ 2019 makes concrete and tangible improvements to the product chassis that are unmitigated benefits to consumers. Premium loads in the first 10 years have dropped from 10%, significantly above the industry average of 6% for accumulation IUL products, to just 5.5%. Curiously enough, though, premium loads after year 10 tick back up to 6.5% although they are still significantly below the old load rate of 9%. Per thousand charges are unchanged and about half of the industry average, although elevated early COI charges made up the difference in Max Accum+ 2018 but have been trimmed down for the latest version. Take a look at the chart below comparing COI rates as a percentage of Net Amount at Risk for the population of accumulation-oriented IUL products relative to the two generations of Max Accumulator+. And although the graphs stops at year 35 (age 80), take my word for it that the COI slopes for both products end up significantly exceeding the market average in later years. By age 121, Max Accum+ 2019 has COI charges that are more than double the industry average at nearly 80 cents for every $1 of insurance coverage.

All of these cost reductions add up to not-so-trivial performance improvements. Over 5,000 real-world equity scenarios and data points from years 10, 20, 30, 40 and 50 for a 45 year old Preferred Male with a $45,000 7-pay premium for $1M of DB, Max Accum+ 2019 improves cash value IRR performance over its predecessor by nearly 50 basis points. The difference is most dramatic in the early years of the contract where charges more significantly impact performance – at year 10, MA+ 2019 sports a 1.1% CV IRR improvement over MA+ 2018. By year 50, the difference has sorted itself out to just under 20 basis points, which is still a pretty significant improvement given that the 20 bps has been compounded over 50 years. There’s just no way to argue that Max Accumulator+ 2019 isn’t a real and tangible improvement over the old product. It most certainly is. And it’s also pretty hard to argue that the total value package isn’t extremely attractive. It has all of the illustrated performance of a multiplier product with all of the consistency, reliability and simplicity of a traditional Indexed UL.

How did AIG do it? Simple – they took it on the chin. Profitability for this product is undoubtedly lower than the outgoing product. There’s just no way around that conclusion. But AIG wants to be a player in the Indexed UL space and has made the decision to stake out its turf as the product-of-choice for producers who want a simple Indexed UL that delivers stellar illustrated performance. Max Accumulator+ certainly fits the bill, now more than ever. This begs the question ­of why AIG did it. The simple reason, it seems, is that AIG is front-running the market for the 2017 CSO switch. They knew they wanted a competitive product. AIG, like every company, is looking to sell products that don’t put long-term guarantees on their balance sheet and Indexed UL fits the bill. They also knew they weren’t going to play the multiplier game. What they didn’t know was how other companies were going to react to the increased drag on policy performance in accumulation sales due to the new CSO table courtesy of slightly lower MEC premiums and much lower guideline level premiums (more on this phenomenon in an upcoming post). So instead of guessing, they went ahead and set the benchmark. Even at lower funding levels, Max Accumulator+ is going to deliver performance on par or better than its predecessor. That’s the baseline now for every 2017 CSO reprice. We’ll see how other companies react and my guess is that they’re going to balk. From an outsider’s point of view, AIG is now way out over its skis on both their aggressive cap (13%!) and their relatively lean policy charges. It doesn’t feel sustainable and, I have to admit, I sympathize with that sentiment. It doesn’t feel sustainable to me either, even though AIG insists it is. Time will tell.

This is a case study in what makes life insurance products so tricky. All else being equal, AIG has delivered tangible cost reductions that produce very real performance benefits. But not all else is equal. A less profitable product will have more rate pressure on it in the long run. Which one will have its cap reduced first, the 2018 product or the 2019 product? You know the answer. So is the 2019 version really an improvement over 2018? Yes, it is. It really is. I’ll take low charges and lower benefits over high charges and higher benefits all day, every day because carriers are far more reluctant to change charges than benefits. Low charges are a benefit unto themselves. They create more reliable and predictable performance. They limit catastrophic scenarios in both the short and long run. The fact that AIG seems to be offering lower charges with high performance is probably a temporary phenomenon and should be treated that way. The “right” cap for the product is probably closer to 11% and it would still be a compelling proposition with that cap. Illustrate accordingly.

But that’s not quite the end. AIG Max Accumulator+ 2019 still has one more trick up its sleeve.