Session 23 PD, Annuity Product Update. Moderator: Kevin W. Rabin, FSA, MAAA

Transcription

1 Session 23 PD, Annuity Product Update Moderator: Kevin W. Rabin, FSA, MAAA Presenters: Aatman Naresh Dattani Yuan Tao, FSA, CFA, MAAA Judith Zaiken, CLU, ChFC SOA Antitrust Disclaimer SOA Presentation Disclaimer

2 SOA 2017 Life & Annuity Symposium U.S. Macro Annuity Trends May 8, 2017 Judy Zaiken LIMRA Secure Retirement Institute

3 2 Sales Trends Product Mix

4 Annuity Sales Mix Over Time $256.8 $265.0 $238.7 $238.6 $238.4 $219.9 $218.8 $220.8 $216.4 $222.4 $219.7 $229.8 $235.8 $235.7 $222.1 $189.9 $185.3 $163.5 $126.1 $131.5 $ Source: LIMRA Secure Retirement Institute, U.S. Individual Annuities survey Variable Fixed-Rate Deferred Indexed Income / SS

5 Back a decade ago VA $184b FIA $25b FRD $35b SPIA $7b SS $6b 4 Source: LIMRA Secure Retirement Institute, U.S. Individual Annuities survey

6 To Now VA $105b FIA $61b FRD $39b SPIA $9b DIA $3b SS $6b 5 Source: LIMRA Secure Retirement Institute, U.S. Individual Annuities survey

7 Annuity sales have shifted dramatically VA $184b VA $105b FIA $25b FRD $35b SPIA $7b SS $6b FIA $61b FRD $39b SPIA $9b DIA $3b SS $6b 6 Source: LIMRA Secure Retirement Institute, U.S. Individual Annuities survey

8 Total annuity sales pulled down by VA s 2012 $219.7b Total Variable Annuity Fixed Annuity 2013 $229.8b 2014 $236.9b 2015 $235.7b 2016 $222.1b Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Source: LIMRA Secure Retirement Institute, U.S. Individual Annuities survey

9 VA Sales have only seen 1 quarter of growth since 2012 U.S. Individual Variable Annuity Sales (in billions) $36.9 $38.7 $38.0 $36.4 $36.2 $36.0 $35.5 $36.8 $35.0 $35.7 $35.3 $34.2 $34.2 $32.4 $32.9 $31.7 $26.9 $26.6 $25.3 $25.9 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Source: LIMRA Secure Retirement Institute, U.S. Individual Annuities survey.

10 U.S. Individual Variable Annuity Sales (in billions) Risk management key factor in slow decline $36.9 $38.7 $36.8 $35.0 $35.3 $38.0 $35.7 $36.4 $34.2 $36.2 $35.5 $34.2 $32.4 $36.0 $32.9 $31.7 $26.6 $26.9 $25.9 $25.3 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Source: LIMRA Secure Retirement Institute, U.S. Individual Annuities survey

11 U.S. Individual Variable Annuity Sales (in billions) Fiduciary regulation accelerated decline $36.9 $38.7 $36.8 $35.0 $35.3 $38.0 $35.7 $36.4 $34.2 $36.2 $35.5 $34.2 $32.4 $36.0 $32.9 $31.7 $26.6 $26.9 $25.9 $25.3 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Source: LIMRA Secure Retirement Institute, U.S. Individual Annuities survey

12 VA GLB sales now make up less than half of total VA Sales Variable Annuity Sales 16% 16% 15% 16% 17% 15% 16% 18% 20% 20% 20% 21% 27% 28% 27% 30% 30% 32% 29% 29% 30% 32% 33% 35% 57% 56% 58% 54% 53% 53% 54% 53% 51% 48% 47% 44% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q VA Employer Plan Sales VA sales - No GLB, Either not Available or not Elected VA sales - GLB Elected 11 Source: LIMRA Secure Retirement Institute, U.S. Individual Annuities survey LIMRA Secure Retirement Institute, VA GLB Election Tracking Survey

13 Income Later Sales Less Dominated by GLWB $24.9 $21.3 $19.0 $16.5 VA sales - GLB Elected Indexed sales - GLB Elected Deferred Income Annuities $13.0 $10.8 $4.6 $4.5 $6.5 $6.7 $8.0 $7.6 $0.16 $0.40 $0.62 $0.56 $0.73 $0.56 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Source: LIMRA Secure Retirement Institute, U.S. Individual Annuities survey, VA & Indexed GLB Election Tracking Survey VA GLB sales exclude GMAB sales Analysis includes new/existing sales and excludes sales of FRD annuities with a GLB rider

14 66% of retail VA assets now have a GLB rider IN-Force VA Assets with GLB 2010 $521 B 2012 $661 B 2014 $843 B 2015 $838 B 2016 $884 B 2008 $272 B 13 Note: Retail = VA with GLB + VA without GLB; Excludes individual annuities in employer plans. Source: U.S. Individual Annuity Yearbook 2015 and Quarterly Variable Annuity Guaranteed Living Benefit Election Tracking Survey, LIMRA Secure Retirement Institute, 2016.

15 Record indexed annuity sales in $33.9b 2013 $39.3b 2014 $48.2b 2015 $54.5b 2016 $60.9b Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Source: LIMRA Secure Retirement Institute, U.S. Individual Annuities survey.

16 A positive reaction to the initial DOL fiduciary proposal U.S. Individual Indexed Annuity Sales (in billions) April 2015 Release of initial DOL fiduciary rule listing FIA s under exemption $14.3 $16.1 $15.7 $16.2 $15.0 $14.0 $11.3 $13.0 $11.9 $12.2 $11.6 $12.5 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Source: LIMRA Secure Retirement Institute, U.S. Individual Annuities survey.

17 Indexed sales momentum changed in 2016 U.S. Individual Indexed Annuity Sales (in billions) April 2016 Release of final DOL fiduciary rule listing FIA s under BICE $14.3 $16.1 $15.7 $16.2 $15.0 $14.0 $11.3 $13.0 $11.9 $12.2 $11.6 $12.5 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Source: LIMRA Secure Retirement Institute, U.S. Individual Annuities survey.

18 FRD sales strong in 2016 despite low interest rates 2013 $29.3b 2014 $30.8b 2015 $30.9b 2016 $38.7b 2012 $24.7b Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Fixed Rate Deferred Book Value MVA 17 Source: LIMRA Secure Retirement Institute, U.S. Individual Annuities survey. Fixed rate deferred = Market value adjusted + Book value

19 Disappointing end to 2016 for income annuities Fixed Immediate Deferred Income Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Source: LIMRA Secure Retirement Institute, U.S. Individual Annuities survey.

20 19 Sales Trends Investor Objectives

21 Total Retail Annuity Sales by Investment Objectives Guaranteed income is the largest component of annual annuity sales. $196.3 $206.7 $204.7 $183.1 $22.8 $33.3 $39.0 $40.0 $14.7 $18.2 $20.0 $26.8 $21.7 $27.5 $29.4 $28.8 $123.8 $117.3 $118.3 $109.0 $191.7 $34.0 $28.4 $36.6 $ Guaranteed income Principal protection Protection + Market growth Market growth 20 Source: U.S. Individual Annuity Yearbook 2015 and VA GLB Election Tracking Survey, LIMRA Secure Retirement Institute, Note: Totals are for retail sales only and exclude sales in employer plans and structured settlements. Guaranteed income bucket includes VA sales with GLWB/GMIB/GMWB rider elected, fixed indexed sales with GLWB rider elected, immediate income annuity (SPIA) and deferred income annuity (DIA).

22 Income Guaranteed $1.1 Trillion* invested in annuities for guaranteed lifetime income/withdrawals Annuity Assets Directly Associated with Guaranteed Lifetime Income/Withdrawals Source: U.S. Individual Annuity Yearbook 2015, LIMRA Secure Retirement Institute, *An important component, already annuitized assets in variable, fixed-rate and indexed annuities, is not reflected due to nonavailability of the data. **Estimates of year-end annuity assets in reserve.

23 Average Annual Guaranteed Lifetime Income from Annuities Annuity owners draw $8,000 $11,000 in annual guaranteed lifetime income or withdrawals $10,849 Per Year Deferred Income Based on 11,497 contracts $10,342 Per Year Fixed Immediate Based on 34,530 contracts $8,167 Per Year VA with GLWB Based on 456,603 contracts 22 Source: Income Annuity Buyer Study, and Guaranteed Living Benefits Utilization: 2014 Experience, LIMRA Secure Retirement Institute, The income payout amounts are based on 34,530 fixed immediate and 11,497 deferred income annuity contracts issued in VA-GLWB withdrawals are based on 456,603 VA-GLWB contracts issued before 2014 and taking only systematic withdrawals in 2014.

24 Focus on changing fiduciary requirements goes well beyond sales $14 BILLION Employer Plans in Indexed Rollover/Withdrawals $652 BILLION Employer Plans in VAs $191 BILLION IRAs in Indexed Transfers between contracts/ companies & withdrawals $725 Billion IRAs in VAs $100 Billion* Annual sales under BIC-E IMPACT OF DOL FIDUCIARY RULE ON ANNUITY ASSETS 23 Source: U.S. Individual Annuity Yearbook , and DOL Viewpoints: Annuities are in the Eye of DOL Storm, LIMRA Secure Retirement Institute, *$100 billion refers to 2015 IRA sales in variable and indexed annuities that would come under BIC-E provision.

25 $750 Billion may be converted into guaranteed lifetime income Opportunity for Annuity with Guaranteed Lifetime Income in Retirement (in billions) 24 Sources: Retirement Income Reference Book, LIMRA Secure Retirement Institute, The analysis is based on 2013 Survey of Consumer Finances, Federal Reserve Board, 2014 and LIMRA Retirement Study Consumer Phase, 2014.

26 LIMRA Annuity Sales Forecast LIMRA Annuity Sales Forecast 25

27 Individual Variable Annuity Sales Forecast 2016 $104.7b 21% % % The VA landscape will continue to be shaped by regulation 26 Source: LIMRA Secure Retirement Institute, April Updated periodically on:

28 Individual Indexed Annuity Sales Forecast 2016 $60.9b 12% % % Distribution disruptions will hinder indexed annuity sales 27 Source: LIMRA Secure Retirement Institute, April Updated periodically on:

29 Individual Fixed-Rate Deferred Annuity Sales Forecast 2016 $38.7b 25% % % Fixed-rate deferred annuity sales are expected to grow 28 Source: LIMRA Secure Retirement Institute, April Updated periodically on:

30 Individual Income Annuity Sales Forecast 2016 $12.0b 2% % % Income annuity sales will increase but not until Source: LIMRA Secure Retirement Institute, April Updated periodically on:

31 Individual Total Annuity Sales Forecast 2016 $222.1b 6% % % Annuity market will see single digit declines in next two years 30 Source: LIMRA Secure Retirement Institute, April Updated periodically on:

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33 SOA Life and Annuity Symposium Variable Annuity Market Trends Aatman Dattani May 8-9, 2017

34 Agenda Variable Annuities Overview of the Market Sales by Company Sales by Distribution Channel Guaranteed Living Benefits Sales, Distribution Channels and Elections Product Related Updates Recent Product Changes Milliman Hedge Cost Index Structured Variable Annuities Predictive Model as a Potential Tool for Pricing and Product Development Assets Global Response to the Low Interest Rate Environment

35 Overview of the Variable Annuity Market 2016 Variable Annuity Sales ( VA ) declined by 21% vs The VA sales to equity market correlation does not hold anymore Source: LIMRA

36 Variable Annuity Sales by Company There has been a reshuffling in ranks of the top 10 VA writers vs De-risking, diversification of product offerings, changes in regulation (fair value, DOL) likely impacted sales Sales in $ billions Source: LIMRA

37 Variable Annuity Sales by Distribution Channel Sales by distribution channel have stayed consistent in spite of an overall decline in sales 19% 17% 16% 16% 15% 14% 34% 33% 35% 36% 34% 32% 11% 12% 12% 11% 12% 15% 24% 25% 24% 24% 25% 27% 11% 12% 13% 12% 13% 12% Banks Career Direct Indep. B-D Full service Nat. B-D Source: LIMRA

38 Variable Annuity Guaranteed Living Benefit Sales The percentage of VA s available without GLB s has risen from 7% in 2013 to 20% in 2016 GLWB is the most elected rider (around 70% of the time) with GMIB a distant second (7-10%) 17% 19% 17% 16% 16% 20% 7% 9% 11% 13% 9% 17% 9% 12% 15% 14% 20% 12% 67% 64% 59% 56% 52% 48% Source: LIMRA 2011 ($158bn) 2012 ($147bn) 2013 ($145bn) Employer Plan 2014 ($140bn) 2015 ($133bn) 2016 ($105bn) GLB Not Available

39 Variable Annuity Guaranteed Living Benefits Sales - Continued Independent Agents are the largest seller for GLWBs while Career Agents lead in GMIB and GMAB GLB elections, when available, have typically declined Rider Sales by Channel 2Q % 12% 7% 17% 19% 8% 41% 31% 44% 84% 63% 49% 34% 21% 13% 8% 11% 21% GLWB GMIB GMAB GMWB Hybrid Wirehouses Independent Career Bank Source: LIMRA

40 Variable Annuity Market Product Changes VA products in the last year have been de- risked using the following strategies: Increase in Rider Fees Limitations in Contributions Reduction in Benefits Benefits that Differ by Age Fund Allocation Limitations Links to VIX, Treasury Indexes New Products e.g. IOVA Closing Existing Products Volatility Control Funds

41 Milliman Hedge Cost Index Estimated Hedge Cost for a typical Lifetime GMWB Rider fee of 1.15%; M&E and Investment Management Fees of 2.25% Annual 5% rollup and resets; lifetime withdrawal rates of 4-6% depending on attained age Modeling Assumptions based on typical actuarial and behavioral assumptions used by VA writers Target fund volatility of 10%; calculations based on end of month US swap rates (bps) Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17

42 Structured Variable Annuities Companies introduced this product to diversify their product offering Built on VA chassis but share downside risk with policyholder Sales have increased over 100% in 2016 to $5.4 billion Impact of rising interest rates Demographics of buyers Source: LIMRA

43 Predictive Modeling Potential Tool for Product Development Rating Agencies and Regulators are placing higher scrutiny on company assumptions Predictive modeling of policyholder behavior offers a statistically defensible framework for demonstrating assumption effectiveness to internal and external stakeholders Milliman GLWB utilization study (2m policies from 7 VA writers, experience): Policyholders who are older at issue are up to 30 times more likely to begin withdrawals in the first quarter Policyholders are half as likely to utilize on a policy with a roll-up than one without, regardless of length of roll-up period Less than half of policyholders utilize their lifetime benefits with 100% efficiency

44 Variable Annuity Assets 2015 VA Assets declined for the first time since the financial crisis Stagnant equity markets and negative net flows resulted in the drop Outflows exceeded inflows in all four quarters Dollars in Billions 2,000 1,800 1,600 1,400 1,200 1, ,397 1,517 1,151 1,389 1,561 1,593 1,762 1,908 1,967 1,922 1, Source: LIMRA

45 Global Impact of the Low Interest Rate Environment on VAs Low Rates here to stay Move away from interest rate risk Focus on unit linked and protection products Pension reforms Q Sales dropped 8% in UK, 45% in France and 18% in Rest of Europe. GMWB sales dropped while GMAB sales rose. Product De-risking to blame? Low Rates here temporary Continue writing protection products Optimize capital efficiency and reduce costs Negative Interest Rates USD, AUD and NZD denominated products replaced GMAB (JPY) Strategic shift SPWL with VA Features Variable Life with GMDB converted to fixed life in years (FIT) Premium invested in two buckets during FIT: stable + aggressive Stable fulfills guarantee, aggressive allows for upside

46 Milliman is among the world's largest providers of actuarial and related products and services. The firm has consulting practices in healthcare, property & casualty insurance, life insurance and financial services, and employee benefits. Founded in 1947, Milliman is an independent firm with offices in major cities around the globe. For further information visit milliman.com. The material and content is the proprietary information of Milliman or the party that provided the Content to Milliman, and Milliman or the party that provided the Content to Milliman retains all right, title, and interest in the Content. This presentation, including all Content, is copyrighted and protected by international copyright laws and treaty provisions. You agree to comply with all copyright laws worldwide in your use of this presentation, and agree that the Content may not be copied, distributed, republished, uploaded, posted, or transmitted in any way without the prior written consent of Milliman, except that you may print out a copy of the Content solely for your personal use. No intellectual property rights are transferred to you. You may use this presentation solely for personal, non-commercial purposes. You may not use this content for any other purpose, including any commercial purpose. For example, you may not co-brand or frame this content without the express prior written permission of Milliman. Thank you Aatman Dattani aatman.dattani@milliman.com

47 Fixed and Indexed Annuity Product Update Sessions 23 & 35 PD 2017 Life and Annuity Symposium Seattle - May 8, 2017 Yuan Tao, FSA, MAAA, CFA Oliver Wyman

48 Agenda 1 Sales and market trends 2 Impact of DOL 3 Product trends 4 Key takeaways Oliver Wyman 1

49 Indexed annuities continue to gain in importance while income annuities remain a small segment Variable Market risk for policyholder Lower Higher Indexed MVA Book value SPIA DIA Source: LIMRA and Wink Sales Market Report Oliver Wyman

50 Top 10 FIA writers make up nearly 70% of industry sales FIA Rank (2016) Company 2016 YE Sales ($ Billions) 2015 YE Sales ($ Billions) YoY Change (%) % Indexed (2016) % Fixed (2016) % Variable (2016) Composition of sales 1 Allianz Life % 2 American Equity % 3 Athene % High Low 4 Great American % 5 AIG % 6 Midland National % 7 Nationwide % 8 Global Atlantic % 9 North American % 10 Symetra % Source: Wink s Sales & Market Report and LIMRA Oliver Wyman 3

51 Impact of DOL Fiduciary Rule If the Rule survives Potential impact Lower FIA sales, particularly in IMOs due to BICE financial institution requirement Sales / distribution Higher fixed-rate annuity sales, due to less onerous requirements under PTE 8424 Shelf standardization by distributors More focus on RIA channel More fee-based products Product design Simpler designs Downward pressure on commissions Pressure to reduce size and length of surrender charge Lower and more dynamic lapse behavior Product pricing More rational GLWB utilization behavior Lower commission Higher acquisition and maintenance expenses for DOL compliance Oliver Wyman 4

52 FIA product trends Half of FIA writers have or plan to introduce a fee-based FIA in 2017, according to LIMRA Fee-based FIAs had insignificant market share in 2016 (~1%) Recent launches are shown below: Great American Launching Indexed Protector 7 (August 2016) Lincoln Launching Lincoln Core Capital and Lincoln Covered Choice 5 and 7 (February 2017) Allianz Life Launching New Retirement Foundations ADV Annuity (February 2017) The success of fee-based FIAs remains to be seen Oliver Wyman 5

53 FIA product trends (continued) Hybrid indices continue to gain popularity 70% FIA Sales by Index 60% 50% 40% 30% 4Q Q % 10% 0% S&P 500 Hybrid Fixed All other Trend S&P 500 Hybrid Continues to be the most popular choice but losing market share Slightly less than 50% of sales as of 4Q 2016 Gaining popularity, representing 30% of sales as of 4Q 2016 Often proprietary, typically volatility controlled Typically used for uncapped strategy Often illustrates more favorably Fixed Increased share, possibly due to relative attractiveness of fixed rate Other Combined share less than 7% Source: Wink s Sales and Market Report Oliver Wyman 6

54 FIA product trends (continued) GLWBs continue to be the main driver of sales with secondary features helping writers differentiate GLWB index-linked income growth Other GLWB structures Nursing home income riders Trend Stacked rollups (e.g. 4% + account value performance) Turbocharged account value driving income Income increases after income start Rollups are compound / simple / or absent (e.g., vary income by age / duration) Less breakpoints in income bands More income options (flat, guaranteed increase or index-linked increases) Offered for free or additional charge (e.g. 10 bps) Typically doubles the income for up to 5 years if cannot perform 2 of 6 ADLs Complex to price from first principles Enhanced death benefits Offered with or without GLWB (sometimes for an additional charge) Maximum payout Payout periods / reduced lump sum Oliver Wyman 7

55 Fixed annuity product trends GLWB riders on fixed deferred annuities provide an attractive alternative to DIAs Case Study: Male, 55-year old, $100,000 single deposit * FA with GLWB Deferred Income Annuity Deferral Period 10 years 10 years Annual Increase Rate 5% compounding N/A Income Base end of Deferral Period $ 162,889 N/A Guar Lifetime Withdrawal Rate 5.5% N/A Monthly Lifetime Income Amount $ 747 $ 760 (with cash refund) * Product features and quote are based on Fidelity.com as of April 4, 2017 Several writers offer a GLWB rider on fixed deferred annuities: New York Life (entered in 2015), American Equity, Midland National and National Life Oliver Wyman 8

56 Key takeaways 1 FIAs continue to be the fastest growing annuity segment 2 DOL ruling is driving the near-term market outlook 3 Writers and product will continue to adapt Oliver Wyman 9

57 Session Q&A Oliver Wyman 10