Achaean Financial is Proving Innovation is Alive and Well in the Annuity Business

Lorry Stensrud, a seasoned executive turned entrepreneur, is on the leading-edge of retirement income product development with his new Venture Achaean Financial.

Achaean’s Income Plus+ product provides a relatively high level of guaranteed starting income while maintaining both liquidity and upside potential.

Read on for a glimpse into the most recent generation of product development in the retirement income industry.



Annuity Digest:  Can you briefly describe your background and how you arrived at this particular point with the new venture?

Lorry Stensrud:  I have been the annuity business most of my career.  I ran Lincoln’s annuity business a few years ago, was on the start up team for Xerox in the mid 80’s when they were in financial services, and later when they sold Xerox Life to General American I was CEO of the renamed Xerox Life, Cova.  My background has been on the marketing and sales side of the business and I have spent considerable time on product development.

Annuity Digest:  What has been the primary catalyst for Achaean Financial and the new product and how do you view Achaean Financial?

Lorry Stensrud:  While I was at Lincoln we launched I4Life which at the time was a patent pending design that was geared for income. When I left I was determined to develop the next generation of retirement income products—with 77 million baby boomers you knew the demand for guarantees would be significant.  The defined contribution space and fee based advisors are markets where the life industry has never gained traction and current products just don’t fit.

After seeing how annuities performed in the down years of 2001-02, I thought the industry was asking for further trouble with increasing the risk profile and I did not want any part of that process.  A friend of mine told me the only perfect hedge is in a Japanese garden and he was right. Second generation variable annuities with new hedging capabilities were going to be the cure all for risk mitigation; someone forgot to tell them about volatility.

I have a couple of friends that are in the pharmaceutical business and have run start-ups. That is an industry where the big boys align themselves with as many bio-techs as possible. They leverage creativity, speed to market and innovation. When a product gains approval the big company comes in with capital, distribution and in many cases will buy the bio-tech or license the product. That is the basis for our model.

One of the main reasons the industry is having trouble with retirement income is because you have to have innovation and collaboration to be successful.  Neither are hallmarks of financial services.  It is not just collaboration at the life company level but collaboration with the multiple silos at distribution and asset management. 

While I do think traditional wholesaling models will survive, the industry is not prepared for the alternative forms of distribution that come along with retirement income. If you are a major Wall Street firm and you include our product on a proprietary fee based platform and include advice, who do you think will wholesale the product? Now you have a solution and not a product sale and almost all life company wholesaling organizations are product driven. Using Achaean for non traditional markets, the life company now has a variable cost distribution strategy.

Annuity Digest:  What is your view on the state of the retirement income market and, in particular, the appetite for guaranteed income?

Lorry Stensrud:  The marketplace has not moved past withdrawal benefit and income benefit products. Most companies still do not grasp what customers want to buy. The demand for guarantees will sky rocket and current offerings do not get the job done. The marketplace is still a 1035 exchange business and that will continue to put pressure on life companies for the next best withdrawal benefit or income benefit. Companies did not learn from the down markets in 2001-02, they repeated the same mistakes only to a bigger tune.  Defined contribution plans, fee based advisors including Registered Investment Advisors all need guarantees.  Large asset managers are all looking for guaranteed products to compliment their core investment offerings.  The industry needs to get beyond the current set of living benefits and move to products that are longevity and mortality based designs that tend to be lifetime products. To me the current versions look more like structured notes that do not produce enough income and in many cases run out of gas just when clients need income the most.

We have talked to a few very large plan sponsors and not one is willing to do a single source life company offering for their retirees.  Most want to retain the same asset managers for retirees as they do for accumulation, and this is a recent change. Our discussions with them are around building a multi-life company platform with a reinsurance backstop for added protection.  Working with IBM, we know how to integrate the technology and our attorneys know how to structure the offering.

I was with a former CEO last week and a life insurance analyst a month ago and the concerns that falling ROE’s, hedge costs above pricing, volatility and increased costs due to XXX are all causing capital issues. The industry does not have enough capital to meet the demands of customers for guarantees at a time when sales growth will explode.

We are involved in discussions with reinsurers and financial sponsors about the potential for owning some of the business companies write using Income Plus+.  Unlike variable annuities, Income Plus+ has higher ROE’s and minimal volatility.  This represents a potential new source of capital for the industry. The private equity industry is looking for ways to capitalize on longevity risk but the two major impediments have been low returns and volatility.  We address both of these.

When you look at the new products that have been introduced and not selling you have to ask if companies went out and did any kind of market testing or if they developed these products in a vacuum. I think the answer is obvious.  We have held discussions with large plan sponsors, asset managers, broker-dealers and benefit providers and have asked them: what do you want in terms of guarantees.  Companies will spend millions on systems and infrastructure but they will not spend small amounts on market testing.

Annuity Digest:  Can you provide a high-level description of the Achaean Product?

Lorry Stensrud:  The basic chassis of our product is an immediate variable annuity (“IVA”) with a high level of starting income.  We offer a guarantee that the income can never go down only up and when it goes up can never go down from the new level.  We offer some liquidity and a death benefit.  Our patent pending application is all about the methodology we use to pay for the guarantee.  Our objective is to have initial income that is within 10% of a competitive single premium immediate annuity (SPIA). With liquidity and upside potential, it becomes a compelling story for advisors and investors.


Annuity Digest:  Can you discuss some of the more technical aspects of the Achaean Product—particularly the relationships and trade-offs between income levels, liquidity and volatility?

Lorry Stensrud:  First of all the actuaries would call our designs a third generation product design where we have built many of the risk dials in the product.  We can dial up and down income levels, liquidity, death benefits etc.  We can change our payout rates at random based on market conditions just like a SPIA.  We have caps and collars built into the product and because of those designs we have built in a bi-directional hedging strategy that reduces overall hedge costs.  Just as important, we are almost immune from volatility.  From a life company CEO perspective it addresses one the main concerns they have for 2010.

Annuity Digest:  How does the Achaean Product differ from conventional withdrawal benefits?

Lorry Stensrud:  It is not a withdrawal product and it is not an accumulation product. Our market is for those policyholders who want income now.  Our product is also counter intuitive to withdrawal products.  If equity markets perform over time our ability to invest more in equities increases thereby providing additional income to the policyholder and the company.

Annuity Digest:  How does the Achaean Product compare to conventional annuity offerings in terms of both cost and simplicity?

Lorry Stensrud:  Technically it is very complex product that requires significant liability-driven investing skills which most insurance companies do not have.  We are using a managed separate account legal structure with one fund and multiple divisions. The product would work using insurance sub-accounts but we lose flexibility with the format.  We are working with one of the large global investment banks where they are indifferent as to who manages the assets.  Their interests are in building the solution using their liability-driven investing and hedging overlays. On the cost front our costs are less, since this is a lifetime product we can amortize product costs over the lifetime of the product which is over 20 years for a male age 65. In the fee based and defined contribution business we have no compensation to amortize so that alone drives down costs.  Most will concentrate on the starting payout number and how we give increases.  We have returned total investment control to the life company and the asset manager.  The policyholder will not see asset allocation models, rebalancing and the features and benefits associated with current products.  What they are buying is a guaranteed steam of income that should increase over time.

In terms of simplicity we still need some SEC approvals for non-qualified, but the illustrations should be very simple and easy to understand.  I think most firms will position Income Plus+ against a SPIA—only with upside, a death benefit and some liquidity.

Annuity Digest:  Who are your natural partners—for both distribution and product development?

Lorry Stensrud:  On the product development front we have built the base chassis.  As we move forward with insurance companies based on their distribution they can modify as needed.  As I mentioned we have built in a number of dials that allow the life company to customize based on distribution targets.

On the distribution front we are talking to asset managers, insurance companies and defined contribution providers.  The need for retirement income is everywhere.

Annuity Digest:  Do you envision a broad or niche appeal among financial advisors?

Lorry Stensrud:  Income Plus+ was originally designed for the fee based and defined contribution markets.   We can pay some commission but have no interest in being in the 1035 marketplace.  Income Plus+ will appeal to all asset managers that are in the defined contribution space.  We will combine “Insurance Guarantees for Life” with “Life Expectancy Investment.”  The asset manager should be indifferent to what the client buys as they are managing the entire offering.

Annuity Digest:  Will the Achaean Product appeal to advisors who are not actively selling annuities, and if so, why?

Lorry Stensrud:  Investors want some of their assets to be in guarantees and advisors will need to provide them if they are going to retain clients. One of the large Wall Street firms told me an advisor keeps a client for nine years and when they retire and need income advice—that is when the advisor is most likely to lose the client.  My view is that advisors understand the need for guarantees—they just don’t like the current versions in the marketplace since they are costly and confusing.  A good example is how many understand that once you have lost a couple of ratchets with withdrawal benefits and are taking income you most likely will never get another ratchet.  We are also in discussions with two major fund groups and they are being pushed by advisors and their wholesalers to find guarantee options for current income products.

Annuity Digest:  Will the Achaean Product appeal to fee-based advisors, and if so, why?

Lorry Stensrud:  One of the reasons our product will appeal to fee- based advisors is our costs will be less and the presentation should be simple. Since ours is a lifetime product our fees can be amortized over the life of the contract versus five-to-seven years for variable annuities.  Another reason is that advisors and investors will be paying attention to the income guarantee itself and how it can go up over time.

The product has been designed to fit alongside a company’s proprietary fee based platform and serve as the guaranteed income solution.

We are also in discussions with a firm and will build an exchange traded fund (ETF) version of Income Plus+, and the ETF version with low costs in the RIA marketplace will be a first.  We will combine this with an advice offering and registered call centers.  For a life company we can build the entire offering on a variable cost basis.

Annuity Digest:  How does the Achaean Product fit within the defined contribution segment?

Lorry Stensrud:  As I mentioned earlier we developed this product with the defined contribution markets in mind.  This design is ideal for the mass affluent segment of the marketplace that the industry has missed. This marketplace needs guarantees and they need as much income as possible.  Retirees need to trade off some liquidity for increased income and our type of design works for this segment.  The big defined contribution asset managers will demand to manage the assets for the “Insurance Guarantees for Life” that are sold along side of their traditional offerings.  Plan sponsors increasingly want to use the same asset managers for payout as they do for accumulation and we see this trend increasing.  A recent Harris study indicated 95 percent of retirees would give us some upside appreciation for guarantees and a PIMCO study found that 80 percent of plan sponsors would add guarantees.

Annuity Digest:  Can you talk about how the Achaean Product might be used by other carriers to de-risk existing books of variable annuity business?

Lorry Stensrud:  Current variable annuities have a product liability that is locked in place and there is only so much they can do to protect themselves.  In almost all cases the life company has all of the downside and the policyholder has the upside.  By adding Income Plus+ as a settlement option the life company has the ability to reset the liability and take advantage of our bi-directional hedging strategy and superior ROE’s.  For policyholders that take this benefit the life company will free up substantial reserves and reset at a lower reserve.  Not all policies are candidates today but could be candidates over the next few years. Companies that can manage an in-force block of business will find this a very effective long term strategy. 

With de-risked business companies can keep the business or they should be able to sell a de-risked block.

In today’s environment, financial investors are not giving much credit to variable annuities.  Just look at life company multiples. If a life company uses our de-risking version and can affect the changes mentioned it is a great story for the rating agencies and analysts.

Annuity Digest:  Do you intend to license the product?

Lorry Stensrud:  The short answer is yes.  We will align with one or two global investment banks and will license to them. We will license to any insurance company that wants to use our de-risking strategy and we will license to companies for new business.  It is not our intent to license to everyone but rather work with companies in specific market segments.  If we license to a major variable annuity writer with exiting wholesaling capabilities, we have no intention of duplicating those efforts.  We would like to act as an MGA in the RIA and defined contribution space as these are markets where the life industry has almost no traction.

Since our product is mortality and longevity based it, works all over the globe.  We need to be careful with this as patent laws are not the same outside of the US.

Annuity Digest:  What is the timeline for launch and what can we expect to see in the near-term?

Lorry Stensrud:  We are just in the process of signing on with a global bank for our de-risking strategy, and we are in discussions with a small group of companies which will come to closure soon.  Retirement Income is different than variable annuities.  Our product is a lifetime product and this limits the number of acceptable life companies.  Since innovation is difficult in the life arena and since most companies have a “not invented here mentality,” it takes longer for outsiders to gain traction.

Annuity Digest:  What other markets do you foresee?

Lorry Stensrud:  The mid market life company market could be a significant market place for us.  We can deliver a turnkey solution that includes product, advice and administration to companies that would never be able to do this on their own.  Most of these companies would have captive sales forces that will need our solution. We will tag-team this effort with a major reinsurance company.

The bank marketplace will be huge.  We expect the very largest banks will build their own offerings.  We will take the same strategy we will use for mid market insurance companies and use with mid market banks.

Annuity Digest:  You mention advice—how does that work?

Lorry Stensrud:  Mike Henkel, who was President of Ibbotson and Associates, is now in charge of advice at Envestnet and he is building one of the best advice engines I have seen.  Our product was designed to fit into a solutions-based environment.  As retirees think about the tradeoffs between taking various forms of income, our product is a standout.  Most systematic withdrawal recommendations are in the 3.5 percent to four percent range.  For a male age 65, our rate is currently in excess of six percent.  When you add in volatility we have another advantage as our rate cannot go down.  When you work through the advice model Social Security is the first level, our guarantee is the next level and investments are third.  The size of the allocation to Income Plus+ is based the need for income and trading off liquidity for income.

As you work through the advice model the client picks a desired outcome, and only after they have picked the outcome do they see the products behind that outcome.  The allocation to Income Plus+ is normally in the 25-35 percent range.

Annuity Digest:  Tell us about your patent filing.

Lorry Stensrud:  We used a major WDC firm to file our patent last year and have some additional filing in process.  In most cases it takes two-to-four years to move from patent pending to a patent.  During that time competitors cannot see what we have filed so they are in the dark as to how to maneuver around our designs.  In the case of the Lincoln I4L patent, it has been almost ten years and no one has copied that product and they have won an infringement suit and follow on appeal in Federal Court.

Our up-front licensing fee is equal to about five percent of total M&E fees, so why would a life company gamble on an infringement suit?  In the defined contribution markets with all of the fiduciary issues, no one would sell a product with an infringement suit hanging over their head.

Annuity Digest: Thanks very much for your time Lorry.

Key Phrases Manual: 


Great to see new players innovating in the decumulation space. Interesting article, but would need more information to understand how the product would work from a consumer's point of view.

It sounds like the product could be summarized as follows: Immediate income for life with initial payout targeted to be within 10% of a SPIA payout, has the possibility of increasing, offers some liquidity and potentially a death benefit. But the consumer would not control how their assets are invested.

Transparency (and potentially simplicity) would be a concern. How does the consumer know when / how their income would increase? Can they see the underlying account value? Similarly, the death benefit is unclear. The slides mention potential for a significant death benefit, but how would this be calculated?

Also not explicitly discussed is the liquidity option. Since the (upfront) expenses born on the issuing company would be recouped over 20 years (for a 65 year old male), presumably someone who wishes to liquidate their policy would have to pay surrender charges (similar to variable annuities). And how much would they get back?

Would be interested in a follow up, once a more defined product has been developed.

Your questions are all good ones, we have developed something new and transformational, have applied for patents and really have no interest in sharing all of our information until we know who is asking the questions and have NDA's in place.

The consumer will know how the product works and when they can expect income, they will see account values and death benefits. Each company can modify our product based on their distribution. Unlike WB's and IB's the customer is buying an income guarantee, they want an income that can only go up and not down. Many of your questions will be addressed in the disclosure document. This is a lifetime purchase and the guarantee is all important.

The product features are defined in our models, we have stochastic models, preliminary pricing and sensitivity analysis that life companies can review and modify for their own purposes. Our product has been vetted by one interntional life company and two global investment banks.

A good example would be a life company that also sells SPIA's, they will be in a great position to offer both and determine the trade offs and always have product in the marketplace.

The flexibility we give the life company and asset manager will work to the benefit of the customer over the life of the contract. Our dynamic models allow the flexibility customers will need to increase income.

Liquidity and death benefit options will be disclosed by company as each will be different, again based on distribution.
In terms of transparency since we are using a MSA we do not have to have an 800 page annual report.Our objective is simplicity and transparency and to get by the confusion so many advisors have with annuities.

As outlined in the article we are targeting the DC and fee based markets, we have developed a product that will be easy to understand.

Bottom line is you need to stay tuned and see what we have in the marketplace.

Again, the purpose of the article was to give an overview not a full blown description.