Fixed Index and Registered Fixed Index Annuity Product Trends

Transcription

1 Fixed Index and Registered Fixed Index Annuity Product Trends Actuaries Club of Hartford and Springfield 2017 Fall Meeting Hartford - November 14, 2017 Tom Buckingham, MBA, FSA, MAAA Nicholas Carbo, FSA, MAAA

2 Agenda 1 Product comparison of FIAs, RFIAs and VAs 2 FIA and RFIA market dynamics 3 Accumulation market 4 Income guarantee market 1

3 Product comparison of FIAs, RFIAs and VAs RFIAs are a new product segment bridging the differences of VAs and FIAs Fixed Index Annuities Registered Fixed Index Annuities Variable Annuities (FIAs) (RFIAs) (VAs) Upside participation Limited participation in market returns Higher participation in market returns than FIAs Full participation in market return less fees Downside protection Down side protection Subject to downside with floor or buffer offered Full downside risk absent of guarantees Fees No fees assessed Some include M&E fees M&E and fund fees standard Asset allocation Many offer various index accounts Restrictions on transfers Many offer various index accounts Some offer VA flexibility Asset allocation varies by product and customer risk profile Income options GLWB offered Annuitization benefits Annuitization benefits only GLWB offered Annuitization benefits Worse Better FIAs are typically sold to risk-averse customer who still want a higher return than a fixed investment and many times compete with certificates of deposit 2

4 Fixed indexed annuity sales trends ( ) 2017 FIA sales are on track to drop 5% vs 2016 based on Q sales % CAGR ( ) 46.9 $ Billions YTD Q Q2 1 Source: Wink s Sales & Market Report (Annualized) 1 Q sales were multiplied by two to get a 2017 annualized result 3

5 Recent acquisitions reshaped the FIA market Acquirer/Seller (date) Transaction type: IPO Japanese insurers Alternative buyers 4

6 Crediting methods and indices Term end point and hybrid indices continue to be strong in the FIA market Crediting methods (Q2 YTD 2017) Indices (Q2 YTD 2017) Other, 4.3% Term End Point (TEP), 14.3% Fixed, 14.4% Other, 1.5% Fixed, 14.4% Rainbow / Multi-Index, 0.7% Monthly Point-to-Point (M-PTP), 11.3% Daily / Monthly Averaging (AVG), 6.5% Annual Pointto-Point (A- PTP), 49.2% Hybrid Indices, 28.6% Other public NASDAQindices, 1.1% 100, 1.5% Russell 2000, 1.0% S&P 500, 51.2% Annual point-to-point crediting method and S&P 500 index are still the most common, but hybrid and proprietary indices (e.g., target volatility and dynamic rebalancing indices) are gaining significant traction Source: Wink s Sales & Market Report 5

7 Fee-based FIA product launches Half of FIA writers have or plan to introduce a fee-based FIA in 2017, according to LIMRA December 2015 Midland National MNL Prosper 5 February 2017 Allianz Retirement Foundation ADV Annuity July 2017 Symetra Advisory Edge Income Advisory Edge September 2017 American Equity Eagle Advisory 8 Q Q Q Q Q Q August 2016 Great American Index Protector 7 February 2017 Lincoln Lincoln Core Capital May 2017 Pacific Life Pacific Index Advisory July 2017 Nationwide Nationwide Summit 6

8 Benefits of fee-based FIAs The removal of compensation from the product allows for benefits to the customer and insurance company Higher customer value The customer will likely receive a higher cap rate The surrender charges will likely be lower or eliminated Less strain to insurer The company will not be paying an upfront commission, resulting in less strain to the insurance company Market opportunity Agents that only sell fee-based may be willing to look at FIA as a choice for their customers The uncertainty around the DOL fiduciary rule may increase demand for these products Questions remain as to how fee based FIAs will be made available to the middle market 7

9 Registered fixed index annuity product launches Product launches are accelerating recently with top competitors launching version 2.0 of their products Oct 2010 AXA introduces Structured Capital Strategies May 2013 Metlife introduces Shield Level Selector September 2013 Allianz Life introduces Index Advantage August 2016 CUNA introduces Member s Horizon Annuity August 2017 Brighthouse introduces Shield Level Select Access (Fee Only) August 2013 CUNA introduces Member s Zone Annuity Feb 2017 AXA Structured Capital Strategies Plus filed In addition, Great West and Great American have filed prospectuses for RFIA products January 2015 Voya introduces Potential Plus October 2015 Voya closes Potential Plus 8

10 Quarterly Premium ($ BN) Quarterly RFIA sales (2011Q3 2017Q1) Annualized RFIA sales are approaching $8BN % Allianz Brighthouse Source: Morningstar 2012 AXA projected 9

11 Motivations for introducing RFIAs Innovation Higher cap rates New product segment Capital requirements Diversification with VA Principles-based Risk management Diversification with VA Low interest rates Market demand Growing sales Accumulation story D 10

12 Risks and profitability drivers for RFIAs and base FIAs The interest rate market is the main driver of risk and profitability for RFIAs and base FIAs i Crediting rate spread risk Risk that pricing spread is not achieved Lower reinvestment yields / inforce management / guarantees Disintermediation Risk of ALM mismatches in rising rate environment, magnified by dynamic lapses Policyholder behavior Risk of higher / lower lapses when option budget is uncompetitive / competitive Equity risk Most carriers effectively over-hedge and benefit from option payoffs in excess of the option budget 5 Accounting mismatches Disconnects between AG33/FAS 133 and asset accounting 11

13 Customer options for guaranteed income Three major types of products exist in the market to guarantee income for life Income annuities FIA GLWB VA GLWB Product characteristics Income Guaranteed income Various payout structures available Gender specific rates Guaranteed income Single and joint life options Unisex rates Guaranteed income Single and joint life options Unisex rates Cash value Cash value options limited GMSV (Guaranteed minimum surrender value) Modest upside potential Full participation in market returns less fees Subject to downside risk Death benefits Various death benefit options or no death benefit Account value returned on death GMSV guaranteed upon death Account value returned on death Most VA GLWB have no guaranteed death benefits GMDB typically available Typical pricing regime Methodology Real world pricing Real world pricing Risk neutral pricing 12

14 Benefits for the three types of products The benefits offered by the three products significantly differ 1 Income guarantees 2 Cash value 3 Death benefits 13

15 Guaranteed monthly income Guaranteed income rates by product and deferral The longer the deferral period, the more competitive the FIA GLWB guaranteed income becomes 60 year old male guaranteed monthly income by deferral period 1, FIA GLWB guaranteed income exceeds income annuity cash refund FIA GLWB guaranteed income exceeds income annuity life only Deferral period VA GLWB Income annuity life only Income annuity cash refund FIA GLWB 1.Income illustrated for a single premium of $100k 2. Rates based on common products in the marketplace 14

16 Cash value range ($k) Cash value range ($k) Cash value range ($k) Historical experience Historical experience Cash value by product for income starting immediately FIA products currently offer higher guaranteed cash value than comparable alternatives 60 year old male with income starting at issue At issue $100 5 years from issue $200 FIA GLWB has paid out $6k more than VA GLWB $75 $150 $50 $100 $25 $50 $0 Product Income annuity cash refund FIA GLWB FIA GLWB VA GLWB Income annuity cash refund Cash value commentary No cash value offered, cash refund is only a death benefit Narrow range of possible cash values, with guarantee $0 10 years from issue $250 $200 $150 $100 FIA GLWB VA GLWB Income annuity cash refund FIA GLWB has paid out $12k more than VA GLWB VA GLWB Wide range of possible cash values $50 $0 FIA GLWB VA GLWB Income annuity cash refund 1.Income illustrated for a single premium of $100k 2.Range based on S&P returns from 1/1/87-1/1/2017, using the best and worst results for the number of years of experience 15

17 Death benefit range ($k) Historical experience Death benefit range ($k) Death benefit range ($k) Historical experience Death benefit by product for income starting immediately FIA products currently offer strong guaranteed death benefit, with modest upside potential 60 year old male with income starting at issue At issue $100 5 years from issue $200 $75 $150 $50 $100 $25 $50 $0 Product FIA GLWB VA GLWB Income annuity cash refund Death benefits commentary $0 FIA GLWB VA GLWB Income annuity cash refund 10 years from issue $250 Income annuity cash refund FIA GLWB Death benefit slightly higher than FIA guarantees Narrow range of possible death benefits, with guarantee $200 $150 $100 VA GLWB Wide range of possible death benefits $50 $0 FIA GLWB VA GLWB Income annuity cash refund 1.Income illustrated for a single premium of $100k 2.Range based on S&P returns from 1/1/87-1/1/2017, using the best and worst results for the number of years of experience 16

18 Rankings of the three benefits FIA GLWB offers the highest income in many cases with strong policyholder optionality when compared to income annuities and VA GLWB Income annuities FIA GLWB VA GLWB Income 1 Life only income guarantees are very 2 The income guarantee is very 3 The income guarantee is weakest of the three strong strong options Cash value (strong equity 3 market) Limited or no cash value 2 Modest upside potential 1 The cash value is invested in the market less fees Cash value (weak equity market) 3 Limited or no cash value 1 Minimum of GMSV 2 The cash value is invested in the market less fees Death benefits 2 Various death benefit guarantees can be 1 GMSV paid on death Modest upside 3 The death benefit value is invested in the market less fees (assuming no purchased potential GMDB rider) Individual purchase decisions are based on each client s circumstances 17

19 Risks and profitability drivers for FIA GLWB Policyholder behavior and interest rates are the two largest risks for FIA GLWB Policyholder behavior GLWB utilization Lapses and dynamic lapses Interest rate risk Asset liability interactions Management actions Interest sensitive policyholder behavior Index lift Benefit / risk from over-hedging Volatility strike skew and equity risk premium Statutory reserves Correct calculation Hedging interaction Relief in select states Mortality Base mortality Mortality improvement Anti-selective lapses? 18

20 Rate of return Client and company IRR for an FIA with GLWB starting income immediately The rate of return achieved by the client and the company is dependent upon the timing of withdrawal or death 60 year old male starting income at issue 10% 9.5% 9.7% 8% 6% 4.6% 4% 3.6% 2% 0.9% 0% -2% Age 70 / Year 10 withdrawal Age 80 / Year 20 death Age 90 / Year 30 death Age 100/ Year 40 death Time of policyholder exit 1.Client IRR represents pre-tax return on invested cash flow (premium) 2.Company IRR represents the internal rate of return on after-tax distributable earnings Client IRR Company IRR 19

21 Key takeaways 1 FIAs have become more mainstream 2 RFIAs are less mature but growing rapidly 3 FIA GLWBs offer strong income guarantees while preserving liquidity 4 Carrier returns will be influenced by policyholder behavior and economic markets 20

22 Questions 21