Overview of the Market Landscape. Presenter(s): Philippe Combescot

Transcription

1 Sponsored by and Overview of the Market Landscape Presenter(s): Philippe Combescot

2 Overview Of The Market Landscape EBIG Conference, 16 November 2015 ( hours) Philippe COMBESCOT, Managing Director Global Equity & Commodity Derivatives

3 $ Billions Annuity Sales over Time Over the last 10+ years annuity sales and the split between fixed and variable have been roughly stable. But significant change within each category : VA separate account went from 55% to 80% of Variable Annuities sales Indexed Annuities went from 16% to 63% of total Fixed Annuity sales Annuity Sales per quarter over the last 10+ years Variable Fixed Source: LIMRA. 2

4 $ Billions Fixed Annuity Sales over Time Over the last 10+ years fixed annuity sales have been roughly stable. But Indexed Annuities went from 16% to 63% of total Fixed Annuity sales Fixed Annuity Sales per quarter over the last 10+ years Indexed MVA Fixed Book Value Source: LIMRA. 3

5 * Indexed Annuity Market Overview Indexed annuities now firmly established as the second largest annuity segment (beyond variable annuity, 3x FA market) Sizeable issuance growth of 7.8% annual rate since 2007 Coming changes which could increase the FIA size: Low interest rates are driving a search for yield and players with alternatives strategies are becoming prominent. Hybrid Indices are > 20% of sales Baby boomers nearing retirement are nearing peak age for IA sale Sales from (peak year before introduction of IA income rider) are about to exit the surrender charge period US Indexed Annuity Issuance ($Bn) Top Issuance Volumes ($mm) 5 2Q 2015 YTD 2Q 2014 YTD Allianz Life 4,442 6,605 Am erican Equity 3,059 1,913 GAFRI 1,518 1,660 Athene USA 1,381 1,185 Security Benefit Life 1,275 2,352 Am erican GeneralLife 1, Fidelity & Guaranty 1, M idland 1, Sym etra 1, EquiTrust Top Issuers Market Share 0 Source : BNP Paribas. Winks * 4

6 Variable Annuity Guaranteed Living Benefits Q GLB election rate Guaranteed living benefits still popular. Out of $27 billions variable annuity sales over Q guaranteed living benefits were elected for $18.5 billions. When GLBs are available election rate has been declining since 2012 from 90% to currently 75%. Source: LIMRA VA Assets with GLB elected GLWB remains the most popular type of benefits representing 82% followed by GMIB for 13%. VA assets with GLBs growing steadily VA assets with GLWB assets elected represents 62%. GLWB assets increased 2.5 times since the end of 2009 vs 1.75 increase in the S&P 500. Very little increase for other types of GLB. Source: LIMRA. 5

7 Insurance Companies use of Derivatives Derivative hedging per risk type Insurance companies use derivatives to hedge : Interest rate risk: 62% of the total derivatives notional. 67% is through swaps, the rest through caps, floors, and forwards Equity risk: 30% of derivatives notional. 78% of equity risk hedging is done through options. The rest through futures and Total Return Swaps. Foreign Exchange risk: 6.1% of derivatives notional Source: Schedule DB Equity option type Equity option position: 570 billion notional Calls: 33% of total notional. Mainly used to hedge Fixed Indexed Annuity crediting. Puts: 35% of total notional. Underlying is mainly S&P 500. Mainly used to hedge Variable Annuities Source: Schedule DB 6

8 Insurance Companies Equity Derivatives Option Position Total current exposure through S&P 500 puts $M < 1.5y 1.5y - 5y > 5y Notional 118,052 31,596 18,266 Delta (21,888) (6,452) (3,633) Vega Avg strike 75% 65% 63% Largest position relative to the overall equity derivatives market is created by S&P 500 puts. Largest vega position. Large forward position Source: Schedule DB S&P 500 vega bought per quarter for maturities > 5y The amount of long term S&P 500 vega bought by insurance companies has significantly decreased since the end of Activity is correlated with heightened VIX levels This is broadly inline with the rise of the Equity market and long term interest rates. Source: Schedule DB 7

9 Where are Long term Rates headed? Interest rates have declined over the last 20+ years Focus has been impact of low rates on Product Guarantees, Policyholder behaviour, Liquidity and ALM Focus needs to change for the opposite scenario Long term Rates have been declining for the past 20+ years Source: BLOOMBERG. 8

10 Where are Long term Rates headed, cont d? Current BNP forecast below. Gradual increase in Rates is the current consensus with bear flattening Year End Forecasts for USD Treasury Rates Spot BNP forecast End 2015 BNP forecast End 2016 BNP forecast End 2017 Fed Funds Target % % % 2.5% Fed Funds O/N 0.13% 0.25% 1.5% 2.5% 2Y 0.63% 1.0% 2.0% 2.5% 5Y 1.38% 1.6% 2.25% 2.55% 10Y 2.1% 2.15% 2.5% 2.65% 30Y 2.93% 2.9% 3.0% 2.85% Source: BNP Paribas *Spot rates as at 12 October

11 Variable Annuity Simplified Model Rho exposure computed with simplified BS model Option maturity 20y Average strike in the portfolio from 2008 has increased with increasing Equities 10

12 Rho Empirical Sensitivity without Ratchet (Monthly ) A stronger Rho sensitivity to rates Source: BNP Paribas. 11

13 Rho Empirical Sensitivity with Ratchet (Monthly ) Ratchet feature increase Rho sensitivity to rates Source: BNP Paribas. 12

14 Rho (Mln/bp) Exposure Sensitivity with Ratchet Feature Rates (bp) Rates (bp) spx (%) (498) (446) (397) (351) (330) (309) (289) (269) (233) (199) (167) -100 (351) (304) (261) (221) (202) (185) (167) (151) (120) (91) (65) -75 (285) (242) (202) (165) (147) (131) (115) (100) (71) (45) (21) -50 (226) (185) (148) (114) (98) (83) (68) (54) (28) (4) (171) (133) (99) (68) (53) (39) (26) (13) (122) (87) (55) (26) (13) (77) (44) (15) (36) (6) spx vol (%) (172) (208) (243) (277) (293) (309) (324) (340) (369) (398) (425) -100 (56) (90) (122) (154) (169) (185) (199) (214) (243) (270) (297) -75 (8) (40) (71) (101) (116) (131) (145) (160) (187) (214) (240) (25) (54) (68) (83) (96) (110) (137) (163) (188) (12) (26) (39) (52) (65) (91) (116) (141) (13) (25) (50) (74) (97) (12) (35) (58) (0) (22) Increased demand for Rho with failing rates and failing stocks Increased demand for Rho rising equity volatility and failing rates Ratchet feature increase Rho sensitivity to rates 13

15 Impact of Rising Interest Rates US GAAP Embedded derivative values will decrease (FAS-133) Index Credit hedges are less sensitive to risk-free rate Increased persistency pushes cash flows away STAT reserves - Will be lower for new products ALM Mismatches Potential increase in Disintermediation risk 14

16 Hybrid Options and Pricing Considerations Equity/Rate Hybrid hedges allow hedging to specific scenarios that are cheaper than the sum of the parts Limiting drivers for hybrid options Overall size capped at ~ 20% of underlying vanilla market Pin and gap risk associated with embedded digital risk on rates Utilize spread payouts Diversify across strikes and maturities Correlation exposure given limited supply of ELS and Correlation Swaps Liquidity is mostly in the 3m-2y region Hybrid products allow the hedging the impact from both Rates and Equities that are typically cheaper than the sum of the components SPX Puts (and spreads) contingent on Rates SPX Puts where Notional scales down as Rates increase Payer Swaption contingent on SPX performance 15

17 Equity/IR Correlation Market SPX/10Y Swap Rate Implied Correlation Levels Expiry Implied Bid Implied Offer 6m Y Y Y Correlation has stayed at elevated levels due to various crisis Insurance company hedging has certainly contributed to the structural change in the implied correlation. Market for correlation is still developing ELS and correlation swaps. Correlation skew downside equity strikes would have higher implied levels Source: BNP Paribas. 16

18 -50.0% -45.0% -40.0% -35.0% -30.0% -25.0% -20.0% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% Rate Option Premium Hybrid Option Example Payoff = MAX(0, 0.8 SPX(T) / SPX(0)) * Q(CMS10y < 2%) Discount to Vanilla = 35% 30.00% 20.00% 10.00% 0.00% 2.00% 1.73% 2.28% 20.00%-30.00% 10.00%-20.00% 0.00%-10.00% SPX Return 17

19 New Product Themes Product design is unrelenting in FIA s Volatility Controlled Indices (uncapped) Guaranteed Lifetime Withdrawal Benefits (special treatment of Benefit Base) Free partial withdrawals Lifetime Income option GMWB rider fees as a function of Rates? 18

20 Important Information This material is for informational purposes only and is not intended to be a complete and full description of the discussion involved. Additional information is available upon request. Neither the information nor any opinion contained in this material constitutes a recommendation, solicitation or offer by BNP Paribas or its affiliates to buy or sell any security, futures contract, options contract, derivative instrument, financial instrument, or service, nor shall it be deemed to provide investment, tax, legal, accounting or other advice. All opinions, information, and estimates in this material constitute BNP Paribas or its affiliate s judgment as of the date of this material. This material is only intended to generate discussions regarding particular instruments and investments and is subject to change, or may be discontinued, without notice. This material should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. Information contained herein is derived from sources generally believed to be reliable, but no warranty is made that such information is accurate, complete or fair and should not be relied on as such. The risk of loss associated with futures and options trading, and trading in any other products discussed in this material, can be substantial. Investors considering options trading may wish to review the Options Disclosure Document: Characteristics and Risks of Standardized Options at ( The information on this website is not part of or incorporated by reference in this document. The risk of loss in trading options and other derivatives can be substantial. Options involve risks and are not suitable for all investors. This brief statement does not disclose all the risks and other significant aspects in connection with transactions of the type described in this document Neither BNP Paribas, persons connected with it, affiliates of BNP Paribas, nor any of their respective directors, partners, officers, employees or representatives accepts any liability whatsoever for any direct or consequential loss arising from any use of these materials or their content. The information in this material is not intended for distribution to, or use by, any person or entity in any jurisdiction where (a) the distribution or use of such information would be contrary to law or regulations, or (b) BNP Paribas or a BNP Paribas affiliate would become subject to new or additional legal or regulatory requirements. BNP Paribas is incorporated in France with Limited Liability. Registered Office 16 boulevard des Italiens, Paris. BNP Paribas Securities Corp., an affiliate of BNP Paribas, is a U.S. registered broker-dealer and a member of FINRA, the NYSE and other principal exchanges. BNP Paribas, All Rights Reserved. THIS DOCUMENT IS FOR THE GENERAL INFORMATION OF BNP PARIBAS S CLIENTS AND IS A GENERAL SOLICITATION OF DERIVATIVES BUSINESS FOR THE PURPOSES OF, AND TO THE EXTENT IT IS SUBJECT TO, 1.71 AND OF THE U.S. COMMODITY EXCHANGE ACT. 19