annuities in a covid-19 world€¦ · annuities in a covid-19 world nicholas carbo, fsa, maaa...

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ANNUITIES IN A COVID-19 WORLD

Nicholas Carbo, FSA, MAAA

Actuaries Club of

Hartford/Springfield

July 7, 2020

Jennifer Healy, FSA, MAAA

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All great changes are preceded by chaos.

Deepak Chopra

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IndustrySales

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Economic Environment

AGENDA

Industry Sales

Product Development & Inforce Management

Regulatory

Future

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0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

12/31/2019 1/31/2020 2/29/2020 3/31/2020 4/30/2020 5/31/2020

ECONOMIC MARKETSignificant market decline and drop in interest rates became headwinds for the insurance industry

10 year US treasury rates

S&P 500 index

5

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

12/31/2019 1/31/2020 2/29/2020 3/31/2020 4/30/2020 5/31/2020

S&P 500 AND VIX INDEX Significant market decline was also coupled with a significant increase in volatility, impacting inforce and new business blocks of VA, FIA, FA, and structured annuities

VIX index

S&P 500 index

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0%

1%

2%

3%

4%

5%

6%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

12/31/2019 1/31/2020 2/29/2020 3/31/2020 4/30/2020 5/31/2020

CREDIT SPREADS AND 10 YEAR US TREASURY RATESDeclines in rates were a positive for credit spreads, which helped support FA, FIA, and structured annuity crediting rates

10 year US treasury ratesICE BofA BBB US Corporate Index Option-Adjusted Spread

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0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

1 Mo 2 Mo 3 Mo 6 Mo 1 Yr 2 Yr 3 Yr 5 Yr 7 Yr 10 Yr 20 Yr 30 Yr

CHANGE IN YIELD CURVE (US TREASURY)Yield curve dropped 100+ bps, but still upward sloping, encouraging long term investments

12/31/2019

6/20/2020

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2019 TOTAL ANNUITY SALES: $242B

Source: LIMRA Secure Retirement Institute: 1Q2020 SRI US Individual Annuity Sales Report REVISED 05.27

3.5%

Strongest Year of Sales in a Decade

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SALES GENERALLY TREND WITH INTEREST RATES


Q2 ‘19 Q3 ‘19

Q4 ‘19

Q1 ‘20

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TOP 10 CARRIERS – Q1 2020


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TOP 5 – SALES CHANGES Q4 2019 / Q1 2020

Fixed Rate

New York Life + 29%

AIG - 13%

Global Atlantic + 15%

MassMutual - 35%

Western Southern + 290%

Indexed

Allianz - 7%

AIG - 4%

Nationwide - 13%

Athene - 2%

Lincoln - 2%

Total Fixed Rate sales up 4% Q/Q Total Indexed sales down 4% Q/Q

Security Benefit Life +66%Reliance Standard +51%Protective +35%Pacific Life +27%Sammons Financial -23%Jackson National -41%

Athene +1038%American National +335%Brighthouse +289%Reliance Standard +159%Sammons Financial +125%Symetra -42%Principal -74%


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SALES PROCESS- THIRD PARTY MODEL – BEFORE COVID-19

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SALES PROCESS- COVID IMPACTS

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COVID DISRUPTION - Q2 SALES ESTIMATED TO BE DOWN

VA

FIA

FA

RILA

Income

Jan Feb Mar Apr May

• Social distancing and WFH mandates were major disruptions to the sales process

• Advisors/customers focused elsewhere

• Inventory/pipeline helped keep sales levels higher early in the pandemic, closing out 1Q

• Spread widening due to economic turmoil helped boost rates and sales in early Q2

• Industry was quick to adapt and adjust to new working conditions

Source: LIMRA Annuity Market Forecast & Monthly Annuity Sales Reports

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• 2020 sales estimated to be down 8% - 15%

• It will be 2022 before industry sales near 2019 levels

• Products with potential to “win” in 2020:

• Fixed Rate Deferred – safe, guaranteed. Short duration. Transactional

• RILA – Provides combination of downside protection and growth potential

COVID DISRUPTION – SALES OUTLOOK

Source: LIMRA Annuity Market Forecast

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PRODUCT IMPACTS

Product type

Economic impacts

Product impacts

Fixed index and structured annuities

Lower earned rates

MVA linked to treasuries

Fixed and income annuities

Lower earned rates

Increased option prices (market volatility)

MVA linked to treasuries

Variable annuities

Increased cost to hedge

• Lower treasury rates

• Increase market volatility

Decreased emphasis

Decrease in credited rates

GLWB riders pulled in many cases

Re-filings to lower guaranteed credited rates / index features

Re-filings related to MVAs linked to treasury rates

Decreases in credited rates

GLWB riders pulled in many cases

Re-filings to lower guaranteed credited rates / index features

Launching or plans to launch Structured annuities

Re-filings related to MVAs linked to treasury rates

GLWB rider fee increases

GLWB riders pulled in some cases

Launching or plans to launch structured annuities to offset VA risks

Market volatility has been beneficial to structured annuities products and will likely accelerate the development of these products

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Future (2020 and beyond)

29%

Already issued33%

No38%

Have you started issuing structured annuities? Future (2020 and beyond)

10%

19%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2020 Maybe

Source: Oliver Wyman survey

SURVEY OF FIA WRITERS CURRENTLY WRITING STRUCTURED ANNUITIESMore than 50% of FIA writers have considered or plan to offer a structured annuity

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STRUCTURED ANNUITY PRODUCT LAUNCHES Increasing sales has attracted more participants into the structured annuity space

2010 2013 2014 2015 2016 2017

Oct 2010• AXA introduces

Structured Capital Strategies

May 2013• MetLife

introduces Shield Level Selector

August 2013• CUNA introduces

Member’s Zone Annuity

September 2013• Allianz Life

introduces Index Advantage

January 2015• Voya

introduces Potential Plus

October 2015• Voya closes

Potential Plus

August 2017• Brighthouse

introduces Shield Level Select Access (Fee Only)

August 2016• CUNA introduces

Member’s Horizon Annuity

Feb 2017• AXA Structured

Capital Strategies Plus filed

2018

Feb 2018• Great West

launches Capital Choice

Nov 2018• Symetra

launches SymetraTrek

May 2018• Lincoln

launches Level Advantage

May 2018• Great American

launches Index Frontier

2019 2020

May 2019• Great

American launches Summit 6

July 2019• Athene

launches Amplify

January 2020• Ameriprise launches

Structured Solutions

May 2020• Prudential

launches FlexGuard

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STRUCTURED ANNUITY SALES (QUARTERLY $MM)

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020

Equitable Brighthouse Allianz Lincoln CUNA All others

Source: WINK

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Stat

uto

ry g

ain

(lo

ss)

Stat

uto

ry g

ain

(lo

ss)

Statutory gain (loss) profile across shocksTraditional VA GMxB Structured annuities

When aggregated with traditional VA GMxBs, unhedged structured annuity exposure essentially acts as an OTM put option – therefore reducing the total hedge need of the VA portfolio

STRUCTURED ANNUITIES - HEDGING BENEFITSStructured annuities can be used as a hedge against VA GMxB liabilities

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FA AND FIA FLOW REINSURANCEMost FA and FIA carriers have entered or are considering entering a flow reinsurance arrangement to improve profitability and product competitiveness

~1/3rdof current FIA writers use reinsurance

Source: Oliver Wyman pricing survey

1%

2%

3%

4%

5%

6%

7%

1/2/2019 2/2/2019 3/2/2019 4/2/2019 5/2/2019 6/2/2019 7/2/2019 8/2/2019 9/2/2019 10/2/2019 11/2/2019 12/2/2019

History of 10 year UST and FIA cap rates (S&P 500 1YPTP)

10 year UST

Average

Minimum

Maximum

S&P 500 1YPTP cap ratesThe recent decline in rates has accelerated the

interest in reinsurance

Reinsurer pricing advantages include tax, asset origination and capitalization

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FIA GLWB RESERVE FINANCINGFinancial reinsurance allows direct writer to hold less redundant reserves, reducing rider driven strain

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

0 5 10 15 20 25 30 35 40

Duration

Account value GLWB reserve CSV Economic reserves

Illustrative account value and reserves

Financial reinsurance considerations

• Risk transfer

• Recapture provisions

• Risk charge

Reinsuring redundant reserves resultsin an increased IRR

More than 50%of FIA GLWB writers have some form of reinsurance

Financial reinsurance is an opportunity to reduce strain and increase product profitability, but treaty and regulatory elements require careful consideration

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HISTORY OF FIXED AND VARIABLE ANNUITY M&A DEALS ($BN)Over the last 10 years, the fixed and variable annuity market has been transformed by a number of acquisitions, IPOs, and new entrants

Alternative buyers Japanese insurers IPOs and spinoffs

$1.2

Protective /Great West (1/24/2019)

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

$0.2

Global Atlantic / Ameriprise (FA)(3/20/2019)

Traditional reinsurers

$0.2

RGA / Horace Mann (VA and FA)(6/24/2019)

Ares Management / Global Bankers (7/9/2019)

$0.4

Kuvare/ Lincoln Benefit Life(7/29/2019)

Nassau Re/ Foresters Financial(10/17/2019)

Somerset Re/ Prudential(FIA) (11/13/2019)

$2.7

Fidelity National Financial / Fidelity & Guaranty(2/7/2020)

$0.4

Guggenheim / Security Benefit Life(2/15/2010)

$0.63

Athene / Liberty Life(10/15/2010)

Harbinger / Old Mutual(6/6/2010)

$0.4

Guggenheim / Equitrust(10/6/2011)

$1.35

Guggenheim / Sun Life(12/17/2012)

$1.55

Athene / Aviva USA(12/21/2012)

Voya IPO(5/1/2013)

Global Atlantic / Forethought(9/23/2013)

F&G IPO(12/13/2013)

$5.7

Dai-Ichi Life / Protective(6/24/2014)

Nassau Re / Phoenix(9/29/2015)

$5.0

Meji Yasuda / StanCorp(7/23/2015)

$3.7

Sumitomo Life / Symetra(8/11/2015)

$1.84

CF Corp / F&G(5/24/2017)

Brighthouse IPO(8/7/2017)

AXA IPO(5/9/2018)

$1.1

Apollo –Athene / Voya annuity business(12/21/2017)

$1.1

Investor Group –Global Atlantic / The Hartford (12/4/2017)

$1.2

Athene/ Jackson FA /FIA(6/18/2020)

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REGULATORY

• SEC Regulation Best Interest (Reg BI) went into effect June 30

– Securities or investment strategies involving securities - Requires advisors act in the customer’s best interest without placing their own financial or other interest ahead of the interest of the retail customer.

• NAIC Best Interest Model Reg – adopted by 2 states (Arizona and Iowa), both effective 1/21

– Establishes enhanced standard of conduct for advisors recommending annuity products

• SECURE Act

– Effective 1/1/20

– Extended RMD age from 70.5 to 72

– Changes to Stretch bene IRA’s, lifetime income within retirement plans

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REGULATORY

• CARES Act - Coronavirus Aid Relief and Economic Security Act

Passed 3/27/20 – largest economic stimulus bill in history

- Focused on stimulus package $2T

- Paycheck Protection Program for small businesses

- Direct check for individuals

- Waives RMD requirements for 2020

- No tax penalty up to $100K withdrawal for qualified individual from plan or IRA

• RILA Bill - Registration for Index Linked Annuities Act

- Bi-partisan bill introduced to the Senate in May 2020

- Requires the SEC to design a form for the filing of RILAs

- The new form would remove the requirement to provide GAAP financials

- Insured Retirement Institute created RILA Act Task force to coordinate lobbying to advance the bill

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LOOKING FORWARD- WHAT WILL OUR INDUSTRY LOOK LIKE AFTER COVID?

Sales Process & Processing• Will sales process/wholesaler models completely change? Stay virtual?• Will industry more widely adopt more efficient digital technologies for processing

business?

Products• Will products be re-designed to be more capital efficient and better aligned with

financials?• With “lower for even longer” rates, will we see an overhaul in product pricing and

expenses in an effort to maximize customer value?• Will RILA market continue to expand? Will it become the “arms race” of the 20’s?

Carriers & Inforce Management• Will we see more remote work and hence lower expense infrastructure for

carriers?• Will we see more M&A and consolidation?• Will we see more transactions on inforce?• Will more private equity investors (or foreign investors) come onto the scene?

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QUESTIONS

annuities in a covid-19 world€¦ · annuities in a covid-19 world nicholas carbo, fsa, maaa...

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