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Inhale deeply….hold it….hold it….ahhhhh, yes…..the smell of March Madness is in the air. Squeaking rubber soles against the mirrored glossy hardwood, arena buzzers ringing loudly, and frenzied collegiate bands ordained in bright-colored rugby shirts….the NCAA national collegiate basketball tournament is front and center and consuming the attention of americans everywhere. Trying to effectively blog against this tidal wave of sports fanaticism seems a daunting task. So I figured, if you can’t beat em’…join em’. Below we’ll cheekily consider the financial strength of several life insurers and see which one advances to be crowned the DOL 95-1 champion.

Before we unveil the bracket, some quick background regarding the US Department of Labor’s Interpretive Bulletin 95-1  aka the “Safest Available Annuity Provider Standard”. This piece of regulatory fiduciary guidance, which was issued following the collapse of some well-known life insurers (i.e. Executive Life, Mutual Benefit, etc.) offers a solid framework for evaluating and selecting an insurer. While DOL 95-1 is largely focused on ERISA fiduciaries sponsoring defined benefit pension plans (who are interested in procuring annuity settlement contracts), the framework remains useful for evaluating guarantors more broadly including in the context of a defined contribution plan investments, and/or a retail insurance company product. For those interested in a more technical dissertation I’d refer you to an article I penned for iiJournal’s Guide to Longevity Risk Management. In short, DOL 95-1 outlines six core criteria items which fiduciaries should be considerate of when evaluating insurers:

  1. Quality & diversification of annuity provider’s investment portfolio
  2. Size of insurer relative to size of proposed contract
  3. Level of insurer’s capital & surplus
  4. Lines if business of the annuity provider and other indications of an insurer’s exposure to liability
  5. Structure of the annuity contract and guarantees supporting the annuities, including use of separate accounts
  6. Availability of additional protection through state guaranty associations and the extent of their guarantees

A quick note of disclosure (close your eyes and imagine Jim Nantz’s melodic voice). All of the insurers discussed below are high-quality, financially strong institutions, any of which might be deemed to meet the guidelines codified under DOL 95-1. This exercise is intended to provide a general and fun introduction to the topic of analyzing a life insurer’s financial strength. It is not intended to imply one company is better or worse than another, nor is it intended to replace a more rigorous analysis and/or the engagement of an independent expert to assist with insurer/product evaluations. I’ve included links below to each insurers website so that readers can conduct their own due diligence and draw their own conclusions regarding each organization’s financial strength. Let’s go ahead and take a look at the tournament matchups.

Mutual Insurer Bracket

The mutual insurer bracket consists of four leading mutual life companies. The hallmark of a mutual insurer is that it is owned and operated for the benefit of policyholders as opposed to a stock company which is owned by shareholders. This distinction creates a wide disparity in terms of how mutual companies view risk, capital, and profit decisions compared to their stock company brethren. The tendency to hold more capital and flexibility to accept lower profits creates a natural alignment of the interests of mutual insurers with the policyholders who purchase their guarantees.

Quarterfinal Round

New York Life is the top dog in this half of the tourney bracket, facing off against the smaller firm from the west coast Pacific Life. New York Life easily defeats Pacific on the quality of their overall ratings, size, and consistent general account and risk based capital growth. In the matchup of  #2 Mass Mutual vs. #3 Mutual of Omaha, Mass Mutual gets the victory in a closer than expected match, using their larger size and capital position to earn the win over the smaller midwest firm. Hats off to Pacific Life & Mutual of Omaha who left it all out on the floor. Pacific Life’s robust Risk Based Capital level did not go unnoticed, and Mutual of Omaha’s stellar bond quality were clearly key factors in their gaining an invitation to this “best of the best” event.

Semifinal Round

#1 NY Life squares off against  #2 Mass Mutual in a battle of balance sheets. NY Life wins a squeaker in overtime based upon having marginally more size and higher portfolio bond quality.NY Life earns a trip to the finals and will square off against the winner from the stock insurer half of the bracket. Despite failing to advance, Mass Mutual is a perennial powerhouse in this tournament and we look forward to seeing them in action for many years to come.

Stock Insurer Bracket

Over in the other half of the draw, the stock insurer bracket contains four leading, brand name stock life insurers, two of which are true heavyweights in terms of their size and global reach. These publicly traded stock firms tend to have a shorter term focus on meeting earnings expectations and deploying capital in ways that foster share price growth.

Quarterfinal Round

Met Life is the top seed facing off against #4 American General (important to note that the regulated life insurance liabilities were not where AIG’s past problems stemmed from). Met Life chalks up the victory despite a second half comeback by the recently recapitalized American General. In the end, Am Gen just could not overcome their significantly lower ratings and dramatically smaller size. The #2 seed Principal vs. number #3 Prudential matchup witnessed an intense, see-saw match. Principal jumped out to an early lead based upon its business line diversity and lower exposure to volatile & expensive to hedge variable annuity liabilities. Prudential fought its way back into the match and eventually prevailed to win on a last second buzzer beater. In the end, Pru’s size and improved bond quality was just too much for the smaller Principal to match.

Semifinal Round

#1 Met Life squares off against  #3 Prudential in a battle of the 800 pound gorillas. This matchup is high scoring and fast paced, with lots of lead changes throughout. Prudential took a slight lead in the second half on the strength of innovation driving top-line results in product lines like variable annuities, synthetic stable value wraps, and jumbo pension closeouts. However, at the end of the day financial strength from a policyholder perspective is all about bottom line results, and Met Life sealed the victory on the strength of it recent strategic business re-organization and interest rate hedging program, decisions which while not headline grabbing are aligned with keeping the company on track to perform consistently. Met Life is headed to the “ship” to square off against its cross-town rival.

Championship

“Snoopy” vs. “The Company You Keep”…Beagle vs. Witty Phrase…Park Ave. vs. Madison Ave. This classic matchup started out as a competitive back and forth affair. However, in the second half, NY Life pulled away as Met Life became fatigued under the weight of variable annuity exposure and less well capitalized, significantly larger balance sheet. While Met Life covered the “Vegas odds” they were unable to overcome New York Life’s conservatively run, well-managed, mutual company business franchise.

So there you have it, I’m pleased to crown NY Life as the DOL 95-1 Tourney Challenge Champion. Let’s hope they offer a competitive price to complement their pristine balance sheet. In closing, I’d like to extend a note of recognition to all the high-quality, best of breed insurers who were called upon to support this fictional, fun, and hopefully interesting literary exercise.

I hope you enjoyed this written indulgence.  What do you think?

The video below is an absolute classic IMO. FYI, I’m a Syracuse University alum so I thought I’d throw this in to give a few added chuckles for readers/viewers. Advanced apologies for Mr. Boeheim’s salty tone.

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With St. Patrick’s Day now officially in the rear view mirror, I thought I’d take the opportunity to craft a St. Paddy’s day themed blog post. That was the easy part. Then came trying to figure out how to cogently connect the two (Irish holiday & pension finance) in a way that made sense, was informative, and interesting to read. Not 100% sure if this is going to fit the bill, but nonetheless it should be mildly entertaining for those of you nursing hangovers.

Lucky Charms (the iconic General Mills cereal), also known as “the nectar of the gods” and a leading driver of the US obesity & diabetes epidemic, is best known for its wonderful colored marshmallows which come in 8 different shapes. The shapes represent Lucky’s (the leprechaun guy on the cereal box) charms, each having its own magical powers. As I started to think about this and try to relate it somehow to the pension market, it seemed that these 8 lucky charms could be easily analogized to 8 emerging best practices in pension risk management. Below, I bestow upon you The Lucky Charms of Pension Risk Management.

#1: Long Bonds: the “toe in the water” LDI weapon of choice…easy and relatively painless

#2: Funded Status Monitoring: the annual valuation process ain’t cuttin’ it anymore

#3: Investment Outsourcing: most pension committees lack governance processes and decision-making agility

#4: LDI Glidepaths: averaging into cost-effective liability hedging (see #2 & #3 above in order to tactically execute here)

#5: Terminated Vested Lump Sum Windows: begin strategically settling liability, expense savings

#6: Annuity Settlements: reduce the size and complexity of the pension program  see my older post linked below: https://pensionindemnification.wordpress.com/2013/02/24/introducing-the-newest-member-of-your-pension-committee-sisyphus/

#7: Data Cleanup: you know…..those files sitting in the cabinet down in HR

#8: Accelerated Contributions: a worthy consideration for financially flexible organizations

So there you have it, the 8 Lucky Charms of Pension Risk Management. However, as we all have often heard, “you make your own luck in life”. Good things will happen to pension sponsors who are aware and actively considerate of the items above. Thanks for reading, that’s all for now…I need to go find some of those marshmallows…they are after all “MAGICALLY DELICIOUS”!

state of the union

Article II, Section 3 of the United States Constitution, states the President shall, ” from time to time give to Congress information of the State of the Union and recommend to their Consideration such measures as he shall judge necessary and expedient.” With the broader national discourse consumed with a louder debate on important items like gun control and “Sequestration”, I thought I would exercise my executive privilege as the imaginary and “self-appointed” Commander-in-Chief of the US Pension Risk Transfer Marketplace to deliver my own State of the Union.

As the good folks at Kodak might say…a picture is worth a thousand words.  In the spirit of brevity, I thought I would let the above image do most of the talking here. My executive summary would be that I believe a paradigm shift is clearly underway and pension de-risking is poised to continue to deliver tremendous value to corporate pension programs which are focused on controlling volatility and preparing for their pension end game.

If I were to highlight one conclusion from the above illustration, it would be to note the level of 2012 Terminal Funding Group Annuity marketplace sales. While still relatively modest in absolute terms, the marked increase in 2012 sales (excluding GM & Verizon) came absent a material rise in interest rates and plan funding levels. It appears that increasingly companies are willing to pay to transfer benefit obligations to an insurer, in order to achieve complete cost certainty.

In closing I’d like to echo the immortal words of perhaps our nation’s most beloved former President, JFK from a 1961 speech in Germany…..Ich bin ein Berliner (I am a jelly doughnut)! Thanks for taking the time to read this. Let me know what you think!

Two years ago today witnessed the launch of an innovative new insurance based, guaranteed group annuity contract structure which was designed to provide a competitive, turnkey solution to help manage pension volatility. With 24 months having passed since the product launch, it seems like a good time to reflect on the LDI marketplace and the some of the activity related to Insured LDI and its manufacturer Pacific Life Insurance Company. Below I have presented some of the external & internal factors which have evolved over the last few years.

External marketplace factors:

  • Interest rates and funding levels have stayed low
  • Mild strengthening of US economy
  • Increased adoption of dynamic asset allocation glidepaths to manage funded status volatility and effectively phase in costs of liability hedging
  • Prevalence of delegated investment outsourcing solutions
  • Migration of existing intermediate and core bond portfolio allocations  to long duration government and long duration credit fixed income
  • Increased evaluation and adoption of settlement strategies employing  combination of voluntary lump sums and purchased annuities
  • Pension funding relief via MAP-21

 Internal Pacific Life factors:

  • Pacific Life acquired JP Morgan’s pension advisory group (August 2011), rebranded as Pacific Global Advisors
  • First Insured LDI contract sale announced in December 2011…less than one year after formal product launch
  • A modest increase in the observable sales/marketing effort driving the Insured LDI product
  • Pacific Life’s development of buy-in annuity contract product to add to their pension de-risking suite of products

 Observations:

The successful development and execution of any new product requires an effective blend of strategy, people, and patience. With only 24 months since the product launch it may be too early to declare victory or defeat. However, it seems as though Pacific Life is focused on the pension market as a driver of its business strategy. Personally, I think Insured LDI is a solid product (see link at the end of this post for those who desire a primer on its design and benefits) and its ability to track/hedge pension liabilities with no tracking error is a great feature (one which cannot be delivered by a non-guaranteed asset management product), which deserves a seat at the table with any pension sponsor looking to effectively evaluate the complete range of LDI solutions. Conversely, I know (based upon years of professional experience positioning and advocating for insured solutions) that guaranteed insurance products are, generally speaking, foreign to the pension consulting  and asset management ecosystem which prefer’s traditional benchmark driven mandates, manager databases & searches, consultant relations coverage, and institutional fee structures. I think there are a lot of consultants/LDI managers out there who might argue that the cost/benefit of the Insured LDI product is a bit like bringing a bazooka to a fist fight…at least as it relates to mid/large size plan sponsors who are funded at 70-80% and unable or unwilling to pay for that level of liability hedging .  At the end of the day selling an orange at the apple-fest is going to present some challenges. But one must remember Pacific Life is a mutual company and it may not need or want to transform the way people buy and generate massive billion dollar sales volumes. Carving out a niche of $5-$50 mil contract placement to buyers with specific needs/wants and collecting a couple hundred million annually may be enough to move the needle internally…and a few years down the road…with more education, awareness, and higher rates/funding levels…who knows what might happen. Meanwhile, the company remains positioned to continue to participate in the pension closeout/buy-out annuity market which is downstream from hedging liabilities and seems poised for growth.

Insured LDI Overview:

http://ip.rsd.pacificlife.com/ipc/home/institutional_products/defined_benefit_plans/insured_ldi.html

Dietrich & Associates Insured Pension Risk Transfer Overview:

https://www.dietrichassociates.com/Pension%20Risk%20Transfer.aspx

Welcome to Pi (Pension Indemnification). My name is Jay Dinunzio and I am passionate about guaranteed institutional insurance products (less passionate about spelling & grammar which I am apologizing in advance for) and the variety of practical applications they can have to help manage retirement plan risks.

I am fortunate to have developed a robust and diverse network of industry contacts spanning insurance, retirement, asset management, consulting, legal, and plan sponsor functions. The experience I’ve gained and knowledge acquired over the last 12 years is a testament to those around me. This blog is my way of giving back and staying connected with a thoughtful discussion.

For those of you who haven’t had a chance to speak with or meet me, feel free to check me out on Linkedin at  www.linkedin.com/in/jaydinunziopensionrisktransfer  and/or drop me a line @ jay.dinunzio@gmail.com.

Stay tuned for future posts inclusive of some editorializations, wit, and sarcasm…just to keep it interesting. In the meantime check out this vintage John Hancock TV commercial from 1971. Consider the following:

  • 1971 was the year PIMCO was founded
  • 17 years later Blackrock was founded in 1988
  • State Street Global Advisors was formed just 22 short years ago in 1990
  • John Hancock Life, formed in 1862, had already celebrated its 100th birthday by 1971
  • Clearly, one if the significant benefits of insurance products is the strength annd stability of the industry
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