#388 | 2023 in Review

person holding white and brown newspaper

Looking back over a year’s worth of articles is always fun and gratifying. There were 44 articles published on The Life Product Review last year, pretty close to the one-per-week standard that I try to maintain, and all of them were fun to write and taught me a lot in the process. Below are links for each article and commentary on the content and what’s changed (or not) since publication.

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#346 | Transamerica is Back (in Brokerage)
One of the key points of this article was that Transamerica is intent on getting back into the brokerage space and the product being reviewed in the article, Freedom Choice IUL, was the tip of the spear. Over the past 12 months, however, it seems as though Transamerica has shifted tack. They’re still poking around the BGA space but their focus seems to have returned almost entirely to regaining market share in World Financial Group (WFG), their wholly owned multi-level marketing distributor that produces hundreds of millions of dollars in new annual premium. I can’t say I blame them. As the article points out, pushing Freedom Choice IUL with BGAs was going to be a real challenge. My expectation is that FCIUL will likely be recalibrated to compliment the flagship offering, Financial Foundation IUL, so that Transamerica can compete more directly with Nationwide and Pacific Life within WFG. And if a few BGAs happen to sell FCIUL, then that’s the cherry on top.

#347 | The Other Kind of COI Lawsuit
Kansas City Life remains embattled by COI lawsuits and lost at least one other lawsuit after the one referenced in this article. Additionally, there were other, similarly framed COI lawsuits made against other insurers in 2023. I stand by the central point of the article which is that these COI lawsuits misinterpret the contractual language and purport that these non-participating Universal Life policies should have essentially functioned as participating contracts. However, the distinction seems to be lost on juries – and ignored by the law firms that stand to make millions from the judgements.

#348 | The Next Front in the IUL Illustration War?
The primary point of this article was to point out that a loan-specific fixed interest bonus is one of the last remaining ways for life insurers to augment illustrated performance in Indexed UL beyond what was intended by regulators under AG 49. North American’s Builder Plus 3 was the case in point. Since then, other companies have filed variants of indexed loan accounts with bonuses. Some, such as Lincoln’s, are simply a means to offer different caps (or participation rates) that reflect the variable loan interest rate. That makes sense. Others, such as National Life’s, look more akin to what North American is doing by using bonuses to augment illustrated performance. Thankfully, though, the strategy hasn’t become widespread – at least not yet.

#349 | A Reckoning in Term
This article was almost hilariously, but entirely accidentally, well-timed. It was released on February 6th and Lincoln announced on February 9th that it was essentially backing out of the Term market. Since then, Lincoln has dramatically increased its Term pricing. At the same time, however, a small handful of other companies have continued to go tit-for-tat on Term prices throughout the year. The space at the top of the market is very, very tight. For a 10 Year Term on a 45 year old for $1M of death benefit, there are 7 companies within $1 of each other on an annual premium basis. After that, the prices start to jump up quite a bit. The point of the article that some companies are choosing to scrap for Term business on an arguably uneconomical basis remains.

#350 | Unstoppable: 10 Price Improvements and a Funeral in Hybrid Life/LTC (Living Benefit Review)

#351 | Rising Rates & Policy Loans
As noted above, more companies have released and/or have filed for loan-specific accounts in Indexed UL in order to pair the caps and participation rates to the variable loan account.

#352 | The Walls are Closing In on Term Conversions (Steve Cox)
AG 49-B Article – Aspire Magazine

#353 | Premium Financing & Rising Rates
The phenomenon highlighted in this article was premium financing vendors showing dramatic reductions in future interest rates in order to retain the mirage of illustrated arbitrage even with current loan rates north of 7%. I published the article in March and saw, throughout the year, a few dozen proposals from various premium financing vendors that used the same projection of declining rates and perpetual arbitrage. One even had a signature page at the front of the proposal stating that the consumer “asked” to be shown a 2% constant arbitrage. Right. The practice is still prevalent despite its obvious dangers. The article also talks about elevated stress on premium financing transactions as a follow up to 2022’s #331 | Cue the Premium Financing Lawsuits and increasing litigation activity. From what I’ve seen, there seems to be a veritable avalanche of litigation coming in premium financing. One expert witness I know has something like 50 cases in-house and isn’t taking any more. I got a call from an agent, lawyer or potential plaintiff about once every 10 days last year regarding failed premium financing transactions. 2024 may be the year when some very messy, very nasty stuff comes to light.

#354 | SVB, Liquidity and Life Insurance
Of all of the posts I wrote in 2023, I might be most proud of this one. Everything was being questioned in the immediate aftermath of SVB, including life insurers. And for good reason. Life insurers own long bonds and had unrealized losses on their balance sheets just like banks. The article showed exactly how much damage could be inflicted on life insurers in the event of a run – and it wasn’t pretty. More than half of life insurers looked more or less like SVB. But what separates a life insurer from a bank, as the article points out, is the liquidity of the liabilities. That’s why there was not a situation like SVB for life insurers. Instead, life insurers arguably had a banner year as they benefited from increased flows and margin thanks to higher interest rates. Life insurers didn’t dodge a bullet. They’re made out of Kevlar, at least when it comes to liquidity crises.

#355 | A Financial Strength Gut Check
I got a surprising amount of feedback on this article because of its common-sense conclusion – the best people to understand the true financial strength of life insurers are agents and brokers. They’re the ones who know what life insurers are giving away pricing and underwriting. Eventually, that sort of behavior always comes back to haunt life insurers. If you want to know what the future holds for a life insurer, ask an agent.

#356 | Northwestern Mutual Enters the 10 Pay Fray
#357 | The Multi-Verse of 7702 Rates (Steve Cox)

#358 | The Asset Side
This article took an enormous amount of research, maybe the most of any article for the whole year. It shows a breakdown of investments and duration for 25 insurers by category and draws the conclusion that, essentially, there is no common playbook for life insurers when it comes to investments. In a scenario where credit comes under pressure, as was expected by many people in 2023, then some companies will get hurt worse than others. Fortunately, credit didn’t crack in 2023. Defaults remained muted and no life insurer, to my knowledge, took significant impairments on fixed income. The pundits are saying that 2024 could be the year of reckoning – we shall see.

#359 | The New Weapons of AG 49-B
This article outlines the precise sequence of steps that life insurers were using in the wake of AG 49-B to continue to generate high illustrated performance. It remains true and virtually every competitive Indexed UL product uses these mechanisms to varying degrees. The response from regulators? Nada. And in truth, the effect of pure gamesmanship in Indexed UL illustrations has been relatively small compared to the effect of using new portfolios with higher investment rates and the bloodbath in sales at life insurers focused on premium financing. There was a lot of other noise in 2023. As things potentially normalize a bit in 2024, the focus may come back to illustration gamesmanship and, if it does, then the likelihood of a regulatory inquiry goes up.

#360 | Quantifying Sequence of Return Risk with LISA
If you missed this one, I highly recommend giving it a read. Several brokerages and agencies reached out to LISA after this article and have begun to incorporate the results into their product and case evaluation process. It is fantastic software that has only gotten better since this article came out.

#361 | Cap Price Pressure
The key observation of this article is probably best summarized by this snippet: “Short of a dramatic drop in interest rates and volatility skew, neither of which seem likely to happen, the default assumption should be that Cap prices will remain elevated for some time.” At the time, the price for a 10% S&P 500 point-to-point Cap was hovering at around 5.4%. Over the summer, the cost rose up to 5.6% but it’s since come back down to 5.4%, with a recent dip to 5.3%. To put that into perspective, the IUL Benchmark Index tracks the cost of a 10% Cap all the way back to 2007 and it never exceeded 5.1% until the very end of 2022. Cap prices are still at all-time highs and, as a result, the main point of the article still stands – don’t expect to see meaningful cap price increases except where life insurers are using new money portfolios.

#362 | Accordia and the End of an Era

#384 | Global Atlantic Axes In-Force Rates
These two articles run together. The last two sentences of #362 read “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 just beginning. And from the looks of things, it could be a rough ride.” Then #384 details how Global Atlantic squashed rates on in-force Accordia contracts despite the fact that option prices hadn’t really changed and net investment yield should have gradually ticked up. It’ll be interesting to see how many of those 130,626 policyholders are still on the books at the end of 2023.

#363 | The Long Reach of Guaranteed UL

#364 | Reinsurance and the Remaking of Life Insurance
The primary point of these articles is the fact that direct life and annuity insurers are increasingly reliant on reinsurance as a means to de-risk their own book while simultaneously concentrating a huge amount of financial risk into the hands of a few relatively new reinsurance firms. That trend continued unabated through the rest of 2023 after #364 was published in mid-June. Another $35B in risk was reinsured and PE-backed firms snagged $85B in assets through acquisitions in the second half of the year. Among those transactions was a landmark deal between Manulife and Global Atlantic that included life, annuity and LTC risk. The LTC piece was particularly interesting because the Manulife press release said that the LTC block was going to Global Atlantic but the Global Atlantic press release mentioned that the actual LTC risk was being retroceded to another reinsurer and Global Atlantic was simply managing the assets and interest rate risk. So who actually holds the bag on the LTC risk? Your guess is as good as mine.

#365 | The Other Whole Life Market
I was pulled aside at a conference recently by a long-time subscriber and he (very nicely) told me that I gave Final Expense less credit than it deserves with this article – and I think that’s a fair point. The fact that Final Expense mortality is so high is evidence that policyholders can receive real benefits from these contracts. The claims do get paid. But at what price? That’s the balancing act in Final Expense and I stand by my observation in the article that the primary beneficiary of Final Expense isn’t the consumer or even the insurer, it’s distribution.

#366 | Survivorship Bias
#367 | Survivorship for Accumulation
#368 | Nationwide Flexes Its Muscles in the Hybrid Life/LTC Market. Again. (Steve Cox)
#369 | Brighthouse SmartGuard Plus

#370 | Securian’s Great Delinking
This article got a lot of attention, including from some other industry press outlets, which was somewhat surprising to me. Securian was an outlier in the fact that it was still trying to maintain consistent rates for both in-force and new business policyholders. Most of its competitors gave up on that idea a long time ago and were rewarded as interest rates went up and they could create new portfolios (as covered in other articles). Since this article came out and Securian faced backlash on its rate reduction for older in-force contracts, the company made a nominal 0.25% increase to the in-force caps. That’s a nice olive branch, but I think it probably just accelerated what Securian would have done later last year (or early this year) anyway. As portfolio yields gradually increase, so will the Cap, assuming that option prices don’t increase in price as well. That’s how things are supposed to work. And I think that’s really the point of the article – Securian did what it was supposed to do with these Cap reductions, as painful as they were.

#371 | Hybrid Life/LTC – The Sand Wedge of Insurance Products (with Steve Cox)
#372 | Hybrid Product Design Elements (with Steve Cox)

#373 | 2023 Mid-Year Engineered Index Observations – Part 1
#376 | Mid-Year Engineered Index Observations – Part 2
#377 | Mid-Year Engineered Index Observations – Part 3
There was plenty of fodder for this series of articles. Engineered indices took a drubbing through October of last year. If you want to boil down the point of all three of these articles, it might go something like this – the vast majority of engineered indices were optimized for a falling rate environment and came completely undone as interest rates rose because of losses in their long-duration fixed income allocations and the Excess Return deduction. The only way out for those indices was for rates to drop, which is exactly what happened after October. For the year, the average standard engineered index (4.2-6% volatility target with Excess Return) was up 1.53% against double digit returns in the S&P 500 and, believe it or not, solid returns in the Agg as well. Clients could have done better in 2023 in almost anything but a low volatility Excess Return engineered index.

#374 | The Missed UL Opportunity

#375 | Engineered Indices & FIA
This article also caught a lot of attention for its observation that illustrated returns in Fixed Indexed Annuities are, in some cases, triple what is found in Indexed UL. It’s well worth a read if you’re not familiar with the FIA market.

#378 | Whole Life as a Fixed Income Alternative – Part 1
#379 | Whole Life as a Fixed Income Alternative – Part 2
#380 | Whole Life as a Fixed Income Alternative – Part 3
This series was a lot of fun to write. I’d used similar content for presentations throughout the year and it finally occurred to me that I should probably write it all down for TLPR and, in the process, certain sections sort of took a life of their own. The observations in the series are further supported by the fact that all of the Big 4 mutuals increased their DIR this year, which will be a topic of an upcoming TLPR article once year-end statutory filings have been made public.

#381 | End Game: Brookfield and American National
Since this article was published, American National filed their Q3 statutory statement. Two things are worth noting. First, American National has been moving assets out of Schedule D (fixed income) and into Schedule BA, which is equity-like assets that have generally higher capital charges. That’s a good thing and a recognition of the fact that some of the stuff American National was holding in Schedule D as referenced in the article probably shouldn’t have been there in the first place. Second, American National has been loading up on more Brookfield-affiliated investments throughout the year, adding around $300M in Q3 alone of reported affiliated investments.

#382 | Protective Gets the Golden PLR
#383 | Mid-Year Insurer Financials Observations

#385 | Proof, Pudding
No article was more fun to write this year or got more attention than this one!

#386 | A Shift in Guaranteed VUL
#387 | Threading the Needle on 7702 (with Steve Cox)