#293 | John Hancock & Allianz Ride the Wave

a man surfing on sea waves

If you’d asked any life insurer at the end of 2020 what the big story would be in 2021, they likely would have said the impact of AG 49-A on the Indexed UL market. The new regulation swept away much of what had passed for “innovation” in Indexed UL and opened the door to the next generation of products focused, like their FIA brethren, on proprietary indices. As I’ve written at length, these proprietary indices have some intrinsic pricing and back-tested – but not necessarily realized – performance advantages that are leveraged and magnified within AG 49-A. It’s almost like life insurers wrote AG 49-A* with the premeditated intent of exploiting the loophole for proprietary indices. Almost.

But that wasn’t the only big story of 2021. On New Year’s Day of 2021, the life insurance world seemed to be flipped upside down when the minimum 7702 interest rate dropped from 4% to 2% overnight, the first material change to 7702 since it was created in the mid-1980s. The change to the 7702 rate caught most of the industry, particularly Universal Life writers, off guard. Since then, they’ve been scrambling to adapt their products, processes and illustrations to the new 7702-2% regime in real-time. It’s been a messy and convoluted process.

The dust is finally starting to settle on 2021 and two things are becoming abundantly clear. First, the changes to 7702 are a boon to Whole Life, but have yielded few (if any) benefits for Universal Life. Second, proprietary indices truly are the new feature de jour in Indexed UL. Any serious player needs to incorporate them. There is simply no way that a traditional S&P 500 account can compete on illustrated performance with a proprietary index account that has been optimized for AG 49-A. That’s a fact.

This week, two Indexed UL products hit the market that solidify the stories for both 7702 and AG 49-A. Allianz finally made changes to its only product, Life Pro+ Advantage IUL, to reflect the new 7702-2% rates and John Hancock released a “repriced” version of Accumulation IUL 21 with a Barclays proprietary index strategy with a fixed interest bonus. Both companies had all year to watch the market and see what other companies are doing. Both companies are well-known for having perhaps the best pulse on what their distribution partners want. What these two companies do matters, and rarely do they have the wrong read on the market.

Allianz Life Pro+ Advantage IUL

Allianz is one of the last – if not the last – major life insurer to update its Indexed UL product to reflect the new 2% 7702 rate. Their view appears to be markedly different from some of their peers. Symetra was the first life insurer to update its illustrations to reflect the new 2% rate and a few months later they made a few minor tweaks to the product itself. From the outside, it looked like Symetra was in a rush to be compliant and to demonstrate the benefits of higher premium limits to agents and their clients. Other carriers followed suit, taking it upon themselves to make the change as quickly as possible.

Not Allianz. Instead, Allianz seems to have decided to wait until its next product slot to make the update. You’d think that would crush Allianz’s sales but quite the opposite happened. Instead, Allianz has had a gangbuster year. Why is that? There are a lot of reasons, not the least of which is Allianz’s premium financing intake and its AG 49-A-optimized Classic account options. But one other reason, in my view, is that Allianz’s delay in implementing the new 2% 7702 rate allowed it to maintain old death benefits and therefore old Target premiums per dollar of premium paid. Compensation matters and compensation was preserved at Allianz as they waited to make the switch to the new rates. In a normal environment, higher compensation than competitors would have been a drag on performance, but not in the world of Indexed UL illustrations, where finding a few basis points of illustrated performance is as easy as gaming the current illustration regime.

Most companies making the switch to the new 2% 7702 rate maintained the same ratio of Target premium to Death Benefit as under 7702-4%. If the client had a fixed premium budget to fund an accumulation-oriented product, the new 2% 7702 rate requires a lower death benefit and, therefore, a lower Target premium as a percentage of the premium budget. To mitigate the effect, some companies have been advocating – and for very dubious reasons – that agents pitch GPT Option 1 death benefit illustrations in order to bring compensation back to where it was using Option 2 GPT with the old 4% 7702 rate. Other carriers have introduced illustration solves that essentially use the old rates. And still other agents have employed the “reverse blend” that I wrote about earlier this year, justifying death benefits higher than the minimum amount because, it seems, that clients do care about death benefit after all – but only if agent compensation is on the line.

It seems as though Allianz has been watching all of this and decided to go a different direction. Instead of maintaining the same ratio of Target to Death Benefit like most of its peers did, Allianz appears to have focused on maintaining the same ratio of Target to Guideline Level Premium. For example, under the 7702-4% rate, Life Pro+ Advantage had a $16,358 Target for a $42,539 GLP, a ratio of 38.5% for a 45 year old Preferred male and $1M DB. Under the new 7702-2% rate, the Target is $26,114 and GLP is $68,680, a ratio of 38.0%. In other words, with Allianz, the death benefit has changed, but the total compensation, total policy charges and surrender charges basically haven’t.

And from my view, that’s the right call, especially for Allianz. Most companies have a wide mix of business coming in on their Indexed UL products, but not Allianz. The vast majority of Allianz’s business is maximum funded sales either used in premium financing arrangements or more traditional retirement income positioning. Allianz is a one-trick pony. Allowing Target premiums to drop with the new and lower 7702-2% death benefit doesn’t work for their market, where the vast majority of their sales are built around premium, not death benefit.

This puts Allianz in a league of its own when it comes to compensation. Take a look at 21 IUL products and their Target premiums for a 45 year old Preferred Male for $1M DB:

AllianzLifePro+ Advantage (7702-2%)26,114
North AmericanBuilder Plus 324,350
PrincipalIUL Accumulation II (08/2021)22,290
LincolnWealthAccumulate 2 IUL (2020)-5/10/2120,830
SymetraAccumulator IUL 4.020,453
Pacific LifePacific Horizon IUL19,680
Penn MutualAccumulation Builder Flex IUL18,981
John HancockAccumulation IUL 21 Reprice18,960
AIGMax Accumulator+ II18,510
AccordiaLifetime Builder ELITE 202018,100
NationwideIUL Accumulator II 202017,850
SecurianEclipse Accumulator IUL17,800
F&GPathsetter IUL17,280
American NationalSignature Performance IUL16,990
Mutual of OmahaIncome Advantage IUL16,450
AllianzLifePro+ Advantage (7702-4%)16,358
ZurichWealth Builder IUL16,343
TransamericaFinancial Foundation IUL15,840
PrudentialPruLife Index Advantage UL (2020)15,650
EquitableBrightlife Grow14,810
ProtectiveProtective Indexed Choice UL 7-218,510

The only company even close to Allianz is North American, but the disparity is bigger than it looks. The top payout at North American is in the ballpark of 135%. For Allianz, the top payout is a whopping 155%. All in, that puts Allianz total compensation at nearly 25% higher than North American. The next two companies, Principal and Lincoln, both have top compensation in the 125% range, putting Allianz 45% and 55% higher, respectively. Allianz has always traded on its extremely high payout, but now it can also tout its extremely high Target premiums.

Higher compensation comes at a cost, of course. Life Pro+ Advantage has a 15-year fixed expense charge that is undoubtedly related to compensation. But the product also has inflated early COI charges that are also undoubtedly related, at least in part, to compensation. The combination of the two vaults Allianz into the category of high compensation, high charge products. With the update to 7702-2%, Allianz left the COI rate untouched but, because the death benefit is lower, the COI charge itself is lower – and therefore, so is the COI margin that can be scraped as margin to cover compensation.

To make up for the lost revenue, Allianz has increased the fixed expense charge. In the old product, the total fixed expense charge over 15 years was about 1.8 times Target. In the new product, the ratio is 2.46, but the higher fixed expenses are offset by lower COI charges from the lower initial death benefit. Over 15 years, the total charges in the new product are just a smidge lower than in the old product and, therefore, new product performance is just a smidge higher than the old product. And, of course, Allianz gives you the flexibility to blend the death benefit to reduce Target premiums and to compete on a level playing field with all of the companies that allowed their compensation to drop as a percentage of max funded premium.

In other words, here’s the punchline: Allianz Life Pro+ Advantage hasn’t changed. The only thing that changed is the death benefit. So if you liked the old product’s illustrated performance and compensation, you’ll like this one, too. If you feel like you need to compete with other products with lower compensation, just blend the death benefit. It’s hard to argue with Allianz’s logic on this one – and it’s a little bit mystifying why other carriers didn’t do the same thing. In this case, the old adage proves true: patience is a virtue and my hunch is that Allianz’s patience in making their 7702 update is going to pay off, even if illustrated performance stays roughly static.

John Hancock Accumulation IUL 21 Reprice

By now, you’re familiar with the story – a life insurer adds a proprietary index to their Indexed UL product and tacks on a fixed interest bonus to dramatically improve illustrated performance. At first blush, John Hancock’s alleged reprice to its Accumulation IUL 21 product is no different. The index in question is Barclays Global MA Index and Hancock offers it in both bonused and non-bonused guises. The non-bonused version has a 125% participation rate and the bonused version has a 100% participation rate with a 0.65% fixed interest bonus. Both illustrate at 6.13%, the hypothetical BIA maximum rate for the product, but obviously the bonused account tacks on the 0.65% for a grand total of 6.78%.

The net effect on the product is not trivial. Illustrating the Barclays account with the bonus yields somewhere in the neighborhood of 35% more income than in the Select Capped account, which is the closest thing Accumulation IUL 21 Reprice has to a Benchmark Index Account. The bump from the Barclays bonused to non-bonused is still a whopping 25%. That’s the magic of fixed interest bonuses – the same option budget but 25% more income. Not too shabby for something that costs the carrier nothing. Like I said earlier, what’s a few basis points of expense drag if you have tools like this to juice illustrated performance?

And that’s exactly what’s going on with this “reprice” of Accumulation IUL 21. Take a look at the comparison of the three most recent generations of Accumulation IUL, all funded at the same premium level, death benefit and an Option 2 DB. Charges are cumulative through the specified year.

TargetExpense Charges – Y20COI Charges – Y20COI Charge – Y40
AIUL 1719,07070,01131,610248,156
AIUL 1918,96081,89231,182393,730
AIUL 20/2118,96057,47230,778393,730
AIUL 21 RP18,96072,19631,597407,386

In the long run, fixed expenses aren’t a huge input into policy performance, but they are a significant factor into carrier profitability. The fact that the expense charges vary significantly by product generation even though Target does not indicates that John Hancock is accepting different profitability levels for each product generation. Why would that be? Think about it – AIUL 17 didn’t have any multiplier accounts. There was no place to hide policy charges. But with AIUL 19, which was stuffed to the gills with massive multiplier strategies, policy charges were easy to paper over with illustrated option profits from the multipliers. AG 49-A eliminated the illustrated benefits of multipliers and, with it, the focus returned to policy expenses – hence, AIUL 20 and 21 have lower expense charges than AIUL 19.

AIUL 21 Reprice is a return to form. The addition of the Barclays Global MA index with a fixed interest bonus allows for the illustration to once again paper over the actual expense structure. Apples to apples, AIUL 21 Reprice is less competitive than AIUL 21, at least from the cells that I looked at. But apples to oranges, AIUL 21 Reprice illustrates 30%+ better income than AIUL 21. That’s the magic of incorporating a proprietary index under AG 49-A. And magic, I think, is the operative word. Webster’s defines “magic” as “the art of producing illusions by sleight of hand.” If that’s not an accurate description of an IUL illustration using a proprietary index with a fixed interest bonus, then I don’t know what is.

Virtually all of the other Indexed UL writers who have begun to use proprietary indices with fixed interest bonuses were already writing FIA products with those same proprietary indices. They were sold, as it were, on the benefits (real, perceived or purely optical) of proprietary indices. But not John Hancock. John Hancock doesn’t have an FIA. They are new converts to proprietary indices. Either John Hancock is just now discovering the purported real-world benefits of proprietary indices or they’re just now adding the proprietary index strategies because of AG 49-A. The first would be a ridiculous and laughable admission. Proprietary indices have been around for years and surely, surely, one of the largest writers of life insurance has been well aware of their existence.

But until now, John Hancock had chosen not to use them. Why? Because, perhaps, they didn’t see the real-world benefits of these strategies? Perhaps they thought they were too complex? There had to have been a reason why they didn’t include them in their product. Even PacLife can defend adding a proprietary index to its IUL because it has been using them in its FIA products for years – but not John Hancock. So why now?

The only reasonable explanation is that proprietary indices provide outsized illustrated performance under AG 49-A. Illustrated performance, mind you, that has nothing to do with real-world expected performance and runs afoul of the intent of AG 49-A. The fact that now the big 3 BGA players (Lincoln, PacLife and John Hancock) are now doing it is all the validation we need to see that this is the next wave of Indexed UL. And I have a feeling that John Hancock may be the last company on a surfboard before the inevitable shark of AG 49-B gets everyone out of the water.

One final note. I’ve received numerous questions about how life insurers pass illustration actuary testing with these proprietary index accounts. John Hancock makes the underlying math for this account easy to decipher. The difference in participation rate between the two strategies is 25% (125% vs 100%) and we know that it’s worth 0.65% in a fixed interest bonus. Using that same ratio, the option budget for the non-bonused account is a meager 3.25% (0.65% * 5). Given that the maximum illustrated rate is 6.13%, that option budget produces a whopping 89% implied illustrated option profit, well over the 45% option profit specified in AG 49-A.

How’d that happen? Well, as someone at a life insurer pointed out to me recently, AG 49-A only applies the 45% option profit restriction to the illustrated rate of the BIA, which means other accounts are free to illustrate whatever returns they want relative to the hedge budget. But how does this product pass actuarial testing with an option profit that high? Your guess is as good as mine, but remember that AG 49-A also allows for the aggregation of the accounts for illustration testing. Some of the accounts can pass gloriously and others can fail miserably as long as the aggregate passes. That, or John Hancock’s math isn’t as clear as it looks at first blush.

*If you’re confused about what I mean by life insurers writing a regulation, then go back and review the proceedings of AG 49-A. The Regulators specifically requested that the industry and ACLI coalesce on a recommended guideline, which the Regulators then adopted nearly lock, stock and barrel – with a couple of last-minute concessions and compromises that ultimately paved the way for the prevalence of proprietary indices with fixed interest bonuses.