#188 | Nationwide New Heights IUL

This review has been updated to reflect lower cap rates for Nationwide IUL Accumulator II announced on 12/2/2019 and effective 1/15/2020.

For folks in the life insurance side of the industry, the name “New Heights” doesn’t mean anything. But if you’re at all familiar with what’s been going on in Fixed Indexed Annuities over the last few years, then you know New Heights to be a juggernaut. The Nationwide New Heights FIA was launched in 2014 in partnership with Annexus, an independent distribution and product development organization out of Phoenix, and was a smash hit. Nationwide went from being virtually non-existent in the FIA space to a perennial top-5 seller almost entirely on the backs of its New Heights products. The Annexus and New Heights formula undoubtedly works for FIA. But will it work for Indexed UL?

The formula for New Heights FIA has two basic parts. First, Annexus was, is and will probably always be the primary conduit for distributing Nationwide New Heights products. Annexus has banded together 15+ prominent IMOs under a single distribution agreement through Annexus. The advantage for IMOs in working with Annexus is access to products that other IMOs don’t get and strict enforcement of rules against sharing overrides with agents. The idea with New Heights IUL is that it can borrow from its big brother’s success within the current Annexus IMO distribution footprint and that feels like a pretty good bet.

The second part of the formula was “uncapped” exposure to index performance. New Heights really took off when Nationwide added proprietary index options, starting with JP Morgan’s MOZAIC, in 2015. Nationwide later swapped out the original MOZAIC for MOZAIC II and added NYSE Zebra EDGE. Both of these indices are volatility controlled, multi-asset proprietary index strategies. I’ve written extensively about these types of indices in other posts so I’m not going to belabor the point here, but I’m fundamentally a believer that these indices provide diversification benefits, but not necessarily performance benefits. Nationwide, however, has not been shy about promoting MOZAIC’s potential performance relative to the S&P 500. The same messaging goes for NYSE Zebra Edge, which was developed in collaboration Roger Ibbotson. Yes, that Roger Ibbotson. The famous one. The fact that he’s involved in an index to be used in an FIA is both an indicator of just how important these proprietary indices are to the story of many FIAs these days, but particularly Annexus and New Heights.

This brings us to New Heights IUL. From a distribution standpoint, product is restricted only to Annexus IMOs, in keeping with the first part of the formula that worked for New Heights FIA. The second part of the formula, the proprietary index options, is the only differentiator between the street Nationwide Accumulation IUL II and New Heights IUL. Put differently, at the same illustrated rate, Accumulation IUL II and New Heights IUL illustrate identical performance. In theory, this avoids channel conflict because life producers have tended to not pay much attention to proprietary index options, especially in Nationwide’s traditional BGA and network marketing channels. As a result, New Heights IUL looks like a nice, neat strategic play – give a proprietary product to (mostly) proprietary distribution in a way that only they will care about while avoiding diluting the story for your bread-and-butter distribution.

But Nationwide added one twist that, I think, they’re probably going to come to regret. Despite the fact that the products have identical charges, New Heights IUL has a maximum illustrated rate of 6.24% while the street product tops out at just 5.25%. Why is that? Well, here’s where things get a little bit bizarre. Stick with me. The street product offers an S&P 500 account with a 0% floor and 8.25% cap, which results in the stated 5.25% maximum AG49 illustrated rate. New Heights IUL, by contrast, has an S&P 500 account with a 0.5% floor and a 9.5% cap, which means that the product has to use a “hypothetical” 0% floor account for calculating AG49 maximum rates. The cap for the hypothetical account, as stated in the illustration, is 10.25% and it delivers the 6.24% maximum illustrated rate. Why, then, do two products with identical charges have very different S&P 500 caps?

Simple. Nationwide is using a pricing tactic that other carriers have started to use with proprietary indices as well. Since the indices are a core part of the Annexus story, it’s reasonable to assume that a significant portion of premium will be allocated to those indices. We also know that those indices are significantly cheaper to hedge than the S&P 500 per 1% of illustrated lookback performance. Proprietary indices offer more illustrated bang for the hedge cost buck or, on the flip side, offer the same illustrated bang as the S&P 500 but for far fewer hedge cost bucks. This extra profit margin can be essentially reinvested back into the option budget supporting the S&P 500 cap. Voila. That’s why New Heights IUL has a 1% higher S&P 500 cap than the street product. It’s all about the magical economics of proprietary indices and the fact that consumers buying through Annexus IMOs will allocate to those indices rather than the S&P 500.

There are a lot of implications of this pricing tactic, but I’m going to point out the most obvious – if consumers in New Heights IUL actually elect into the S&P 500 cap account instead of the proprietary index accounts, then the cap in New Heights will drop to the same level as the street product. Nationwide, in other words, is banking on the fact that consumers will see the illustrated advantage of the higher S&P 500 cap but don’t elect it because Annexus distributors are focused on the proprietary indices in New Heights FIA. Therefore, the extra illustrated juice in New Heights IUL is proprietary in that no other distributor can make the case that the account flows will go to the proprietary indices.

But just because it happened in FIA doesn’t mean it’ll happen in IUL. FIA illustrations are completely different than IUL illustrations. In FIA, proprietary indices have an illustrated performance advantage over S&P accounts and that has been the reason why the FIA market has devolved into its own form of illustration warfare on the basis of 10 year hypothetical proprietary index lookback performance. But in IUL, proprietary indices don’t receive a direct illustrated benefit. Nationwide’s tactic of subsidizing the S&P 500 cap to juice overall product performance via assumed allocations to the proprietary indices is essentially a rising tide that raises all ships. So is it really reasonable to assume that clients won’t elect into the simplest, most straightforward option that delivers the same illustrated benefit as a proprietary index that no one understands and is tough to communicate? Probably not. Advisors will bear the complexity to get the illustrated benefits in FIA. But there are no illustrated benefits in New Heights IUL for explicitly choosing the proprietary index options over the S&P 500 base account.

In fact, Nationwide went the other direction and put an incentive to choose the S&P 500 account over the proprietary indices. Recall that the 10.25% S&P 500 cap that sets the maximum illustrated rate for the product is not actually available in the contract. It’s hypothetical. The actual basic S&P 500 option offered in New Heights IUL has a 0.5% floor and a 9.5% cap. The proprietary indices, by contrast, have 0% floors. So, in other words, the client can get the same illustrated performance out of any of the accounts, but the S&P 500 has a 0.5% floor. Why, then, would a client forego a 0.5% floor just to get a shot on a confusing, complex proprietary index account with no illustrated advantage?

One of two things is going to happen – either people actually allocate more to the proprietary index accounts and Nationwide has to deal with their traditional distributors being mad about the fact that Annexus has a better illustrating product than they can get or people allocate to the S&P 500 account in New Heights and Nationwide has to drop the cap, which will make Annexus mad. This feels like a no-win bet for Nationwide. It’s also a bet that they could have easily avoided. They could have just used the same option budget for all of the accounts, which would have generated higher participation rates for the proprietary indices but a lower S&P 500 cap and therefore lower illustrated performance for the product. But instead, they chose to give New Heights IUL a “free” illustrated edge, courtesy of artificially reducing option budgets for the folks who actually allocate to the proprietary index accounts. These folks, unbeknownst to them, are getting the short end of the stick and are subsidizing the savvier folks who allocate to the S&P 500 account. For them, New Heights IUL is a pure-arbitrage opportunity to get an artificially high cap. They’d better just cross their fingers that the other policyholders don’t figure it out.

But at the end of the day, regardless of the games that Nationwide is playing with the option budgets, New Heights IUL is a solid product offering in the same way that Accumulation IUL II is. If you like the street product, then you’ll like New Heights IUL. The true, structural difference between the two products is simply a matter of what account options are available on the chassis. If you’re an Annexus IMO and you’re used to selling the Annexus story with MOZAIC II and Zebra EDGE, then you’ll like being able to cross-sell into life insurance on a solid offering. And the irony, of course, is that the illustrated rate wouldn’t have mattered anyway.