timothy c. pfeifer, fsa, maaa pfeifer advisory llc may 5, 2015 session 21-annuity hot topics
TRANSCRIPT
Timothy C. Pfeifer, FSA, MAAAPfeifer Advisory LLC May 5, 2015
• Interest Rates and Shape of Yield Curve
• Equity Market Performance
• Penetration of Annuity Alternatives (e.g., MLCDs)
• Risk Appetite of Insurance Companies
• Continued Favorable Tax Treatment of Annuities
• Product Design
• Regulation
• New Markets
• Investments
• Financial Considerations
22
Key Industry Components Covered
Key Industry Components Covered
Outcome Will Depend on Evolution of the Following:
Outcome Will Depend on Evolution of the Following:
Indexed annuities will increase their dominant position in the individual U.S. annuity marketplace.
Indexed annuities will increase their dominant position in the individual U.S. annuity marketplace.
#1
33
• Sales doubled over the ten-year period 2004-2014 despite a weak interest rate environment ($47 billion in 2014)
• Product will approach variable annuity new sales levels over the next five years, regardless of interest rate/equity market movements
• Why?- More competitive products- Not a security- Expanded distribution (banks, B/D)- New carrier entrants- Less accounting volatility- Consumer appeal of participation with floor
New Indexes will include:•Short Indexes•Seasonality•Total Return•Multipliers
New Indexes will include:•Short Indexes•Seasonality•Total Return•Multipliers
• Lower commissions• Simple designs• Weariness with
market volatility• Independent Agents
still lead sales
• Lower commissions• Simple designs• Weariness with
market volatility• Independent Agents
still lead sales
• Especially if interest rates rise• Concentration in vanilla
indices, with intriguing calculation mechanics
• More uncapped-participation rate emphasis
• Especially if interest rates rise• Concentration in vanilla
indices, with intriguing calculation mechanics
• More uncapped-participation rate emphasis
Product Expansion Into:•SPIAs•DIAs•Qualified Markets
Product Expansion Into:•SPIAs•DIAs•Qualified Markets
Distribution will Shift Further to Banks
and B/Ds
Distribution will Shift Further to Banks
and B/Ds
More Emphasis on Accumulation,
less on GLWBs
More Emphasis on Accumulation,
less on GLWBs
Future Directions of FIAsFuture Directions of FIAs
Indexed annuities will increase their dominant position in the individual U.S. annuity marketplace.
Indexed annuities will increase their dominant position in the individual U.S. annuity marketplace.
44
#1
Insurers will continue to stretch their investment dollar to find ways to improve yields.
Insurers will continue to stretch their investment dollar to find ways to improve yields.
#2
55
Traditional A and AA Corporate Bond Investments No Longer Provide
Sufficient “Fuel”
Traditional A and AA Corporate Bond Investments No Longer Provide
Sufficient “Fuel”
Portfolios Have Veered to A/BBB
Portfolios Have Veered to A/BBB
Reaction
Tight, Theoretical Duration and/or Cashflow Matching on a Seriatim Basis May Also Constrict Returns
Tight, Theoretical Duration and/or Cashflow Matching on a Seriatim Basis May Also Constrict Returns
More Barbelled Portfolios, Vis-à-vis Maturity
More Barbelled Portfolios, Vis-à-vis Maturity
Reaction
Desire for Strong Liquidity May Limit Additional Returns
Desire for Strong Liquidity May Limit Additional Returns
Growth in Private Placements
Growth in Private Placements
Reaction
Insurers will continue to stretch their investment dollar to find ways to improve yields.
Insurers will continue to stretch their investment dollar to find ways to improve yields.
#2
66
Interest in Non-Traditional Investments
Interest in Non-Traditional Investments
Pursuit or Creation of Structured Assets with
Advantageous Yield Alpha
Pursuit or Creation of Structured Assets with
Advantageous Yield AlphaReaction
Use of Outside Asset Management Firms
Use of Outside Asset Management Firms
Engage Firms With Specific Knowledge (e.g., Emerging Market Debt or Real Estate)
Engage Firms With Specific Knowledge (e.g., Emerging Market Debt or Real Estate)
Reaction
Intense Focus on Capital Consumption
Intense Focus on Capital Consumption
SVO Ratings are Key – Equities Still Face 30%
Capital Burden
SVO Ratings are Key – Equities Still Face 30%
Capital BurdenReaction
Deferred Income Annuities will continue to show the highest percentage growth rate for U.S. annuities for much of the next five years.
Deferred Income Annuities will continue to show the highest percentage growth rate for U.S. annuities for much of the next five years.
#3
77
2012 2013 2014 CAGR
374% 117% 21% 132%
Growth Rate of DIAs (Annual)
Facts About DIAs Current Sales
• Market Share: #1 New York Life = 42% — #1-3 = 80%
• In 2014, at least ten life insurers sold over $25 million
• Captive Agents represented 64% of sales, but B/Ds represented 28%
• Successful DIA carriers also sell SPIAs successfully
Only 5 of the Top 15 annuity writers have launched a DIA
Insurers favor longevity risk with limited liability liquidity
Rising rates, steepening yield curve benefit DIA pricing
More creativity in design, including liquidity and tie-ins with other products
Opens some new doors to DIA sales
Deferred Income Annuities will continue to show the highest percentage growth rate for U.S. annuities for much of the next five years.
Deferred Income Annuities will continue to show the highest percentage growth rate for U.S. annuities for much of the next five years.
#3
88
NEW ENTRANTS
FAVORABLE RISK
PROFILE
INTEREST RATES
PRODUCT INNOVATION
QLAC Ruling
Reasons for Future Growth of DIAsReasons for Future Growth of DIAs
The definition of QLACs (Qualifying Longevity Annuity Contracts)
will expand.
The definition of QLACs (Qualifying Longevity Annuity Contracts)
will expand.#4
99
• Tax-qualified deferred income annuity
• Premium amount cannot exceed the lesser of $125,000 or 25% of the purchaser’s pre-tax retirement savings
• Death Benefit during deferral period cannot exceed a return of premium and must be paid in a lump sum
• Income Start Date cannot exceed age 85
• Cannot be a variable or indexed contract, but cost-of-living adjustments and dividend-paying designs are acceptable
• No commutation benefit or cash value
Current QLAC Definition/Treatment
The definition of QLACs (Qualifying Longevity Annuity Contracts) will expand.
The definition of QLACs (Qualifying Longevity Annuity Contracts) will expand.
#4
1010
• Raising the maximum premium and percentage of savings
• Permitting limited commutation – up to six months of income
• Indexed DIA can be incorporated, provided the indexing is only reflected during the deferral period, and not indexing during the benefit period
• Death benefits can be paid out over a period not in excess of five years
Possible Future Movements in QLACs
Selected VA Leaders Have Left Market
The Variable Annuity market has steadily transformed since 2008, signaling more changes for the next five years.
The Variable Annuity market has steadily transformed since 2008, signaling more changes for the next five years.
#5
1111
Sales Have Dropped Since 2011, Peaked in 2007
Sales Have Dropped Since 2011, Peaked in 2007
General De-Risking, With Bouts of Re-Risking; No Company Has
Sustained Appetite
General De-Risking, With Bouts of Re-Risking; No Company Has
Sustained Appetite
Rise of Investment-Oriented VAsRise of Investment-Oriented VAs Stickier Business, Reducing 1035 Opportunities
Stickier Business, Reducing 1035 Opportunities
The Variable Annuity market has steadily transformed since 2008, signaling more changes for the next five years.
The Variable Annuity market has steadily transformed since 2008, signaling more changes for the next five years.
#5
1212
VA sales have lost their connection with the
stock market
What’s Next?What’s Next?“Organic” sales
must replace 1035s, and indications are that sales
will fade in next five years
So-called IOVAs will gain share, but doubts about ability to outperform indexes consistently (after-fees) will limit VA recovery –
tax deferral will sustain sales
Structured annuities will grow to 15% of VA
sales, then plateau
GLWBs will decline in overall prominence, but will still appear on 50-60%
of VA sales
Ownership of annuity carriers by Private Equity Investors has re-shaped the landscape.
Ownership of annuity carriers by Private Equity Investors has re-shaped the landscape.
#6
1313
PE Ownership Concentrated in Fixed Annuity
Insurers
PE Ownership Concentrated in Fixed Annuity
Insurers
Investment Expertise and CreativityInvestment Expertise and Creativity
Favorable Tax Structures Favorable Tax Structures
Possibly Lower Profit HurdlesPossibly Lower Profit Hurdles
Acquisition Capabilities to Build ScaleAcquisition Capabilities to Build Scale
Ownership of annuity carriers by Private Equity Investors has re-shaped the landscape.
Ownership of annuity carriers by Private Equity Investors has re-shaped the landscape.
#6
1414
Probability of One or More Private Equity Owners Divesting of Insurers Very High
Probability of One or More Private Equity Owners Divesting of Insurers Very High
Competitors Will Emulate Parts of Private Equity Strategy (e.g., use of captives)
Competitors Will Emulate Parts of Private Equity Strategy (e.g., use of captives)
At Least One of the Larger Private Equity Firms Will Stay in the Annuity Market, Looking to Expand
At Least One of the Larger Private Equity Firms Will Stay in the Annuity Market, Looking to Expand
If Interest Rates Rise, New Private Equity Players Will Look for a Niche in Which to Succeed
If Interest Rates Rise, New Private Equity Players Will Look for a Niche in Which to Succeed
Private Equity
Themes Over Next Five Years
Private Equity
Themes Over Next Five Years
Guaranteed Living Benefit Generosity
Annuity carriers must be increasingly connected to the performance of their inforce business
Annuity carriers must be increasingly connected to the performance of their inforce business
#7
1515
Important DriversIs Persistency a Good Thing?
Imperative to Have Knowledge of
Policyholder Behavior
High Lifetime Credited Rate Guarantees
Declining Net Portfolio Yields
But Fear of Interest Rate Pops
Annuity carriers must be increasingly connected to the performance of their inforce business
Annuity carriers must be increasingly connected to the performance of their inforce business
#7
1616
Expected Inforce Strategies
• Careful Management of MVAs
• Strategies for Inforce Fixed With Interest Guarantees > 3%
• Limit Subsequent Premiums
Fixed AnnuitiesFixed Annuities
• Elimination of Subaccounts
• Price Increases
• Premium Limitations
• Buybacks and Re-offers
VA GuaranteesVA Guarantees
• Elective Behavior for Withdrawals
• Mortality/Surrenders
• Premium Payments
Improvement in Experience Studies
Improvement in Experience Studies
Contingent Deferred Annuities (CDAs) or Stand Alone Living Benefits (SALBs) will gain steady traction
Contingent Deferred Annuities (CDAs) or Stand Alone Living Benefits (SALBs) will gain steady traction
#8
• Essentially GLWBs providing income guarantees on withdrawals from non-annuities
• Covered assets not owned by life insurer
• Covered assets typically indexes or passively managed
• Appealing to investment advisors who sell little, if any, annuities
• NAIC activities have proceeded slowly, creating some regulatory uncertainty
• Cultural change for advisers to consider an insured component on a non-annuity
• Low interest rates increase hedge costs
• Infrastructure/IT needs
What Are They?What Are They? Why Has Sales Growth Lagged?Why Has Sales Growth Lagged?
1717
Expansion of Supply, as Covered Assets are Hedgeable/Manageable
Strong Fit in 401(k) Plans, RIA, Large Asset Manager World
Market Volatility and Demographics Stir Demand
Contingent Deferred Annuities (CDAs) or Stand Alone Living Benefits (SALBs) will gain steady traction
Contingent Deferred Annuities (CDAs) or Stand Alone Living Benefits (SALBs) will gain steady traction
#8
Regulatory Guidance Will Largely be Completed, Generally Favorably
What Does the Future Portend for CDAs?What Does the Future Portend for CDAs?
1818
• Only One Carrier Has Generated Solid LTC/Annuity Combo Sales
• Difficulty in Attaching to Variable Annuities
• Most Prevalent Benefit is Waiver of Surrender Charge or GLWB Doubler/Tripler
• Dominance of Life Combos
• Low Interest Rates Pinch Ability to Integrate
• Pension Protection Act gives Favorable Treatment to Long Term Care/Annuity Combos
Combination contracts will begin to emerge as a component of annuities.
Combination contracts will begin to emerge as a component of annuities.
#9
1919
What Has Been the Recent Landscape?What Has Been the Recent Landscape?
• Inclusion of LTC, Chronic Illness, and Critical Illness Features on Annuities
• Base Contracts Will Include DRFAs, SPIAs, and DIAs
• Variable Annuity Linkages Will be Harder to Execute
• Inclusion of LTC, Chronic Illness, and Critical Illness Features on Annuities
• Base Contracts Will Include DRFAs, SPIAs, and DIAs
• Variable Annuity Linkages Will be Harder to Execute
Combination contracts will begin to emerge as a component of annuities.
Combination contracts will begin to emerge as a component of annuities.
#9
2020
The Next Five Years Will Bring:The Next Five Years Will Bring:
• Very Favorable Demographics and Pricing Synergies
• Designs Will Push the Contours of State Regulation
Reinsurers will play a bigger role in the annuity marketReinsurers will play a bigger role in the annuity market#10
2121
Role of Reinsurers
Today?
Life Insurance Mostly, But Market is
Changing, Shrinking
Life Insurance Mostly, But Market is
Changing, Shrinking
Growing Interest in Longevity Reinsurance Amongst Reinsurers,
But Thin Market
Growing Interest in Longevity Reinsurance Amongst Reinsurers,
But Thin Market
Annuity Exposure is Mostly GLWB (spotty)
Annuity Exposure is Mostly GLWB (spotty)
Captive Reinsurers Play Role in VA
Accounting Issues, Tax Leverage
Captive Reinsurers Play Role in VA
Accounting Issues, Tax Leverage
Reinsurers will play a bigger role in the annuity marketReinsurers will play a bigger role in the annuity market#10
2222
Reinsurers Re-visit the VA GLB, CDA Market
Reinsurers Re-visit the VA GLB, CDA Market
Packaged Transactions Involving Both Life
and Annuities
Packaged Transactions Involving Both Life
and Annuities
Wider Spread Usage of Offshore Captives For Tax, Accounting Volatility Reasons
Wider Spread Usage of Offshore Captives For Tax, Accounting Volatility Reasons
Still Little Participation in Longevity Risk
Still Little Participation in Longevity Risk
Future Role of
Reinsurers
Timothy C. Pfeifer, FSA, MAAAE-mail: [email protected]
www.pfeiferadvisory.com