Oliver Wyman Annuity Market Update Hartford Actuarial Club May 2014
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Transcript of Oliver Wyman Annuity Market Update Hartford Actuarial Club May 2014
© 2014 Oliver Wyman
Guillaume Briere-Giroux, FSA, MAAA, CFA
Annuity Market Update
Actuaries’ Club of Hartford & Springfield – 2014 Annual Meeting
Hartford – May 21, 2014
© 2014 Oliver Wyman 1 1 © 2014 Oliver Wyman
Agenda
I. Market dynamics
II. Product trends
III. Pricing, valuation and risk management issues
IV. Watch list
© 2014 Oliver Wyman
Market dynamics
Section 1
© 2014 Oliver Wyman 3 3 © 2014 Oliver Wyman
Annuity sales trends (2007-2013) Fixed indexed annuity (FIA) and deferred income annuity (DIA) sales are growing
Variable
Indexed
MVA
Book value
SPIA
DIA
Sales data from LIMRA
Mark
et
risk fo
r p
oli
cyh
old
er
Lo
wer
Hig
her
© 2014 Oliver Wyman 4 4 © 2014 Oliver Wyman
Indexed annuity sales trends (2001-2013) FIA sales have grown at a robust 7.8% annual rate since 2007
Source: Wink’s Sales & Market Report (2006 and prior) and LIMRA (2007 and later)
$ B
illi
on
s
6.8
11.8
14.4
23.1
27.2
25.3 25.0 26.7
29.9
32.1 32.2 33.9
39.3
0
5
10
15
20
25
30
35
40
45
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
7.8% CAGR
© 2014 Oliver Wyman 5 5 © 2014 Oliver Wyman
Top annuity writers in 2013 (1-10)
High
Low
Rank
(2013)
Company 2013 Sales
($ Billions)
2012 Sales
($ Billions)
YoY Change
(%)
Variable Indexed Fixed
1 Jackson National 23.2 22.4 3.5%
2 AIG 17.5 12.0 45.5%
3 Lincoln 16.6 13.4 23.2%
4 TIAA-CREF 13.9 14.1 -1.1%
5 MetLife 12.4 19.5 -36.4%
6 Prudential 12.0 22.4 -46.3%
7 AXA 9.7 8.9 9.7%
8 New York Life 9.7 7.5 29.2%
9 Allianz Life 9.1 8.8 3.3%
10 Transamerica 8.6 5.4 57.2%
Composition of sales
Source: LIMRA
© 2014 Oliver Wyman 6 6 © 2014 Oliver Wyman
Top annuity writers in 2013 (11-20)
Rank
(2013)
Company 2013 Sales
($ Billions)
2012 Sales
($ Billions)
YoY Change
(%)
Variable Indexed Fixed
11 Pacific Life 7.4 7.5 -0.9%
12 Nationwide 6.9 7.5 -7.9%
13 Security Benefit 6.4 3.9 65.0%
14 Ameriprise 5.5 5.6 -2.5%
15 American Equity 4.2 3.9 6.7%
16 Great American 4.0 2.9 36.0%
17 MassMutual 3.6 2.3 56.6%
18 Thrivent Financial 3.6 3.2 10.6%
19 Protective Life 2.6 3.3 -22.9%
20 Symetra 2.5 1.4 80.8%
Source: LIMRA
High
Low
Composition of sales
© 2014 Oliver Wyman 7 7 © 2014 Oliver Wyman
Symetra
Expansion of the FIA market Today’s FIA market has a broad range of players with increasing representation outside of the independent channel
Source: Wink’s Sales & Market Report and Oliver Wyman Research
Phoenix
Banks and wirehouses
Independent and banks
Independent organizations
Priva
te E
quity
Ow
ned
US
Sto
ck
Com
panie
s
Fore
ign
Subsid
iari
es
Mutu
al
Com
panie
s
Ow
ners
hip
Str
uctu
re
Lower Higher Credit Rating
A++ A A- B++ B+ B
Market share and dominant distribution channels by ownership structure and credit rating
Priva
tely
H
eld
Career
Size of bubbles represents 2013
market share
Primary distribution channels
A+
Allianz Life
Sagicor Life
Jackson National
Security Benefit
American Equity
Great
American
EquiTrust
Athene Fidelity &
Guaranty Life
North
American Midland
National
Lincoln Benefit Life
VOYA
Genworth
AIG
National Western
Lincoln
Protective Life CNO Companies
Pacific Life Nationwide
OneAmerica
Western &
Southern
All other
companies
Forethought
National Life Group
15.5
10.4
11.7
7.1
7.9
%
%
%
%
%
© 2014 Oliver Wyman 8 8 © 2014 Oliver Wyman
Economic conditions The yield environment favors longer duration fixed annuities
Source: Federal Reserve of St Louis, Treasury data and BofA Merrill Lynch US Corporate Option-Adjusted Spreads
Select Bond Yields Credit and Maturity Spreads
Credit spreads returned to pre-crisis levels, but the yield curve is steeper. This environment
favors longer duration products such as FIA with GLWBs.
© 2014 Oliver Wyman 9 9 © 2014 Oliver Wyman
Annuity M&A activity is being driven by private equity and alternative buyers Acquirer/Seller (date)
© 2014 Oliver Wyman 10 10 © 2014 Oliver Wyman
Recap of annuity market dynamics
1 Stable VA sales, but shifting players
2 FIA market is expanding fast
3 Risk premiums back to pre-crisis levels
4 Significant M&A activity dominated by private equity and alternative buyers
© 2014 Oliver Wyman
Product trends
Section 2
© 2014 Oliver Wyman 12 12 © 2014 Oliver Wyman
Key annuity product trends
1 VA / FIA hybrids
• Short surrender charge designs with floors less than zero, registered and no minimum
contract value
• Can be VA or FIA by design
• Downside protection via “protection buffers” or “protection floors”, but higher upside
• Sellers include AXA, Allianz Life, MetLife and CUNA Mutual
2 Volatility control
strategies
• Firmly established in VA space
• Emerging in FIA space
3 Nursing home
benefits
• Up to double the GLWB income for a number of years if cannot perform 2 of 6 ADLs
• Increasingly common in FIA space
4 Deferred income
annuities
• Predictable deferred income
• Level income, constant increases, CPI increases or dividend increases
© 2014 Oliver Wyman 13 13 © 2014 Oliver Wyman
Key annuity product trends (continued)
5 VA sales with no
living benefits
• Certain carriers successful in driving VA sales with no living benefit guarantees
• Lower cost designs
• Investment and tax deferral play
6 Stacked rollups • Emerging in FIA space
• AG 33 friendly
7 Flexible designs • At issue: Tie income rates to rate environment
• After issue: Indexing product features
8 Buyback programs • Variable annuities: AXA, The Hartford and Transamerica
• Fixed annuities: The Harford
© 2014 Oliver Wyman
Pricing, valuation and risk
management issues
Section 3
© 2014 Oliver Wyman 15 15 © 2014 Oliver Wyman
Pricing considerations
1 Lapses
• Base rate + impact of GLB
• Policy year skew
• Dynamic rate (base contract for FA / FIA)
• Dynamic rate (GLB in-the-moneyness driven)
2 Age Mix / GLWB
Election
• Utilization cohorts
• Utilization skew (feature driven)
• Utilization skew (attained age driven)
3 Mortality • Base rate
• Mortality improvement
© 2014 Oliver Wyman 16 16 © 2014 Oliver Wyman
Valuation and regulatory radar
AG 33 GLWB
statutory reserves
(in progress)
Valuation and capital for
FIA / VA hybrids (in
progress)
Solvency 2
(2016 or later)
VM-22 (2016)
Risk-based capital
(2014 updates)
2012 IAR table (2014-
2015)
IFRS 9 (2018)
US GAAP targeted updates
(TBD)
NAIC Private Equity
Issues (E) Working Group
© 2014 Oliver Wyman 17 17 © 2014 Oliver Wyman
Risk management radar
ORSA (2015)
Dynamic lapses
Emerging GLWB
utilization experience
Low rate environment /
Federal Reserve actions
Inforce blocks
approaching end of the
surrender charge period
Hedging of GLWBs
Hedging of interest rates
Volatility as an asset class
© 2014 Oliver Wyman
Watch list
Section 4
© 2014 Oliver Wyman 19 19 © 2014 Oliver Wyman
1 Interest rates
2 M&A activity
3 Product innovation
4 Behavioral assumptions
Watch list