#277 | Symetra Accumulator IUL 4.0 and the AI Strategies

For the life insurance industry, 2021 started off with a bang. Overnight, companies selling Universal Life suddenly found themselves incorrectly illustrating and administering tax limitations for every policy being sold as a result of changes to Section 7702 being passed in the wee hours of 2020 with a 1/1/21 effective date. It was pandemonium. But the first ray of light in the dark room was Symetra, which updated its illustration software in early February. The results were exactly as expected – Target premiums took a beating and the benefit to consumers in terms of illustrated performance was minimal. As I wrote back then, “it looks like Symetra traded 40% of the agent’s compensation to give a 4% increase in income.”

I’d also heard at the time that Symetra had another product update in the hopper for later in the year that would find a middle ground, at least on agent compensation. Two weeks ago, Symetra rolled out Accumulator IUL 4.0. The big story with the product are the new Allocation Index (AI) Strategies, which Symetra positions as being the first of their kind. There’s nary a word about the actual product itself. That might lead one to think that the product hasn’t changed but, of course, it has. And if I was Symetra, I wouldn’t exactly be touting it to the world either.

First things first, Symetra did figure out how to increase Target premiums to claw back some of what was lost with the new Section 7702-2% update. On a 45 year old Preferred male, Targets increased by about 17.5%. That sounds like a bigger improvement than it actually is. If you were to use the same $142,857 premium for 7 years, the old product has a $39,790 Target and the new product rings in at $43,572. Under the old Section 7702-4% limits, the Target would have been somewhere in the neighborhood of $70,000 for this same cell.  Yes, Symetra found a way to have higher Targets. But the difference, at the end of the day, is trivial.

You might also notice that the percentage increase in Target by using a specified funding level is smaller than using the same face amount, 9.5% and 17.5% respectively. The reason is because Symetra made a few other changes to the product that result in the Option 2 Guideline Level Premiums being higher in the Accumulator IUL 4.0 than in Accumulator IUL 3.0, which means that the death benefit per dollar of premium is lower under GPT in the new product than the old. What happened that would change the GLPs? There’s really only one explanation – policy expenses in Accumulator IUL 4.0 are higher than in Accumulator IUL 3.0.

It’s not hard to see. Symetra has blending functionality in both products that allows us to match the Targets for both the old and the new product and then run them at the same rate. Under that scenario, the fixed charges in the new product are $10,366 for 10 years versus $9,232 for 10 years in the old product. The new product also has a flat 6% premium load versus 8% in the first year dropping to 5.5% thereafter in the old one. The only spot where the new product has lower charges than the old one is the COI slope, but the difference is minor and made even more trivial given that there’s very little NAR in the maximum funded scenario generally sold for accumulation IUL products. The net result is that – all else being equal – the new product is more expensive and therefore less competitive than the old one. And it’s also almost certainly more profitable.

At this point in the narrative, you’re probably already wincing at what you think I’m going to write: “In order to cover up the fact that the new product is more expensive, less competitive and more profitable than the old one, Symetra is leveraging its new AI Strategies to generate higher illustrated rates paired with a fixed interest bonus that catapults the illustrated performance in Accumulator IUL 4.0 far beyond the outgoing 3.0 product and far beyond even the new North American Builder Plus 3 product.”

Everyone loves a great story and that certainly would have been a great one, but it’s not the truth. Symetra has had a volatility controlled proprietary index (JP Morgan Efficiente 5) in their Indexed UL product for a couple of years and they don’t illustrate JPM Efficiente 5 any better than the S&P 500 options. It seems as though Symetra is making the conscious decision to market JPM Efficiente 5 on its own merits and not on the basis of artificially inflated illustrated performance. Imagine that. When I first saw the announcements about the AI Strategies, I feared that Symetra had changed tack and joined the herd to maximize illustrated performance under AG 49-A. I shouldn’t have worried.

Symetra has been touting its guiding principles of Value, Transparency and Sustainability on its illustrations for a while now. There’s no value, transparency or sustainability in what other companies are doing by combining proprietary indices with fixed interest bonuses in an effort to game AG 49-A. I keep a flyer from another company touting its guiding principles on my desk to remind me that talk is cheap – especially when it comes to life insurance companies saying they will definitely or will never do something. But to Symetra’s vast credit, they’re living up to their guiding principles, at least with this product and their choice not to play the AG 49-A games that many other life insurers are already playing or are considering.

Now, to the strategies themselves. The AI Strategies don’t actually introduce any new elements to the product. For as long as Symetra has offered the S&P 500 and the JPM Efficiente 5 as standalone allocation options, it has also offered a Blended option that has a 50/50 allocation between the two indices on a 2 year point-to-point strategy. The AI Strategies take the blended option a step further.

The mechanics are incredibly simple. Two business days before the next monthly allocation date, the VIX Index value is recorded and used to determine the next month’s allocation between the JPM Efficiente 5 and an uncapped S&P 500 strategy with a spread. If the VIX is equal to or above 16, then the full allocation is rolled into the JPM Efficiente 5. If the VIX is below 16, then the full allocation goes to the uncapped S&P 500 strategy. Voila. Here’s the diagram in Symetra’s marketing materials on how this works:

Source: https://www.symetra.com/globalassets/catalog/lim—1616.1.pdf

Symetra is right in saying that the AI Strategies are an industry first in using an external index (the VIX) to trigger automatic reallocations between crediting strategies, but so what? The marketing pieces delicately and discretely paint the picture that the AI Strategies will produce better performance than either the S&P 500 or JPM Efficiente 5 would on a standalone basis. Even though illustrated performance isn’t any better – although Symetra absolutely could have done that if they’d wanted to – the tables on the illustration show astronomical numbers for the AI Strategies. The 25 year “historical”* average for the 1 year AI Option is a whopping 9.22%, blowing the doors off of the Core S&P 500 “historical” average of 6.02% over the same period. Clearly, the AI Strategies are a superior option, right?

That’s where things get a little bit fuzzy. There is no 25 year history for the JPM Efficiente 5 because it doesn’t exist. Performance for that index stretches back only to 2011, which is why the standalone JPM Efficiente 5 allocation and the Blended allocation don’t show “historical” performance beyond 10 years. And the 10 year “historical” performance that is available for the JPM Efficiente 5 is less than stellar. It was one of the first-generation proprietary indices and, since then, it has chalked up a paltry 3.68% annualized return with 6.4% volatility according to the June performance update. To put that in perspective, a 30/70 portfolio of the S&P 500 and the Bloomberg Barclays Aggregate delivered 5.52% with 5.04% volatility over the same period. For Sharpe enthusiasts, the comparison is 0.58 for JPM Efficiente 5 and 1.10 for the 30/70 portfolio. JPM Efficiente 5 isn’t exactly a performance powerhouse.

So how is it that the AI Strategies deliver such fantastical “historical” performance? The answer, as far as I can tell, has very little to do with the JPM Efficiente 5 and mostly to do with the uncapped S&P 500 account. The language in the actual filing for the AI Strategies is a little bit ambiguous, saying “…if We elect to cease to use an Index, We may substitute a comparable Index.” It doesn’t say they have to do it. That little turn of phrase may be what allows Symetra to do a full 25 year “historical” view of the performance of the strategy because they can use only the S&P 500 uncapped strategy through the period of time before JPM Efficiente 5 existed.

That explanation lines up with the “historical” performance in the illustration. The current spread for the uncapped S&P 500 account is a mere 5%. Little wonder why the backtesting looks phenomenal for the AI Strategies. Applying a 5% S&P 500 spread on the usual AG 49 / AG 49-A backtesting calculation generates north of an 8% illustrated rate, far in excess of the current 5.70% maximum illustrated rate for the product using the current 9.0% cap.

When it comes to these sorts of uncapped S&P 500 accounts, there are always two issues at play – the short-term pricing and the long-term view of the strategy. From the perspective of short-term pricing, a 5% spread is probably about right for today’s volatility environment. It costs around 4% to hedge, which isn’t far off of the 4.25% cost to hedge a 9.5% cap. Symetra understandably seems to have built a bit of a margin for error in the pricing of the spread precisely because spread prices are so incredibly volatile. Witness what happened last year when vol spiked and companies rushed to increase their spreads or, in Pacific Life’s case, close off the uncapped S&P 500 account altogether.

From a short-term view, spreads are opportunistic. When the spread is low, it’s a good allocation option with virtually unlimited upside. When the spread is high, then it’s better to go elsewhere because the hurdle rate is so steep. The AI Strategies play directly into this mentality by automatically allocating the client out of the uncapped S&P 500 strategy when the spread is too high and puts them into the JPM Efficiente 5 which, by virtue of its volatility control mechanism, has inherently stable participation rates. It’s a nice, neat story.

But is it a good story? No, I would argue that it’s not. Moving clients into a volatility controlled index when volatility ticks up is – generally speaking – not a great idea. Volatility control works by allocating the index into cash or cash-like instruments to offset the higher volatility of the equity component. When volatility is at 10, for example, the index might be half in equities and half in cash. When it goes to 20, the index might be a quarter in equities and three quarters in cash. When volatility goes to 50, like it did last year, then the index might a whopping 90% or more in cash and just 10% in equities. We saw this last year when many volatility controlled indices like JPM Efficiente 5 were upwards of 98% in cash or bonds. Forcing a 100% allocation to a volatility controlled index right as volatility spikes is essentially the same as moving the client to cash – there’s very, very limited upside on a product that’s already designed to protect principal with a 0% floor. It’s the worst of both worlds.

That’s why we have to ignore the short-term view of the benefits uncapped S&P 500 accounts and focus more on the long-term view of the benefits. The reality is that spreads are financially the most optimal indexed crediting strategy ­from a pure pricing standpoint regardless of the level of the spread. Spread pricing is what it is. If spreads are high because volatility is high, that’s typically because there’s been a huge drop in the market and the high spread is accounting for the massive upside potential of the strategy. But even more importantly, spread pricing takes advantage of volatility skew. In simple terms, spread pricing is pound-for-pound cheaper than participation rate or capped hedges. It is intrinsically more efficient – even though it is also intrinsically more volatile.

This is a tough concept for a lot of insurance folks to get their head around because they’re so used to judging accounts based on the declared rates, which is why producers have flocked to volatility controlled indices with 100%+ participation rates despite the fact that those volatility controlled indices have heavy cash or bond components. There is only one – yes, only one – way to get a real risk-adjusted edge in indexed insurance products and that is by being on the right side of volatility skew. Spreads are the best way to do that.

From my vantage point, the irony of Symetra’s AI Strategies is that they make a compelling case for the uncapped S&P 500 account with a spread on its own merits. Forget JPM Efficiente 5. But, unfortunately, the uncapped S&P 500 account isn’t available on its own. Why is that? Because my hunch is that AI Strategies was born more out of a need to manage some of the undesirable elements of pure uncapped S&P 500 spread accounts than it was out of any sort of performance edge. The problem with spreads is that the life insurer can’t change rates fast enough to meet the market. Spreads back in March of last year should have been in the 30% range – but a lot of companies inexplicably held at below 10%. That creates arbitrage opportunities, as I discussed at length in a video last year. One easy way to eliminate the problem is simply to push clients out of the spread account at just the moment when the spread would have to spike. And if there’s a client story for why they’d want to make the switch – so be it.

Should Symetra’s AI Strategies be a deciding factor in selling Accumulator IUL 4.0? I don’t think so. The product is solid on its own merits. Despite the increases to the policy expenses, it remains a competitive and sustainably priced accumulation IUL offering. It is one of the few products these days that doesn’t really play an illustration gimmick and that is something to be applauded, especially considering that Symetra has the tools in hand and has chosen not to use them for that purpose. But if you love the AI Strategies, then just sell another product with a pure-bred uncapped S&P 500 strategy and decide whether or not to allocate prior to the policy anniversary on your own. You don’t need Symetra to do it for you.

*I put historical in quotes because, as I’ve written about many, many times, the “historical” numbers shown in the illustration are not historical. They are hypothetical. They make the assumption that today’s caps, participation rates and/or spreads would have been applied in the past and that is a purely hypothetical assumption. Remember the first time you heard that if you multiply any number by zero the product is always zero? This is the same – if you apply a purely hypothetical assumption to any historical data, no matter how much or how good the historical data is, the result is always purely hypothetical.