Why RILAs Are So Hot
2. An issuer can use derivatives to handle exposure to changes in stock or other investment indexes.
Raju sees RILA products as “spread-based” products. That means that Equitable’s results depend mainly on the difference, or spread, between the rates it’s paying the annuity holders and the yields it gets on the portfolio supporting the annuities.
“The equity market exposure is fully hedged at the time of issuance,” Raju said. “All the assets are invested in the general account, and a fixed maturity date and short average duration enable tight asset-liability management matching. We reprice the product every two weeks based on current interest rates and option costs, ensuring we can deliver a consistent IRR [internal rate of return] of at least 15%.
3. For the issuer, hedging makes a RILA perform roughly the same as a traditional fixed annuity.
Managing the general account assets behind a RILA is similar to managing the assets behind a fixed annuity, but the asset value guarantees tend to be more limited, and the issuer can charge separately for whatever level of value it chooses to protect.
Because offering a well-hedged RILA product is a relatively low-risk endeavor, “RILAs are capital-light for Equitable and have less than half the required capital of a fixed annuity,” Raju said.
4. An issuer with its own asset-management team can improve product performance and profitability by managing the assets itself.
Some asset managers buy life insurers to get access to their assets.
Other life insurers hire outside managers to manage most or all of their annuity assets.
Raju said Equitable can maximize investment yields and product profitability by having AllianceBernstein manage much of the portfolio supporting the RILA contracts.
5. All of the headwinds support strong income growth.
At Equitable, Raju said, RILAs helped produce an 8% year-over-year increase in individual retirement income in the first quarter.
Robin Raju. Credit: Equitable
