Session 25 PD, Annuity Product Update - Fixed & Variable. Moderator: Kendrick D. Lombardo, FSA, MAAA

Transcription

1 Session 25 PD, Annuity Product Update - Fixed & Variable Moderator: Kendrick D. Lombardo, FSA, MAAA Presenters: Steven Roy Cramer, FSA, MAAA Casey Edward Malone, FSA, CERA Michael P. Sparrow, FSA, CERA, MAAA

2 Income Annuity Update Presented by Casey Malone, FSA, MAAA, CERA Consulting Actuary May 19, SOA Life and Annuity Symposium

3 Income Annuity Sales *Limra SRI 1 May 29, 2014

4 SPIA Sales Sales were up 8% from 2012 to 2013 after being down 5% from 2011 to Sales were down in the first half of the year, but rebounded late -> up 30% from Q to Q * Could it be the rates? Pretty good bet. *Limra SRI 2 May 29, 2014

5 Deferred Income Annuities ( DIA ) SPIA with a deferred income date, e.g. purchased at age 50 for income to begin at age 70. Sales growth of 113% from 2012 to 2013* Rates can t be the whole story. Offered by about 12 companies (up from 6 in 2012): New York Life Northwestern Mutual Mass Mutual Guardian The Principal CUNA Mutual Lincoln Met Life Prudential American General Symetra USAA *Limra SRI 3 May 29, 2014

6 Sales Decomposition Type All Fixed SPIA/DIA SPIA DIA Change 4.7% 17.3% 20.7% 7.8% 120.0% Possible Driver Fixed Sales Rates Rates Rates Innovation Type All Fixed SPIA/DIA SPIA DIA Q Q % Change 17.5% 44.6% 38.5% 30.0% 82.1% Possible Driver Fixed Sales Rates Rates Rates Innovation Type All Fixed SPIA/DIA SPIA DIA Q1 Q Q1 Q % Change 0.7% 8.4% 13.9% 0.0% 144.3% Possible Driver Flat VA De risk? DIA Flat Innovation YE 2012 Q Q Q YE yr UST 1.78% 1.87% 2.52% 2.64% 3.04% Qtrly Change 0.09% 0.65% 0.12% 0.40% 4 May 29, 2014

7 Appeal of DIAs Deferral period allows consumer to isolate longevity risk. Deferral period means less assets need to be allocated to longevity piece. Less of a drop in liquid assets to the consumer Less of a drop in AUM for producer Allows greater equity/bond market participation Flexible premium approach would allow for future interest rate participation or inflation protection during the deferral period. Much wider consumer base: Appeals to income someday customers, not just income today customers. BYOP Build your own pension 5 May 29, 2014

8 DIA GMWB Tradeoffs Male, issue age 55, income age 65, $100,000 premium, death at age 90 DIA: 10 yr certain after 10 years, ROP DB for 10 years, $9,480 annual income GMWB: 6% simple rollup for 10 years, 4% w/d rate at age 65, 3.5% total AV drag (M&E, rider, inv. mgmt.), $6,400 annual income 6 May 29, 2014

9 DIA Innovation New York Life New York Life s GFIA (guaranteed future income annuity) Flexible premium DIA Income is purchased at the current rates at the time of premium payment. GFIB (guaranteed future income benefit) rider on Income Plus VA VA rider with guaranteed income set at issue (like GMxB) Money is transferred at NYL s discretion from the VA account value to fund the DIA income Depending on market performance and interest rates, the policyholder may have money in their VA account value at the income start date. 7 May 29, 2014

10 DIA Innovation - Guardian Guardian attached a DIA rider to an IOVA chassis Transfers from VA account value purchase DIA income at current rates Long deferral periods -> earlier of 40 years and age 85 (70 ½ for qual) -> isolates longevity when you need it Optional return of transferred amount death benefit No guarantee like NYL GFIB, but policyholder retains complete control of assets. 8 May 29, 2014

11 DIA Innovation Northwestern Mutual Participating DIA Single premium locks in guaranteed income amount after the deferral period. The income amount could increase through dividends. The dividends can be taken in cash or rolled into increased future income. 9 May 29, 2014

12 2012 IAR Table SPIA/DIA issued in 2014 will be reserved under this new table. All else equal, it should have pricing implications. Source: AAA Report to LATF, Sept

13 2012 IAR Table Reserves will increase at most ages and durations. Largest increases are seen for the DIAs. Source: AAA Report to LATF, Sept

14 Conclusions Rates are going to be the major driver of fixed sales fluctuations over short periods. Demographics are slow to take hold as a major driver, but should drive long term trends. Innovation can possibly drive a shift into income annuities. In SPIA, innovation is stifled by the limitation of taking income within 1 year. The deferral period in DIA frees us up to innovate designs and hybrid products that more closely match many consumers life cycle needs. 12 May 29, 2014

15 Variable Annuity Product Development Update Michael Sparrow, VP & CFO Annuity Products SOA Life & Annuity Symposium May 19,

16 State of Variable Annuity Sales Market for VAs is going sideways VA sales down in consecutive years, despite great markets Living benefit value prop is diminished, less attractive to advisors Current sales are being replaced by alternative vehicles $Bs VA Industry Sales Nationwide Financial * Source: LIMRA 14 VA Product Development Update May 2014

17 State of Variable Annuity Sales Few of industry leaders is showing an appetite for LB growth AIG, Transamerica, Lincoln showed significant growth Jackson shifted mix to IOVA, halted sales to manage capacity Former leaders ceded significant market share to peers Met Life Pru Nationwide Ameriprise TAIA-CREF Jackson AXA Pac Life SunAmerica Lincoln Transamerica Industry Sales Growth Rates: Nationwide Financial * Source: LIMRA -40% -30% -20% -10% 0% 10% 20% 30% What happened to the arms race? 15 VA Product Development Update May 2014

18 What are the possible drivers? Economic Continued low rate environment Desire to take profit following weaker periods Saturation of LB risk Environmental / Other Fed oversight Accounting changes Strain of current statutory reserve rules Discipline??? Nationwide Financial Has the industry gotten smarter or is this just a phase? 16 VA Product Development Update May 2014

19 What has this meant to product developers? Key product trends to discuss Updates to LB portfolios Continued focus on risk management in design Rate sheeting Investment only VAs (IOVAs) Alternative benefit structures Non-equity VAGLBs Fixed Indexed annuities and Structured VAs Nationwide Financial 17 VA Product Development Update May 2014

20 Recent VA Product Updates Product update season revealed surprisingly little change to core VAs of the market leaders Spring product update highlights: A few withdrawal benefit increases Pru HD and Transamerica Modest fee changes Pac Life and Ohio National Jackson suspends rollup GMDB Are rollup death benefits going to become extinct? New investment only VAs from Pru and AXA, others pending Usual addition / closure / renaming of funds Nationwide Financial 18 VA Product Development Update May 2014

21 Risk managed investments Vol Control Funds Basic lever is risky asset weighting, but approaches vary Target fund s volatility to a prescribed level Set an absolute limit on fund s volatility Protect against principal loss Capped Volatility Target Volatility Characteristics Focus on tail protection Realized vol driven Never increases core risk exposure Both tail & upside effects Realized vol driven Overweight equity in low vol environment Outcomes Less severe drops Lower E(return) Easier to explain results Modest resv benefit Less severe drops Can outperform static fund Harder to explain Better resv benefit Nationwide Financial Principal Protection Both tail & upside effects Considers both vol and gain/loss experience Put-like hedge strategies Can maximize loss protection & resv benefits Very complex strategy Difficult to explain results 19 VA Product Development Update May 2014

22 Risk managed investments Design Choice Policyholder Returns across different scenarios and time horizons Cost of fund mgmt Insurance Company Policyholder Insurance Company Risk and volatility Profitability Firms and Advisors Continuity of carrier and products Transparency Firms and Advisors Nationwide Financial Decision process can be hard. What is most important to your company risk reduction, pricing benefits, fund return outcomes, ability to easily explain and differentiate? 20 VA Product Development Update May 2014

23 Rate sheeting Companies have begun adopting rate sheeting as a tool for more active management of GLWB profitability and competitiveness Benefits Respond to competitive trends faster Less volatile sales Manage profits better Challenges Operationalizing in systems, marketing, and communications Regulatory filings still required Firm acceptance of frequent or unexpected changes Effective May 1, % % % % Nationwide Financial 21 VA Product Development Update May 2014

24 Investment Only VAs Key features of IOVAs Capitalizes on trend toward higher tax rates Extensive array of investments (100+) Tendency towards lower M&E fees No guaranteed benefits or only basic GMDB Key product activity Jackson s Elite Access is the benchmark Who is next behind Jackson to have success? AXA Investment Edge (new) PRU Premier Investment (new) Nationwide Market Flex Nationwide Financial Can tax deferral return to prominence as a primary engine of VA sales? 22 VA Product Development Update May 2014

25 Alternative Structures Different forms of guarantees are eating away at traditional VA investor base Bond only WBs Structured note like designs Fixed indexed annuities Bond Only Prudential Defined Income growing since 2013 debut Like a WB on a fixed annuity, but May be a more capital and risk efficient way to deliver it Contingent Deferred Annuities (CDAs) Interest and momentum appears to have dissipated Similar attempts to target fee-based advisors with VAs have had limited success Nationwide Financial 23 VA Product Development Update May 2014

26 Conclusions The VA world has changed, perhaps for a long time to come Back to the future for tax deferral Long term future of VA guarantees is uncertain Alternative designs are on the rise Volatility control funds have a future beyond just VA market Questions? Nationwide Financial 24 VA Product Development Update May 2014

27 Index Linked Variable Annuities Update & Developments Steve Cramer, FSA, MAAA VP, Product Development

28 Questions 26 1) What are they? 2) Where do they fit? 3) How do they work? 4) What has happened lately? 5) Other questions?

29 What are they? 27 Unit Linked VA s Index Linked VA s FIA s: Fixed Indexed No guaranteed accumulation No guaranteed accumulation Guaranteed accumulation Full upside potential More upside potential Limited upside potential Full downside risk Limited downside risk No downside risk Unitized fund performance Performance tied to an index Index interest credited

30 Where do they fit? 28 Variable Traditional VA Unitized Indexed Annuities

31 How do they work? 29 Consumer Returns 50% 25% 0% -25% -50% -10% 0% +5% +10% +15% Traditional VA

32 How do they work? 30 Consumer Returns 50% 25% 0% -25% -50% -10% 0% +5% +10% +15% Traditional VA FIA

33 How do they work? 31 Consumer Returns 50% 25% 0% -25% -50% -10% 0% +5% +10% +15% Traditional VA FIA ILVA (Buffer)

34 How do they work? 8 50% Consumer Returns 25% 0% -25% -50% -10% 0% +5% +10% +15% Traditional VA FIA ILVA (Buffer) ILVA (Floor)

35 What has happened lately? 33 Launch Date: 10/2010 5/2013 9/2013 8/2013

36 What has happened lately? 34 1) Multiple carriers have entered market 2) LATF Subgroup a) Model 250 (VA) or 255 (MGA)? b) Consumer issues? 3) Illinois proposed regulation a) Classified as Variable b) Consumer issues?

37 Other questions? 35 1) Who will enter this space? 2) What volume can we achieve? 3) Will the simplifying trend continue?

38 Other resources? 36 1) Article in The Actuary Structured-Note Annuity: A Niche Industry is Born with Endless Possibilities By Joe Halpern and Greg Henke 2) LATF Subgroup 3) Illinois Proposed Regulation