impact of historic low interest rates on clients insurance...
TRANSCRIPT
Subject Slide Title
Impact of Historic Low Interest Rates on Clients Insurance Values Non-Qualified Plans Panel
FOR ADVISOR/BROKER USE ONLY. Not for use with Plan Participants.
Subject Slide Title Speaker Bios Jim Van Epps ,Chief Operating Officer, First Principles Capital Management, LLC As one of the founders of FPCM, Mr. Van Epps has over 31 years in the institutional insurance market and is recognized as a leading expert in the corporate and bank-owned life insurance arena. In 2005 he integrated the operations of Van Epps & Associates into FPCM. Mr. Van Epps oversees FPCM's Atlanta operations as well as manages the technological resources and administration of FPCM including accounting, financial reporting and audit controls. He also the Managing Director of FPCM's insurance advisory services. Ron Laeyendecker Senior Vice President, Executive Benefits Markets, Great-West Financial. Mr. Laeyendecker has been with Great-West Life for twenty six years. For twenty four of those years, he has been involved with life insurance and annuity business management, pricing and product development. In 1993, Ron created a dedicated unit focused on the executive benefits markets. Primary responsibilities currently include sales and distribution growth, as well as management of the Executive Benefits Markets line of business, representing over $12 billion of policy owner liabilities. Ron graduated from the University of Wisconsin in 1986, and joined Great-West Life as an Actuarial Assistant. In 1991, Ron became a fellow in the Society of Actuaries (FSA). He is also a member of the American Academy of Actuaries (MAAA), and a member of the Association for Advanced Life Underwriting. In 1996, he became a registered principal. Ron also became a Chartered Life Underwriter (CLU) in 1999. Geoffrey Frakdin In his role as Chief Financial Officer for Specialized Benefit Resources (SBR) and Vice President in MetLife’s CFO Americas Organization, Geoffrey is responsible for the underwriting, product design, pricing and in-force management of SBR’s product portfolio. He is also responsible for SBR’s risk management practices. Specialized Benefit Resources (SBR), a unit of MetLife’s Corporate Benefit Funding department, provides companies with solutions for efficiently financing their nonqualified benefit plan liabilities that include specially-designed corporate owned, bank owned and trust owned (COLI/BOLI/TOLI) life insurance products. Geoffrey joined MetLife after graduating from Rutgers University with a BA in Economics and Statistics. He has been with MetLife for 16 years in various actuarial positions. Geoffrey began his career at MetLife in 1996 as an actuarial assistant in group insurance, and has also worked in individual business supporting pricing of whole life and universal life products. Geoffrey joined SBR in 2000 to manage and price SBR insurance products. Since joining SBR, Geoffrey and his team have focused on delivering innovative products to financial intermediaries and corporations. Peter Gilman, Chief Executive Officer, Carbry Capital. Peter Gilman graduated from Iowa State with a degree in Finance. After working at Clark/Bardes, Inc. in Dallas, Texas for several years, he moved back to Iowa and began working at AEGON / Life Investors as the National Director of Advanced Sales for the Individual Division. Shortly thereafter he founded Extraordinary Markets, an AEGON company. Peter became the President and Chief Executive Officer, and ultimately oversaw a team of approximately 300 people that worked to develop and grow of AEGON’s fully integrated global business insurance solutions platform. Peter now consults various industry stakeholders in their efforts to build a presence in, as well as a better understanding of, the Executive Benefits and Bank Owned Life Insurance marketplace. Carbry Capital is also involved with designing innovative solutions that help provide the life insurance industry with ways to add shareholder value, through improvements in capital and operational efficiency.
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These Presentation pages have been prepared by the authors, contain their own views and do not necessarily reflect, nor should they be construed as, the views of Great-West Financial, MetLife or any of its employees or affiliates. The contents of this presentation represent general industry information and do not contain information specific to the carriers.
Subject Slide Title Moderator Overview
• Moody’s - Life insurers more vulnerable to low interest rates than they think. Dec. 19, 2012 – The low interest rate environment has had a relatively negligible effect
on life insurers so far, according Moody’s. That, however, will change if rates continue to hover near historic lows through 2015 as has been indicated by the Federal Reserve
• WSJ - Is your Life Insurance Policy at Risk Nov 16, 2012 – In the next few years, millions of savers are in for a surprise that could
cost them tens of thousands of dollars now—or hundreds of thousands later.
– The reason: Universal-life insurance policies bought years ago when interest rates were high will face cancellation if policyholders don't pay more.
Subject Slide Title Interest Rate History
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Past performance is not a guarantee or prediction of future results.
1 U.S. Treasury securities are guaranteed as to the timely payment of principal and interest if held to maturity. Investment options are neither issued nor guaranteed by the U.S. Government. A bond fund's yield, share price and total return change daily and are based on changes in interest rates, market conditions, economic and political news, and the quality and maturity of its investments. In general, bond prices fall when interest rates rise and vice versa.
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Subject Slide Title Interest Rate History
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Past performance is not a guarantee or prediction of future results.
1 U.S. Treasury securities are guaranteed as to the timely payment of principal and interest if held to maturity. Investment options are neither issued nor guaranteed by the U.S. Government. 2 A bond fund's yield, share price and total return change daily and are based on changes in interest rates, market conditions, economic and political news, and the quality and maturity of its investments. In general, bond prices fall when interest rates rise and vice versa.
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Subject Slide Title What if Yields Rise?
Market Value of Assets • Market Value of securities
decreases creating unrealized losses
• Losses realized with surrender or 1035 exchange
• (referred to as disintermediation risk)
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Portfolio Yields • Cash Flow from coupons and
principal repayments reinvested at higher yields
• Pre-payments slow • Result: Portfolio yields rise slowly
Credited Rates • Credited rates rise as portfolio yields rise • Rise in credited rates will lag rise in current investment yields
Subject Slide Title What if Yields Spike Up?
Market Value of Assets • Market Value of securities
decreases dramatically – Creates substantial unrealized
losses • Heightened losses for carrier
under surrender or 1035 exchange
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Portfolio Yields • Cash Flow from coupons and
principal repayments reinvested at higher yields
• Pre-payments stop • Result: Portfolio yields rise slowly
Credited Rates • Credited rates rise as portfolio yields rise • Carriers may be forced to artificially support higher credited
rates to reduce probability of surrender or 1035 exchange • Potential for spiraling carrier losses
Subject Slide Title What if Yields Remain Low or Fall?
Market Value of Assets • Market Value of securities
increases • Creates unrealized gains
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Portfolio Yields • Cash Flow from coupons and
principal repayments reinvested at lower yields
• Pre-payments accelerate • Result: Portfolio yields fall
Credited Rates • Credited rates fall as portfolio yields fall • Impact of guaranteed floors
• Higher floors become more valuable to clients • Floors create margin compression for carriers
Subject Slide Title General Account Assets
• Portfolio Management Approach • Diversity • Quality • Liquidity • Total Return • Asset/Liability Management
60% 15%
15% 5% 5%
Bonds
Mortgage Loans
Structured Finance
Corporate Equity & Real Estate
Cash & Short-term Investments
Subject Slide Title Spread Compression
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Spread
Crediting Rate
Subject Slide Title Managing Risk Going Forward
• Lapse Risk
• Guarantees
Subject Slide Title Crediting Rates – New Money vs. Portfolio Rates
New Money Portfolio
Initial Crediting Rate • Market Rate • More responsive to rate
environment
• Portfolio Rate • Less responsive to rate
environment
Renewal Rates
• Blend of assets that have been reinvested and remaining initial assets
• Not impacted by new business/premiums
• Portfolio Rate • Impacted by new
business/premiums
Subject Slide Title Crediting Rates – New Money vs. Portfolio Rates
Portfolio Rates in Current Environment (Market Rates < Portfolio Rates) • Initial Crediting Rate > market rate • New premiums dilute portfolio rate
Portfolio Rates if rates rise • Rates only increase if market rate > portfolio rate • Otherwise, rising rates just slow rate of decrease of portfolio rate • New premiums depress portfolio rate until market rate > portfolio rate
Subject Slide Title
Affects any Product With a Guarantee • Products such as life insurance, annuities, GICs,
structured settlements, stable value products (such as those used in the COLI / BOLI market), etc..
• Guarantees can be in the form of no-lapse policies,
interest rate floors, book value protection, etc.. • Can be found in any policy form such as general
account, hybrid and separate account.
Impact on Other Carrier Products
Subject Slide Title
Why is This Now an Issue • Financial metrics such as ROE that are significantly
impacted by capital and operational efficiency. • Capital means both “regulatory” and “economic”.
• Capital requirements can be significant for asset intensive products with legacy guarantees.
• Effect of economic capital is magnified for reasons that are similar in concept to the discussion on margin compression we just had.
Impact on Other Carrier Products
Subject Slide Title Economic Capital - Spread Compression
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1 2 3 4 5 6 7 8 9 10
Spread
Guaranteed Rate
New Guaranteed
Rate
Crediting Rate
Subject Slide Title
• The combination of low rates, reduced margins and
increased economic capital requirement can combine to create a very difficult ROE story come quarter end.
Net Result
Subject Slide Title
• Reduce the level of policy guarantees. • No-lapse guarantees as well as interest rate floors
• Restrict the inflow of premium
• Override ALM processes
• Reach for duration • Reach for yield
• Divest capital intensive, as well as difficult to hedge,
product lines • Fixed and variable annuities
Impact on Carrier Product Decisions
Subject Slide Title
• Simplify product design • To many moving parts makes it difficult to price and manage
• Focus on protection products.
• Mortality intensive products are more capital friendly
• Encourage the use of variable separate account products for asset intensive transactions • Such as accumulation products like COLI/BOLI and annuities
Impact on Carrier Product Design
Subject Slide Title • Increased use of technology to improve operational
efficiency. • More rules based infrastructure and more reliance upon the
field to perform the labor aspect of the transaction.
Impact on Carrier Operations
Subject Slide Title
• How does the policy express the fund’s total return results?
• Through the crediting rate formula.
• Expect to see modifications in the crediting rate formula used in BOLI products in order to improve the the ability of the product to more efficiently express the fund’s total return results.
• The BOLI product thought process can also be applied in other insurance products in rather innovative ways.
What Next in BOLI Product Development?
Subject Slide Title Consultant Role in this Rate Environment
• Manage expectations – Be proactive on carrier and industry information – Ratings news, earnings releases
• Review policy terms – Guarantees or lack of guarantees
• Project performance (will policies lapse) – Current rates – Lower rates – Rising rates
• Review options – First do no harm
Subject Slide Title
QUESTION & ANSWER