Session 106 PD, Annuity Hot Topics Moderator: Dean Andrew Kerr, FSA, ACIA, MAAA Presenters: Meghan Belinski, FSA Dean Andrew Kerr, FSA, ACIA, MAAA Timothy C. Pfeifer, FSA, MAAA
ANNUITY HOT TOPICS 106PD - 2014 SOA ANNUAL MEETING & EXHIBIT October 28, 2014 Dean Kerr, FSA, MAAA, ACIA CONSULTING ACTUARIES Oliver Wyman
Session overview Dean Kerr Introductions Overview of current hot topics and trends in the annuity space Hybrid (aka structured) annuities industry view Meghan Belinski Hybrid annuities company view Tim Pfeifer Variable annuities Fixed indexed annuities Contingent deferred annuities Deferred income annuities Oliver Wyman 1
Annuity trends Annuity sales: 2004-2013 300 250 Dollar billions 200 150 100 133 137 160 184 156 128 140 158 147 145 50 88 80 78 73 109 111 82 80 72 85 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Fixed Year Source: LIMRA Secure Retirement Institute, U.S. Individual Annuity Sales Survey Variable Overall, the individual annuity market has stayed around the same size for a decade Oliver Wyman 2
Annuity trends Year-to-date sales ($ billions) Variable YTD 2014 YTD 2013 % change Separate account 55.3 58.4-5% General account 15.1 14.9 1% Total variable 70.4 73.3-4% Fixed Fixed deferred 40.1 28.3 42% Indexed 24.3 17.2 41% Fixed-rate deferred 15.8 11.1 42% Book value 11.2 8.2 37% Market value adjusted 4.6 2.9 59% Fixed immediate 5.1 3.6 42% Structured settlements 2.6 2.5 4% Deferred income 1.3 0.9 43% Total fixed 49.1 35.3 39% Total 119.5 108.6 10% Source: LIMRA Secure Retirement Institute, U.S. Individual Annuity Sales Survey (2014, 2nd quarter) Oliver Wyman 3
Hybrid annuities More than $4 billion in sales since their introduction in 2010 Oliver Wyman 4
Hybrid annuities Consumer appeal Fills risk spectrum between FIAs and accumulation VAs invested in an index fund Higher index cap than traditional FIA Buffer design No losses if index drop remains within buffer Uncapped losses after buffer breached Floor design Immediate losses with index drops Losses are limited to floor Hybrid annuities provide consumers with higher index-linked upside potential relative to traditional FIAs in exchange for sharing some downside return risk Oliver Wyman 5
Hybrid annuities Indexed-linked account value growth profile (before fees) 1 FIA with annual cap AV growth Variable annuity AV growth Index return Index return Hybrid annuity buffer design AV growth Hybrid annuity floor design AV growth Index return Index return 1 Assumes no dividends. Oliver Wyman 6
Hybrid annuities Comparison of annuity design elements Fixed indexed annuity Variable annuity Hybrid annuity No downside risk 1 Unlimited downside risk Downside risk with some protection via buffer or floor Participate indirectly in the performance of the underlying index Choice of index, crediting method and term Invest directly in separate accounts/funds Choice of investment options Participate indirectly in the performance of the underlying index Choice of index, crediting method, term and protection level Guaranteed minimum crediting rate No guaranteed minimum crediting rate outside of the fixed account No guaranteed minimum crediting rate Fixed account is available Guaranteed living benefits are usually available Fixed account is often, but not always, available Guaranteed living benefits are usually available Fixed account is not usually available (only one carrier offers a fixed account in the investment options) Lack guaranteed living benefits 1 Ignores surrender charges and other account-based charges. Oliver Wyman 7
Hybrid annuities Design considerations FIA like design VA like design M&E fee None M&E fee Present Investment allocation Policyholders can allocate to one or more segments/accounts Investment allocation Policyholders can allocate between variable options and structured investment/index options Crediting mechanism Each segment/account credits a return based on the underlying index, term, buffer or floor Crediting mechanism Variable options behave like a traditional VA, and an investment expense applies Structured investment/index options behave similarly to "FIA like" products Oliver Wyman 8
Hybrid annuities Product development and pricing considerations Complexity Policyholder behavior Impact of hedging Lack of guaranteed living benefits simplifies pricing Leverage synergies with FIA and VA designs Interestsensitive and indexsensitive dynamic lapses Reduce costs Increase competitiveness Administration Management of nonguaranteed items General risk management Modeling Modeling and implementation of frameworks complex No wellestablished US Statutory or US GAAP frameworks Filing and regulatory concerns Reserving Model regulations and laws Regulatory Oliver Wyman 9
Hybrid annuities The future outlook for hybrid annuities is bright Consumer appeal Access to new distribution Balancing product profile Offsetting VA guarantee risks Sustainable design in a low rate environment There are ample opportunities for new entrants Oliver Wyman 10
UFS Meghan Belinski, FSA AVP & Actuary, MetLife Retail Retirement Products October 28, 2014 For Financial Professional Use Only. Not for Use with the General Public.
Product Overview Registered Single Premium Deferred Annuity sold by prospectus No M&E or annual contract fee Six year surrender charge period Optional Return of Premium death benefit For Financial Professional Use Only. Not for Use with the General Public. 2
Product Overview 1-Year Term 3-Year Term 6-Year Term Shield 10 Shield 15 Shield 25 Shield 100* S&P 500 Index S&P 500 Index Step Rate Russell 2000 Index NASDAQ-100 Index MSCI-EAFE Index Bloomberg Commodity Index SM S&P 500 Index S&P 500 Index Step Rate Russell 2000 Index NASDAQ-100 Index MSCI-EAFE Index Bloomberg Commodity Index SM S&P 500 Index Russell 2000 Index MSCI-EAFE Index N/A S&P 500 Index Russell 2000 Index MSCI-EAFE Index S&P 500 Index Russell 2000 Index MSCI-EAFE Index N/A N/A S&P 500 Index Russell 2000 Index MSCI-EAFE Index S&P 500 Index S&P 500 Index Step Rate N/A N/A Fixed Account available in most states For Financial Professional Use Only. Not for Use with the General Public. *Shield 100 is not available in all states. 3
Product Overview Hypothetical Illustration Policyholder elects a 3 year, Shield 10 with 20% Cap Rate 30% 25% 26% 20% 20% 15% 10% 5% 0% -5% -10% -8% 0% -2% 15% 15% Cap of 20% Shield 10-15% -12% -20% Down Market (1) Down Market (2) Up Market (1) Up Market (2) Index Performance Policyholder Performance Account value will be reduced by any negative index performance beyond the elected level of protection. If the Shield 100 or the Fixed Account is not chosen, there is a risk of substantial loss if the index declines more than the level of protection. For Financial Professional Use Only. Not for Use with the General Public. 4
Customer Value Proposition Protect your retirement assets Participate in growth opportunities Personalize your strategy All contract guarantees, including the optional death benefit and annuity payout rates, are subject to the claims-paying ability and financial strength of the issuing insurance company. For Financial Professional Use Only. Not for Use with the General Public. 5
MetLife Value Proposition Diversifies variable annuity block Product payoff can be easily replicated Periodic rate-setting Policyholder invests $100 in Shield 10, 1 year term, with a cap of 5.0% Fixed Income For Financial Professional Use Only. Not for Use with the General Public. 6
Product Challenges Sales * Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Total $14.3 $65.4 $81.2 $73.5 $75.7 $310.2 Regulatory considerations Firm approvals Distribution acceptance Increasing competition * Sales numbers in millions. Source: Beacon For Financial Professional Use Only. Not for Use with the General Public. 7
Market Indices Clients have the flexibility to allocate your purchase payment among the indices that are available with a chosen Shield Option, or the Fixed Account. These indices are diversified among large and small cap stocks, international stocks and commodities. Please note not all indices are available with all Shield Options. The S&P 500 Index A includes 500 large cap stocks from leading companies in leading industries of the U.S. economy, capturing approximately 80% coverage of U.S. equities. The Russell 2000 Index B includes approximately 2000 small cap companies and provides a comprehensive and unbiased smallcap barometer of US equities. The NASDAQ-100 Index C includes 100 of the largest domestic and international nonfinancial securities listed on The Nasdaq Stock Market based on market capitalization. The MSCI EAFE Index D includes over 1000 international stocks intended to measure major developed international equity markets in Europe, Australasia and Far East (EAFE). The Bloomberg Commodity Index SM E is designed to provide a broadly diversified representation of commodity markets and is comprised of ETF's on physical commodities. 8
A The S&P 500 Index is a product of S&P Dow Jones Indices LLC ( SPDJI ), and has been licensed for use by MetLife Insurance Company of Connecticut. Standard & Poor s, S&P and S&P 500 are registered trademarks of Standard & Poor s Financial Services LLC ( S&P ); Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC ( Dow Jones ); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by MetLife Insurance Company of Connecticut. MetLife Insurance Company of Connecticut's Shield Level Selector SM Annuity is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P 500 Index. B The Russell 2000 Index is a trademark of Russell Investments and has been licensed for use by MetLife Insurance Company of Connecticut. The Shield Level Selector SM Annuity is not sponsored, endorsed, sold or promoted by Russell Investments and Russell Investments makes no representation regarding the advisability of investing in the Shield Level Selector SM Annuity. C Nasdaq, OMX TM, and NASDAQ-100 Index, are registered trademarks of The NASDAQ OMX Group, Inc. (which with its affiliates is referred to as the Corporations ) and are licensed for use by MetLife Insurance Company of Connecticut. The Shield Level Selector SM Annuity has not been passed on by the Corporations as to its legality or suitability. The MetLife Shield LevelSelector SM Annuity is not issued, endorsed, sold, or promoted by the Corporations. THE CORPORATIONS MAKE NO WARRANTIES AND BEAR NO LIABILITY WITH RESPECT TO THE SHIELD LEVEL SELECTOR SM ANNUITY. D The Shield Level Selector SM Annuity is not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any such products or securities or any index on which such products or securities are based. The Shield Level Selector SM Prospectus contains a more detailed description of the limited relationship MSCI has with MetLife Insurance Company of Connecticut and any related products. E Bloomberg and Bloomberg Commodity Index SM are service marks of Bloomberg L.P. and have been licensed for use for certain purposes by MetLife Insurance Company of Connecticut. Neither Bloomberg Finance L.P. and its affiliates (collectively, Bloomberg ) nor UBS Securities LLC and its affiliates (collectively, UBS ) are affiliated with MetLife Insurance Company of Connecticut, and Bloomberg and UBS do not approve, endorse, review, or recommend MetLife Shield Level Selector SM. BLOOMBERG and Bloomberg Commodity Index SM are trademarks or service marks of Bloomberg Finance L.P. and have been licensed to MetLife Insurance Company of Connecticut. Neither Bloomberg nor UBS guarantees the timeliness, accurateness, or completeness of any data or information relating to Bloomberg Commodity Index SM. 9
The prospectus for the Shield Level Selector annuity issued by MetLife Insurance Company of Connecticut ( MICC ) is available from MetLife. The contract prospectus contains information about the contract s features, risks, charges and expenses. Clients should read the prospectus and consider this information carefully before investing. Availability and features may vary by state. Please refer to the contract prospectus for more complete details regarding the optional Return of Premium death benefit. MICC may substitute any index at any time. Shield Level Selector is a long-term investment vehicle designed for retirement purposes and has limitations, exclusions, charges, termination provisions and Terms for keeping it in force. There is a risk of substantial loss of principal for losses beyond the Shield Rate your clients select, because your clients agree to absorb all losses that exceed their chosen Shield Rate. Please refer to Risk Factors in the contract prospectus for more details. All product guarantees are based on the claims-paying ability and financial strength of the issuing insurance company. Withdrawals of taxable amounts are subject to ordinary income tax and if made before age 59½, may be subject to a 10% Federal income tax penalty. Distributions of taxable amounts from a nonqualified annuity may also be subject to the 3.8% Unearned Income Medicare Contribution Tax if your modified adjusted gross income exceeds the applicable threshold amount. Withdrawals will reduce the death benefit and account value. Withdrawals may be subject to withdrawal charges. MetLife Shield Level Selector Single Premium Deferred Annuity is issued by MetLife Insurance Company of Connecticut on Policy Form L-22494 (09/12) and is distributed by MetLife Investors Distribution Company (member FINRA). Both are MetLife companies. L1014394756[exp1114] 10
Timothy C. Pfeifer, FSA, MAAA Pfeifer Advisory LLC October 28, 2014
Focus is on four product types: 1. Fixed Indexed Annuities 2. Variable Deferred Annuities 3. Deferred Income Annuities 4. Contingent Deferred Annuities TODAY The Approach: Q&A: TOMORROW Include SPIAs and DRFAs 2
TODAY Market Dominance Two carriers selling uncapped, managed volatility indexes Spawning Imitators Spread-based products Income-Focused Products Defined benefit approaches, stacked benefit bases Fine-tuning niche competitiveness Benefits relative to DIA, SPIA Shifting Distribution Greater percentage of sales from banks, wires, B/Ds 31% (1 st half, 2014), 17% (2013) Products simpler and shorter SC 3
TOMORROW Absent a very large increase in interest rates, will continue to take share from DRFAs and VAs Income story will still predominate, but interesting indexes will make for more compelling accumulation stories Penetration of FIAs into banks, wires, B/Ds will serve as impetus to pull historical FIA carrier naysayers into market New FIA designs will borrow from the mutual fund, ETF, 401(K) worlds 4
TODAY Continued Steps to De-Risk Volatility Controlled Funds In Addition... Withdrawal Benefits a Function of Interest Rates, Volatility Premium Limitations VA Buyback Programs Some Reinsurance Capacity Investment-Oriented VA Large Subaccount Menu Alternative Assets Few Guarantees Guaranteed Living Benefits Re-direct to GMAB 5
TOMORROW Fewer Manufacturers Due to Earnings/Balance Sheet Volatility Loss of Market Share. Fewer 1035s Due to Rich Inforce Guarantees Rise of Privately-Placed Variable Annuities and Variable Life Continued Evolution of Buyback programs Dial-Downs, Cost Reductions Carriers Seek Portfolio Balance of IOVAs with Lighter Guaranteed VAs 6
TODAY Substantial Sales Growth 1 st half 2014 sales reached $1.3 billion Full year 2013 sales finished at $2.2 billion DIA vs. SPIA Similar pricing mortality Similar commissions Some carrier overlap Carriers in Market At least 12 active sellers Three quarters of business sold via captive channels Top 3 account for 85% Product Focus Limited liquidity, flexibility QLAC status promising Focus on income competitiveness 7
TOMORROW More Product Diversification/Differentiation Liquidity Linkage with other coverages Distinct pricing parameters as experience data emerges Indexing/Inflation component Market Expansion 401(k) Market Packaging with VAs, other products New Distribution 8
TODAY Essentially a stand-alone GLWB policy that wraps non-annuity assets and ensures guaranteed lifetime income Covers certain ETFs and Mutual Funds Main hurdle is regulation Finally recognized as a annuity contract NAIC workgroup reviewing CDAs across all current annuity regulations Some states won t yet approve, but log jam may be breaking Current market is very thin Only a few insurers Starting to gain traction Clearly viewed as a defensive product by many Pricing nuances of CDAs 9
TOMORROW Regulatory Clarification Will play out over next couple of years State approvals will open up Some new law will need to be created Product Design Will not be limited to ETF and Mutual Fund coverage 401(k) market will be popular Designs will be simpler than VA GLWBs, but may not be cheaper Distribution RIAs are clear, untapped channel Some broker/dealers would like to de-emphasize annuities An annuity license still required to sell CDAs Bank area is a wild card 10
Timothy C. Pfeifer, FSA, MAAA E-mail: tpfeifer@pfeiferadvisory.com www.pfeiferadvisory.com