#326 | Prestige 10 Pay – The New Ohio National’s New Product

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Quick Take

Despite recent layoffs in key field-facing positions and the punitive new open block dividend formula, Ohio National leadership is adamant about their desire to grow sales. It seems as though the first piece of the puzzle of how they’re going to pull that off is being put into place – Prestige 10 Pay, an Indexed Current Assumption Whole Life product, a very clever new take on a very old product chassis. The easiest way to think about CAWL is that the guaranteed side of the ledger operates like Whole Life courtesy of fixed premiums and tabular guaranteed values, but the non-guaranteed side of the ledger operates life Universal Life because of non-guaranteed charges and interest. Theoretically, Prestige 10 Pay will appeal to both Whole Life and Indexed UL sellers. Whether it works in reality is going to depend on how Ohio National chooses to set rates – and whether agents will be willing to sell an Ohio National product after the transaction with Constellation.

Full Article

By now, the story in terms of Ohio National’s corporate and financial restructuring is fairly clear, as I’ve written about extensively. But the story for Ohio National’s next move as a new business franchise is decidedly less so. Participating Whole Life is no longer really viable with the open block dividend formula that was approved as a part of the sale to Constellation. Industry news outlets reported numerous layoffs in underwriting, distribution and product leadership that signal an intentional slowdown. From the outside, it looks like Ohio National is about to throw in the towel on new business.

But at the same time, I’ve also heard that Ohio National’s leadership has been adamant about its commitment to writing new business during a recent agent rewards trip in Hawaii. The message was, essentially, that it was time for them to stop defending themselves about the transaction and to start executing on the strategy to grow the company. The question is how they’re planning to do that. The answer, it seems, is a long-rumored new Indexed Whole Life product that was just approved by the Compact last week and set to be released in August – Prestige Indexed 10 Pay.

At first blush, it looks like Ohio National might be following in the footsteps of Guardian and OneAmerica, both of which have indexed crediting options in their participating Whole Life products. The core idea behind Guardian’s Indexed Performance Feature (IPF) is that it allows the client to allocate cash value in Paid Up Additions to an indexed crediting strategy. This allows the policy to maintain its base guarantees while letting the client take a bit more risk and get a bit more upside on the values that have been accrued from previously paid excess premiums or dividends. IPF is very clearly a bolt-on strategy. Take it or leave it. Either way, Guardian is still offering a participating Whole Life policy.

However, that is not what Ohio National is doing. Instead, Prestige Indexed 10 Pay (“Prestige” for the purposes of this article) is a non-participating Current Assumption Whole Life policy. If you’re wondering what in the world that is, you’re not alone. Out of the 1,826 Whole Life filings stored in the Interstate Compact database stretching back to around 2007, only 12 are Current Assumption Whole Life. Of those 12 filings, the majority are from small companies that don’t really operate in our space – Farm Family Life, Unified Life, Federal Life, Catholic Order of the Foresters and Pacific Guardian Life. A few other major companies have very old filings of Current Assumption Whole Life, such as Equitable (2007), Western-Southern (2008) and EquiTrust (2011). The only modern, major company that appears to actively sell Current Assumption Whole Life is Securian.

So what is it? The best way to understand CAWL is to think of it as a hybrid between Whole Life and Universal Life – a Fixed Premium Universal Life, if you will. The fixed premium allows it to offer tabular guaranteed cash values that eventually equal the death benefit. Premiums that aren’t paid out of pocket can be covered by an Automatic Premium Loan feature. The client has the option to convert the policy to Reduced Paid Up Status. In those respects, it looks like a standard Whole Life policy.

However, unlike traditional Whole Life, CAWL has no dividends. Instead, it assesses policy charges based on the currently declared rates, subject to guaranteed maximums. The Cost of Insurance charge is deducted based on Net Amount at Risk and the death benefit follows the CVAT corridor. CAWL also pays currently declared interest, subject to the guaranteed minimum. Instead, Account Value grows based on current policy charges and current interest credits. In these respects, CAWL operates identically to a Universal Life policy.

To put it succinctly – CAWL has the fixed premium and guarantees of Whole Life, but the Account Value mechanics of Universal Life. On the guaranteed side of the ledger, it’s Whole Life. On the current side of ledger, it’s Universal Life. At least, that’s how it looks to me after reading Ohio National’s filing and every other CAWL filing I could find.

Prestige has been filed only as a 10 Pay product and the premium is based on a 2% guaranteed interest rate, which means it should come through as a pure-bred accumulation product in the vein of MassMutual and Guardian’s 10 Pay products. The guarantees won’t be the highlight compared to short pay Whole Life products with higher guaranteed rates – such as New York Life and Security Mutual – but they will likely be substantially better than any retail Indexed UL product on the market.

In terms of upside, it’s hard to tell from the filing how competitive the current rates for both charges and index participation will be in Prestige, but there are a few breadcrumbs. One thing that sticks out right away is a 9% premium load on top of a premium load for “any state and local taxes that we determine to be allocable to this policy in excess of 1.4%.” All in, that means that most policies will be in the 10% total premium load range. There’s also a lifetime Policy Maintenance Charge of $10 per month and a Per Unit Charge. In the sample filing on a 35 year old Standard Male with a $100,000 death benefit, the Per Unit Charge is $69 per month.

Total it up and over 10 years, total charges to paid premium is around 24%. For the sake of comparison, I ran a John Hancock Accumulation IUL 21 Reprice – one of the most expensive Indexed UL on the market in terms of policy charges – with the same $100,000 face and slightly lower maximum non-MEC premium over 10 years of $5,547. Total non-COI policy charges over 10 years tallied up to 22.6% of premium. Some of the rates in the filing are bracketed so they could be lower in the real world, but it looks like Prestige isn’t cheap.

For interest crediting, Prestige sports four indexed account options – S&P 500 with a Cap, S&P 500 with a Participation Rate and no Cap, Russell 2000 with a Cap and DJ Euro Stoxx 50 with a Cap. Pretty standard. All of the accounts earn a currently declared interest bonus of 0.2% starting in year 11. Ohio National’s regular Indexed UL products have always been right down the middle of the fairway in terms of crediting strategies and it appears that Prestige is no different.

To make Prestige more of a natural fit in the Whole Life market, Ohio National filed it with a bevy of riders that are typically used in a variety of sales scenarios for Whole Life – Children’s Term, Guaranteed Purchase Option and Waiver of Premium. To make it a natural fit in the LIRP-oriented Indexed UL market, Prestige also sports true-blue indexed loans, as are found in almost every Indexed UL product, and an Overloan Protection Rider that will allow it to be loaned to 94% of Account Value (or 99% of AV minus the OPR charge). As long as the policy charges don’t drag down too much on the illustrated performance, Prestige will be seen as a highly competitive, innovative and category-busting product. It offers the guarantees of Whole Life with the illustrated performance of Indexed UL, effectively straddling two of the hottest stories in life insurance.

The problem, of course, is that it’s on Ohio National paper. As a 2% product, the baseline guarantees in Prestige are relatively weak. The filing shows a stream of guaranteed values that are, I think, at least somewhat of an indication. The policy doesn’t break even until year 21. The long-term IRR doesn’t break 1%. Yes, Prestige has guarantees. But they’re not reason enough to buy this policy when there are participating Whole Life policies with much richer guarantees on the market.

They’re also likely not rich enough to assuage concerns about what Ohio National might do to the non-guaranteed elements that drive the Account Value performance of the policy. The reality – regardless of whether it’s justified or not – is that trust in Ohio National is very low, to put it diplomatically. My understanding of the agent reception in Hawaii of this product was ice cold. That’s more a reflection, in my view, of what agents think about Ohio National, not the product. The only thing that could bridge the trust gap is strong guarantees and this product doesn’t have them. For that reason, my sense is that Prestige isn’t going to be the smash success that I’m sure Ohio National hopes it will be. There’s still just too much at risk. Too many non-guaranteed elements.

However, Prestige is very clever. A lot of companies have been pondering how to tap into the activity in the Whole Life space without actually offering a participating Whole Life product. Prestige and the Current Assumption Whole Life chassis is a very, very interesting way to do it. I’d heard of CAWL but didn’t really understand it before I dug through this filing. I’m guessing that I’m not the only one. Even if Prestige doesn’t stem the tide at Ohio National, it may serve as a product template for other non-mutual companies to ty to take a bite out of massive participating Whole Life market that is almost entirely dominated by the Big 4. I’d be surprised if there weren’t more than a couple of these CAWL products in market in a couple of years.

For the final verdict, we’ll have to wait and see how Prestige looks in the real world. It’s possible that Ohio National hooks this thing up to a new-money, Constellation-managed portfolio that allows it to come out with blistering rates – something like a 14% Cap and 7.5%+ illustrated rates. That would cause quite a splash. It’s also possible that the charges and premiums in the statutory filing are sandbagging the actual rates and that the policy charges are cheaper and the guarantees are richer than they appear. Prestige will need something to overcome the noise surrounding Ohio National right now. And I have a hunch that it will. The stakes are too high for Ohio National to not do everything it can to ensure Prestige is a hit.