#209 | Global Atlantic Global Accumulator IUL

4/24/20 Update – Global Atlantic has reduced caps across the board, reducing Lifetime Builder Elite 2020’s cap from 13.5% to 12.5% and Global Accumulator IUL’s cap from 11.5% to 10.5%. The story and review below still apply.

Global Atlantic has a storied history in Indexed UL. What started as Indianapolis Life then became AmerUS, which then became Aviva, then briefly became Athene and finally became Accordia, which is owned by Global Atlantic. The core story, however, was consistent throughout. The company we now call Accordia has been selling Indexed UL for more than 20 years on the idea of Indexed UL as an asset class with downside protection and upside potential. They’ve generally tried to eschew illustration warfare, notably opting out of the most aggressively illustrated designs in IUL both pre-AG49 and post-AG49. Their flagship product, Lifetime Builder Elite 2020, is basically the same product they’ve been selling for more than a decade. As I noted in a previous review, the new so-called Elite version made a bit of a shift towards illustration warfare by increasing initial policy charges to some of the highest in the industry that went directly to subsidize a then-high, now-stratospheric 13.5% cap. They gave in just a little bit to the pressure. Now, with Global Accumulator IUL (GAIUL), they’re caving to it.

I’m not really sure it’s fair to call Global Accumulator IUL a different product from Lifetime Builder Elite 2020 because it really isn’t. The products have virtually identical chassis in terms of policy charges, which means both policies have exceptionally high initial policy charges. For example, the average IUL for a 45 year old Preferred male with a $1M DB and funded at the 7 Pay limit has about $62k in charges over the first 10 years. Both Elite 2020 and GAIUL ring in at nearly $90k. What do you get in return for all of those policy charges? Both products sport huge illustrated fixed bonuses of 1% on Elite 2020 and 1.25% on GAIUL. The core story of Global Atlantic’s flagship IULs as high charge and high bonus products persists.

In the case of Lifetime Builder Elite 2020, however, there’s another benefit – a 13.5% cap. But not GAIUL. Across the board, GAIUL has meaningfully lower rates than its stablemate despite sharing many of the same indexed strategy accounts. GAIUL has an 11.5% cap on its standard S&P 500, point-to-point account, which is pretty high by any standard other than the one set by Elite’s 13.5% cap on the same account. The caps/participation rates/spreads are equally as uninspiring. The reduced rates are hardly offset by the extra 0.25% in fixed interest bonus in GAIUL relative to Elite. All else being equal, if you ran these two products side-by-side, you’d sell Elite 2020 in a heartbeat.

However, not all else is not equal. Global Atlantic has been an active participant in the AG49 discussions and hinted in an early letter about the fact that, you know, “some companies” might have to introduce charge-funded multipliers in order to compete in today’s market. No surprise that “some companies” means Global Atlantic. But don’t be fooled, folks, these are no normal multipliers. They’re not even called multipliers. They’re called buy-ups. And they’re SMART. What does that mean, you ask? Let’s find out.

At their core, the SMART Buy-Up strategies are designed to provide more upside potential funded through policy charges but only in scenarios where the “policy can withstand” the extra charges. The idea is that all of these charge-funded multipliers do add extra risk, but Global Atlantic is using them in a responsible, SMART way with GAIUL because they’re only allowing exposure to the extra downside and upside when the policy is in a position to handle it. This decision obviously cuts back on the illustrated performance of the product because the buy-ups basically aren’t active at the beginning, but theoretically a design like this would make the product safer and less likely to blow up. It appears that “some companies” will have to compete, but they’re going to say they’re being a lot more circumspect about it than their competitors. But as you’ll see, “some companies” might have overplayed their hand on this one.

There are two SMART strategies in GAIUL – Secure and Performance. Secure does actually do what the marketing says it does. As I mentioned before, GAIUL has a 1.25% fixed interest bonus that starts in the 6th year. The SMART Secure strategy has a 1.25% asset-based charge to buy a 25% multiplier that not coincidentally also starts in the 6th year. In other words, Global Atlantic is offering clients the chance to swap their 1.25% fixed interest bonus for a 25% multiplier. This is…err…SMART because it appears to be pretty simple and straightforward and doesn’t appreciably increase the risk in the policy. It appears that the minimum credit any given year would still be 0% on a net return basis. It also appears that Global Atlantic is making this a bit too complicated. Another option would have just been to literally swap the 1.25% fixed interest bonus for a 25% multiplier and get rid of the whole idea of an asset-charge altogether. If you’re paying a bonus and immediately taking it back with a charge, why not just net it out to begin with and just provide the multiplier benefit? Because in this case, the swap isn’t quite as even as it looks.

Global Atlantic is playing a little sleight of hand here. The 1.25% fixed interest bonus is credited to the average account value throughout the year, as is common for both fixed interest bonuses and indexed credits across the industry. The asset-based charge for SMART Secure, however, is deducted at the beginning of the year based on the beginning of the year Account Value. That means although the fixed interest bonus and the asset charge share the same 1.25% rate, they’re applied to different things. Basing the asset charge on the beginning of year value provides a real, albeit small, benefit to Global Atlantic relative to the payout of the fixed interest bonus. But it has another benefit as well. Indexed interest in GAIUL is based on end of year account value. This means that the 1.25% asset charge is being assessed at the beginning of the year, offset by an interest bonus paid based on the average account value, and being spent to buy a multiplier credited to end of year account values. All of this adds up to a not-trivial benefit for Global Atlantic in terms of the actual dollars flowing in the contract, even though the optics are nice, neat and clean. And policyholders are obviously on the other side of the trade – which is also why these SMART options don’t illustrate quite as well as you might otherwise think.

The SMART Performance option has the same math but at an even bigger scale. SMART Performance has a 5.25% asset charge, which makes a nice and not-offensive 4% net asset charge on paper after subtracting the 1.25% asset bonus. Unlike Secure, Performance doesn’t start in the 6th year. Instead, it’s in effect any time the account value is greater than 20% of the policy face amount. This is what makes it SMART – the extra charges and extra multipliers only come into effect when the account value is above that threshold. But is it SMART? Think about it. On a $1M face amount, that equates to a $200k account value. There are only 2 times the policy will be below $200k in account value. First, during the premium payment period when the account value is climbing, and second, when the account value has entered the death spiral. This 20% threshold means that you don’t get a chance to have more leverage on the way up and that it steps off the gas when the policy is going to blow up anyway. Take a look at the graph below, which analyzes the performance of these products over 500 random return scenarios relative to the maximum AG49 illustrated rate performance.

What this chart is saying, in summary, is that GAIUL has the same risk profile as any other not-SMART leveraged Indexed UL product. The downside risk is still significant compared to non-leveraged products, like GAIUL’s stablemate Elite 2020. Just look at the chart – which one would you rather have? Easy choice. Elite 2020’s real world performance is almost identical to its level-rate illustrated performance whereas GAIUL systemically overstates its performance. Elite 2020 has some downside risk related to equity returns, but not nearly as much as GAIUL. Marketing aside, these strategies are no smarter than any other charge-funded multiplier strategy. The fact that Global Atlantic put in the 20% threshold requirement does effectively nothing other than provide for flyer fodder.

And the problems don’t stop there. If you look at the crediting report in a GAIUL illustration, you’ll notice something kind of odd. Pick a year (any year) and compare the charges used to support SMART Performance relative to the credits from the strategy. The ratio of credits to charges is about 1.2/1, implying a 20% illustrated profit from the trade every year. While in the real world this would be an egregiously aggressive assumption, it’s lower than it should be for an Indexed UL illustration. The base option profit assumption for the product is around 30%, which you can glean by dividing the maximum AG49 illustrated rate (6.84%) by the cost of the options (5.25%, based on how SMART Performance is priced). So what gives? Where’d the other 10% option profit go?

Blame the timing issue I brought up earlier, only bigger this time around because the asset-charge in SMART Performance is bigger than in SMART Secure. Here, Global Atlantic is deducting 5.25% of the account right off the bat, crediting 1.25% of the average account value back and then providing a 100% multiplier on the end of year account value, which is worth something like 95% of the beginning of year account value. The net result is that this multiplier is less powerful on the illustration but every bit as risky as multipliers offered by other companies. That doesn’t sound so SMART to me. That actually sounds kind of…you know…not SMART.

Why would Global Atlantic do this? I can think of only one real reason, which is that Elite 2020 is unsustainably priced and that 13.5% cap is about to drop to something closer to the 11.5% in GAIUL, which will make GAIUL the superior product for illustrated performance. In fact, Global Atlantic tips its hand to just how unsustainable Elite 2020’s cap is by how it priced SMART Performance, where a 5.25% asset-based charge buys a 100% multiplier. This essentially means that Global Atlantic is pricing the cost of an 11.5% cap at 5.25% – actually, north of that once you take into account the timing sleight of hand, so let’s call it 5.4%. That’s about right in today’s market. What carrier is earning 5.4%? None. Global Atlantic has all but said in their AG49 comment letters that they’re using their prodigious policy charges to fund higher caps. So what about a 13.5% cap and its roughly 5.75% cost? Even less sustainable. It’s pretty obvious that it’s only a matter of time before Global Atlantic drops its cap on Elite 2020 to around 11.5% and GAIUL becomes the flagship product still producing hefty illustrated performance – but this time with a lot more risk.

Global Atlantic’s move to release Global Accumulator IUL right now is also curious, given everything going on with AG49. GAIUL is a classic case of a company papering over a new and demonstrably inferior (but more profitable) product with charge-funded multiplier interest, as many other companies have also done. This tactic will no longer work under any of the proposed changes to AG49, meaning that Global Atlantic will just be left with a demonstrably inferior product (at least, compared to Elite 2020). So what’s the point? Why’d they even roll this thing out? Probably because it was already slated and they figured they could make hay for a few months while the sun is shining. Maybe it’s not such a coincidence that Global Atlantic has broken from the ACLI pack to advocate its own solution to AG49.

In any event, what’s the upshot for producers? Don’t be fooled by illustrated performance. A product that was already delivering aggressive, charge-fueled performance courtesy of a high cap is now delivering even more aggressive, even more charge-fueled performance courtesy of multipliers. Those two things are not the same. Global Accumulator IUL might look like Elite 2020 on an illustration, but it sure as heck won’t look like Elite 2020 in the real world.