Oliver Wyman Annuity Market Update Hartford Actuarial Club May 2014

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Annuity market update session at the Actuaries' Club of Hartford & Springfield 2014 Annual Meeting.

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Oliver Wyman Annuity Market Update Hartford Actuarial Club May 2014

  1. 1. © 2014 Oliver Wyman Guillaume Briere-Giroux, FSA, MAAA, CFA Annuity Market Update Actuaries’ Club of Hartford & Springfield – 2014 Annual Meeting Hartford – May 21, 2014
  2. 2. © 2014 Oliver Wyman 11© 2014 Oliver Wyman Agenda I. Market dynamics II. Product trends III. Pricing, valuation and risk management issues IV. Watch list
  3. 3. © 2014 Oliver Wyman Market dynamicsSection 1
  4. 4. © 2014 Oliver Wyman 33© 2014 Oliver Wyman Annuity sales trends (2007-2013) Fixed indexed annuity (FIA) and deferred income annuity (DIA) sales are growing Variable Indexed MVA Book value SPIA DIA Sales data from LIMRA Marketriskforpolicyholder LowerHigher
  5. 5. © 2014 Oliver Wyman 44© 2014 Oliver Wyman 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) $Billions 6.8 11.8 14.4 23.1 27.2 25.3 25.0 26.7 29.9 32.1 32.2 33.9 39.3 0 5 10 15 20 25 30 35 40 45 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 7.8% CAGR
  6. 6. © 2014 Oliver Wyman 55© 2014 Oliver Wyman Top annuity writers in 2013 (1-10) High Low Rank (2013) Company 2013 Sales ($ Billions) 2012 Sales ($ Billions) YoY Change (%) Variable Indexed Fixed 1 Jackson National 23.2 22.4 3.5% 2 AIG 17.5 12.0 45.5% 3 Lincoln 16.6 13.4 23.2% 4 TIAA-CREF 13.9 14.1 -1.1% 5 MetLife 12.4 19.5 -36.4% 6 Prudential 12.0 22.4 -46.3% 7 AXA 9.7 8.9 9.7% 8 New York Life 9.7 7.5 29.2% 9 Allianz Life 9.1 8.8 3.3% 10 Transamerica 8.6 5.4 57.2% Composition of sales Source: LIMRA
  7. 7. © 2014 Oliver Wyman 66© 2014 Oliver Wyman Top annuity writers in 2013 (11-20) Rank (2013) Company 2013 Sales ($ Billions) 2012 Sales ($ Billions) YoY Change (%) Variable Indexed Fixed 11 Pacific Life 7.4 7.5 -0.9% 12 Nationwide 6.9 7.5 -7.9% 13 Security Benefit 6.4 3.9 65.0% 14 Ameriprise 5.5 5.6 -2.5% 15 American Equity 4.2 3.9 6.7% 16 Great American 4.0 2.9 36.0% 17 MassMutual 3.6 2.3 56.6% 18 Thrivent Financial 3.6 3.2 10.6% 19 Protective Life 2.6 3.3 -22.9% 20 Symetra 2.5 1.4 80.8% Source: LIMRA High Low Composition of sales
  8. 8. © 2014 Oliver Wyman 77© 2014 Oliver Wyman Symetra Expansion of the FIA market 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 PrivateEquity Owned USStock Companies Foreign Subsidiaries Mutual Companies OwnershipStructure Lower HigherCredit Rating A++AA-B++B+B Market share and dominant distribution channels by ownership structure and credit rating Privately 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 LifeCNO Companies Pacific Life Nationwide OneAmerica Western & Southern All other companies Forethought National Life Group 15.5 10.4 11.7 7.1 7.9 % % % % %
  9. 9. © 2014 Oliver Wyman 88© 2014 Oliver Wyman Economic conditions The yield environment favors longer duration fixed annuities 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 returned to pre-crisis levels, but the yield curve is steeper. This environment favors longer duration products such as FIA with GLWBs.
  10. 10. © 2014 Oliver Wyman 99© 2014 Oliver Wyman Annuity M&A activity is being driven by private equity and alternative buyers Acquirer/Seller (date)
  11. 11. © 2014 Oliver Wyman 1010© 2014 Oliver Wyman Recap of annuity market dynamics 1 Stable VA sales, but shifting players 2 FIA market is expanding fast 3 Risk premiums back to pre-crisis levels 4 Significant M&A activity dominated by private equity and alternative buyers
  12. 12. © 2014 Oliver Wyman Product trendsSection 2
  13. 13. © 2014 Oliver Wyman 1212© 2014 Oliver Wyman Key annuity product trends 1 VA / FIA hybrids • Short surrender charge designs with floors less than zero, registered and no minimum contract value • Can be VA or FIA by design • Downside protection via “protection buffers” or “protection floors”, but higher upside • Sellers include AXA, Allianz Life, MetLife and CUNA Mutual 2 Volatility control strategies • Firmly established in VA space • Emerging in FIA space 3 Nursing home benefits • Up to double the GLWB income for a number of years if cannot perform 2 of 6 ADLs • Increasingly common in FIA space 4 Deferred income annuities • Predictable deferred income • Level income, constant increases, CPI increases or dividend increases
  14. 14. © 2014 Oliver Wyman 1313© 2014 Oliver Wyman Key annuity product trends (continued) 5 VA sales with no living benefits • Certain carriers successful in driving VA sales with no living benefit guarantees • Lower cost designs • Investment and tax deferral play 6 Stacked rollups • Emerging in FIA space • AG 33 friendly 7 Flexible designs • At issue: Tie income rates to rate environment • After issue: Indexing product features 8 Buyback programs • Variable annuities: AXA, The Hartford and Transamerica • Fixed annuities: The Harford
  15. 15. © 2014 Oliver Wyman Pricing, valuation and risk management issues Section 3
  16. 16. © 2014 Oliver Wyman 1515© 2014 Oliver Wyman Pricing considerations 1 Lapses • Base rate + impact of GLB • Policy year skew • Dynamic rate (base contract for FA / FIA) • 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
  17. 17. © 2014 Oliver Wyman 1616© 2014 Oliver Wyman 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
  18. 18. © 2014 Oliver Wyman 1717© 2014 Oliver Wyman 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 Volatility as an asset class
  19. 19. © 2014 Oliver Wyman Watch listSection 4
  20. 20. © 2014 Oliver Wyman 1919© 2014 Oliver Wyman 1 Interest rates 2 M&A activity 3 Product innovation 4 Behavioral assumptions Watch list

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