#362 | Accordia and the End of an Era

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Yesterday, Global Atlantic announced that “after carefully evaluating our greatest opportunities to provide the most compelling products and value…we have made the strategic decision to sharpen our focus…as a result, effective July 1, 2023, Global Atlantic will be suspending sales of the index universal life (IUL) products that are issued by Accordia Life Insurance Company. This includes Lifetime Builder ELITE IUL, Global Accumulator IUL [and] Lifetime Foundation ELITE IUL.” With that, Global Atlantic closes the book on one of the longest-running and most successful Indexed UL franchises in the industry.

There’s some debate about which company had the first Indexed UL product, but there is no doubt that Indianapolis Life was there at the very beginning in the mid-1990s. Occasionally I’ll still run into brokerages and agents who were part of the original Indy Life groundswell of Indexed UL. Back then, the story was pure – downside protection with upside potential. Indy Life, in my view, was the first company to realize the powerful intuitive appeal of the product and to capitalize on it even as Variable UL was in vogue.

In January of 2000, Indy Life merged with American Mutual Holding Company to form AmerUS. From there, the company became a powerhouse and perennial top seller in both the IUL and FIA markets. In 2006, Aviva PLC purchased AmerUS and continued to grow the annuity franchise, regularly vying with Allianz for the top spot in FIAs. On the Life side, competition in Indexed UL was heating up and Aviva decided to diversify the portfolio by expanding into Guaranteed UL. Their product was cheap – dirt cheap – and, from the many cases I saw, underwritten with a rubber stamp.

At the tail end of 2012, after the company had abruptly exited the Guaranteed UL product line, Aviva announced that it would be selling its US operations, the former AmerUS, to Athene. Athene had no interest in the Life block and immediately sold it – arguably gave it­ ­–  to Global Atlantic, who rebranded it as Accordia. The new owners made every effort to shore up the operation, retaining key employees and hiring some of the best and brightest sales folks in order to rebuild the franchise around Indexed UL.

However, the Indexed UL market had changed and Accordia had not changed with it. Increasingly, the industry had shifted its focus away from downside protection with upside potential and towards illustrated performance and premium financing. Accordia’s products, by contrast, weren’t particularly aggressively illustrated and the company generally wasn’t courting premium financing sales. As a result, the revitalization effort seemed to fall flat almost out of the gate.

Accordia fought back in 2017 on two fronts. First, it updated the long-standing Lifetime Builder product to an “Elite” version that, as I wrote at the time, incorporated a classic actuarial sleight of hand – higher early charges in exchange for better long-term illustrated performance. The product went from being middle of the pack to the one of the best illustrating non-multiplier products in the industry. Second, Accordia branched into the red-hot markets of foreign nationals and premium financing. It worked. Accordia’s sales grew. By 2019, the company had vaulted back into the top rankings of top Indexed UL sellers. From the outside, it looked like Global Atlantic was dead serious about growing the Accordia Life business.

Around that same time, I was on a flight from Orange County to Phoenix and struck up a conversation with the guy sitting next to me. He was a partner in a private equity firm and I thought it would be a short conversation until he told me that he was actually on the board of Global Atlantic. That piqued my interest. We chatted a bit about the company and I asked him what he thought about the Accordia Life business and all of the investment that Global Atlantic was putting into it. He chuckled and said “Look, it’s an experiment. If it works, we’ll keep it going. If it doesn’t, we’ll just shut it down.” The disconnect between what Accordia was saying publicly and what this guy had just told me privately struck me like brick in the face. I knew, even in that moment, that the clock was ticking.

2019 proved to be the high water mark for Accordia. I would argue that Accordia’s last real sign of life was Global Accumulator IUL, which was a creative spin on charge-funded multipliers intended to compete with the likes of PacLife PDX, and released at exactly the wrong moment – April of 2020, when the discussion around AG 49-A was running red hot. As a result, the product was dead on arrival. Not long afterwards, the company did a reorg and Life was combined with Annuities. Key folks started to leave the firm. Product development stopped. The spigot on some of their premium financing and foreign national deals was closed.

What Global Atlantic probably figured out is that although Indexed UL is a huge market, there is not actually a lot of production up for grabs. Each company has its own little niche. Some companies, like Transamerica, National Life and F&G, focus on huge multi-level marketing firms. Other companies, like Penn Mutual and Pacific Life, focus on high-end producer groups. Still other companies, like Allianz, focus on cross-selling with firms that also do annuity production. Other firms have certain loyal distributors. Others play to the infinite banking crowd. Every company has its turf. For a prime example, look no further than PacLife, which hasn’t field a product that wins the illustration war in years – and yet they remain the largest seller of Indexed UL. Why? Turf.

Accordia, in my view, did its best to stake out turf in 2018 and 2019. What turf was that? Taking business that other companies wouldn’t take. The problem with that strategy, of course, is that there are reasons why other companies don’t take the business. From what I understand in talking to folks who were at Accordia around that same time, eventually problems started to surface that caused Accordia to backtrack on some of its more generous programs and accommodations, which immediately led to sales reductions.

Without the ability to take that business, they were left scrapping for what’s left over in the independent channel against companies with more modern products, better ratings and (over time) more field support. The legacy of Indy Life and AmerUS doesn’t count for anything in the modern Indexed UL market that has been dominated by PacLife since 2009. Global Atlantic gave it a shot, but now the experiment is over.

I can’t say I blame them for pulling the plug on Accordia. Most of Global Atlantic’s annuity business is in the institutional channel and its preneed business is done through Senior shops, so the high-end brokerage-oriented Indexed UL business didn’t really fit into the broader strategy. Global Atlantic has also had some well-documented struggles with technology and administration for Life policies and seemed to really struggle to release new product updates. On top of that, like most PE-backed firms, Global Atlantic wants more assets to manage – and Indexed UL brings assets in very, very slowly relative to annuities with relatively high capital strain. It just didn’t make sense for Global Atlantic to keep the lights on. So ends the storied 25-year saga of the Indy Life Indexed UL franchise, the one that started it all.

What happens now? The future performance of their policies is now entirely in the hands of a company that no longer sells the product that they bought. It’s an orphan block. The conventional wisdom in the insurance business is that orphaned blocks eventually suffer because there is no incentive for the issuing company to keep agents happy by maintaining competitive renewal rates. That may be a helpful general rule, but there are always exceptions. Resolution Life maintained solid non-guaranteed elements when it owned LBL and has maintained decent rates with its acquired Voya Life businesses as well, but they have no new business franchise. On the flip side, Lincoln has one of the strongest new business franchises in the industry and yet it dropped all in-force crediting rates to guaranteed minimums in 2011 and has yet to raise them back up. Distribution didn’t say anything about it. The treatment of non-guaranteed elements in orphan blocks has more to do with corporate culture and strategy than it has to do with the existence of a new business franchise.

Unfortunately for Accordia policyholders, Global Atlantic has zero qualms with setting different Caps for in-force than new business, a practice commonly referred to as “decoupling” that is verboten at some insurers like Securian and Pacific Life. Looking at Accordia’s Schedule DB, you can pretty easily see exactly what kind of Caps they’re offering for in-force policyholders and how much notional value – which is equal to allocated Account Value* –  is getting each Cap. Take a look at the Q1 2023 filing results for a single trade date of 3/24/2023. Accordia hedges twice a month, so this represents two weeks’ worth of allocated account value.

The weighted average Cap by hedged notional is just 7.35%. By any measure, that is not attractive, especially when you look at the fact that the largest single cohort of $50 million in hedged notional is getting a 6.5% Cap and the second largest is at just 5.7%. Global Atlantic’s historical explanation for the discrepancy between Caps offered on new business and in-force is that the old products were priced with a larger spread than the new products. That’s a fair but incomplete point. I’ve been observing Accordia’s products for a long time and, from my vantage point, they have always been priced with subsidization from high early policy charges, especially the most recent vintage. I would argue that what we’re seeing is actually time-dependent – as the high early charges burn off, the Caps come down. That does not bode well for any in-force policyholder at Accordia. Heads the insurer wins, tails the policyholder loses.

And Accordia is probably going to need it. Accordia’s $4.5 billion in Indexed UL reserves are dwarfed by its nearly $6.6 billion in Guaranteed UL reserves that are squirreled away in 3 captive insurers, a transaction with enough complexity and financial engineering to get mainstream press back when Ben Lawsky in New York was going after what he (correctly) called “shadow insurance” arrangements. If Lincoln’s massive $2.2 billion reserve increase and write down in Q3 of 2022 is any indication of underlying Guaranteed UL economics for the indutry, then it’s not a leap to assume that the same sort of thing is laying around latent in Accordia’s block as well.

There are lessons to be learned in the saga of Indy Life to AmerUs to Aviva to Athene to Accordia and the demise of the new business Life operations at Global Atlantic. I’m not sure that Aviva would have sold the US operations had they not loaded themselves to the gills with ultra-cheap and gratuitously underwritten Guaranteed UL. As with Ohio National, one rotten egg spoiled the whole bunch. After the sale, it was extremely hard for Accordia to rebuild its market presence even after hiring top-tier talent and investing in new products, so they apparently resorted to accommodations that grew sales but weren’t sustainable. If nothing else, the story of Accordia shows just how incredibly challenging the life insurance business is and why we don’t often see new entrants into the space. If Accordia can’t make it work, with its legacy as a top-selling Indexed UL player, then who can?

But the main lesson to be learned is the one that is the most challenging and uncomfortable – this can happen to any company. Accordia is not the only company with a heaping pile of toxic Guaranteed UL on the books. It is not the only company struggling for market share in an ultracompetitive market. It is not the only company fighting for capital at a larger enterprise with pressure to deliver double-digit returns. Accordia will not be the last company to exit the retail independent life insurance business. Choose your carriers wisely.

The reality is that the 25 years of Accordia’s history in the Indexed UL space is a short span of time in the context of a life insurance illustration. The fact that Accordia has only $283 million (YE22) of policy loans on the books tells you that in the grand scheme of things, these Indexed UL policies are still very much in their adolescence. They’re not even being used yet for their intended purpose as an alternative asset class for tax-free income through policy loans. The long-term performance of these policies is very much still yet to be determined. The new business franchise may be ending, but for the 130,626 remaining Indexed UL policyholders at Accordia (as of YE 2022), their journey is still just beginning. And from the looks of things, it could be a rough ride.

*It’s not exactly equal. Accordia offered par rates greater than 100% on some S&P 500 accounts with lower Caps, so the notional is overestimated in that case. For example, hedging a 150% par rate requires buying $150,000 of hedged notional for every $100,000 in allocated Account Value.