Variable Annuity Market Trends. Presented by : Ken Mungan, FSA, MAAA Financial Risk Management, Practice Leader

Transcription

1 Variable Annuity Market Trends Presented by : Ken Mungan, FSA, MAAA Financial Risk Management, Practice Leader

2 Agenda Current Market Update Industry issues Product trends Risk management trends Low interest environment Macro hedging 2

3 Variable Annuity Sales Results Full year 2011 new VA industry sales totaled $153.4 billion, a 12.3% increase over In full year 2011, the combined market share for individual VAs of the top three VA carriers was 50.4%: MetLife: 21.7% Prudential: 15.4% Jackson National: 13.3% 1 st Half 2012 sales = $73.5 billion Average total VA fee increased from 3.15% in 2010 to 3.65% today Source: Morningstar & FBR Capital Markets 3

4 Full year 2011 VA Sales Top Ten Companies ($ in millions) 12/31/1 1 Rank 12/31/ 10 Rank Company 2010 Sales 2011 Sales % Chg. vs Q4 11Mkt Share 1 2 MetLife $18,298.9 $28, % 19.7% 2 1 Prudential 21, , % 12.0% 3 3 Jackson National 14, , % 10.2% 4 4 TIAA-CREF 14, , % 9.3% 5 5 Lincoln Financial 8, , % 5.9% 6 9 Nationwide 5, , % 5.6% 7 7 SunAmerica/VALIC 6, , % 5.5% 8 8 AXA Equitable 6, , % 4.7% 9 6 Ameriprise 6, , % 4.2% AEGON/Transamerica 3, , % 3.7% Last couple of years market share consolidation amongst the top 10 4

5 1st Half 2012 Rank Company VA Sales (Billions) 1Prudential Annuities Jackson National 9.6 3Met Life 9.5 4TIAA-CREF 7.5 5Lincoln Financial 4.9 6AXA Equitable 4.6 7AIG Companies 4.6 8Riversouce Life 2.8 9AEGON/Transamerica Nationwide Financial 2.4 Top VA Industry top companies have taken action to reduce sales 5

6 Industry Trends Issues facing VA writers Profitability competitive pressures and low interest rate environment Earnings volatility and product mix diversification Capital intensity versus other opportunities Managing legacy in-force Company actions Exit the market Consolidate distribution Reduce competitiveness of guarantees Protected funds Continue with the status quo - Increase market share 6

7 Product De-risking Reduced guaranteed benefits Withdrawal rate reduction Bonus rate reduction Age restrictions Investment restrictions Index funds Embedded risk management features to reduce capital market risk Protected funds Interest rate linked guarantees 7

8 Product Design Using Protection Strategies Risk-managed fund types Target volatility Target different levels Aggressive, Balanced etc. Capital protection Level of downside risk Gap risk / Options Duration extension Policyholder restrictions Several companies require 100 % allocation to a protected fund to elect a guarantee Dual-rider approach, richer benefits when protected fund is chosen 8

9 Recent Performance 9

10 10 Annual Return Distribution Protected Growth Portfolio

11 Rates of Return Protected Growth Portfolio Over a 1 year time horizon, with no deposits or withdrawals, the Protection Strategy reduces average returns Over a 30 year time horizon with fixed withdrawals, the Protection Strategy produces a higher average internal rate of return for the investor The Protection Strategy addresses the sequence of returns problem 11

12 Total Savings from the Protection Strategy Source of Savings Guarantee Manufacturing Cost Savings from Protected Funds Annual Basis Point Savings Reduction in expected hedge costs 40 Cost of capital savings 36 Savings on quarterly earnings volatility mitigation 20 Total 96 Cost of Capital Savings Hurdle Rate 12% Tax Rate 35% Pre Tax Yield on Capital 4.00% Required Capital: Traditional Funds 4.50% Required Capital: Protected Funds 2.00% Capital Savings 2.50% Cost of Capital Savings 0.36% Notes: 1. Reduction in expected hedge costs based on business sold in 2011; valued as of 12/31/ Cost of capital savings = Capital Savings * (Hurdle Rate / (1 - tax rate)- Pre-Tax Yield on Capital) 3. Quarterly earnings volatility mitigation includes impact of actions to reduce risk after significant market declines & impact of DAC write-offs. 4. Additional savings are likely from a reduction in behavior risk which is NOT included in the values shown above. 12

13 Examples of GMWB with Risk-Managed Fund Company A Company B Guarantee Rider Standard Risk managed Fund Standard Risk managed Fund Minimum Allocation to Protected Funds Withdrawal Percentage at Age 60 (Single Life) Withdrawal Percentage at Age 65 (Single Life) Bonus 0% 100% 0% 100% 4% 4.25% 4% 5% 5% 5.25% 4.5% 5% 8% Simple + 10 Year Doubler 8% Simple + 10 Year Doubler 5% Compounded 5% Compounded Ratchet Annual Annual Annual Annual Other Features 8 Year ROP AB (terminates contract) 13

14 Notable Product Management Strategies Company C: Lump Sum offer GMIB Rider Buy Back Program Optional benefit to receive 80% of NAR + Surrender Value Eligibility requirements Company D: GMDB Buyback offer Products sold from 2002 to 2007 Investors have 90 days to evaluate the offer Considerations Customer value proposition Economic considerations 80% upfront NAR versus historic utilization Roll-ups on benefit base Financial considerations C3 Phase II / VA-CARVM Standard Scenario and GMIBs Take up rate? Distribution incentives 14

15 Milliman Hedge Cost Index The expected hedge cost for a hypothetical lifetime GMWB block is estimated to be 148 bps as of August 2012, 9 bps lower than the previous month. In recent months, the Milliman Hedge Cost Index has risen to levels last see in December 2008, primarily due to lower swap interest rates. Milliman conducts a periodic review of product features and assumptions underlying the hypothetical lifetime GMWB block used to calculate the Milliman Hedge Cost Index to maintain consistency with current product designs in the marketplace. 15

16 Risk Management Trends Risk management strategies have tended to stabilize Development of industry best practices oriented towards highly robust operational processes Delta / Rho and opportunistic vega Reinsurance capacity is limited Use of structured solutions is minimal Hedge objectives moving towards Economic basis GAAP reserving changes -> Non performance risk More companies are moving GLB reserves from Operating Income to Net Income Financial crisis highlighted importance of statutory requirements 16

17 Risk Management Trends Economic basis : Risk-neutral valuation Swap curve or synthetic risk-free curve Historic long term volatility versus market based volatility Long term options are illiquid Pricing reflects large regulatory and capital costs Companies have reduced the amount of vega hedging, use of historic volatility aligns better with actual hedge strategy Increased hedging of guarantees that are not fair valued GMDB Life-contingent portion of GLB 17

18 Macro Hedging Best Practices Macro hedging used by many insurer s to cover risk not covered by Core hedge program Best Practice Clearly defined objective Use of liquid and transparent hedge instruments Risk-limits Financial / Accounting Considerations Operational controls and processes Consistent measurement and of performance and effectiveness Typical Company Practices Defined as reducing Economic or Statutory capital requiring Senior Management approval. Combination of equity, currency, interest futures and options Derivatives use plan Clear disclosures on accounting impact Complex process requiring a range of models, often ad-hoc Given complexity, measurement and monitoring are in-frequent Overall, Macro hedging meets best practices. Operational processes and monitoring should be improved. 18

19 Conclusions Insurer s are taking significant actions to respond to the issues with Variable Annuities Larger VA writer s are maintaining their market position by derisking and embracing protected funds Still significant interest rate risk on new business profitability further de-risking may be required In general, industry is following best practices around macro hedging. Further work needs to be done to develop robust operational processes and improved monitoring. 19