market trends matthew coleman kendrick lombardo · state actions naic suitability working group...
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Equity-Based Insurance Guarantees Conference Nov. 5-6, 2018
Chicago, IL
Market Trends
Matthew ColemanKendrick Lombardo
SOA Antitrust Compliance Guidelines SOA Presentation Disclaimer
Sponsored by
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Equity-Based Insurance GuaranteesNovember 5, 2018 (8:30 – 9:30am)
Market TrendsMatthew Coleman, FSA, MAAAKendrick Lombardo, FSA, MAAA
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Trend Drivers:1. Sales Regulation2. Capital & Reserve Regulation3. Tax Regulation4. Technology5. Bond & Equity Markets6. Pricing Trends7. Product Trends
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Sales Regulation
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The Fiduciarization of Financial Services
The DOL Conflict of Interest Rule vacated by 5th Circuit Court (March) The DOL introduced the concept of extending fiduciary obligations to all financial products salespeople Court held that the DOL rule was arbitrary and capricious & exceeded ERISA’s authority DOL ordered to pay appeal costs of plaintiffs
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The Fiduciarization of Financial Services
SEC Proposes Best Interest Investment Advice Rule (April) Two tiered standard “Regulation Best Interest” (not Fiduciary) for Brokers Fiduciary standard for investment advisors Additional disclosures (e.g. conflicts & proprietary products) Conflicts are not prohibited No private right of action Title reform: brokers cannot use “advisor” Relationship summary: standards, disclosures, fees Public comment period through August
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The Fiduciarization of Financial Services
Polarization of opinion & confusion Fiduciary standard: it’s perfect for everyone else. Will free markets and competition drive efficiency and value in financial services? Will significantly increased regulation drive better value for consumers? Is strengthened disclosure sufficient without Fiduciary obligations?
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State Actions
NAIC Suitability Working Group Revising Suitability Model Regulation (new draft October 25) Rejected NY’s requests to include sales of Life Insurance in the regulation Group considering conflicts of interest, best interest and other fiduciary-type aspects
New York’s Best Interest Regulations Applies to all recommendations for individual and group life as well as annuities Final rule issued in July Exemptions for PRT, COLI, BOLI Some think more robust than DOL
Nevada Fiduciary Standard Effective in 2017 Applies to all financial advisers Subjects advisers to financial liability
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Regulation Capital, Reserving and Reporting
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Other Regulatory Market Drivers
Principles Based Reserving (VM-20) For Life Insurance Required in 2020 Conversion affects all aspects of life pricing, management and reporting
International Financial Reporting Standards (IFRS-17) Applies to companies operating or with ownership outside the US, China and Northern Africa Affects Reinsurers Effective 1-1-2021 Replaces IFRS-4
VM-22: Effective this year Lower Valuation Rates for Payout Annuities Higher Cost for Guaranteed Payout Structures (SPIA, GLWB, GMIB, DIA, etc) Other principles based guidance is being developed for deferred, non-variable annuities
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Other Regulatory Market Drivers
Annuity Reserving Working Group Recommending a PBR method for Non-Variable Annuities Consistent with AG 43/VM21 Exclusion Test and Floor Reserve Approaches under consideration
SVL Interest Rate Modernization Work Group Updating Statutory Reserve Rates Similar to VM-22 for Deferred Annuities Likely leading to lower reserve rates and higher reserves
NAIC LATF/RBC Longevity Risk Subgroup Recommendations on how to recognize longevity risk in RBC or statutory reserves
GAAP Targeted Improvements FASB adopts new accounting standard for long-duration contracts Requires fair valuation for market risk elements DAC amortized over expected (possibly shorter) term
Quantitative Impact Studes I & II Refinements and Harmonization of AG43 and C3P2
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Regulation Tax Reform
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Summarizing Tax reform Items
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Item High Level Impact CommentBusiness Tax Rate: 35% to 21%
1. Higher Post Tax dollars retained 1. More profit realized … eventually
DTA‘s 1. Existing DTA’s on balance sheet reduced in value 1. The value of paying less taxes in the future, having paid extra in the past, is less when reducing taxes paid at 21% vs at 35% (see slide 5)
Ability to utilize NOL Offsets for Taxes Paid
1. No longer Carryback2. Limit of utilizing 80% of regular taxable income in any year3. No expiration for carryforward
1. Remove ability to monetize tax values2. Reduces ability to monetize tax values3. Eventually able to monetize value
Tax is timing: Pulls taxes paid forward
DAC tax 1. Increased amount to be amortized2. Increased Amortization Period
1. Pull forward tax to be paid2. Slowed down eventual realization of income
Tax is timing: Pulled forward tax payments
Tax reserve 1. 92.81% of Stat Reserve 1. Immediate impact of lower tax reserve to be
amortized over 8 years2. Future Tax reserve basis changes
1. Weakening: 4 years instead of 10 year amortization2. Strengthen: All at once
1. Pull forward Taxes to be paid
Secondary Impact:RBC Factors
1. NAIC has updated their post tax factors 1. Significantly increase RBC, and thus decrease RBC%
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Summarizing Tax reform Items
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Item High Level Impact CommentDRD 1. Higher Post Tax dollars retained 1. More profit realized … eventually
Deferred Foreign Profits 1. 15.5% tax rate from repatriating previously deferred profit 1. Accretive to US Statutory Balance Sheets2. Enterprise wide would depend on how deferred profits were
represented on foreign balance sheet
GILT, BEAT, FDII:• Global Intangible Low Taxed
Income (“GILTI”) Tax • Deduction for Foreign Derived
Intangible Income
1. Tighten up ability to defer / avoid taxes using foreign entities or locations
1. Very Company Specific
On balance, The Tax Reform:
Pulled forward the timing of taxes to be paid
Increased the post tax income that will eventually be realized
Enterprise Values increased: EEV’s increased
AAT (CFT): Values increased - sufficiencies increased, deficiencies also decreased
Secondary impacts from the drop in individual tax rates, lower value of tax deferral
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Tax Reform Impact on Balance Sheets
Immediate: Reduction to Statutory balance sheets, driven primarily by:
Significant Reduction in DTA’s (Life saw a reduction of ~ 15B in DTA value)
Statutory: TAC reduced
The reduction in tax reserve increased taxes paid, even with the smoothing over 8 years.
More Complete Picture: Increased total value
EEV’s went up significantly in aggregate
How much was very dependent on specific conditions of the company
Most commonly was in the 5 -20% increase to EEV range
Essentially, any reduction in values top DTA’s was more than covered
by increases to future post tax income
Makes sense if had profit to cover DTA to begin with
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Impact on Products . . . Illustrative Cashflows Example
Similar IRR’s, but larger initial strain … more capital used from the same amount of sales / premium
A deviation (A/E) leads to larger impacts (more volatility)
Impact on inforce depends on the average age of the block, so where in the “life cycle” the inforce sits
Primarily increased inforce value, as items after the initial strain are higher positives.
Offset some by reductions in value of DTA’s (seeing significant net positive on balance)
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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Illustrative Distributable Earnings Cash FlowsBefore and After Tax Reform
Pre Tax Reform Post Tax reform
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Implications & Expected resultsLikely Areas of Focus
Reinsurance: Likely increase some uses, decrease other uses Many reasons for a reinsurance treaty Those that use it to help manage RBC% volatility from excess mortality, will need more reinsurance to protect against the same
excess mortality Part of comprehensive tax planning approach, pricing A XXX product, may see reduction in use (less value)
Assumption Setting: More effort will be made Larger impact (more volatility) from A/E deviations More important than ever to set assumptions well, monitor / notice Balance between model / assumption structure complexity vs. accuracy
May push towards more structural accuracy
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Implications & Expected resultsLikely Areas of Focus
Pricing: Aggregate impacts are very product specific. Generally, IRR’s are seeing minimal change: larger
initial strain, larger profit in later years Manage capital use
Larger initial strain followed by larger profit compared to pre tax reform priced product CF’s. More capital used for same $X Million of sales
Planning process impacted: sales targets for capital use goals Some product pricing exceptions of note: AXXX products
Retaining the benefit of huge initial loss, from not paying taxes, at 35% , benefited the IRR / pricing levels of this product immensely. At 21% the value of this structure goes down, and pricing suffered.
Rating agencies reactions to NAIC changes to RBC factors may lead to adjusting RBC% target used in pricing
M & A: EEV’s have increased: value of existing business is higher (more after tax earnings retained) RBC factors adjusted: more capital required to maintain specific RBC% targets
Rating agencies have not yet opined on their position of what RBC% they see as “just right” Aggregate impact very company specific
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Technology
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InsureTech
Direct to Consumer (Internet) Marketing Is insurance bought or sold? Perfecting the elevator speech (or phrase) Significant consumer education
Quotes are the primary mechanism of promotion Carefully crafted e-app Post-sale followup & service (a potential strength) Effects of InsureTech on Behavioral assumptions
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InsureTech
Mobile Sales Enablement for Agent-Based Distribution Mobile Applications and straight-through processes Regulatory compliance enhancement Reduced NIGO and associated cost
Aging Agent population has uneven acceptance rates
Mobile Experience for Policyholders Enhanced customer control and engagement Effect on utilization and antiselective behavior
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InsureTech & Advanced Analytics
Emerging Underwriting Methodologies SOAs Delphi Study
Traditional/Simplified/Accelerated all actively used
Delphi: 20-50% should qualify for accelerated (40-80% in 10Y)
Key blockers: older ages & impaired, higher face, foreign nationals, complex cases, fraud potential
Accelerated mortality expected to have less than a 5% increase over traditional on average
Predictive Analytics & Machine Learning Identifies sub-trends and sub-factors within data
Refinement of policy owner behavior
Mortality and Morbidity tables
Tailoring of products and pricing to specific applications
Machine Learning: Updates and recalibrates predictive analysis outcomes with updated data
Feature Engineering cost/accuracy
Validation is critical20
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Reinsurance
Financial Reinsurance for inforce management Pros: Low cost, doesn’t increase leverage, moderates earnings volatility
Cons: Reduces top line, increased admin costs, reinsurer credit risk
Targets: policyholder behavioral risk management;
volatile earnings;
capital management;
underwriting assist;
new markets;
improved NIY or profitability
ERM
Reinsurance and sale of blocks Blocks with high guarantees
Capital raise
Uncertainty of regulation (e.g LTC)
Expense reduction
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Fixed Assets & Equities
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Finance.Yahoo.com
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6.00%
Treasury Yields2005 - 2018
30 Year 10 Year 5 Year 13 Week
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Finance.Yahoo.com
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Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18
Treasury Yields2018
30 Year 10 Year 5 Year 13 Week
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Federal Reserve Economic Data
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Moody's Seasoned Corporate Bond Yield Averages 2005 - 2018
BAA Rating AAA Rating Credit Spread
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Federal Reserve Economic Data
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Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18
Moody's Seasoned Corporate Bond Yield Averages 2018
BAA Rating AAA Rating Credit Spread
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Finance.Yahoo.com
0
500
1,000
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3,000
3,500
S&P 5002005 - 2018
S&P 500
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Finance.Yahoo.com
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500
1,000
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S&P 5002018
S&P 500
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Federal Reserve Economic Data
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VIX2005 - 2018
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Federal Reserve Economic Data
0
5
10
15
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25
30
35
40
45
VIX2018
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Market Estimates
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Federal Reserve Data
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Pricing Trends
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Pricing Trends
Profit targets have moderated in response to lower interest rates, with statutory targets continuing to dominate. Still, GAAP drives some behaviors. Growth in EV and VNB continues. A few have dropped RBC Targets in response to tax changes, but not universal Predictive analytics usage continues to grow across assumptions, underwriting and inforce
management. Variation in judgement still continues, on how to apply, adjust and supplement Lapses coming in lower than previously expected for several, but experience varies by
company. Lapse floors have moderated significantly from years past, but there still are some significant variations in views across the industry. Mortality improvement has slowed, but most have not translated that to decreased life
expectancies Real World returns help the vast majority of IUL, VA and FIA pricing results for companies, with
mean reversion targets for rates have continued to drift downward Many have built robust pricing models for VAs with projected hedging, GAAP and Statutory
impacts, but others have used less sophisticated methods
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The median target return on investment for ranged from 8% to 15%
35
ROI Target Values
Product
All Companies
Low Median High
VUL 9.0% 10.0% 12.1%
IUL 9.0% 10.5% 12.0%
VA 8.0% 12.0% 14.8%
FIA 9.0% 10.5% 12.0%
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ROI = Statutory return on investment (internal rate of return)* Only includes products with a sufficient number of responses
For VA and VL products, Real World Returns still a key driver of pricing results, with the most common assumptions for gross equity returns was 8.00% – 8.49%, and for intermediate term bond returns 4.00 – 4.49%
*Gross equity return and gross intermediate term bond account earned rate assumed in calculating expected profitability (before deductions for mortality and expense risk charge, investment advisory fee or other fund expenses)
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6%
3%
9%
15%
15%
27%
9%
6%
9%
<5.5%
5.50 - 5.99%
6.00 - 6.49%
6.50 - 6.99%
7.00 - 7.49%
7.50 - 7.99%
8.00 - 8.49%
8.50 - 8.99%
9.00 - 9.49%
9.50 - 9.99%
0% 5% 10% 15% 20% 25% 30%
Gross Equity Return*(Percent of Responses)
8%
8%
29%
16%
14%
8%
4%
8%
4%
3.00 - 3.49%
3.50 - 3.99%
4.00 - 4.49%
4.50 - 4.99%
5.00 - 5.49%
5.50 - 5.99%
6.00 - 6.49%
6.50 - 6.99%
7.00 - 7.49%
7.50 - 7.99%
8.00 - 8.49%
0% 5% 10% 15% 20% 25% 30% 35%
Gross Intermediate Term Bond Return*(Percent of Responses)
Predictive analytics was most frequently used in underwriting and assumption setting, with some growing inforce management use
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TERM WL UL NLG UL VUL IUL FA VA FIA SPIA & DIA
Use of Predictive Analytics
Assumption Setting Inforce Management Underwriting
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Sales & Product Trends
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Wink Market Reports
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Wink Market Reports
2730
32 32 3439
47
5358
54
63
0
10
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30
40
50
60
70
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018(est)
Prod
cutio
n in
$M
illio
nsIndexed Annuity Production
2008 - 2018(est)
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Wink Market Reports
Bank, 17%
Career, 6%
Broker Dealer, 21%
Independent Agent, 56%
FIA Sales 2018
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Wink Market Reports
Fixed
Monthly Cap
Averaging
Annual Cap
Multi-Year
Other
FIA Crediting Methods
S&P 500
Hybrids
Fixed
Other
FIA Indices
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FIA Sales Trends
Big fixed (FA, MYG, FIA) deferred annuity sales in 2018Q2 (>$28B) FIA Trends FIA Sales are up – recovery from DOL and broaden market appeal Accumulation an increased focus for FIA Performance-based income riders address GMWB reserve issues Fee-based FIA launches – reaction to DOL Continued growth of bespoke and volatility control indices M&A activity continues (e.g. Voya, Hartford, F&G)
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Limra
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2009 2010 2011 2012 2013 2014 2015 2016 2017 2018(est)
Aver
age
Annu
al S
&P 5
00 In
dex
VA P
rodu
ctio
n ($
B)
U.S. Variable Annuity Sales - 2009-2018(est)
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Annual sales in 2018 trending at a record $9.3B
Morningstar
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2011 2012 2013 2014 2015 2016 2017 2018
Qua
rterly
Pre
miu
m ($
B)
Registered FIA Sales2011-2018
OthersAllianzBrighthouseAXA
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VA Sales Trends
Sales of VA products and particularly VA with GMWB are decreasing Accumulation oriented (non-GMWB) Sales have been steady Structured Annuities continue to climb and gain new entrants
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Fixed & Indexed UL Sales
2.06 2.03 2.07
2.45
3.15
4.01
4.634.91
5.49
6.01
5.54
4.41
4.80 4.86
5.38
4.96 4.875.18 5.08 5.12
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17Fixed Indexed Sales
Market Decline
Secondary Guarantee Products
Great Recession
Bull Equity Market & Low Interest Rates
Source: LIMRA’s Individual Life Sales Survey and LIMRA estimates
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Indexed UL Market Share
• IUL market share has consistently grown over the past decade.
• IUL represents nearly 20% of total new life insurance premium
7% 7%9%
13%
17%
23%
28%
34%
42%45% 46%
50%
54%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2Q18YTD
IUL Premium Market Share of All Universal Life Sales
Source: LIMRA’s Individual Life Sales Survey and LIMRA estimates
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IUL Sales Trends
Increase of Combo LTC Products IUL sales as a percent of total UL continue to rise
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Final Thoughts
Regulational volatility continues to create uncertainty, increasing costs Technology searches for enhancement of products and distribution, but direct-to-consumer sales efforts
remain unproven. The financial markets have been stable with some volatility lately. Annuities have recovered well after DOL fears removed. FIA’s are succeeding in new markets and have not been hampered by new ownership. RFIA’s are the fastest growing annuity segment. IUL’s continue strong growth
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About Willis Towers WatsonWillis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 40,000 employees serving more than 140 countries. We design and deliver solutions that manage risk, optimize benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas – the dynamic formula that drives business performance. Together, we unlock potential. Learn more at willistowerswatson.com.
Matthew ColemanDirector
101 South Hanley Road, Suite 900, St. Louis, MO 63105-3437
T +1 913 689 8679 E [email protected]
Kendrick LombardoSenior Director
175 Powder Forest Drive | Weatogue, CT 06089
T +1 860 843 7153E [email protected]
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