HEDGENESS VARIABLE ANNUITY GLWB RATINGS
July 2019
I. GLWB RATINGS:
I. GLWB RATINGS:
II. OVERVIEW:
The star ratings are an indication of the relative value each Guaranteed Lifetime Withdrawal Benefit (GLWB) provides a retiree couple in given scenario defined below (1).
Variable annuities with GLWB offerings are designed to address the current retirement income needs of pre-retirees and retirees that have less access to secured income from sources such as pension plans and are not willing to sacrifice their retirement account value (lump sum) for an immediate annuity.
However, traditional quantitative metrics (e.g. expenses) that are currently used to evaluate non-insurance retirement investments (e.g. mutual funds or ETFs) fall short in assessing variable annuities because of their inherent complexity. Additionally, much of the academic research about annuities focuses on the “annuity puzzle” which requires annuitization through an immediate annuity, rather than the ability to invest along with the benefit of an income guarantee that continues if account value goes to zero.
New approaches are needed to holistically evaluate variable annuities with income guarantees, mainly because of their dual nature – investment plus insurance. This research – conducted with our patent pending analytics software V.A.I.Q – creates a standardized framework for analyzing variable annuities with income guarantees. The fact that the variable annuity with the lowest expense and highest guaranteed withdrawal rate received the lowest rating speaks volumes in regard to the inadequacy of traditional metrics to evaluate and compare variable annuities with GLWBs.
III. RETIREMENT SCENARIO:
IV. INDUSTRY COVERAGE:
For the variable annuities analyzed, the following criteria was used (2):
Using this criterion, this research ranks variable annuities with GLWBs from thirteen (13) insurers. All of these thirteen insurers were part of the top twenty sales of U.S. individual variable annuities in 2018, accounting for 95% of the market (4).
The seven issuers from the top twenty list that were not covered either do not offer a GLWB or package a different insurer’s GLWB. The excluded companies were: TIAA, New York Life, Thrivent Financial, Fidelity Investments Life, Northwestern Mutual Life, CMFG Life Insurance Company, and Massachusetts Mutual Life.
V. PRODUCTS (5):
The star ratings are an indication of the relative value each Guaranteed Lifetime Withdrawal Benefit (GLWB) provides a retiree couple in given scenario defined below (1).
Variable annuities with GLWB offerings are designed to address the current retirement income needs of pre-retirees and retirees that have less access to secured income from sources such as pension plans and are not willing to sacrifice their retirement account value (lump sum) for an immediate annuity.
However, traditional quantitative metrics (e.g. expenses) that are currently used to evaluate non-insurance retirement investments (e.g. mutual funds or ETFs) fall short in assessing variable annuities because of their inherent complexity. Additionally, much of the academic research about annuities focuses on the “annuity puzzle” which requires annuitization through an immediate annuity, rather than the ability to invest along with the benefit of an income guarantee that continues if account value goes to zero.
New approaches are needed to holistically evaluate variable annuities with income guarantees, mainly because of their dual nature – investment plus insurance. This research – conducted with our patent pending analytics software V.A.I.Q – creates a standardized framework for analyzing variable annuities with income guarantees. The fact that the variable annuity with the lowest expense and highest guaranteed withdrawal rate received the lowest rating speaks volumes in regard to the inadequacy of traditional metrics to evaluate and compare variable annuities with GLWBs.
III. RETIREMENT SCENARIO:
- The purchaser of the variable annuity is a retiree couple electing a joint/spousal GLWB with both annuitants being sixty-five (65) years old.
- In consultation with their financial advisor, the retiree couple is comfortable with the range of guaranteed withdrawal rates (4.0% to 5.5%) and allocating funds to the variable annuity as part of their retirement plan.
- Annual withdrawals are taken starting in the first year of the purchase of contract.
- Sub-accounts were selected based on maximum exposure allowed to equities, as per the GLWB investment requirements.
IV. INDUSTRY COVERAGE:
For the variable annuities analyzed, the following criteria was used (2):
- Variable annuity offers a GLWB (3).
- Variable annuity features the ability to maintain the approximate asset allocation in the sub-accounts through the duration of the contract.
- Variable annuity has a surrender period between five (5) and seven (7) years.
- Variable annuity or GLWB is issued directly from the insurance carrier.
- The issuing insurance company has a minimum credit rating of A.
Using this criterion, this research ranks variable annuities with GLWBs from thirteen (13) insurers. All of these thirteen insurers were part of the top twenty sales of U.S. individual variable annuities in 2018, accounting for 95% of the market (4).
The seven issuers from the top twenty list that were not covered either do not offer a GLWB or package a different insurer’s GLWB. The excluded companies were: TIAA, New York Life, Thrivent Financial, Fidelity Investments Life, Northwestern Mutual Life, CMFG Life Insurance Company, and Massachusetts Mutual Life.
V. PRODUCTS (5):
Insurance Carrier |
Variable Annuity Product Name |
GLWB Rider Name |
Sub-account(s) |
AIG |
Polaris Platinum III |
Polaris Income Plus Flex |
SA VCP Dynamic Strategy |
Allianz |
Connections |
Income Protector |
AZL MVP Growth Index Strategy |
AXA |
Retirement Cornerstone |
Guaranteed Minimum Income Benefit |
EQ/Aggressive Growth Strategy |
Brighthouse |
Series VA |
FlexChoice Access Level |
MetLife Stock Index MetLife Aggregate Bond Index |
Great-West |
Smart Track II |
Secure Income Foundation |
Great-West SecureFoundation Balanced |
Jackson National |
Perspective II |
LifeGuard Freedom Flex Max |
JNL/Vanguard U.S. Stock Market Index |
Lincoln |
American Legacy |
Market Select Advantage |
American Funds Growth American Funds Bond |
Nationwide |
Destination B 2.0 |
Lifetime Income Track |
NVIT Investor Destinations Capital Appreciation |
Pacific Life |
Pacific Choice |
Core Income Advantage Select |
Pacific Dynamic Moderate-Growth |
Principal |
Lifetime Income Solutions II |
Flexible Income Protector |
Principal Diversified Growth |
Prudential |
Defined Income |
Defined Income Benefit |
AST Multi-Sector FIxed Income |
RiverSource |
RAVA 5 Advantage |
SecureSource Core |
Variable Portfolio – Moderate |
Transamerica |
Variable Annuity Series |
Retirement Income Choice 1.6 |
TA U.S. Equity Index |
VI. METHOD
EXPENSE:
Expense for each product is the summation of the following fees: mortality & expense & administrative fees (M&E&A), sub-account investment management fees (fund fees), and GLWB rider fees.
The M&E&A fees and GLWB rider fees are the current charges from each product, and not the minimum or maximum charges that contract may incur. The fund fees are based on the sub-account(s) net expense ratio at time of writing.
Expense for each product is the summation of the following fees: mortality & expense & administrative fees (M&E&A), sub-account investment management fees (fund fees), and GLWB rider fees.
The M&E&A fees and GLWB rider fees are the current charges from each product, and not the minimum or maximum charges that contract may incur. The fund fees are based on the sub-account(s) net expense ratio at time of writing.
BENEFIT:
Benefit is a number derived by calculating the cost to insure each product’s guaranteed income benefits by purchasing derivatives and then applying relevant weightage factors.
Each variable annuity's benefit in this analysis was calculated using the VAIQ analytics in the following manner:
1. VA Income Inputs
a. Guaranteed withdrawal rate of GLWB rider.
b. Asset allocation requirements for GLWB rider.
c. Time horizon of guarantee. (6)
2. Recreate VA
a. Create portfolio with asset allocation between bonds and equity. (7)
b. Add derivatives to insure portfolio for guarantees.
3. Generate Scenario
a. Run portfolio with derivatives through historical equity and bond market scenarios while withdrawing guaranteed income rate.
b. Purchase new derivatives as needed (pricing created through Black-Scholes-Merton model). (8)
c. Calculate the cost of all derivatives through the scenarios.
To derive the final Benefit number, a weightage factor for the insurance carrier’s credit rating is applied.
Benefit is a number derived by calculating the cost to insure each product’s guaranteed income benefits by purchasing derivatives and then applying relevant weightage factors.
Each variable annuity's benefit in this analysis was calculated using the VAIQ analytics in the following manner:
1. VA Income Inputs
a. Guaranteed withdrawal rate of GLWB rider.
b. Asset allocation requirements for GLWB rider.
c. Time horizon of guarantee. (6)
2. Recreate VA
a. Create portfolio with asset allocation between bonds and equity. (7)
b. Add derivatives to insure portfolio for guarantees.
3. Generate Scenario
a. Run portfolio with derivatives through historical equity and bond market scenarios while withdrawing guaranteed income rate.
b. Purchase new derivatives as needed (pricing created through Black-Scholes-Merton model). (8)
c. Calculate the cost of all derivatives through the scenarios.
To derive the final Benefit number, a weightage factor for the insurance carrier’s credit rating is applied.
BENEFIT TO EXPENSE RATIO & VAIQ RATINGS:
Benefit to Expense Ratio is a quantitative relationship between Expense and Benefit. To arrive at Ratings, scaling is performed from the resulting Benefit to Expense Ratios into five-star VAIQ Ratings.
Benefit to Expense Ratio is a quantitative relationship between Expense and Benefit. To arrive at Ratings, scaling is performed from the resulting Benefit to Expense Ratios into five-star VAIQ Ratings.
VII. DETAILED RESULTS:
VIII. FOOTNOTES:
(1) Different circumstances (i.e. age, life, or deferral) could produce different results. The information produced by the VAIQ Ratings regarding the possibility of varying investment outcomes are hypothetical, do not reflect actual investment performance, and are not promises of future performance. Results may differ over time. VAIQ Ratings do not promise future income or protect against loss of principal. There is no guarantee that an investment approach based on the VAIQ Ratings will be effective. The VAIQ Ratings are subject to change. VAIQ Ratings shown are for informational purposes only.
(2) These criteria were met as of the time of this writing.
(3) An insurance carrier does not need to strictly have a GLWB, but any income rider that allows withdrawals at a guaranteed rate prior to annuitization of the contract. In effect, the income rider is, for all practical purposes, a GLWB – the latter, in a sense, being “annuitized” only when value of sub-accounts is depleted. However, if income rider does not allow any withdrawals while maintaining the value of sub-accounts, then the income rider is subject to annuitization (loss of value of sub-accounts to the variable annuity holder) to gain any guaranteed income benefit, and thereby does not qualify as a GLWB benefit.
(4) LIMRA Secure Retirement Institute, U.S. Individual Annuities Sales Survey.
(5) Product and feature availability may vary by state and/or broker/dealer.
(6) Based on life expectancy at age of purchase using Social Security Actuarial Life Table.
(7) The Standard & Poor's 500 Index and the Bloomberg Barclays US Aggregate Bond Index are utilized as proxies for each product’s sub-account(s) as equity and bonds, respectively, in proportion to the asset allocation each product allows.
(8) The historical volatility of the Standard & Poor's 500 Index and the Bloomberg Barclays US Aggregate Bond Index are applied in the Black-Scholes-Merton model to generate pricing for derivatives in scenario generation.
IX. DISCLOSURE:
The VAIQ Ratings (Ratings) are maintained by Hedgeness, Inc. (the Company). While the Company issues descriptions of what the Ratings are intended to accomplish, the Company does not provide any guarantee or accept any liability related to quality or accurateness of data in respect to the Ratings and does not promise that the Ratings will not diverge from their specified methodologies. The Company does not provide any guarantee for Company errors.
This information should not be trusted as investment advice, or a recommendation by the Company regarding the use or appropriateness of the Ratings. Investors should consult their financial advisor to assess their investment goals. Investing involves risk, including potential loss of principal. The Company is a software company and not authorized to sell any investment advice. The information contained herein may not be copied or redistributed; does not constitute investment advice offered by the Company; is provided solely for informational purposes; does not constitute an offer to buy or sell a security; and is not warranted to be correct, complete or accurate.
All names of indices, carriers, and products used in this research are the property of their respective owners, and not those of Hedgeness Inc.
© 2019 Hedgeness, Inc. All Rights Reserved.
(1) Different circumstances (i.e. age, life, or deferral) could produce different results. The information produced by the VAIQ Ratings regarding the possibility of varying investment outcomes are hypothetical, do not reflect actual investment performance, and are not promises of future performance. Results may differ over time. VAIQ Ratings do not promise future income or protect against loss of principal. There is no guarantee that an investment approach based on the VAIQ Ratings will be effective. The VAIQ Ratings are subject to change. VAIQ Ratings shown are for informational purposes only.
(2) These criteria were met as of the time of this writing.
(3) An insurance carrier does not need to strictly have a GLWB, but any income rider that allows withdrawals at a guaranteed rate prior to annuitization of the contract. In effect, the income rider is, for all practical purposes, a GLWB – the latter, in a sense, being “annuitized” only when value of sub-accounts is depleted. However, if income rider does not allow any withdrawals while maintaining the value of sub-accounts, then the income rider is subject to annuitization (loss of value of sub-accounts to the variable annuity holder) to gain any guaranteed income benefit, and thereby does not qualify as a GLWB benefit.
(4) LIMRA Secure Retirement Institute, U.S. Individual Annuities Sales Survey.
(5) Product and feature availability may vary by state and/or broker/dealer.
(6) Based on life expectancy at age of purchase using Social Security Actuarial Life Table.
(7) The Standard & Poor's 500 Index and the Bloomberg Barclays US Aggregate Bond Index are utilized as proxies for each product’s sub-account(s) as equity and bonds, respectively, in proportion to the asset allocation each product allows.
(8) The historical volatility of the Standard & Poor's 500 Index and the Bloomberg Barclays US Aggregate Bond Index are applied in the Black-Scholes-Merton model to generate pricing for derivatives in scenario generation.
IX. DISCLOSURE:
The VAIQ Ratings (Ratings) are maintained by Hedgeness, Inc. (the Company). While the Company issues descriptions of what the Ratings are intended to accomplish, the Company does not provide any guarantee or accept any liability related to quality or accurateness of data in respect to the Ratings and does not promise that the Ratings will not diverge from their specified methodologies. The Company does not provide any guarantee for Company errors.
This information should not be trusted as investment advice, or a recommendation by the Company regarding the use or appropriateness of the Ratings. Investors should consult their financial advisor to assess their investment goals. Investing involves risk, including potential loss of principal. The Company is a software company and not authorized to sell any investment advice. The information contained herein may not be copied or redistributed; does not constitute investment advice offered by the Company; is provided solely for informational purposes; does not constitute an offer to buy or sell a security; and is not warranted to be correct, complete or accurate.
All names of indices, carriers, and products used in this research are the property of their respective owners, and not those of Hedgeness Inc.
© 2019 Hedgeness, Inc. All Rights Reserved.
