#254 | AG 49-A and Allianz Life Pro+ Advantage

When it comes to product, Allianz plays a decidedly different game than many of its competitors. Rather than having a bevy of products geared towards virtually every possible application, Allianz offers just a single Indexed UL that has been gradually evolving over time but looks very similar to its progenitor, GenDex IUL, which dates back nearly 20 years. Allianz is a one-trick pony when it comes to life insurance – but it works. Allianz is ranked third in Indexed UL sales and has posted staggering growth rates for the last couple of years. Anecdotally, I’ve seen confirmation of Allianz’s growing preeminence in the Indexed UL space. I regularly have agents and end-consumers email me illustrations of proposed transactions and, recently, virtually all of them are Allianz Life Pro+ Advantage. From my vantage point, Allianz has a growing dominance in the Indexed UL space, particularly in specialty-market niches like premium financing.

What’s behind the rise of Allianz? The answer seems deceptively simple – consistency. Allianz has been doing the same thing and telling the same story for a very long time. Their distributors are extremely loyal, in part because many of those distributors also sell boatloads of Allianz FIA products. But there’s more to the story. Allianz has also figured out how to play to the psychology of its producers with near-clinical accuracy. No company, I would argue, understands its distributors and producers better than Allianz. For example, Allianz knows that illustrations are, first and foremost, marketing tools. That’s why Allianz’s illustrations are hands-down the most beautifully designed in the industry. They tell a clear and concise story about the power of the product but also thoughtfully placed disclosure and automatically included policy charge pages. When it comes to illustrations, Allianz sets the benchmark.

Another example is compensation. Allianz pays (I kid you not) somewhere near 155% of Target premium as total compensation on Life Pro+ Advantage. But 155% of what? The Targets in Life Pro+ Advantage are actually pretty low. If you multiply 155% by Targets from age 40-60, the sweet spot for IUL sales, the total compensation is actually very similar to companies with more traditional (125-135%) payouts. Why did Allianz do it this way? Because it knows its audience. Distributors go googly-eyed over the 155% payout because it gives them an enormous override if the agent is willing to take a traditional, street-level payout. Early on, distributors made a killing selling Allianz. But now, agents are hip to the game and, from what I hear, often ask for 120%+ payouts because they know how big the total nut is. Still, distributors and premium financing vendors that split cases probably make more money on Allianz than any other company. That counts for a lot.

Nowhere does Allianz’s understanding of its distributors show stronger than in the product itself, Life Pro+ Advantage (LPA) IUL. Allianz took a very different tack than some of its fiercest competitors in the wake of AG 49. As PacLife raked in hundreds of millions of dollars in production with its best-selling, multiplier-driven PDX IUL, Allianz retrenched in its core story – a simple, straightforward product that illustrates exceedingly well. Life Pro+ Advantage doesn’t have any complex bonus or multipliers. Its policy charge chassis is unremarkable, although you could argue that the charges are organized in such way to minimize drawing attention to any charge in particular, with a premium load that is slightly higher than average (8%), initial COIs among the highest in the industry but a base charge that is among the lowest in the industry and extends for 15 years rather than the standard 10 years. The optical effect is that Life Pro+ Advantage looks cheap although it actually isn’t. Fully funded at the maximum non-MEC premium limits, LPA is actually one of the more expensive products in the industry.

How, then, does Allianz generate high illustrated performance with such a conventional and unremarkable chassis? I wrote a whole article on the previous version of the product, Life Pro+ Elite, but I’ll summarize it in four words – Allianz uses proprietary indices. The simple story is that Allianz sets a maximum illustrated rate for the product using an S&P 500 account without a bonus which, right now, has a 10% cap and 6.15% illustrated rate. The 6.15% serves as the maximum illustrated rate for any account within the product. Allianz then uses proprietary indices to generate a calculated lookback rate higher than 6.15% at a lower option cost than the S&P 500. For example, a 10% cap generating a 6.15% illustrated rate might cost 4.9% on the S&P 500 but a 120% participation rate on the PIMCO Tactical Balanced ER Index that generates the same 6.15% illustrated rate might cost only 4%, creating 0.9% in savings that can be reinvested back into the performance of the product.

In the pre-AG 49-A Life Pro+ Advantage, the savings from using proprietary indices were reinvested in a 15% multiplier. Up until October, Allianz sported a 6.92% illustrated rate from an 11.75% S&P 500 cap. Grossed up by 15%, that meant Life Pro+ Advantage was illustrating a net rate of a whopping 7.96%, which meant that it was producing the roughly the same net rate as Pacific Life PDX 2 allocated entirely to the Performance Plus option with a 7.5% asset-based charge and multiplier. As if that wasn’t enough, Allianz also later added a Select option with a 1% asset-based charge and 40% multiplier, which juiced the net rate to an astronomical 8.7%, one of (if not the) highest net rate in the industry, exceeding even John Hancock’s Enhanced option in Accumulation IUL 19.

Life Pro+ Advantage was and is a sleeper of a product. Whereas other companies applied huge charges and multipliers to S&P 500 accounts, Allianz used proprietary indices and small multipliers. Other companies used brute force; Allianz used finesse. The result was that the Allianz product looked conservatively illustrated, but it wasn’t, particularly before Allianz dropped the S&P 500 cap from 11.75% to 10.5% a few months ago. It’s just that the aggressive part of the product wasn’t as obvious as a huge charge-funded multiplier. Instead, the aggressive part of the product is the illustrated performance of relatively new, largely untested proprietary indices that are engineered first and foremost for stable option prices rather than actual real-world performance. Life Pro+ Advantage relies on lookbacks from those indices to generate its outsized illustrated performance and reinvests the savings of those indices back into more illustrated performance. That’s the magic.

If this story sounds familiar to you, then it’s because I’ve written at least six articles at this point showing how this exact product construct – which, by the way, Allianz has been using for several years now – generates outsized performance under AG 49-A. Whereas AG 49-A arguably cut the legs out from under the multiplier-focused companies like Pacific Life, John Hancock and Lincoln, it plays perfectly into Allianz’s longstanding strategy. Regardless of what insurers say, the goal of every life insurance company in working with regulators is to play to its own book. Life insurers want regulations that fit with its competitive position. Full stop. End of story. And boy does AG 49-A play to Allianz’s book.

In order to tune Life Pro+ Advantage IUL for maximum illustrated performance under AG 49-A, Allianz added a new suite of indices so-called Classic allocations that have a 0.9% guaranteed interest bonus in all years. However, the only index options in the Classic allocations are – you guessed it – proprietary indices. The same goes for the Bonused and Select allocations, which have multipliers instead of a fixed interest bonus and continue unchanged from the pre-AG 49-A Life Pro+ Advantage except that the S&P 500 options have been removed. Why add the Classic allocations? Because that’s what works best under AG 49-A. The multipliers in the Bonused and Select and allocations don’t have an illustrated benefit thanks to AG 49-A, but fixed interest bonuses do, both in terms of ledger performance and illustrated loan arbitrage.

To give you a sense of how big of a difference the Classic accounts make, take a look at the results of a basic scenario of a max funded policy on a 45 year old with distributions for 20 years after retirement. In short, the new Classic accounts and their 0.90% interest bonus moves Allianz from near the bottom of the spreadsheet to the near the top.

This is a perfect indication of the bizarre world of AG 49-A. If you believe that indexed crediting is superior to fixed crediting – which every life insurer selling Indexed UL and certainly (and vociferously) Allianz does – then does it make sense to swap indexed exposure for a fixed interest bonus? Of course not. To put some numbers on the trade, just look at Allianz’s illustration. The Standard account for the Bloomberg US Dynamic Balance II ER Index has a 161% participation rate and a 15-year lookback performance of 8.70%. Why only 15 years? Because, like all proprietary indices, the index itself is only a couple of years old and the ability to do a lookback is limited. But we’ll take it at face value like the good folks at Allianz do when they talk about the performance potential of these indices. Switching to the Classic account drops the participation rate to 120% and the 15-year lookback to 6.52%, a drop of 2.2%.  The PIMCO index shows the same difference. The Balanced index is a static blend of bonds and stocks and therefore has a longer hypothetical lookback period. Over 25 years, the Balanced Index lookback is 7.93% for the Standard account and just 5.78% for the Classic.

No matter what way you cut it, if you believe the lookbacks – which, is to say, you believe that indexed crediting will outperform fixed crediting – then the Classic account will undoubtedly result in inferior performance to the Standard account to the tune of somewhere around 1.35% annually. That is not a good trade. No rational person who believes in the performance potential of indexed crediting would take that trade. And yet, in the bizarre world of AG 49-A, the Classic account illustrates significantly better performance and 25% more income than the Standard account. This is a non-sensical conclusion. If you’re like me and you believe that perpetual option profits are mostly in the imagination of insurers and producers, then all of these accounts should illustrate at the same (lower) rate. If you’re like the folks who are paid to believe in perpetual option profits by selling or manufacturing Indexed UL, then you would at least argue that the Classic account should illustrate worse than the Standard account because, in the real world, it will perform worse over the long run.

Under AG 49-A, we get neither. We get an indefensible position. No one in their right mind would argue that the Classic account deserves to illustrate better than the Standard account. This is clearly and obviously not what the regulators intended with AG 49-A. And yet, that’s exactly what happens.

It’s only a matter of time before more life insurers employ the Allianz strategy. In fact, it’s already happening. As I’ve written about before, AIG Max Accumulator+ was already using fixed bonus structures paired with proprietary index options and that holds over into the new, recently released, AG 49-A-compliant Max Accumulator+ II. In the standard High Cap S&P 500 account with a 0.1% fixed bonus, illustrated income is $56,828. In the Merrill Lynch Strategic Balance Index account with a 0.65% fixed bonus, illustrated income jumps 20% to $68,020, even higher than Allianz. The formula of a proprietary index paired with a fixed interest bonus works, at least from the standpoint of illustrated performance under AG 49-A.

If there’s anything we can say about Allianz, then it’s this – at least they’re sticking to their knitting. Allianz will tell you that they have experienced fantastic performance in their in-force Indexed UL products and much of that performance is attributable to proprietary index performance. They would tell you that the proof is in the pudding and I think there’s an argument to be made in their favor. This latest iteration, it might seem, is just another way to leverage the unique performance and option pricing characteristics of proprietary indices.

But in reality, these new Classic allocation options in Life Pro+ Advantage are not about real-world performance. They’re about illustration gimmickry. There is absolutely no reason in the real world for the Classic accounts to illustrate better performance than the Standard accounts. If anything, Allianz’s argument about the historical performance of these indices works against the Classic options. Allianz built these accounts to win the illustration war. If the early numbers are any indication, then win they will.

In some ways, the updates to Life Pro+ Advantage IUL are not surprising. They’re in keeping with Allianz’s long-term approach to its Indexed UL product and fit perfectly into AG 49-A. Instead, the most interesting part of what Allianz has done with Life Pro+ Advantage isn’t on the illustration. Instead, it’s at www.allianzshowcase.com – and it cracks open a brand-new battlefield in the illustration war.

Note: The Standard Account S&P 500 point-to-point cap on Life Pro+ Advantage was reduced from 10.5% to 10% as a part of the product update released on 12/14. Also, the Blended Index, which has static equity and bond components, has been in existence for 12 years. The Bloomberg US Dynamic Balance II ER Index is only a couple of years old, but its predecessor has been in existence for 7 years.