Oliver Wyman Annuity Product Development Trends - 2014 SOA Annual Meeting Exhibit

© 2014 Oliver Wyman

Guillaume Briere-Giroux, FSA, MAAA, CFA

Annuity Product Development Trends Market and Product Development Trends for Fixed Indexed Annuities

2014 SOA Annual Meeting & Exhibit

Orlando – October 27, 2014

© 2014 Oliver Wyman 1 1 © 2014 Oliver Wyman

Agenda

I. FIA market update

II. FIA product trends

III. Hybrid annuities

IV. Key takeaways


Indexed annuity sales trends (2001-2014) FIA sales are on pace to achieve a 10% cumulative annual growth rate (CAGR) between 2007 and 2014

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

50.0

0

10

20

30

40

50

60

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

10.4% CAGR

Industry forecast

FIA market update


Top FIA writers in 2014 (1-10)

High

Low

Rank

(2014

Q2 YTD)

Company 2014 Q2

YTD Sales

($ Billions)

2013 Q2

YTD Sales

($ Billions)

YoY Change

(%)

% Indexed

(2013)

% Variable

(2013)

% Fixed

(2013)

1 Allianz Life 6.61 2.40 175%

2 Security Benefit 2.35 2.08 13%

3 American Equity 1.91 1.97 -3%

4 Great American 1.56 1.09 43%

5 Athene1 1.19 1.34 -12%

6 Midland National .90 .81 11%

7 Voya .85 .52 65%

8 EquiTrust .82 1.00 -18%

9 Symetra .74 .44 68%

10 Fidelity & Guaranty Life .70 .49 41%

Composition of sales

1 2013 sales figure combines Aviva and Athene

Source: Wink’s Sales & Market Report and LIMRA

FIA market update

4 4 © 2014 Oliver Wyman

Lincoln

Symetra

Competitive landscape (2013) 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 broker dealers

Independent and banks

Independent organizations

Recent

Acquirers

U

S S

tock

Com

panie

s

Fo

reig

n

Subsid

iarie

s

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

Private

ly

Held

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

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

%

%

%

%

%

FIA market update

5 5 © 2014 Oliver Wyman

AmerUS

(Aviva USA / Athene Block)

ING

(Now VOYA)

Competitive landscape (2005) The FIA market was previously heavily concentrated in “niche players” focusing on the independent channel

Source: Advantage Compendium and Oliver Wyman Research

Banks and broker dealers

Independent and banks

Independent organizations

Recent

Acquirers

U

S S

tock

Com

panie

s

Fo

reig

n

Subsid

iarie

s

Mutu

al

Com

panie

s

Ow

ners

hip

Str

uctu

re


A++ A A- B++ B+ B

Market share and dominant distribution channels by ownership structure and credit rating

Private

ly

Held

Career


market share

Primary distribution channels

A+

Allianz Life

Jackson

National

American Equity EquiTrust

Midland

National

Jefferson Pilot

(Now Lincoln)

Sun Life

(Now Delaware

Life)

All other

companies

%

%

Old Mutual

(Now Fidelity &

Guaranty Life)

15.2

8.7 32.3

8.89.9

7.5% %

%

%

% %

FIA market update


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

FIA market update

Credit spreads returned to pre-crisis levels, but the yield curve is steeper. This environment

favors longer duration products such as FIA with GLWBs.

7 © 2014 Oliver Wyman 7

Base product design trends

FIA product trends

1 Volatility control

indices

• Lower hedge cost allows uncapped upside

• Sellers include Security Benefit, Symetra, Allianz Life, Fidelity and Guaranty Life

2 Liquidity features

• Features that are not new but popular include

• Return of premium

• Bailout provisions

• Nursing home waivers

• Shorter surrender charge designs gained popularity

3 Other

accumulation

features

• “Buy up” the cap

• Rolling forward index credits

• Credits linked to change in interest rates

• Guaranteed minimum values

Average commissions have been declining but the trend has stabilized in recent quarters


Benefit rider trends

1 Indexed-linked

income growth

• “Stacked” rollups (e.g. 4% + account value performance)

• “Turbocharged” account value driving income

• Income increases after income start

2 Other variations in

lifetime income

structures

• Rollups are compound / simple / or absent (e.g., vary income rates by age / duration)

• Limiting rollups / limiting younger issue ages common (AG 33)

• Less breakpoints in income bands

• More income options (flat, guaranteed increase or index-linked increases)

3 Nursing home

income riders

• Offered for free or additional charge (e.g. 10 bps)

• Typically doubles the income for up to 5 years if cannot perform 2 of 6 ADLs

• Becoming increasingly common

• Complex to price

4 Enhanced death

benefits

• Offered with or without GLWB (sometimes for an additional charge)

• Wait periods

• Maximum payout

• Payout periods / reduced lump sum

Benefit riders are the most important driver of sales for many carriers, but less so for carriers

focusing on distribution through banks. The next slide shows the relationship with between

rider richness and market share for top FIA carriers offering benefit riders.

FIA product trends


Rider competiveness The richness of GLWB riders and “extras” such as nursing home “doublers” and GMDBs correlates fairly well with market share changes

Decreasing market share

Increasing market share

Stable market share

Rid

er

Co

mp

osit

e R

ich

ness In

dex*


A++ A A- B++ B+ B

Market share and market share changes by credit rating and rider richness


market share

Market share changes

A+

Company E

Company G

Company D

Company B

Company A

Company C

Company F

Source: Sales from Wink’s Sales & Market Report

Rating / rider richness

“equivalent” line

*Rider composite richness index

includes allowance for GLWB

payouts, rider charges, presence

of nursing home benefits and

GMDBs.

This analysis does not factor

commissions, distribution

allowances or base credited

rates.

Lo

wer

Hig

he

r

FIA product trends


Hybrid annuities “Hybrid” or “structured” annuities fill the spectrum between FIAs and variable annuities and had sales of more of $4 billion since their introduction in 2010

Hybrid annuities


Hybrid annuity crediting structures compared to FIAs and VAs

Note: For illustrative purposes, assumes no fees and no dividends

Hybrid annuities


Key takeaways

1 FIA market continues to expand quickly

2 Target volatility indices continue to gain traction

3 Increased differentiation of benefit riders

Key takeaways

Oliver Wyman Annuity Product Development Trends - 2014 SOA Annual Meeting Exhibit

Economy & Finance

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