Overview of 2020 FIA Industry Experience Studies

Behavioral Analytics Advisory CouncilMay 20, 20202:00 – 3:00pm Eastern

Timothy Paris, FSA, MAAAChief Executive OfficerRuark Consulting LLCtimothyparis@ruark.co860.866.7786

Specialopen edition

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DisclosuresThis report is for the exclusive use of the Ruark client named herein, and is not intended for general circulation or publication, nor is it to be reproduced, quoted or distributed for any purpose without the prior written permission of Ruark. There are no third party beneficiaries with respect to this report, and Ruark does not accept any liability to any third party. Information furnished by others, upon which all or portions of this report are based, is believed to be reliable but has not been independently verified, unless otherwise expressly indicated. Public information and industry and statistical data are from sources we deem to be reliable; however, we make no representation as to the accuracy or completeness of such information.

The findings contained in this report may contain models, assumptions, or predictions based on current data and historical trends. Any such predictions are subject to inherent risks and uncertainties, as future experience may vary from historical experience. The client should consider the applicability of these models, assumptions, and predictions for the future, and whether additional margins for conservatism should be included. Ruark accepts no responsibility for actual results or future events. The opinions expressed in this report are valid only for the purpose stated herein and as of the date of this report. No obligation is assumed to revise this report to reflect changes, events or conditions, which occur subsequent to the date hereof. All decisions in connection with the implementation or use of advice or recommendations contained in this report are the sole responsibility of the client. This report does not represent investment advice nor does it provide an opinion regarding the fairness of any transaction to any and all parties.

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Agenda

Introduction

Surrenders

Partial withdrawals and income utilization

Mortality, including new first-ever table

Discussion

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Why is this important?

Adverse and volatile capital

marketsGuarantee

values increaseSurrender rates

decrease

Guaranteed income

utilization increases

Financial strain for issuers and

reinsurers

Multi-trillion dollar market in US and abroad

Investments in risk management should be more important than ever

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Does any of this sound familiar?

Our block is not large enough to have highly credible

experience dataWe have a lot of data, but not

in certain key areas

It is really difficult to translate experience data to assumption models

Can we tell the difference between noise and changes in

underlying trends?

Our CFO wants more analysis so that we can explain our

results relative to peersWhat will it take for us to stop

having surprises?

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Introduction

We aim to be the platform and industry benchmark for principles-based insurance data analytics and risk management

Industry experience studies of policyholder behavior and mortality since 2007, now with about 70% industry coverage for VA and FIA and over $1 trillion account value

Experience data

Industry and company studies

Third-party assumption review

Model development and predictive analytics

Process management

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Our most common services

Standard Model Development

Premium

Experience study reportIndustry tables and graphsCompany tables and graphsBenchmarkingPivot table tool

Customizedusing relevant industry data,

credibility theory, and predictive

analytics

Quantifiablyimprove your

models and risk profile

8

Recent developments

New VA and FIA mortality tables –splits for benefit type and durational

anti-selection

Stat and GAAP – raising the bar for data analysis and policyholder

behavior modeling

How much is 1% A/E improvementworth to you?

Case study – modeling FIA GLIB income commencement

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VA reminder – submit order forms by June 30

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FIA Participating Companies

AIG

American Equity

Athene

Brighthouse

EquiTrust

Fidelity & Guaranty Life

Genworth

Global Atlantic

Great American*

Guggenheim

Lincoln

Nassau Re

Nationwide

Pacific Life

Prudential*

Sammons

Security Benefit

Total account value 9/30/2019: $296 billion

* New participant

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FIA Data

Jan 2007 through Sep 20194 million policyholders

IndustryContract Years(m)

Activity ($m)

Surrenders 23.5 54,841Withdrawals (Base contracts) 20.3 41,608

Withdrawals (GLIB) 7.4 5,399

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FIA Data Highlights

+21% total exposure years

Double the exposure years for GLIB

contracts past the end of the surrender

charge period

49% of exposure years in the last 12 months

are for GLIB

+39% lifetime income withdrawals

FIA Surrenders

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0%

55%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15+Duration

4 years 5 years 7 years 8 years 9 years 10 years 12 years 14 years

Surr

ende

r Rat

eCommon pattern of surrenders based on the length of the surrender charge period

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Surr

ende

r Rat

e

0%

35%

10 ormore

9 8 7 6 5 4 3 2 1 0 -1 -2 -3 ormoreYears Remaining in Surrender Charge Period

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Combine into single metric:Years remaining in the surrender charge period

0%

30%

10 ormore

9 8 7 6 5 4 3 2 1 0 -1 -2 -3 ormore

Surr

ende

r Rat

e

Years Remaining in Surrender Charge Period

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Without Living Benefit

LB Income Commenced

LB Income Not Begun

With LB

Living benefits give policyholders an incentive to persist

Surr

ende

r Rat

e

0%

30%

10 ormore

9 8 7 6 5 4 3 2 1 0 -1 -2 -3 ormore

ITM 15%+ ITM 5 - 15% ITM >0 -5% ATM or OTM

Nominal moneyness presents a muddled picture…

Years Remaining in Surrender Charge Period

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Surr

ende

r Rat

e

0%

30%

10 ormore

9 8 7 6 5 4 3 2 1 0 -1 -2 -3 ormore

ITM ATM OTM 5 - 25% OTM 25+%Years Remaining in Surrender Charge Period

…but actuarial moneyness is clearer

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0%

10%

Less than 4.5% 4.5 - 5.0% 5.0 - 5.5% 5.5 - 6.5% More than 6.5%Moody's BAA Rate

0 - 2% 2 - 4% 4 - 6% 6 - 8% 8+%

Surr

ende

r Rat

e

Fixed market alternatives appear to influence behavior

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Normalized for living benefit presence/utilization and years remaining in surrender charge period

0%

1%

2%

3%

4%

5%

6%

0%

15%

Q1 2007 Q3 2008 Q1 2010 Q3 2011 Q1 2013 Q3 2014 Q1 2016 Q3 2017 Q1 2019

10-Y

r Tre

asur

y Ra

te

Calendar Quarter

Normalized for living benefit presence/utilization and years remaining in surrender charge period

Positive Negative 10-Yr Treasury

Surr

ende

r Rat

eMVA should keep policyholders whole, but policyholders

behave more like it’s a bonus or penalty…

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-80%

0%

80%

-15%

0%

15%

Q1 2007 Q3 2008 Q1 2010 Q3 2011 Q1 2013 Q3 2014 Q1 2016 Q3 2017 Q1 2019

S&P

500

Quar

terly

Dra

wdo

wn

Normalized for living benefit presence/utilization and years remaining in surrender charge period

Positive MVA surrender rate (LHS) S&P 500 quarterly drawdown (RHS)

Surr

ende

r Rat

e

…especially when equity market returns are negative

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0%

40%

10 ormore

9 8 7 6 5 4 3 2 1 0 -1 -2 -3 ormore

under $50,000 $50,000-100,000 $100,000-250,000 $250,000-500,000 $500,000-1,000,000 >=$1,000,000

Surr

ende

r Rat

e

Years Remaining in Surrender Charge Period

Largest and smallest contracts behave differently

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Normalized for living benefit presence/utilization

0%

65%

Q1 2007 Q3 2008 Q1 2010 Q3 2011 Q1 2013 Q3 2014 Q1 2016 Q3 2017 Q1 2019

Normalized for living benefit presence/utilization

10 or more 7 3 0 -2

Surr

ende

r Rat

e

Post-surrender charge rates have climbed in recent years

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Calendar Quarter

-100%

0%

100%

1* 2 3* 4* 5 6 7 8 9 10 11 12 13 14 15 16 17

Devi

atio

n fro

m In

dust

ry A

vera

ge

Company

Surrender Rate: Normalized for years remaining, GLIB presence/utilization, contract size, credited rate, and market rate

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Company benchmarking

FIA Partial Withdrawalsand Income Utilization

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Attained Age

0%

12%

<50 50-59 60-64 65-69 70-79 80+

QualifiedNon-QualifiedW

ithdr

awal

Freq

uenc

y

26

GLIB income commencement rates are low and appear unaffected by RMDs

Duration Since Living Benefit Waiting Period Ends

0%

12%

1 2 3 4 5 6 7 8 9 10 11+

GLIB: Normalized for age and tax status

Commencement rates reflect immediate income takers

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With

draw

al Fr

eque

ncy

With

draw

al Fr

eque

ncy

Greater commencement rates when the value is higher

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0%

12%

ITM 25+% ITM 15 - 25% ITM 5 - 15% ITM 0 - 5% ATM OTM 0 - 5% OTM 5 - 15% OTM 15+%

Nominal Moneyness

GLIB Income Commencement: Normalized for age, tax status, and duration since living benefit waiting period ends

0%

12%

1 2 3 4 5 6 7 8 9 10 11+

GLIB Income Commencement: Normalized for age and tax status

Optional Rider Embedded Benefit

Duration Since Living Benefit Waiting Period Ends

With

draw

al Fr

eque

ncy

Higher commencement rates for optional riders than embedded guarantees

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Once benefits start, most policyholders continue them

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0%

100%

Q2 2008 Q2 2009 Q2 2010 Q2 2011 Q2 2012 Q2 2013 Q2 2014 Q2 2015 Q2 2016 Q2 2017 Q2 2018

Calendar Quarter

Withdrawal Continuation - GLIB

Less Than Full Withdrawals Full Withdrawals Excess Withdrawals

With

draw

al Fr

eque

ncy

0%

100%

<50 50-59 60-64 65-69 70-79 80+

No GLIB

Qualified

Attained Age

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Age and tax status still the most significant drivers of base contract free partial withdrawal frequency

Non-Qualified

With

draw

al Fr

eque

ncy

% o

f Acc

ount

Val

ue

0%

18%

Q1 2007 Q3 2008 Q1 2010 Q3 2011 Q1 2013 Q3 2014 Q1 2016 Q3 2017

Calendar Quarter

No GLIB: Normalized for age, tax status, and duration since free waiting period ends

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Aggregate partial withdrawal amounts have been largely stable over time…

% o

f Acc

ount

Val

ue

0%

25%

10 ormore

9 8 7 6 5 4 3 2 1 0 -1 -2 -3 ormore

No GLIB: Normalized for age, tax status, and duration since free waiting period ends

Years Remaining in Surrender Charge Period

…although free partial withdrawal amounts jump after the surrender charge period ends

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Company benchmarking

34

With

draw

al Fr

eque

ncy

0%

25%

1* 2* 3 4 5 6 7 8 9 10* 11 12 13 14 15* 16* 17

Company

GLIB Commencement: Normalized for age, tax status, duration since waiting period end, size, actuarial moneyness, and GLIB fee structure

FIA Mortality (2018)

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Data

Jan 2007 through Sep 2017

Industry

Exposure – contract years 16,041,624Completed deaths – policy count 264,511Exposure – account value years ($m) 1,240,590Completed deaths – account value ($m) 21,020

0%

150%

0-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85-89 90+

Actual versus 2012 IAM - Projection G2

Male Count Male Amount Female Count Female Amount Base

% o

f Tab

le

2012 IAM does not fit FIA experience very well…

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Attained Age

…but Ruark’s proprietary table fits much better

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0%

150%

0-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85-89 90+

Actual versus Ruark VAM 2015

Male Count Male Amount Female Count Female Amount Base

% o

f Tab

le

Attained Age

Mortality is lower where longevity benefits are greatest

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0%

150%

With LB - Income Commenced With LB - Income Not Begun With LB - Total No Living Benefits

Actual versus Ruark VAM 2015 Normalized for age, gender, and duration

Non-qualified

Qualified Total

% o

f Tab

le

Results by duration suggest a select-and-ultimate effect, prompting development of our first-ever FIA table in 2020

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0%

140%

1 2 3 4 5 6 7 8 9 10+Duration

Normalized for age and gender

2012IAM-G2 2012IAM-G2 Norm Ruark VAM 2015 Ruark VAM 2015 Norm Base

% o

f Tab

le

Company benchmarking of A/E ratios

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0%

140%

1 2 3 4 5 6 7 8 9 10 11 12 13 14

Company

Normalized for age, gender, duration, tax status, and living benefit

vs. 2015 RVAM vs. 2012IAM-G2 Base

42

Our most common services

Standard Model Development

Premium

Experience study reportIndustry tables and graphsCompany tables and graphsBenchmarkingPivot table tool

Customizedusing relevant industry data,

credibility theory, and predictive

analytics

Quantifiablyimprove your

models and risk profile

Readily available for 2020 FIA studies

Discussion

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