Session 62: Annuity Update

SOA Antitrust Disclaimer SOA Presentation Disclaimer

© Oliver Wyman

Annuity updateSOA – 2019 Life and Annuity Symposium

Tampa, FL – May 21, 2019

Nicholas Carbo, FSA, MAAA

1© Oliver Wyman

Agenda

1 Sales update

2 Product innovation/rates and reinsurance

3 Regulations impacting annuities

4 Alliance for lifetime income

2© Oliver Wyman

Annuity sales 2008 – 2018FIA and RFIA sales have been the main driver of increasing annuity sales over the last several years

Book value

SPIA

DIA

Mar

ket r

isk

for p

olic

yhol

der

Source: LIMRA

Low

erH

ighe

r

201320122011201020092008 20172014 2015 2016

Variable

Registered indexed

MVA

Fixed indexed

2018

3© Oliver Wyman

Top 10 annuity writers in 2018The top selling annuity writers in 2018 are diversified across a number of annuity typesRank Company 2018 Sales ($BN) % Indexed % Variable % Fixed

1 AIG companies 18.3

2 Jackson National Life 17.4

3 New York Life 14.1

4 Lincoln Financial Group 12.7

5 Allianz Life 11.5

6 AXA 10.7

7 TIAA CREF 10.3

8 Nationwide 10.3

9 Pacific Life 9.3

10 Prudential Annuities 9.2

Top 10 sales 124.0

4© Oliver Wyman

Recent annuity innovationOther than the advent of RFIAs, product innovation in retail annuities has been largely incremental and focused on de-risking

Variable annuities

Fixed index annuities

RFIA development

• GLWB rider inclusion

• Buffer vs floor design

• Volatility-control indices– Higher potential upside

• Liquidity-focused features– Shorter surrender charge periods– Bailout provisions

• Index-linked income– “Stacking” roll-ups– Growth potential in income even after

policyholder begins withdrawals• Fee based offering?

• Volatility-control funds– Required for most living benefits

• UST-indexed features– Roll-up/payout rates linked to the UST

• VIX-indexed features– Rider fees linked to the VIX

• Tiered withdrawal rates– Payout rate declines after account

value depletes

5© Oliver Wyman

Fee-based FIA product launchesFee-based FIA products have made up 0.50% of the 2018 industry FIA sales

September 2017

• American Equity– Eagle Advisory 8

Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017

December 2015

• Midland National– MNL Prosper 5

August 2016

• Great American– Index Protector 7

February 2017

• Allianz– Retirement

Foundation ADV Annuity

February 2017

• Lincoln– Lincoln Core

Capital

May 2017

• Pacific Life– Pacific Index

Advisory

July 2017

• Nationwide– Nationwide

Summit

July 2017

• Symetra– Advisory Edge– Income Advisory

Edge

Q1 2018

February 2017

• AIG– Power Index

Advisory

January 2018

• Prudential– PruSecure

Advisor

March 2018

• Jackson National– Marker Protector

First product with no surrender charges!

There have been no fee-based FIA launches since Q1 2018

6© Oliver Wyman

Registered fixed index annuity product launches Increasing sales has attracted more participants into the registered fixed index annuity space

2010 2013 2014 2015 2016 2017

Oct 2010• AXA introduces

Structured Capital Strategies

May 2013• Metlife introduces

Shield Level Selector

August 2013• CUNA introduces

Member’s Zone Annuity

September 2013• Allianz Life introduces

Index Advantage

January 2015• Voya

introduces Potential Plus

October 2015• Voya closes

Potential Plus

August 2017• Brighthouse introduces

Shield Level Select Access (Fee Only)

August 2016• CUNA introduces

Member’s Horizon Annuity

Feb 2017• AXA Structured

Capital Strategies Plus filed

2018

Feb 2018• Great West

launches Capital Choice

Nov 2018• Symetra

launches SymetraTrek

May 2018• Lincoln

launches Level Advantage

May 2018• Great

American launches Index Frontier

7© Oliver Wyman

M&A deals ($BN)The competitive annuity landscape has been transformed by a number of acquisitions and IPOs over the last 10 years

Alternative buyers Japanese insurers IPOs and spinoffs

2010 2011 2012 2013 2014 2015 2016 2017 2018

8© Oliver Wyman

VA GLWB income historyCarriers began to re-risk late last year, likely pressured by declining VA sales in 2016-2017VA GLWB income available after 10-year withdrawal delayBased on consistent set of major VA issuers in industry

• Oliver Wyman has tracked the annual income guaranteed by major variable annuity GLWB products since 2009

• In 2009, the average policyholders can withdraw over 10% of initial premiums each year after deferring for 10 years

• By 2014, this amount has dropped to 8% as legacy benefit parameters become unsupportable given low interest rates

• Range of variation across major products has also shrunk in the same timeframe, as industry has consolidated and moved to similar pricing methods

• In mid-2017, numerous carriers began re-risking –i.e., increasing benefit richness and removing investment restrictions– Changes “front ran” recent interest rate increase– Likely driven by rapidly-declining sales in 2016

and 2017, led partially by DOL threat

• As a result, range of product variation has opened up once more, signaling heating competition

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2009

Q1

2009

Q3

2010

Q1

2010

Q3

2011

Q1

2011

Q3

2012

Q1

2012

Q3

2013

Q1

2013

Q3

2014

Q1

2014

Q3

2015

Q1

2015

Q3

2016

Q1

2016

Q3

2017

Q1

2017

Q3

2018

Q1

2018

Q3

Inco

me

avai

labl

e af

ter 1

0 ye

ars

(% o

f pre

miu

m)

Range of income available Median income available 10-year UST

9© Oliver Wyman

Fixed annuity rate offeringsFixed annuities have seen no margin improvement from the recent interest rate rise, as all yield enhancements were passed back to the consumer

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Gua

rant

eed

cred

iting

rate

Range of crediting rates Median crediting rate

Reference portfolio gross yield

Evolution of crediting rates for 5-year MYGAsBased on consistent set of MYGA issuers in industry

Reference portfolio comprises 50/50 A/BBB public corporate bonds

10© Oliver Wyman

FIA GLWB AG 33 reserves exceed economic reservesConservative prescribed assumptions lead US statutory reserves to be higher than “economic reserves”

AG 33 RESERVES

1Policyholder utilization• Based on company pricing assumptions

• Experience is limited for GLWB benefits (can look to VAGLB)

2Discount rates• Related to the portfolio earned and expected reinvestment rates

• Responsive to current interest rate environment

3Mortality assumption• Based on company experience

• Typically higher mortality than the Annuity 2012 IAR

ECONOMIC RESERVES

VS

1Policyholder utilization• Optimal policyholder utilization

• Maximum present value of all benefit streams

2Discount rates• Prescribed by regulation

• No connection to the “actual” portfolio earned rate

3Mortality assumption• Mortality assumption has lower mortality than typical company

pricing assumptions

11© Oliver Wyman

FIA reserve financingFinancial reinsurance allows direct writer to hold less redundant reserves, reducing rider driven strain

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

0 5 10 15 20 25 30 35 40Duration

Account value GLWB reserve CSV Economic reserves

Illustrative account value and reserves Financial reinsurance considerations• Definition of economic reserves

• Risk transfer

• Recapture provisions

• Risk chargeReinsuring redundant reserves resultsin an increased IRR

Financial reinsurance is an opportunity to reduce strain and increase product profitability, but treaty and regulatory elements require careful consideration

12© Oliver Wyman

Initial view on principles-based CTE calculation for an FIA with GLWB

Initial reserve for a representative model point*

0

95

100

105

Lapses Principles based CTEAG 33 W/d wait Expenses

*Issue age 62 with a 8% simple rollup capped at 10 years and income rates varying by attained age

Range will vary by product, company and final VM-22 methodologies

VM-22 methodologies for a principle-based CTE calculation are not defined; the final manual will affect the principle-based reserve levels

13© Oliver Wyman

US state and NAIC Best Interest rules

History of the Fiduciary and industry annuity sales The DOL rule was struck down in June 2018, but there have been additional proposals that may result in potential headwinds for annuity sales

2015 2016 2017 2018 2019

DOL Fiduciary Rule Timeline

Other Best interest rules

April 6, 2016DOL final ruling published

Jun. 21, 2018DOL rule died

Early 2015DOL proposes Fiduciary rule

Annuity sales ($BN)April, 2018SEC rule proposed

32 36 33 32 27 27 26 25 24 25 26 26 25 26 25 25

1213 14 16

16 16 15 14 14 16 15 14 15 18 18 20

910 12 12

15 1411 10 13 12 11 10 12

15 15 17

0

10

20

30

40

50

60

70

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4VA FIA FA

Uncertain period

It was uncertain if FIAs would be included in the DOL rule, some distributors started

leaning toward FIAs instead of VAs

Source: LIMRA

?

14© Oliver Wyman

Best interest rule status by stateSeven states have proposed best interest regulation with three states adopting the proposals

Implemented

Proposed

Died

New York reg 187 is effective August 1, 2019 for annuities and February 1, 2020 for life insurance

15© Oliver Wyman

Standards comparisonThe DOL rule, NAIC best interest rule and Reg. BI impact different segments due to jurisdictional differences

NAICbest

interestFINRA suitability

Employer-sponsored plans DC & DB

Individual accounts

Mutual funds Annuities

ERIS

A pl

ans

& IR

AsN

on-E

RIS

A pl

ans

& n

on-

qual

ified

fund

s

ERISA fiduciary

DOL fiduciary

SEC best interest

Broker-dealers and investment advisors Insurance only agents

16© Oliver Wyman

Non-guaranteed element means any element within a policy provision other than an exempt policy provision that may be changed at the insurer’s discretion without the consent or request of the policy owner and that affects the policy charges or benefits. Non-guaranteed element includes indeterminate premium policy rates, expense and benefit charge rates, interest crediting rates, cost of insurance rates, and index account parameter, but shall not include elements that are not within the insurer’s discretion...

– NEW YORK STATE DEPARTMENT OF FINANCIAL SERVICES11 NYCRR 48 (INSURANCE REGULATION 210)

New York Regulation 210

17© Oliver Wyman

New York Regulation 210Mark your calendars

May 1“By May 1 of each year, the insurer shall file... a listing of any adverse change in the current scale of non-guaranteed elements of any existing policy that occurred in the prior calendar year.”

6 years“The insurer shall maintain in its records, for six years after the termination of the last policy subject to the board-approved criteria, the written documentation of the determination of non-guaranteed elements required by this Part.”

120 days“An insurer shall file any adverse change in the current scale of non-guaranteed elements…at least 120 days prior to implementation.”

60 days“An insurer shall provide a disclosure document to a policy owner…at least 60 days prior to any adverse change in the current scale of non-guaranteed elements.”

5 years“The board-approved criteria shall…include a statement of the maximum period, not to exceed five years, between reviews of anticipated experience factors and non-guaranteed elements for reasonableness.”

18© Oliver Wyman

Alliance for Lifetime IncomeThe Alliance for Lifetime Income has been rolling out various promotions to bring awareness to the benefits of guaranteed lifetime income

Goals of the Alliance for Lifetime Income• Awareness of annuity products

• Education on Lifetime income products

• Benefits of your portfolio including lifetime income

• Removing misconceptions about annuities

Ways to get the word out• Various pop-up booths in 2018

• Sponsor 2019 Rolling Stones tour

• Bringing excitement to Lifetime Income, through various ads

19© Oliver Wyman

Key takeaways

1 Diversification outside of VAs will continue

2 Regulations will continue to impact the life and annuity business

3 The Alliance for Lifetime Income will increase awareness of annuities for those that need them most

20© Oliver Wyman

Questions

2019 Life and Annuity SymposiumAnnuity Update (Session 062)Bob Tomsik

To Participate, look for Polls in the SOA Event App or visit las.cnf.io in your browser

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Find The Polls Feature Under More In The Event App or Under This Session in the Agenda

NAIC VM-21 & C3 Phase2 Road Map

7

Variable Annuity Issues Working Group revises VM-21

New proposal to be effective 1/1/2020

NAIC commissions two Quantitative Impact Studies in 2015

Seeks recommendations to existing framework

NAIC Enacts C3P2 in 2006 and AG43 in 2009

Introduced extreme complexity on VA statutory balance sheet

Many companies implement captive reinsurance

What is the proposal?

8

3 Themes Emerge

Proposed VM-21 and C3P2 Themes

9

Comparability Across Organizations

• Standardize & update assumptions and methods

• Disclosure, disclosure, disclosure

Promote Hedging

• Hedge accounting for interest rate derivatives

• Removal of working reserve• Reduction in error factor

Reduce Non-Economic Volatility

• Align standard scenario calcwith stochastic CTE

• Policy aggregation permitted• Easier identification of reason

for standard scenario dominance

Adequate Liability Funding with Reasonable Confidence

Theme #1: Standardization

11

1 year 5 year 10 year 30 year

.

VM-20 ESG Company A Company B

Theme #2: Promote Hedging

Current AG43, with hedging Period 0 Period 1 Period 2 Period 3(A) Hedge Income -30 -5 -5(B) Revenue less Expenses & Claims 15 20 30(C) = -[(A)+(B)] Deficiency (Surplus) 15 (15) (25)(D) = ∑ (C) Accumulated Deficiency (Surplus) 15 0 (25)(E) = Max(0, (D)) Reserve $15

12

Current AG43, with NO hedging Period 0 Period 1 Period 2 Period 3(A) Hedge Income 0 0 0(B) Revenue less Expenses & Claims 15 20 30(C) = -[(A)+(B)] Deficiency (Surplus) (15) (20) (30)(D) = ∑ (C) Accumulated Deficiency (Surplus) (15) (35) (65)(E) = Max(0, (D)) Reserve $0

Theme #2: Promote Hedging

Proposed VM-21, with hedging1 Period 0 Period 1 Period 2 Period 3(A) Hedge Income -30 -5 -5(B) Revenue less Expenses & Claims 15 20 30(C) ∆ Policyholder Assets2 n/a 1,000 0 -1,000(D) = -[(A)+(B)+(C)] Deficiency (Surplus) (985) (15) 975(E) = ∑ (D) Accumulated Deficiency (Surplus) (985) (1,000) (25)(F) = Max(0, (E)) Reserve $0

13

1 Simplification where AV=CSV; 100% surrender @ t=32 Because working reserve is $0

Current AG43, with hedging Period 0 Period 1 Period 2 Period 3(A) Hedge Income -30 -5 -5(B) Revenue less Expenses & Claims 15 20 30(C) = -[(A)+(B)] Deficiency (Surplus) 15 (15) (25)(D) = ∑ (C) Accumulated Deficiency (Surplus) 15 0 (25)(E) = Max(0, (D)) Reserve $15

Theme #3: Reduce Non-Economic Volatility

• Ultimately four potential winners: AG43 SS/Stochastics and C3P2 SS/Stochastics. Under current structure, SS is not sensitive to interest rate movement, but the stochastics are. Explanation is very different depending on which one wins!

• Makes for discontinuities in funding that are hard to hedge

• New AG43 will align SS calculation with stochastic CTE framework– Scenario Amount = Starting Assets + GPVAD– Aggregation across policies permitted– Easier identification of reason for SS dominance

14

Theme #3: Remove Non-Economic Volatility

Standard Scenario Stochastics Max

Current AG-43Standard Scenario Stochastics Max

15

ρ (rho) 0 0 < ρ (rho) < Fair Value

Accounting Merge?

16

FASB LDTI: Market Risk Benefits (MRB), GMxB Summary

GMxB Today (FAS 133) TomorrowAccumulation (GMAB) FAS 157 (aka fair value) Fair ValueIncome (GMIB) SOP 03-1 Fair ValueDeath (GMDB) SOP 03-1 Fair ValueWithdrawal (GMWB) Varies in industry1 Fair Value

1 – variations include all SOP 03-1, all fair value, bifur

17

Putting it all back together

Questions to ask yourself:• Is the company I work for based in another country? Should I care about US

accounting?• What is the primary accounting framework used in pricing – statutory or GAAP?

Pricing Options:• Eat it• Avoid it Exit market• Shift it Reinsurance• Change it:

• Hedge program – increase rho hedging, move to fair value• Product design – create benefit tied to interest rate changes / minimize interest

rate sensitivity in benefit design 18