Session 60 PD, Annuity Product Development Trends Moderator: Guillaume Briere-Giroux, FSA, MAAA

Transcription

1 Session 60 PD, Annuity Product Development Trends Moderator: Guillaume Briere-Giroux, FSA, MAAA Presenters: Guillaume Briere-Giroux, FSA, MAAA Kendrick D. Lombardo FSA, MAAA Vikas Sharan, FSA, FIA, MAAA

2 Annuity Product Development Trends Market and Product Development Trends for Fixed Indexed Annuities 2014 SOA Annual Meeting & Exhibit Orlando October 27, 2014 Guillaume Briere-Giroux, FSA, MAAA, CFA 2014 Oliver Wyman

3 Agenda I. FIA market update II. FIA product trends III. Hybrid annuities IV. Key takeaways 2014 Oliver Wyman 1

4 FIA market update Indexed annuity sales trends ( ) FIA sales are on pace to achieve a 10% cumulative annual growth rate (CAGR) between 2007 and % CAGR 50 Industry forecast $ Billions Source: Wink s Sales & Market Report (2006 and prior) and LIMRA (2007 and later) 2014 Oliver Wyman 2

5 FIA market update Top FIA writers in 2014 (1-10) Rank (2014 Q2 YTD) Company 2014 Q2 YTD Sales ($ Billions) 2013 Q2 YTD Sales ($ Billions) YoY Change (%) % Indexed (2013) % Variable (2013) % Fixed (2013) Composition of sales 1 Allianz Life % 2 Security Benefit % 3 American Equity % High Low 4 Great American % 5 Athene % 6 Midland National % 7 Voya % 8 EquiTrust % 9 Symetra % 10 Fidelity & Guaranty Life % sales figure combines Aviva and Athene Source: Wink s Sales & Market Report and LIMRA 2014 Oliver Wyman 3

6 FIA market update Competitive landscape (2013) Today s FIA market has a broad range of players with increasing representation outside of the independent channel Market share and dominant distribution channels by ownership structure and credit rating Primary distribution channels Mutual Companies National Life Group Pacific Life Nationwide Western & Southern OneAmerica Independent organizations Independent and banks Banks and broker dealers Career Ownership Structure Foreign Subsidiaries US Stock Companies Privately Held Recent Acquirers Phoenix Fidelity & Guaranty Life CNO Companies Security Benefit EquiTrust Sagicor Life American Equity 11.7 % Forethought 7.1 % 10.4 Athene Allianz Life % VOYA Genworth 15.5 All other companies % National Western AIG Symetra Midland National 7.9 Lincoln Benefit Life % Jackson National Protective Life Lincoln Great American North American Size of bubbles represents 2013 market share B B+ B++ A- A A+ A++ Lower Credit Rating Higher Source: Wink s Sales & Market Report and Oliver Wyman Research 2014 Oliver Wyman 4

7 FIA market update Competitive landscape (2005) The FIA market was previously heavily concentrated in niche players focusing on the independent channel Market share and dominant distribution channels by ownership structure and credit rating Primary distribution channels Mutual Companies Allianz Life Jackson National Sun Life (Now Delaware Life) Independent organizations Independent and banks Banks and broker dealers Career Ownership Structure Foreign Subsidiaries US Stock Companies Privately Held American Equity 9.9 Old Mutual (Now Fidelity & Guaranty Life) % EquiTrust All other companies % % 15.2 % 8.8 % ING (Now VOYA) Jefferson Pilot (Now Lincoln) AmerUS (Aviva USA / Athene Block) Midland National 7.5 % Size of bubbles represents 2005 market share Recent Acquirers % B B+ B++ A- A A+ A++ Lower Credit Rating Higher Source: Advantage Compendium and Oliver Wyman Research 2014 Oliver Wyman 5

8 FIA market update Economic conditions The yield environment favors longer duration fixed annuities 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. Source: Federal Reserve of St Louis, Treasury data and BofA Merrill Lynch US Corporate Option-Adjusted Spreads 2014 Oliver Wyman 6

9 FIA product trends Base product design trends 1 Volatility 2 Liquidity control indices features Lower hedge cost allows uncapped upside Sellers include Security Benefit, Symetra, Allianz Life, Fidelity and Guaranty Life 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 2014 Oliver Wyman 7

10 FIA product trends 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 3 Nursing 4 Enhanced home income riders death benefits 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) 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 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 Oliver Wyman 8

11 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 Market share and market share changes by credit rating and rider richness Rider Composite Richness Index* Lower Higher Rating / rider richness equivalent line Company A Company B Company D Company C Company E Company G Company F Market share changes Stable market share Increasing market share Decreasing market share Size of bubbles represents 2013 market share *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. B B+ B++ A- A A+ A++ Lower Credit Rating Higher Source: Sales from Wink s Sales & Market Report 2014 Oliver Wyman 9

12 Hybrid annuities 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 Oliver Wyman 10

13 Hybrid annuities Hybrid annuity crediting structures compared to FIAs and VAs Note: For illustrative purposes, assumes no fees and no dividends 2014 Oliver Wyman 11

14 Key takeaways Key takeaways FIA market continues to expand quickly Target volatility indices continue to gain traction Increased differentiation of benefit riders 2014 Oliver Wyman 12

15 Annuity market update Variable annuities Vikas Sharan, FSA, MAAA 27 October 2014

16 Agenda Variable annuities History Sales trends Product development activity Inforce management Key takeaways Page 2 Annuity market update Variable annuities

17 Journey so far 1982 Free GMDBs 1990s Tax-deferred status 1996 VA sales $100B GLWB introduced GLWB features war 2006 GMIB 2008? confirmed introduced GMWB/GMAB Index annuity introduced 2012 sales $25B Great Recession Pullback and exits 2010 Rationality/ consolidation VA started as a product used for saving/accumulation and transitioned into a product used for income generation Source: IRI Fact Book Page 3 Annuity market update Variable annuities

18 Annuity market survey What we heard from survey participants New annuity business is down in 2013, but exchanges and transfers are up 50%. Insurers are innovating to impress analysts and shareholders. Insurers have lower credibility in our system due to recent actions. The froth in the index annuity market feels like the early days of the variable annuity market. It s back to the old days, focusing on tax deferral and capital growth. Insurers do not fully appreciate the gravity of their actions over the last several years. Net sales for variable annuities will increase by over 50% in the next five years. The annuity industry loves to compete on features, while the mutual fund and security industries compete on performance, customer service, reputation and consistency. Advisors want simpler products. Irrational pricing still exists. The next wave of innovation is on the horizon. Sales per advisor were twice as high in Private equity firms may not focus on customer priorities first. There must be a better way to get guaranteed income. Consumers don t understand complex index annuities. A psychological barrier to deferred income annuities still exists. Page 4 Annuity market update Variable annuities

19 Annuity market survey Key findings Predominant forces Intense competition among carriers remains planted in features, complexity and price Rivalry based competition increases the attractiveness of substitute offerings to both distribution and customers Once lured away, distributors and customers become increasingly difficult to lure back. Differentiating strategies Acknowledge the need to rebuild trust with advisors Continue to simplify and rationalize products Focus on service and experience and de-emphasize price Rethink innovation Page 5 Annuity market update Variable annuities

20 Annuity market sales trends VA sales levels off, increased competition from FIAs VA sales have leveled off in recent years per LIMRA*, influenced by A general pull-back from market leaders, coupled with general de-risking Withdrawal income benefit has competition from FIAs Competition from non-insurance solutions, e.g., mutual funds Sales ($B) VA FA FIA SPIA DIA Source: LIMRA Data Bank * 2014 sales calculated as annualized sales based on YTD 2014 Q2 sales. Page 6 Annuity market update Variable annuities

21 Variable annuity sales Market leader pullback and de-risking shifts the sales leader board Variable annuity sales for writers in the top 5 for the last six years shown below $30.0 VA Sales by Calendar Year Top 5 Companies in Sales Pullback: MetLife and Prudential open about pullback efforts in 2012, de-risk products and bring sales levels closer to the pack VA Sales ($B) $25.0 $20.0 $15.0 $10.0 Consistent mix: The top 5 list consists of the same companies. AIG replaced MetLife last year in the Top 5 list. $5.0 $ Jackson National Life Lincoln Financial Group TIAA-CREF AIG Prudential MetLife AXA Source: LIMRA Data Bank * 2014 sales calculated as annualized sales based on YTD 2014 Q2 sales. Page 7 Annuity market update Variable annuities

22 Variable annuity GLB election rates Increased lifetime withdrawal concentration, reduced election rates Distribution of GLBs by sales type and GLB election rate trends are shown below* Lifetime withdrawal benefit designs continue to increase their presence in the market relative to other benefit types. GLB election rates have fallen over the last several quarters. 56% 57% 58% 57% 59% 60% 61% 62% 100% 95% % Total Assets 31% 31% 30% 31% 30% 30% 29% 29% 13% 12% 12% 12% 11% 11% 10% 10% % Any GLB elected 90% 85% 80% Q Q Q Q % Q Q Q Q Q Q GMAB, GMWB & Hybrid GMIB GLWB * Source: LIMRA VA GLB Election Tracking Survey, Q Page 8 Annuity market update Variable annuities

23 Product development Latest developments and trends VA products continue to utilize features that help manage risk Target volatility funds now ubiquitous Derivative within the fund Feature Indexing linking contract features to a market index Several companies filing new products that allow flexibility to change roll-up rates and withdrawal percentages to be reactive to market conditions Newer annuity product designs emerging Deferred income annuities Some liquidity constraints, but starting to generate new sales New York Life has sold over $1 billion; at least nine other providers have product on market Structured hybrid annuities Index-linked annuities with downside protection provided in exchange for upside No living benefits offered on some of the early designs Growth oriented VAs Introduced to attract investors interested in return and low fees more than guaranteed benefits Jackson National achieved $1 billion sales in the first quarter of 2014 Page 9 Annuity market update Variable annuities

24 Product development Latest developments and trends Contingent deferred annuity (CDA) Insurance companies are partnering with asset managers to offer a guaranteed income rider on a mutual fund or a managed account investments Concept similar to VA with guaranteed withdrawal riders Offer downside protection in form of lifetime income Offer upside potential with step-ups Restriction on underlying MF/ETFs that can be included in the CDA by using an approved fund filter Proportion of CDA fee might vary by investment choice (e.g., higher fees for actively managed funds compared to index tracking funds) No death benefit Regulations still evolving NAIC working group: Page 10 Annuity market update Variable annuities

25 Annuity income comparison 30% Waiting 10 years to begin income Waiting 20 years to begin income Guaranteed withdrawals/payout as a percent of initial premium 25% 20% 15% 10% 5% 0% VA-10 FIA-10 VA-20 FIA-20 Payout as a % of initial premium DIA 10 female DIA 10 male DIA 20 female DIA 20 male Source: EY s Retirement Income Knowledge Bank, EY desk research Ignoring the impact of market returns, FIA products with GLWB riders provide higher guaranteed withdrawals than VA products with GLWB riders. More surprising is that some FIAs provide more guaranteed income than DIAs. Page 11 Annuity market update Variable annuities

26 In-force block management Variable annuity writers with legacy blocks still looking to offload risks Number of mergers and acquisitions (M&A) transactions in recent years Variable annuity block toxicity reduced somewhat from favorable equity markets and rising interest rates Industry still looking to reduce risk exposures Approaches: Buy-outs Hartford, Transamerica and AXA have experimented with GMXB buyout clauses AXA recently announced a second wave of offers on legacy policies sold Unclear how successful these program have been thus far Reinsurance options Straight all-in coinsurance deals still not widely available Longevity reinsurance transactions starting to emerge Divestiture Greater supply of buyers driven by private equity interest, as discussed Limits on distribution Restrictions on future contributions Page 12 Annuity market update Variable annuities

27 Risk management and hedging Programs undergoing evolutionary, not revolutionary change Equity markets have stabilized and interest rates have risen, but challenges still remain for hedging programs: Difficulty of having a single hedging strategic objective effectively address multiple accounting and regulatory frameworks Measurement of program objectives under multiple lenses, including statutory, US GAAP and economic Accounting mismatch issues on SOP 03-1-based benefits Industry trends in the hedging space include: Increased adoption of macro hedging strategies by variable annuity writers to complement core dynamic hedging strategies to manage tail risk and capital Increased sophistication of interest rate, equity and volatility models within valuation systems to produce more granular valuations Increased industry interest and adoption in GPU-based technology to accelerate processing times, increasing capacity and/or frequency of trade grid refresh Additional assistance from product design, with the emergence of target volatility funds and other features that help manage product risk Page 13 Annuity market update Variable annuities

28 Key takeaways Variations of product designs evolving in the market Continued evolution of risk management Carriers continue to de-risk VA offerings Further integration of risk management and hedge activity with product development to create sustainable offerings Products available in the market which seem more attractive than VA FIA sales will probably surpass VA sales in five years VA focus will increase on being a tax-deferred saving vehicle Page 14 Annuity market update Variable annuities

29 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US Ernst & Young LLP. All Rights Reserved ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com