#416 | The Continuing Evolution of Transamerica
In the life insurance industry, Transamerica is everything and nothing all at once. LIMRA sales statistics place Transamerica as the 3rd largest seller of Indexed UL by premium and the 2nd largest seller by policy count through Q2 of this year. Virtually all of that business comes from one distributor – World Financial Group (WFG), a network/multi-level marketing group owned by Transamerica with 37,000 licensed multi-ticket agents* where Transamerica has a 64% market share, according to Aegon’s 1H24 earnings presentation. In WFG, Transamerica is everything.
Outside of WFG, Transamerica is basically nothing in the life insurance space. The last article in this publication dedicated to Transamerica was #346 | Transamerica is Back (in Brokerage) back in January of 2023. Transamerica had just released Financial Choice IUL (FCIUL), its first new Indexed UL product in ages, and was voicing its intention to take FCIUL back into the independent brokerage market. The only problem with that strategy was that, as the article details, independent brokerages are still fuming over Transamerica’s abandonment of the channel a decade ago and subsequent changes to non-guaranteed elements on certain blocks of business. There was no way they were going to forget all of that history to sell yet another non-guaranteed product from Transamerica. And they didn’t. Transamerica is still wholesaling into brokerages, but it’s a relatively small effort.
Instead, Transamerica has retrenched back into WFG and seems intent on claiming a larger market share. Quick math shows that WFG’s total new Life production will be around $800 million in 2024 by the metrics shown in Aegon’s earnings presentation. To put that into context, industry-wide Indexed UL sales were $3.8 billion in 2023, meaning that WFG accounts for more than 20% of all Indexed UL production. If Transamerica can increase its market share from 64% to 80%, then it would blow past National Life as the leading seller of Indexed UL. Transamerica’s best opportunity is to sell more on the homefront. The goal at Transamerica seems to be everything to WFG, even if that means being nothing anywhere else.
Part of that strategy is a long overdue update to Financial Foundation IUL (FFIUL), its flagship product within WFG. FFIUL has been in the market for as long as I can remember and has remained largely unchanged – and for good reason. WFG is, at its core, a marketing organization that is built on recruiting new agents who can sell policies and recruit more new agents. It’s an extremely efficient machine that runs on the fuel of FFIUL. Putting a different type of fuel into the machine would cause it to knock and sputter, as Pacific Life and Nationwide have found out after years of fighting for share within WFG.
But FFIUL had a few impurities – for lack of a better term – that needed to be cleaned out with the newly released product, Financial Foundation IUL II. The most obvious has to do with the fact that FFIUL has long only been available with indexed crediting strategies that have a 0.75% crediting Floor and a 0.72% asset-based charge, which Transamerica refers to as the Index Account Monthly Charge (IAMC). The net effect of a 0.72% IAMC and a 0.75% Floor is that the worst case for a policyholder is essentially a 0% net indexed credit, which is in-line with most other Indexed UL products. But the best-case scenario also deducts the 0.75% IAMC, which means that FFIUL II’s headline 12.25% S&P 500 Cap actually nets out to 11.5%. The same goes for its maximum illustrated rate of 7.25%, one of the highest in the industry, but it nets to a much more benign 6.53% after the IAMC.
There was a time before AG 49-A when this sort of strategy would produce substantially better illustrated performance, but that time is long gone. AG 49-A clarifies that a Supplemental Hedge Budget funded by an asset-based charge such as the IAMC cannot illustrate with options profits. As a result, there should be essentially no illustrated advantage to offering an account with an IAMC and one without. So why did Transamerica keep the IAMC for FFIUL II? Because that’s what WFG agents were used to selling and, secondarily, because it does generate a higher top-line illustrated rate and cap. It may not improve illustrated returns, but it does improve the optics of the rates. And in WFG, rate optics count for a lot.
FFIUL II hedges the IAMC story by offering a Basic S&P 500 Index Account without an IAMC. The new account still maintains a 0.75% Floor because it’s a key part of the marketing story for FFIUL within WFG. Thanks to AG 49-A, the new Basic account illustrates at 6.5%, just 3bps shy of the net illustrated rate for the strategies in FFIUL that have the IAMC. The choice between the accounts is less about illustrated performance and more about the story that the agent is telling the client. The fact that Pacific Life and Nationwide offer indexed accounts without IAMC-like charges allows FFIUL to compete heads-up with those offerings and, theoretically, allows Transamerica to grab some share that it may feel that it has lost by using the IAMC.
The second impurity is a little bit more subtle. If you look at the top of the ratesheet for FFIUL, you’ll see not the S&P 500 – which is what basically every other company puts at the top – but the Global Index Account. Transamerica has offered this account since at least 2009 in various products and WFG agents love it. The credit for the account is equal to 50% of the return for the better of the S&P 500 and the EURO STOXX 50, 30% of the return for the worse of those two indices and 20% of the Hang Seng Index. Prior to AG 49, this account regularly illustrated returns of nearly 9% thanks to the lookback methodology. But after AG 49, it illustrates the same as the S&P 500 strategies. The appeal is in the story, not the illustrated performance.
The impurity in the Global Index Account was that Transamerica used the Hang Seng as the constituent index meant to provide exposure to Asian economies. The problem with the Hang Seng should have been its absolutely abysmal performance since 2010. The index value in January of that year was around 22,300. Today, the index value is 21,092. The S&P 500, by contrast, has grown from 1,136 to 5,856 over the same period. The reason is not hard to spot. The Hang Seng – as I wrote in 2013 in #44 | Global Hindsight Bias – is heavily exposed to Chinese state-owned enterprises that have performed poorly. Even the ever-bubbly Shanghai Stock Index has a similar track record over the same period. Publicly traded Chinese equities has been a terrible place to be for a very long time, regardless of the growth in the country’s economy at large.
The issue, instead, was the fact that then-President Trump disallowed certain overseas investments in 2021, including the Hang Seng. Pacific Life subsequently dropped their Hang Seng account, as covered in #260 | The Hang Seng & Indexed Account Availabilitypublished in February of that year. So why didn’t Transamerica drop their Hang Seng account? I’m not entirely sure but, whatever the answer is, they weren’t hedging it directly with options on the Hang Seng. A hedge disconnect works for a time and at a certain scale, but it can become a real problem. Transamerica had to swap out the index at some point but, understandably, didn’t want to mess with the most popular account within WFG.
The new FFIUL II keeps the same motif of providing exposure to Asian economies but with the Nikkei 225. The main thing that most Americans know about the Nikkei is that it took a spectacular spill throughout the 1990s. However, since the 2010s, it has performed relatively well – extremely well, even, when compared to the Hang Seng. The Nikkei 225 is bigger and more liquid than the Hang Seng by orders of magnitude. And, of course, it represents the economy of a geopolitical ally that likely won’t run into an asset or trade embargo. The Nikkei 225 is an upgrade to the Hang Seng on every dimension.
FFIUL also had an impurity regarding the way that Transamerica applied tax corridor factors under both GPT and CVAT**. Both tests dictate a relationship between cash value and the death benefit that allows the policy cash value to grow without immediate tax incidence. Both tests also have a certain point at which the corridor factor can drop to zero, allowing the cash value to equal the death benefit. But not at Transamerica. The old FFIUL product maintained a 1% corridor after age 100, the points at which most carriers drop the corridor factor to zero. Maintaining a corridor is certainly more conservative from a tax standpoint, but unnecessarily so. The rules are pretty clear. The new FFIUL II follows the rest of the industry in offering a corridor factor of zero at age 100. The net result is a slight improvement in performance for overfunded scenarios and, therefore, higher illustrated policy distributions.
Finally, FFIUL was one of two Indexed UL products that doesn’t use sweep dates. Allianz doesn’t do it because it famously dynamically hedges its FIA and IUL blocks. Dynamic hedging has lots of purported benefits that range from saving a few basis points to ensuring world peace and prosperity. The actual benefits are debatable, but one is that a company already doing dynamic hedging can theoretically basket all of its trades and therefore allow for scale efficiency when issuing policies daily. That makes sense for Allianz because of the gargantuan size of its indexed insurance blocks. It does not make as much sense for Transamerica.
As a result, FFIUL II sweeps values to indexed accounts on the 15th of the month like the vast majority of the rest of the industry – and, funny enough, that might be the biggest structural change the product. Premium loads remain the same. The Per Unit Charges have been increased by a few percentage points. The COIs have been re-sloped and generally increased, as you can see in the table below showing the ratio of the new rates to the old rates. The dotted line is 100%, meaning that the new COIs are equal to the old COIs. Overall, policy charges have increased slightly but are offset by slightly better offered and illustrated rates, with the maximum illustrated rate going from 7% to 7.25%.
If the goal of releasing an updated version of Financial Foundation IUL was to keep what works and clean up a few loose ends, then FFIUL II succeeds magnificently. But FFIUL II throws one new wrinkle into the mix – the Balanced Uncapped Index Account. It’s only offered with the IAMC with a 0.75% Floor and 113% Participation Rate, the only uncapped option available in FFIUL II. And my hunch is that the uncapped story is going to play very, very well within WFG. I wouldn’t be surprised if the Balanced account even displaces the Global account as the most popular election.
Unlike the Global account, the Balanced account is a fixed 34/33/33% split between three indices – the S&P 500, the Nikkei 225 and Fidelity SMID Multifactor Index. There is, of course, no way that Transamerica could offer uncapped participation in either the S&P 500 or the Nikkei 225. Pure at-the-money option prices are around 8% for both indices, which would imply Participation Rates of something like 70% based on the declared rates in the S&P 500 strategy. So how in the world does Transamerica offer a 113% Participation Rate in the Blended account?
The secret sauce, of course, is the Fidelity SMID Multifactor Index. The structure of the index is as vanilla as it gets. SMID is Excess Return with a 5% volatility target and a 0.5% embedded cost. That sort of structure is incredibly cheap to hedge because it locks volatility at 5% and zeroes out the interest rate component through the Excess Return calculation, which deducts the risk-free rate directly from index returns rather than by pricing it through the option. The result is an index that costs around 2.5% to hedge. So when you blend them all together, the total hedge cost is 6.19%. After applying the 113% Participation Rate, the hedge cost is just a hair under 7%. Rich. Really rich.
How does Transamerica afford it? Well, it doesn’t have to because that’s not how hedging works for this account. These indices are not perfectly correlated. Over the past 10 years, the annual returns for SMID and the S&P 500 are only about 53% correlated – but that’s not actually the issue. Negative returns in one index drag down the cumulative return for all 3 indices that then receives the 113% Participation Rate. That’s what makes the options cheap and the reason why Transamerica can offer such a high Participation Rate. Take a look at the chart below showing annual returns for each trading day over the past 10 years for the S&P 500 (blue) and SMID (yellow) ranked by S&P 500 returns:
It sure looks like there is a lot of directional correlation, doesn’t it? Your eyes aren’t deceiving you. For 83.5% of trading days, the SMID and S&P 500 move in the same direction. In 12.6% of trading days, the S&P 500 is up but SMID is down. Only 3.8% of trading days had positive SMID returns and negative S&P 500 returns. Adding SMID to the mix rarely enhances the return of the Balanced account. SMID outperformed the S&P 500 in only 14.3% of daily annual returns when the sum of both indices was positive, which is what you care about because otherwise it’s a 0% credit regardless. That means the S&P 500 was the better performer in a whopping 85.7% of those scenarios. SMID is a dead weight on the S&P 500 in terms of returns, but the fact that it’s in the Blended account means that the options are cheaper and, therefore, the Participation Rate is higher. That’s enough to make the Blended account appealing in a distribution that has already shown preference for accounts with nice optics.
On the same day that FFIUL II rolled out, Transamerica also released Financial Choice IUL II. In the world of WFG, FCIUL is very much a side show to FFIUL – and that isn’t changing with the new product. But, again, this is about shelf space and FCIUL II is primarily designed to look more like Pacific Life and Nationwide’s products than FFIUL II. It has higher Target premiums and higher initial policy charges that are offset by a non-guaranteed 0.4% persistency credit starting in the 11th year as long as the policy is funded near maximum non-MEC premiums. FCIUL II offers 0.25% Floors and no IAMC on the base strategies, but it also has “Plus” versions of both the S&P 500 and Global Index accounts that have 1% IAMCs. The Balanced account also has a 0.15% IAMC. And unlike FFIUL II, this product also has a pure allocation option to the Fidelity SMID Index with a 225% current Participation Rate.
The different purposes of the two products are clearer than in the past. FFIUL II is clearly meant to be the tried-and-true, bread-and-butter, Target-funded sale for the vast majority of the business going through WFG. FCIUL II, by contrast, is designed to perform and illustrate as well or better in overfunded sales while offering slightly higher Target premiums. FCIUL II is meant to augment the product portfolio and grab some sales that FFIUL is currently losing to Pacific Life and Nationwide without taking share from FFIUL. It’s the specialist product while FFIUL is the generalist.
What both products have in common, however, is a lack of much of the illustration gimmickry that have marked the releases of other recent Indexed UL products, as covered in #411 | New Accumulation IUL Releases. They offer different accounts and strategies with the intent of providing choice, not pushing agents and clients towards one option or the other based on illustrated performance alone. The fact that all of the accounts illustrate the same is a principled choice that Transamerica made regardless of the competitive landscape and it’s a welcome change from the way many other insurers have approached the Indexed UL market.
But more than anything else, the fact that Transamerica is still pushing new product to market is evidence that it is committed to the space. Aegon’s earnings calls are littered with references to the life insurance market in the US – a stark contrast to the earnings calls for other large companies where life insurance is barely mentioned. The difference is just that Transamerica is going after a different part of the market, what the earnings calls refers to as the “middle market.” Bolstering that strategy is the recent release of Transamerica’s new Final Expense Whole Life suite in partnership with Bestow. Transamerica is here to stay, it’s just that “here” means something very different to them than it does to their peers in the independent channel.
*One interesting tidbit in the Aegon earnings presentation is that WFG actually has 79,000 licensed agents, which means that a whopping 42,000 agents have sold just one policy. Dividing the total WFG production by the number of multi-ticket agents yields an average annual production of just under $22,000.
*I know, I know, CVAT isn’t technically a corridor factor but that’s how it usually gets applied.
