Oliver Wyman FIA Market Update Life and Annuity Symposium May 2014

© 2014 Oliver Wyman

Guillaume Briere-Giroux, FSA, MAAA, CFA

Fixed Indexed Annuity Market Update

2014 Life and Annuity Symposium

Atlanta – May 20, 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


Market dynamics

Section 1


Annuity sales trends (2007-2013) Fixed indexed annuities (FIAs) are now firmly established as the second largest annuity segment

Variable

Indexed

MVA

Book value

SPIA

DIA

Sales data from LIMRA

Mark

et

risk fo

r p

olicyh

old

er

Lo

wer

Hig

he

r


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

illio

ns

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


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 wirehouses

Independent and banks

Independent organizations

Private

Equity

Ow

ned

US

Sto

ck

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

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

%

%

%

%

%


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 wirehouses

Independent and banks

Independent organizations

Private

Equity

Ow

ned

US

Sto

ck

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% %

%

%

% %


Recap of trends in market players and distribution

1 Foreign subs in retreat

2 Private equity gaining ground

3 Expansion in banks and broker dealers

4 Broader carrier base


FIA market driving forces Significant changes are being driven by the following key forces

Forces Description Sales New Entrants

/ Channels

M&A

Activity

Changes in

Domicile

Interest rates • Low interest rates are driving a “search for yield” and players

with alternative asset strategies are becoming prominent

Regulatory • Variations in how states apply reserve and capital requirements

• Solvency II and Canadian solvency requirements

Demographics /

consumer needs

• Income riders make up ~65% of sales and 70% of agents

consider them a “must have” (Phoenix survey)

• Baby boomers nearing retirement with significant wealth are

nearing “peak age” for FIA sales

Inforce blocks

• Most sales from 2004-2005 (peak years before introduction of

FIA income riders) are about to exit the surrender charge period

• This should propel sales in 2014-2015; we expect business

rolling off the books to be a more significant driver of FIA sales

moving forward (as with the VA market)


Economic conditions FIA sales are benefiting from higher investment yields since mid-2013

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 are slightly above pre-crisis levels and the yield curve is steeper. This makes

FIAs comparably more attractive than alternatives such as fixed annuities (generally shorter

maturities) or CDs.


Acquisitions by private equity / alternative buyers reshaped the FIA market Acquirer/Seller (date)


Many FIA carriers decided to re-domicile in the past year Regulatory environment, pool of insurance expertise and operating costs are drivers

Relocation to Iowa announced January 2014

Relocation to Iowa announced November

2013

Relocation to Illinois announced January 2014

Decided to locate overall headquarters in Des Moines

(2013) and relocated jobs from Kansas (2014)


Product trends

Section 2


Notable base contract features and trends

1 VA / FIA hybrids

• Can be VA or FIA by design

• Designs with floors less than zero, registered and no minimum contract value

• Downside protection via “protection buffers” or “protection floors”

• Higher upside

• Short surrender charges

• Sellers include AXA, Allianz Life, MetLife

2 Volatility control

indices

• Lower hedge cost allows uncapped upside

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

3 Liquidity features

• Features that are not new but popular include

• Return of premium

• Bailout provisions

• Nursing home waivers

• Shorter surrender charge designs gained popularity

4 Other

accumulation

features

• “Buy up” the cap

• Rolling forward index credits

• Credits linked to change in interest rates

• Guaranteed minimum values

Average commissions continue to decline, but much of this is driven by the popularity of

shorter surrender charge designs as opposed to changes in the interest rate environment


Benefit riders

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


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: Wink’s Sales & Market Report and Oliver Wyman Research

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


Pricing, valuation and risk

management issues

Section 3


Pricing, valuation and risk management issues

1 Pricing assumption checklist

2 Valuation and regulatory radar

3 Risk management radar


1. Pricing assumption checklist

1 Lapses

• Base rate + impact of GLB

• Policy year skew

• Dynamic rate (base contract)

• 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

4 Management

Actions

• Crediting rate strategy

• Initial asset mix

• Reinvestment strategy

5 Economic

Assumptions

• Interest rates

• Credit spreads and default costs

• Equity performance

• Volatility skew


2. 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


3. 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


Watch list

Section 4


1 Interest rates

2 M&A

3 Statutory reserving

4 Risk management of riders

Watch list

Oliver Wyman FIA Market Update Life and Annuity Symposium May 2014

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Transcript of Oliver Wyman FIA Market Update Life and Annuity Symposium May 2014