Fixed Index Annuities:

Transcription

1 Fixed Index Annuities: Challenges and Opportunities Presented at ACLI 2016 Annual Conference Washington, DC Sam Nandi, FSA, MAAA Milliman Financial Risk Management, LLC October 17, 2016

2 What is a Fixed Index Annuity? Generally operates like a declared-rate fixed annuity, except: Interest that would have normally been credited is replaced by a crediting mechanism linked to the S&P 500 or other index Company takes the funds they would have otherwise used to credit interest and uses them instead to buy options on an equity index 2

3 What is a Fixed Index Annuity? From the Company s perspective: From customer s perspective: Upfront sales commission 7 to 12 year surrender charge schedule Company invests over this horizon and earns a spread over risk-free by taking term/credit/liquidity risk The hedging budget based off yield earned on the asset portfolio The parameters of the call option (participation rate, cap, spread) are adjusted each year to stay within the budget Recent sales have included VA-style long-term guarantee (GLWB or LIB) providing longevity and return protection Manage policyholder behavior risk Company manages risks life insurers are accustomed to taking (ALM, credit, liquidity, longevity) to deliver retirement solution Principal protection, plus some upside from market participation Surrender charge schedule means horizon should be relatively long Should not be viewed as replacing equity in an asset portfolio, nor should product be seen as delivering equity like returns Choices of indices and crediting mechanisms that determine index credits Long-term retirement income stream that you can t outlive 3

4 Compare/Contrast FIA to VA Fixed Index Annuity Variable Annuity Who owns the underlying assets? General account of the insurer Policyholder Can the Account Value go down from year to year? No Yes Horizon for equity participation Typically 1-year Long term Categorization of product with respect to sales Insurance product Securities product Annual industry sales $40-60 billion $ billion Primary market risks to manage Interest rate and credit; equity risk is minor Equity, interest rate, volatility risk 4

5 US Annuity Sales History 5

6 2016 Q1 Index Annuity Sales Leaders Rank Company Total Sales 2016 Q1 ($Bil / Mil) Market Share Trends 1 Alllianz Life 2, % 2 American Equity 1, % 3 Great American 1, % 4 AIG % 5 Nationwide % 6 Midland National % 7 Athene USA % 8 Symetra % 9 Voya % 10 Lincoln National % 11 Security Benefit Life % 12 Pacific Life % 13 Global Atlantic % 14 North American % 15 Fidelity & Guaranty % 16 EquiTrust % 17 National Life % 18 CNO % 19 Jackson National % 20 Protective % Total 92.14% Record sales year in 2015 Favorable positioning due to questions regarding future of VA Recent entrants with VA background Several leading companies backed by private equity firms 6

7 Annuity Sales by Distribution Channel (2015) VA s have been treated as securities products, which can only be sold by distributors or advisors with a securities license. Difference in distribution channels may also reflect different levels of sophistication of policyholders 7

8 Evolution of Product Features Index crediting mechanisms Non-traditional and proprietary indices Hybrid FIA-VA products Lifetime Income Benefit rider 8

9 Index Annuity Option Types Vanilla Exotic Option Type Point to Point Averaging Binary Monthly Cliquet Rainbow Description Simple function of ending index level Payoff is a function of arithmetic average of daily or monthly index levels during crediting term Payoff is a fixed amount if index increases during year Payoff is a sum of monthly returns of index during crediting term, subject to cap (but no floor) each month Payoff is based on performance of 3 separate indices, typically paying x% of the highest return and y% of the 2 nd highest return. 9

10 Use of Non-Traditional and Proprietary Indices Index Name or Ticker Carrier Short Description ML Balance AIG S&P / 10YT, blended on risk parity ML Strategic Balanced AIG Risk Parity BUDBI Allianz S&P / Barclays Agg, blended on vol control SPX Div5% Am Equity Equity / cash; equity based on dividend paying in S&P LVCI Athene Stocks / bonds, allocated on relative strenght (momentum) Shiller Barclays CAPE Athene Multi-asset/vol control SPX RC 10% Athene S&P / cash, blended on vol control SPX RC 2.0 8% Athene S&P / 10YT, blended on vol control SPX RC 5% Athene S&P / cash, blended on vol control CROCI 5.5% Delaware Sector rotator based on DB CROCI methodology (value) DB Multi Delaware Multi-asset MVO, using futures GS Dynamo Equitrust Multi-asset momentum DJ RC 10% F&G Vol control version of DJ REIT index ARMOUR Forethought Trend following futures, long only, only 2 assets at a time MSDSI GLAC Multi-asset MVO, using etfs, more buckets than most MS Diversified Select Guggenheim Multi-asset/vol control JPM Mozaic Nationwide Momentum MOZAIC Nationwide Multi-asset risk parity based on futures SPX LowVol 5% North American Equity / cash; equity based on 100 least volatile in S&P ALTVI Security Benefit Trend following futures; long-short BNP Security Benefit High dividend stock picker + call overwriting + embedded puts MS Dynamic Allocation Security Benefit Multi-asset/vol control MSDA Security Benefit Multi-asset MVO, using etfs TVBI Security Benefit Equity / 2YT, stocks selected on RBP (value) methodology JPM Efficiente 5 Symetra Efficient frontier/vol control DB CROCI 5% Voya Value strategy/vol control GS Momentum Builder Western & Southern Multi-asset momentum Nearly 30% of recent FIA sales across industry are in non-traditional and proprietary indices 10

11 Hybrid VA-FIA Product Variable Annuity Product chassis (AV can go down), with Index Annuity crediting mechanism (linked directly to S&P 500) Assets held in Separate Account on behalf of policyholder Pure index exposure to customers easy to hedge/manage/price Insurance company absorbs some of the downside exposure to index (typically first 10%), but policyholder is left with tail exposure Since it s technically a VA, considered a securities product, need registered salespeople Sold by companies who are traditional VA writers AXA s Structured Capital Strategies MetLife Flex Market Shield 11

12 How Does the Lifetime Income Benefit work? Guarantees policyholder lifetime income (percentage of benefit balance) regardless of performance of index credits Benefit balance can grow over time with annual step-ups and rollups Customer s Account Value supports withdrawal until assets are exhausted. Insurer pays benefits thereafter. Policyholder determines how/when to utilize the benefit Greater longevity is a risk to insurer, extending period of potential insurer funded payouts Poor market/index performance leads to earlier exhaustion of customer assets, and higher potential insurer funded payments Over 50% of recent industry sales include this rider Reserving under AG33 pushes companies to hold reserves consistent with optimal behavior 12

13 Impact of DOL s Fiduciary Rule The DOL rule included FIA under the Best Interest Contract (BIC) exemption requiring a financial institution to enter into a fiduciary contract with the customer Industry observers and trade groups have forecasted 2017 sales could be 20-30% lower than 2016 Independent agents (historically over 60% of sales) could be most affected Product development towards new products compatible with a fee-based advisory model Long term outlook remains positive Valuable resource to meet retirement income needs of aging population Manageable product risks Historical VA writers moving toward FIA s 13

14 Thank you! Contact information: Sam Nandi, FSA, MAAA Milliman Financial Risk Management, LLC 71 S. Wacker Drive, Suite 3100 Chicago, IL USA