Timothy C. Pfeifer, FSA, MAAA Pfeifer Advisory LLC May 5, 2015 Session 21-Annuity Hot Topics.

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.


#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



44

#1

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



#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.


#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



#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.


#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



#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.


#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



#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


#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



#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


#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



#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.


#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



#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

Timothy C. Pfeifer, FSA, MAAA Pfeifer Advisory LLC May 5, 2015 Session 21-Annuity Hot Topics.

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Transcript of Timothy C. Pfeifer, FSA, MAAA Pfeifer Advisory LLC May 5, 2015 Session 21-Annuity Hot Topics.