#345 | 2022 in Review

street corner reflecting in rearview mirror

With 2022 in the rearview mirror, I thought I’d go back through the full list of articles and give a few current comments on the topic covered. Articles are listed chronologically. If a bunch of articles were on the same topic, I grouped them based on the date of the first article.

I have no doubt that there’s going to be plenty to write about in 2023. Thanks for coming on the journey with me by subscribing to The Life Product Review!

1/11 – #300 | Get Ready for AG 49-B
4/14 – #311 | The Shifting Winds of AG 49-A
8/15 – #329 | AG 49-B Takes a Leap Forward
11/30 – #342 | AG 49-B & The Next Phase of IUL
A lot has happened on this front over the past year and I think these articles have captured the story and the implications of the forthcoming regulatory changes for Indexed UL illustrations. However, I’m still trying to put the puzzle pieces together with what happened in late December at the Fall NAIC meeting. I wasn’t there and didn’t dial in. From what I understand, the Securian “quick fix” was adopted by the A Committee but any discussion of further changes to the guideline and broader changes to #582 have been scuttled. That’s a disappointing development and I’m actually a bit surprised that it happened because of how much momentum there was in the IUL Subgroup for real change. That said, the IUL Subgroup is just that – a subgroup. As things go up the chain at the NAIC, the players change and the issues become more politicized. Stay tuned.

1/20 – #301 | The Rise of Defined Outcome Funds
A lot happened on the topic of Defined Outcome Funds (DOFs) in 2022. The article points to the fact that rising interest rates will disproportionally help DOFs because they rely on the risk-free rate as the implied hedge budget and we’ve seen that play out through the year. One year ago, the Cap on CBOE Vest’s flagship 10% Buffer fund (BUIGX) was 14%. Last month, it was 26%. Some of that is related to volatility, certainly, but a whole heck of a lot of it is related to the rise in one year interest rates, which have increased from 0.4% in December of 2021 to nearly 5% in November. Despite the fact that these funds are more attractive than ever, they haven’t appeared to garner the flows that the companies putting them in their products were expecting. Instead, the focus and growth in annuities has been in fixed rate products (MYGAs). However, I still believe in this chassis and I expect more companies to continue to put DOFs into their variable insurance products – and why not? It’s cheaper, simpler and easier than building a RILA or IVUL.

1/26 – #302 | An Imminent Mortality Disaster?
The core premise of this article was that yes, mortality experience did actually appear to deteriorate from 2019 to 2021 but that mortality is only one of many line items in determining overall profitability. Deteriorating mortality is not necessarily a death knell for the life insurance industry. The other key point is that the experience would likely start to revert before it made its way permanently into pricing – and I’m not sure that’s happening. Across the Big 4 Mutuals, which represent the most diversified exposure to mortality in the industry, mortality through Q3 of 2022 is down about 5% from the same period last year. That’s not nearly as much as I’m sure the carriers would have hoped. Mortality appears to still be elevated relative to trends prior to Covid. The longer that lasts, the more likely it is that carriers will need to start pricing it in.

2/07 – #303 | Consolidated Distribution, Proprietary Products
It’s almost funny to read this article in light of the unprecedented distribution consolidation that happened this year, particularly Integrity’s acquisition of Annexus. Proprietary product is clearly a big part of the angle, as evidenced by the fact that several of these aggregating distributors have hired actuaries to head up their product efforts. Integrity is currently searching for a head of product as well. I’m increasingly hearing from life insurers that large aggregators are ramping up their product efforts and although they’re not quite demanding proprietary product in order to maintain relationships, the conversation is starting to steer that way. My sense is that we’re going to see a lot more proprietary product in 2023 and 2024.

2/16 – #304 | The Lincoln Enhanced Allocation Rider
I wrote in this article that I thought other companies may follow suit and that Lincoln might add more crediting options, but neither of those things have happened yet. Change is slow. Lincoln also appears to be running something of a stealth campaign on LEAR. When I speak about it from stage, I inevitably have advisors come up to me with wild eyes asking if they accidentally sold a Lincoln product with LEAR and didn’t realize it. Certainly possible. Maybe even probable. Part of the strategy with LEAR appears to be to underplay it because, if you aren’t aware that it’s on the product, you’ll just think Asset Edge VUL is the most killer VUL product on the market.

2/28 – #305 | The Specter of Rising Interest Rates
7/05 – #322 | Crossover
8/10 – #328 | Rising Rates and Section 7702
9/16 – #333 | Mid-Year Statutory Results Round-up
All of these articles deal, in some way, with the rapidly rising interest rate environment last year. If anything, they understate the impact of rising rates on the industry if for no other reason than that rates are higher now than they were in the middle of last year, although rates are lower than in September and October. The Q4 financials will give us a much better picture of how insurers are faring and I expect that there are going to be some real surprises. One of them will be that certain life insurers are showing a pop in investment yield in fixed income that is higher than you’d expect. For the last few years, life insurers have been increasingly pushing into structured credit as an alternative to traditional fixed income, particularly Collateralized Loan Obligations (CLOs), which are securitized pools of corporate loans. One of the quirks about CLOs relative to traditional corporate bonds is that CLOs are almost always floating rate obligations. As rates increase, so do the coupons. The more that a life insurer has allocated to CLOs, the more quickly their overall portfolio yield will increase even without significant new premium flows or portfolio turnover. This effect, I think, is going to cause a bit of a divergence of paths between companies who have large CLO blocks and those that don’t. But on the flip side, I think it’s also worth pointing out that although many life insurers (and other asset managers) have convinced themselves that CLOs offer higher yields without higher risk because of a so-called “complexity premium,” the asset class hasn’t been really stress tested yet. We’ll need a recession to do that.

3/10 – #306 | The New Indexed UL Narratives – Part 1
3/16 – #307 | The New Indexed UL Narratives – Part 2
The feedback on these articles was intense. They really hit a nerve for a variety of reasons, but it the prevailing sentiment was one of disbelief – are agents really pitching Indexed UL this way? The short answer is yes, but 2022 changed the focus. I still hear a lot about actual historical Indexed UL performance and agents telling clients that they can expect similar future performance despite a decade of nearly uninterrupted, blockbuster equity returns and Caps that have come down quite a bit from previous levels. I still hear about the attractiveness of Allianz’s annual lock feature, but given that their indices have generally been pummeled this year, it’s a bit of a moot point. Guaranteed minimums are still important, but with rates so high, the perceived value has dropped. And, finally, I’ve seen a few third-party modeled illustrations, not as many as I was expecting. Perhaps we’ll have to wait for AG 49-B for more of those. Instead, the narrative around Indexed UL in 2022 is how it might participate in a rising rate environment. Hence, the focus on that in later posts.

3/24 – #308 | The New Ohio National
This article details the Open Block Dividend Formula applied to Ohio National’s open Whole Life block. It’s worth re-reading because we are already living in the first phase of this formula and it’s what is going to govern future dividends for Ohio National policies from here on out.

4/07 – #310 | The Proprietary Index Duration Bomb
This one aged like bourbon in a sweltering Kentucky summer. Indices with long-duration bond exposure have been absolutely decimated this year. But even more than that, as equity volatility cooled off, rate volatility remained so high that the indices have had to hold high cash allocations, which means that the indices haven’t really been able to rebound. Take, for example, Allianz’s Bloomberg US Dynamic Balance II ER index (BUDBI II). Currently, the index is invested 0% in the S&P 500 and 100% in the Agg – but at a 0.5 leverage, meaning basically a 50% in the Agg and 50% in cash. Even with Allianz’s new 200% declared participation rate, the index looks like it’s dead in the water. Situations like this have led index provides to run in a herd towards indices with duration overlays to try to solve this problem. There is now a very clear distinction between old and new in the index world and the line is drawn at duration.

4/27 – #312 | The New Money Tipping Point
The potential for companies to pursue new money strategies became a recurring topic in my articles this year. The pressure is certainly on. However, one thing I should have done earlier define exactly what I mean by new money. new money exists on a spectrum ranging from the simplest approach, which is just creating a new portfolio for a particular product (or series of products), to the most complex approach of having potentially tens or hundreds of portfolios for certain products over certain time periods. The administrative hassles of a complex new money design are prohibitive for most carriers, but the idea of carving off a new portfolio is relatively easy. That’s what I mean when I talk about new money. Forget the administrative complexity – I’m talking about the simplest possible approach that any company can do with a bit of elbow grease. Is the juice still worth the squeeze? I’m not sure. Rates have come down quite a bit from their highest point in mid-October. A blended new money portfolio is probably yielding right around 5%. That’s a pickup from portfolio yields but, to put it into perspective, it’s about 100bps less than just 90 days ago. Things change quickly these days.

5/06 – #314 | Engineered Index 5 Year Performance
Engineered Index performance was absolutely abysmal last year. Of the 33 engineered indices found in Indexed UL products, just one – S&P PRISM – was positive for the year and it squeaked by with a 35bps gain. But even PRISM is an instructive story. In the 13 days between February 23rd and March 8th of last year, the index grew by 5%. For a volatility-controlled index with a 5.5% volatility target, that sort of move is colossal. Why did it happen? Because one of its constituents was S&P GSCI, a commodities index, which grew by an unreal 25% over the same 13 days. Over the rest of the year, both PRISM and GSCI cooled off, with GSCI ending the year with just a 5% gain and PRISM basically even. I don’t think it’s a stretch to say that without that 2 week period, PRISM would have been pummeled just like the rest of the engineered indices. Its success is not an indicator of a superior strategy or proven track record in the same way as the fact that I once won a few hundred bucks killing time at my gate in Las Vegas is of my betting prowess. Instead, what it shows is just how lumpy, unpredictable and complex these indices really are.

5/12 – #315 | The Rising Tide of Accumulation VUL
5/20 – #316 | Follow Up to The Rising Tide of Accumulation VUL
Growth in VUL slowed from last year and sales growth wasn’t as broadly distributed. A few companies had stellar growth but most were flat through Q2. The third quarter was also slow. But considering the turmoil in the equity markets and the attractiveness of fixed rate alternatives, the growth in VUL this year is still commendable and I stand by my general view that VUL is going to be a flagship Universal Life product for the next decade.

5/31 – #317 | Lincoln Drops LifeGuarantee UL
Again, this one aged well. Since it was published, Lincoln posted a $2.6 billion loss primarily related to its Guaranteed UL block, which pushed its RBC below target levels. New CEO Ellen Cooper has been quoted saying that it’s going to take a long time to get the company back to where it wants to be in terms of target capital. The company paused share buybacks and raised capital. Lincoln’s stock is down nearly 50% since then. If you needed any more evidence that these Guaranteed UL blocks are toxic, look no further – and just imagine how bad it would have been if Lincoln had taken the charge prior to 2022 when interest rates are as good as they’ve been in a decade.

7/08 – #323 | The Real New Ohio National
This might have been my most unintentionally shared article. Despite the fact that it was locked, it apparently made its way to everyone at Ohio National to the point where agents – who are not subscribers – trotted it out to company executives. That was never my intention, obviously, but it clearly hit a nerve. Since this article was published, scores of key leaders have left or been let go, CEO Barbara Turner unceremoniously resigned, agents are being told it will take months to process a 1035 exchange and apparently some agents are being terminated for requesting exchanges without writing new business. At the same time, Constellation has ripped $379M in dividends out of the company as of Q3 2022 despite the fact that Ohio National is running at a significant operating loss for the year. The situation, from my perspective, is not encouraging.

8/05 – #327 | The Making of a Juggernaut – Integrity buys Annexus
It felt, at this moment, like Integrity was going to take over the world. Since then, though, the pace has slowed. I watch Integrity’s YouTube channel every week and there have been no significant acquisitions since Annexus. We may well look back at the Integrity/Annexus tie-up as the peak of insurance distribution aggregation. I’m also not entirely sure that Integrity quite got what they thought they were getting with Annexus. I mentioned in this article that Annexus fashions itself as a technical product development company but, in my view, is probably more accurately categorized as a para-distribution company focused on the sales and marketing of products that life insurers put onto the Annexus platform. Given the importance of proprietary product in the strategy for aggregators like Integrity, you’d think that at least part of the strategy for Integrity buying Annexus would be product development chops. However, no actuaries in the Academy directory are listed as working for Annexus. Not long after the Annexus acquisition was finalized, Integrity started putting out feelers in the market for a new position – Chief Actuary & Head of Product Development. I’ve also heard that this role has some level of technical responsibility for Annexus products. Interesting, isn’t it?

8/26 – #330 | IUL Cap Divergence
The main point of this article is that Caps used to be consistent across carriers, but they’re not anymore because of the degree to which some companies subsidize their S&P 500 Cap rate with profits from engineered index allocations. This effect has become even more pronounced. Just a couple of weeks ago, I heard that Allianz is raising its S&P 500 Cap by three “clicks,” which is apparently Allianz-speak for 0.75%. That will put Allianz’s Cap at 11.75%. The current price of an 11.75% Cap is about 5.9%. There is no way that Allianz is earning 5.9% on its portfolio. Period. How are they doing it? Presumably by using profits from other strategies to prop up the rates even though rates on other strategies are also increasing. To put it into context, Allianz’s new 200% participation rate on the BUDBI II ER costs in the neighborhood of 4.2%. As I’ve always contended, engineered indices are a sucker’s bet. The better deal is the S&P 500 Cap. That’s where the value really is – and every client’s allocation to an engineered index subsidizes it.

9/02 – #331 | Cue the Premium Financing Lawsuits
The most important concept in this article that, I think, has kind of entered the lexicon is the idea of “subprime” premium financing with (generally) clients who believe they are getting something for nothing and have limited capacity or willingness to post more collateral in a stress environment. The lawsuits in this article fit that fact pattern to a tee. However, the question everyone has been asking me after this article isn’t about those cases – it’s about Kai-Zen. If you’re not familiar with Kai-Zen, it’s a premium financing program where the client pays 25% of the premium commitment out of pocket (50% for the first 5 years, 0% thereafter) and the remainder is financed. Interest is accrued. The policy sizes are miniscule compared to traditional financing transactions and the clients are usually not high net worth. In general, a Kai-Zen client wouldn’t qualify for traditional premium financing with either the bank or insurer. However, the way Kai-Zen works is that the lending is facilitated by a master trust which governs the trust that owns the policy, thereby allowing the client to access borrowed capital for premiums. But because the client isn’t the lender, the client also can’t post collateral. Instead, the presumption of the plan is that the 25% out-of-pocket amount will cover any required collateral over time. If rates are low and the performance of the IUL policy is good, then the policy starts and stays in the black, eventually repaying the loan and producing an income stream. But if rates pop and IUL performance is bad, then the 25% out-of-pocket collateral buffer could get chewed up. Simple math – on a $100,000 premium, the total loan at a 5.5% rate is $1.15M by the end of the 13th year (when most Kai-Zen illustration show a loan exit) with a paid-in collateral buffer of $250,000. If policy performance (net of charges) is 4% or less, the buffer gets chewed up. In that event, from what I understand, the client would forfeit their stake in the policy. Could that happen? I think it could. It’s certainly possible in today’s rate environment. But is Kai-Zen the same sort of “subprime” financing that I was writing about? No, it isn’t, for the simple reason that it requires a 25% out-of-pocket contribution up front. That sort of out-of-pocket payment doesn’t exist in “subprime” financing. For “subprime,” you need both the limited ability or willingness to post collateral and the idea of getting something for nothing. Kai-Zen only has one of these. While there is quite a bit of risk in Kai-Zen, far more than I think most people promoting the program realize, it is much safer than true “subprime” financing.

11/08 – #340 | The Infinite Banking Concept
This was another article that garnered a lot of attention when it was published – but I had a feeling that would happen. Infinite Banking is a hot topic. What I didn’t expect, though, was for people to send me as many clear examples and anecdotes of how Infinite Banking has shifted towards Indexed UL, particularly on social media platforms (which I don’t use). It seems as though there’s a heavy social media-driven subculture of promoters talking about Infinite Banking and Indexed UL with tens of thousands of followers and hundreds of thousands of views. I have been blown away by the pervasiveness of IBC-type language on social media when it comes to Indexed UL. It’s hard to find “real” IUL content that isn’t oriented around IBC. If you’re a compliance person at a life insurer, prepare yourself. What you’re going to see on TikTok will put your sweat glands into overdrive.

Here are the rest of the articles from last year:

3/31 – #309 | Nationwide Advisory VUL
6/02 – #318 | The Next Wave of Whole Life
6/10 – #319 | Lincoln LifeGoals VUL
6/15 – #320 | Fait Accompli – Prudential and Equitable File Registered Index-Linked ULs
6/24 – #321 | Midland National and the Legacy of Flat COIs
7/15 – #324 | The True Cost of Engineered Indices
7/22 – #325 | Penn Mutual Bucks the Trend
7/28 – #326 | Prestige 10 Pay – The New Ohio National’s New Product
9/08 – #332 | Ohio National Prestige Indexed Whole Life
9/23 – #334 | Whole Life Through the Lens of UL Believer
10/07 – #336 | The Return of Guaranteed UL?
10/14 – #337 | Protection UL and the Allure of Alts
10/21 – #338 | New York Life Wealth Plus
11/01 – #339 | The New Breed of Protection-Oriented IUL
11/18 – #341 | Prudential FlexGuard IVUL
12/12 – #343 | The Original IVUL – Equitable MSO II
12/20 – #344 | Zurich North America Exits Indexed UL