session 47 panel discussion annuity reinsurance market update › ... ›...
TRANSCRIPT
Session 47 PD, Annuity Reinsurance Market Update
Moderator:
Michael L. Kaster, FSA, MAAA
Presenters: Wenan Fei, FSA, CERA, MAAA
Darryl Herrick Michael L. Kaster, FSA, MAAA
Symeon Andrew Williams, FSA, MAAA SOA Antitrust Disclaimer SOA Presentation Disclaimer
Annuity Reinsurance for New Business
Wenan Fei Ph.D., FSA, CFA
SOA 2018 Life & Annuity SymposiumMay 8, 2018
Vice President and ActuaryGlobal Financial SolutionsRGA
2
Structure of Annuity Reinsurance for New Business (How does it work?)
Benefits of Annuity Reinsurance for New Business (How does it create value?)
Outline
3
Typical Structure for Annuity Reinsurance: Coinsurance • The reinsurer shares the cash flows (e.g. premiums and benefits) and associated risks of the reinsured
business with the ceding company proportionally
• Assets and reserves for the ceded business are transferred to the reinsurer
• The ceding company retains the policy administration and the liability to the policyholders (i.e. indemnity reinsurance)
• The reinsurer reimburses the ceding company commission, acquisition expenses, and maintenance expense.
• The reinsurer offers additional ceding commission to the ceding company as an override
• The reinsurer may reinsure the base or the riders or both, for the annuity contracts
Structure of Annuity Reinsurance for New Business
Ceding Company Reinsurer
Premiums
Benefits, Commissions, Expense Allowance, and Reinsurance Override
4
Unique Aspects of Annuity Reinsurance for New Business • May involve frequent reinsurance quotes for new business tranches
• May need weekly reinsurance settlement for premiums and allowances
• May require some treaty provisions to ensure proper rate management by the ceding company and the alignment of the interests and incentives of the ceding company and the reinsurer
• Close partnership between the ceding company and the reinsurer in pricing, product management, and asset management
• Both parties can terminate the treaty for new business on temporary or permanent basis with notice
Structure of Annuity Reinsurance for New Business
5
Transfer Risks• Transfer or share the risks of the new business with the reinsurer when the ceding company is not comfortable
to take the risks by itself (e.g. risky GMxB riders of VA and FIA)
• The ceding company may have limited appetite/capacity for certain risks, but may still want to meet the demands of the policyholders or distribution channels
• Both biometric and market risks of the products are transferred to the reinsurer with full reserve credit for the ceded portion without any basis risk
• Monetize the uncertain future profits with the fixed override paid by the reinsurer
• Key to Success: The reinsurer needs to have some advantage in taking the risks relative to the ceding company, such as having lower cost of risk capital, better hedging capability, better data and experience with the risks, higher appetite for the risks, and etc.
Benefits of Annuity Reinsurance for New Business
6
Improve Pricing and Profitability• Improve the competitiveness of annuity new business (e.g. higher crediting rates of fixed or indexed annuities)
• Improve the pricing return of the annuity new business
• Both objectives are achieved through reinsurance override paid by the reinsurer (i.e. upfront or trail reinsurance commissions)
• Key to Success: The reinsurer needs to have pricing advantage of the products relative to the ceding company
• Example: o A company is launching a new fixed deferred annuity product o Prior reinsurance, the ceding company can support a crediting rate of 2.5% o The reinsurer can support a crediting rate of 3.0% for the same producto 50% quota share, if the reinsurer pays an override of 25 bps trailing commission to the ceding company, the ceding
company can offer a crediting rate of 2.75% with the same return on its retained business o If the ceding company offers a crediting rate of 2.70%, it can improve its ROA of the retained business by 5 bps
• The value created by the reinsurance is equal to the pricing advantage of the reinsurer on the reinsured business
Benefits of Annuity Reinsurance for New Business
7
Improve Pricing and Profitability (Cont.) • Example (Cont.): Drivers of the reinsurance pricing advantages
Benefits of Annuity Reinsurance for New Business
NPV of the Distributable Earning @ Pricing Hurdle RateInterest Margin = 1.75%
( + ) Investment Income on AV 4.25%( - ) Interest Credited on AV 2.50%
Expense Margin = -1.58%( + ) Policy Charge 0.02%( - ) Acquisition Expense -1.35%( - ) Ceding Company Expense -0.20%( - ) Reinsurer's Expense -0.05%
Surrender Margin = 0.15%( + ) AV Released by Surrender 5.65%( - ) Surrender Benefits -5.50%
Amortization of the Difference b/w Reserve and AV 0.23%( - ) Change in Reserve Net AV 0.36%( + ) Investment Income on Reserve Net of AV -0.13%
Pre-Tax Income 0.55%Tax -0.11%Post-Tax Income 0.43%Cost of Capital -0.43%Distributable Earning 0.00%
Reserve as % AV 94.00%Capital as % AV 5.00%
The reinsurer can achieve a higher asset yield.
The reinsurer may have different reserve basis (e.g. U.S. GAAP, IFRS and etc.).
The reinsurer may have a lower pricing hurdle rate and/or capital ratio.
The reinsurer may be subject to a lower tax rate.
8
Optimize Capital Allocation• Achieve a better capital allocation, while still be able to serve diverse product lines to meet the needs of the
market given a limited amount of capital
• Key to Success: The reinsurer has a lower opportunity cost to serve certain products than the ceding company
• Example: o The ceding company want to sell two products; Products A and Bo To be competitive in the market, the two products have ROA = 60 bpso Assume zero tax rate in this example o The capital/asset ratios of the ceding company for A and B are 4% and 6%, respectivelyo The ceding company has $20 million capital o The capital/asset ratios of the reinsurer for A and B are both 6% o The reinsurer has $20 million capital
Benefits of Annuity Reinsurance for New Business
9
Optimize Capital Allocation (Cont.) • Example (Cont.)
Benefits of Annuity Reinsurance for New Business
Prior ReinsuranceProduct A Product B
Asset Base ROA Capital Ratio ROE Capital Net Income Asset Base ROA Capital Ratio ROE Capital Net Income Total Net Income
Ceding Company 250 0.60% 4.00% 15.00% 10 1.50 167 0.60% 6.00% 10.00% 10 1.00 2.50
Reinsurer 167 0.60% 6.00% 10.00% 10 1.00 167 0.60% 6.00% 10.00% 10 1.00 2.00
Total 417 0.60% 4.80% 12.50% 20 2.50 333 0.60% 6.00% 10.00% 20 2.00 4.50
Reinsurance Override -0.10%
Post ReinsuranceProduct A Product B
Asset Base ROA Capital Ratio ROE Capital Net Income Asset Base ROA Capital Ratio ROE Capital Net Income Total Net Income
Ceding Company 500 0.53% 4.00% 13.33% 20 2.67 0 0.60% 6.00% 10.00% 0 - 2.67
Reinsurer 0 0.60% 6.00% 10.00% 0 - 333 0.70% 6.00% 11.67% 20 2.33 2.33
Total 500 0.53% 4.00% 13.33% 20 2.67 333 0.70% 6.00% 11.67% 20 2.33 5.00
1. The opportunity cost of producing Product B is the loss of the income of producing product A by the same capital.
3. By reinsuring Product B, the ceding company achieves higher income.
2. It is not necessary to have a positive reinsurance override.
4. Specialization produces a higher total income for the ceding company and the reinsurer combined.
10
Reduce Financial Strains• Finance the initial statutory surplus/cash strain due to new business acquisition
• Finance redundant statutory reserve (e.g. FIA GLWB)
• Reduce the statutory earning volatility caused by the mismatch between the statutory reserve and hedging assets of FIA and VA
• Reinsurance meets the statutory risk transfer, but can be low risk in nature and pays reinsurer the fee based on the relief provided
• Reinsurance structure often involves experience refunds, funds withheld and voluntary recapture by the ceding company when the relief is fully amortized
• Key to Success: The reinsurer has lower cost in financing and managing the financial strains than the ceding company
Benefits of Annuity Reinsurance for New Business
11
How does annuity reinsurance for new business work?• Coinsurance
• Close partnership between the ceding company and the reinsurer on pricing, rate management and asset management
How does annuity reinsurance for new business create value?• Transfer risks
• Improve pricing and profitability
• Optimize capital allocation
• Reduce financial strains
Summary
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Inforce Annuity Reinsurance
Darryl HerrickHead of Reinsurance OriginationGlobal Atlantic Financial Group
CONFIDENTIAL 2
Global Atlantic is a financial services company focused on the US retirement, life insurance and reinsurance markets
Founded in 2004 at Goldman Sachs as a reinsurance business.Separated in 2013 to be an independent Company
Today, Global Atlantic has ~1,000 employees with nine offices in the United States and Bermuda
1. GAAP Assets, including Separate Account assets2. Total Adjusted Capital, consolidated across US and Bermuda statutory entities3. Includes announced $9 billion reinsurance transaction with The Hartford (pending)
Overview of Global Atlantic
AA.M. Best
“Excellent”
Total Assets1
$50bn+
Statutory Capital2
~$3.5bn
A-Standard & Poor’s
“Strong”
A3Moody’s
AFitch
“Strong”
Acquisitions Reinsurance Clients3 Financial Strength Ratings
(Previously Aviva USA Life)
CONFIDENTIAL 3
For a fixed annuity reinsurance transaction, one of the primary structures is coinsurance, where the reinsurer takes on the reserves and assets backing a block of annuities
Fixed Annuity Reinsurance
1. GA’s flagship US reinsurance company Commonwealth Annuity and Life Insurance Company (“CwA”) is licensed in 49 states. For New York business, CwA utilizes its NY subsidiary, FAFLIC
Upfront Cash Flows: Ceding Company transfers to the reinsurer:
– Book value of assets equal to statutory reserves, less the ceding commission
Ongoing Cash Flows: In periodic settlements, reinsurer will pay the Cedant its share of:
– Policyholder benefits (lapse, mortality and partial withdrawals), as well as– Maintenance expenses and commissions
Assets Held in Trust: Assets backing reserves are held in a “comfort” trust
– Cedant is named beneficiary of the trust– Reinsurer holds additional collateral in the trust to provide further protection to Cedant
Cedant Reinsurer
Day 1: Assets transferred to Reinsurer
Ongoing: Reinsurer pays liability cash flows, expenses and commissions
OvercollateralizedComfort Trust
UCC Security Interest in Trust(Cedant is named beneficiary)
Assets Backing Reserves Held in Comfort Trust
OngoingMaintenanceof Trust
1
2 3
1
2
3
Description
Reserve Credit
Cedant receives reserve credit for
reinsurance as long as reinsurer is
licensed in the state of the Cedant1
CONFIDENTIAL 4
RISK MANAGEMENT
Reduce investment and policyholder behavior risk
Mitigate interest rate and/or equity markets exposure
Manage business mix and capital allocation
RELEASE CAPITAL / IMPROVE ROE
Release capital backing blocks of business
Monetize embedded value and realize capital gains
Provide capital for organic growth
EXIT NON-CORE BUSINESSES
Shift focus, capital and resources to core lines
Downsize run-off blocks
Transfer admin and reduce operational overhead
ACQUISITION FINANCING
Provide acquisition financing through reinsurance of blocks
Provide product expertise and take on undesired lines of business
Annuity reinsurance can help insurers achieve a number of key strategic and financial objectives
Below are four key objectives as well as examples of GA clients who have achieved them
Why Annuity Reinsurance?
CONFIDENTIAL 5
ASSET LIABILITY MANAGEMENT DIFFERENTIATED ASSET STRATEGY
LIABILITY UNDERWRITING DATA CAPITAL OPTIMIZATION
How reinsurers can add value?
Each reinsurer may allocate a portion of its portfolio into assets that enhance yield / generate alpha e.g.
– Structured Products– Hedge funds– Private equity – Emerging markets
The reinsurer needs to be able to demonstrate strong historical track record managing these types of assets
Reposition portfolio to match asset inflows (interest & principal) with liability outflows
Can unlock efficiencies through:
– Duration pickup– Reducing cash flow basis risk– Buying floating rate assets to protect against
dynamic policyholder behavior
Reinsurers could have significant data on policyholder behavior, which allows for improved assumption setting during re-underwriting
Data on policyholder behavior for various product characteristics
– Distribution
– Crediting rate
– Vintage
Reinsurers may have structural advantages that create capital efficiencies
For instance, an offshore/onshore reinsurer can unlock value in the interest maintenance reserve / unrealized gains in a block
CONFIDENTIAL 6
Annuity Reinsurers can improveCedant Economics
Below is an illustration of how reinsurance may help a cedant improve its ROE and raise capital
Example shows 50% reinsurance of $3bn FA block, improving the cedant’s ROE from 5.0% to 7.2%
Transaction creates $150mm+ capital for the cedant, which can be re-deployed to generate earnings
Line Item CurrentReins.Impact
Pro-forma Description
Size Stat Reserves $ 3,000 $(1,500) $ 1,500 $3bn FA block; cede 50%
Capital
Required Capital $ 240 $(120) $ 120 Assumed 1% C-1, 1% C-3, 400% RBC Release 50% of required capital
After-tax Cede - (36) (36) Reinsurer pays 3% Cede i.e. $45mm * (1-21%)
Total Req. Capital $ 240 $(156) $ 84 Reinsurance creates $156mm extra capital
Earnings Net Income $ 12 $(6) $ 6 Current income = 5% ROE * $240mm capital Forego 50% of block earnings
Returns ROE 5.0% 3.9% 7.2% Reinsurance provides 220bp ROE accretion
+220bp ROE accretion
CONFIDENTIAL 7
Considerations for Cedant
Below are a few considerations for the cedant to evaluate the risk in transacting with a reinsurer
Reinsurer Strength
Key criteria include credit ratings, size of balance sheet, transaction experience
Whether the reinsurer is a US regulated entity
Investment Guidelines / Substitution Rights
Assets managed based on investment guidelines agreed to with the cedant
Assets are held in a trust to which the cedant is named beneficiary
Limits by asset class, ratings as well as a list of prohibited investments, substitution rights
Recapture Rights
Cedants should have the right to recapture the block when the reinsurer breaches certain thresholds
Include minimum RBC triggers, breach of investment guidelines, default on settlements, etc.
Overcollateralization
Cedants can demand the reinsurer post additional collateral = [x]% of reserves in the trust account
Provides further credit risk mitigation, protection against investment losses, etc.
1
2
3
4
Case Studies
CONFIDENTIAL
Commonwealth Annuity and Life Insurance Company (“CwA”) entered a 34% quota share coinsurance agreement on a block of fixed annuities written by a leading L&A Company
Business: The block consists of in-force book value fixed deferred annuity policies with ~$9.5bn account value (~$3bn transferred to CwA)
Transaction Highlights / Benefits to Cedant:
1) Raise Capital: The transaction provided ~$300mm+ in statutory capital relief, including the release of capital, IMR and capital gains on assets transferred
2) De-risk Spread Business: Lapse risk, including “cross” lapse/interest rate risk, as well as asset and reinvestment risk are all transferred to CwA
3) NGE Setting Construct: Cedant and CwA established a formulaic construct to align interests regarding NGE setting
4) Transfer CMLs: As part of the reinsurance transaction, CwA acquired $250mm+ of Commercial Mortgage Loans (“CMLs”) enabling the Ceding Company to transfer fewer liquid securities
5) Retain Servicing: Cedant continues to administer servicing for the block
9
Goldman Sachs
Commonwealth Annuity
Global Atlantic
~$3bn FA Assets/Liabilities
Cedant(LifeCo)
Cedant(Parent)
Key Terms Transaction Structure
~$9.5bn FA Block
34% Reinsured66
% R
etai
ned
Policyholder Benefits
Fixed Annuity Block Reinsurance
CONFIDENTIAL 10
UL/VUL Reinsurance
Agreement: Commonwealth Annuity and Life Insurance Company (“CwA”) provided 55% quota share coinsurance of a block of life business owned by a leading US life insurance company
Business: The block consisted of in-force Universal Life (“UL”) and Variable Universal Life (“VUL”) policies with approximately $1.5 billion in reserves
Consideration: The transaction provided approximately $240 million in statutory capital relief, which included the after-tax ceding commission, release of capital and capital gains on assets transferred
Transaction Highlights / Benefits to Cedant:
1) Immediate increase in capital: Cedant’s risk-based capital (RBC) ratio increased approximately 20 percentage points
2) Retain mortality risk: Transaction structure allowed mortality risk to remain with Cedant
3) Retain servicing: Cedant continues to administer servicing for the block
4) Minimize asset transfer: Combination of UL and VUL business allowed Cedant to transfer less amount of general account reserve compared to a pure UL transaction for the same amount of capital relief
5) Flexibility: Ability to size percentage of blocks reinsured depending on capital requirement
6) Timing: Working with our client, the CwA team was able to diligence, execute and complete a transaction in a relatively short time frame
Commonwealth
Goldman Sachs
Commonwealth Annuity
Global Atlantic
Cedant(LifeCo)
Cedant(Parent Company)
~$1.5bn UL / VUL Block
~$1.5bn Assets/Liabilities
Policyholder Benefits(Net of inuring reinsurance)
45% Reinsured
55% Retained
Mortality Reinsurer
YRTMortality
Reinsurance
Key Terms Transaction Structure
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Recent Annuity Reinsurance Trends
Life & Annuity Symposium
May 8, 2018
Mike Kaster – Willis Re Life Solutions
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Annuity Reinsurance Market UpdateAgenda
• Annuity Reinsurance Market update • Mike Kaster, Willis Re Life Solutions
• New Business Annuity Reinsurance • Wenan Fei, RGA
• Inforce Annuity Reinsurance• Darryl Herrick, Global Atlantic
• Key challenges (from ceding company perspective) for executing annuity reinsurance • Symeon Williams, Transamerica
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Annuity Reinsurance Market UpdateAudience Question
• Polling Question #1 – Who do you work for?• Direct writing company • Reinsurance Company• Consulting Firm• Other
• Polling Question #2 – Has your company completed an Annuity Reinsurance agreement with an outside company in the last 10 years?• Yes – as a ceding company • Yes – as a reinsurer• Yes – as an advisor or consultant to a transaction• No – but working on a possible transaction for 2018• No
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Market drivers of annuity reinsurance transactions
4
• Improved capital position• Either through unlocking some trapped value in the business, or• Releasing required capital associated with the block.
• Improving Return on Capital/Equity for overall block• Removing low return business will result in better overall returns
• Low interest rate environment continues to pressure life and annuity writers• Spread compression on general account assets• Pressure on credited interest rates and profit margins• Reluctance of companies to invest capital (Surplus Strain)
• De-risking portfolio to improve ERM metrics• Improved profitability or competitiveness of new business
Many companies are considering various types of transactions in the annuity space, with many different transactions having transacted in 2017.
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Annuity Reinsurance Reserve Credit Taken Trend ($000s)By Contract Effective Date as of Year end for each calendar year
5
-
20,000,000
40,000,000
60,000,000
80,000,000
100,000,000
120,000,000
140,000,000
2012YE 2013YE 2014YE 2015YE 2016YE 2017YE
2017
2016
2015
2014
2013
2012
prior 2012
Source: S&P Global Market Intelligence
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willistowerswatson.com
Annuity Modified Coinsurance Reserve Trend ($000s)2016 increase is mostly Prudential VA affiliated reins transaction
6
-
50,000,000
100,000,000
150,000,000
200,000,000
250,000,000
300,000,000
350,000,000
2012YE 2013YE 2014YE 2015YE 2016YE 2017YE
2017
2016
2015
2014
2013
2012
prior 2012
Source: S&P Global Market Intelligence
© 2018 Willis Towers Watson. All rights reserved.
willistowerswatson.com
Annuity Modified Coinsurance Reserve Trend ($000s)2016 with Prudential VA affiliated reins transaction removed
7
Source: S&P Global Market Intelligence
© 2018 Willis Towers Watson. All rights reserved.
-
50,000,000
100,000,000
150,000,000
200,000,000
250,000,000
2012YE 2013YE 2014YE 2015YE 2016YE 2017YE
2017
2016
2015
2014
2013
2012
prior 2012
willistowerswatson.com
Annuity Reinsurance Reserve Credit Taken + Modco Reserve TrendSum of prior 2 slides ($000s)
8
Source: S&P Global Market Intelligence
© 2018 Willis Towers Watson. All rights reserved.
0
50,000,000
100,000,000
150,000,000
200,000,000
250,000,000
300,000,000
350,000,000
400,000,000
2012YE 2013YE 2014YE 2015YE 2016YE 2017YE
Reserve Credit Taken + ModCo
prior 2012 2012 2013 2014 2015 2016 2017
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Annuity Reinsurance by TypeBased on Reinsurance Reserve Credit Taken and Modco as of 12/31/2017
9
Individual Annuity79%
Group Annuity21%
Source: S&P Global Market Intelligence
© 2018 Willis Towers Watson. All rights reserved.
17.3%
7.1%
5.8%
8.2%57.6%
0.0%
0.0%0.2%
3.7%
Individual annuity coinsuranceIndividual annuity coinsurance with funds withheldIndividual annuity combination coinsurance/modified coinsuranceIndividual annuity combination coinsurance/modified coinsurance with funds withheldIndividual annuity modified coinsuranceIndividual annuity modified coinsurance with funds withheldIndividual annuity Guaranteed minimum death benefitIndividual annuity Guaranteed minimum death benefit funds withheldIndividual annuity other reinsurance
18.4%
2.3%
4.9%
2.0%
72.2%
0.0%0.0%
0.0%
Group annuity coinsuranceGroup annuity coinsurance with funds withheldGroup annuity combination coinsurance/modified coinsuranceGroup annuity combination coinsurance/modified coinsurance with funds withheldGroup annuity modified coinsuranceGroup annuity guaranteed minimum death benefitGroup annuity modified coinsurance with funds withheldGroup annuity other reinsurance
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Annuity Reinsurance by TypePruco internal transaction removed
10
Individual Annuity73%
Group Annuity27%
Source: S&P Global Market Intelligence
© 2018 Willis Towers Watson. All rights reserved.
24.2%
10.0%
8.2%
11.4%
40.6%
0.0%
0.1% 0.3%5.2%
Individual annuity coinsuranceIndividual annuity coinsurance with funds withheldIndividual annuity combination coinsurance/modified coinsuranceIndividual annuity combination coinsurance/modified coinsurance with funds withheldIndividual annuity modified coinsuranceIndividual annuity modified coinsurance with funds withheldIndividual annuity Guaranteed minimum death benefitIndividual annuity Guaranteed minimum death benefit funds withheldIndividual annuity other reinsurance
18.4%
2.3%
4.9%
2.0%
72.2%
0.0%0.0%
0.0%
Group annuity coinsuranceGroup annuity coinsurance with funds withheldGroup annuity combination coinsurance/modified coinsuranceGroup annuity combination coinsurance/modified coinsurance with funds withheldGroup annuity modified coinsuranceGroup annuity guaranteed minimum death benefitGroup annuity modified coinsurance with funds withheldGroup annuity other reinsurance
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Affiliated vs Unaffiliated Transaction History as of 12/31/2017 by Contract Effective YearMost of the affiliated transactions are Mod Co.
11
-
10
20
30
40
50
2012 2013 2014 2015 2016 2017
Affiliated vs Unaffiliated Transaction History (Counts)
Unaffiliated Affiliated
-
20,000,000
40,000,000
60,000,000
80,000,000
100,000,000
120,000,000
140,000,000
2012 2013 2014 2015 2016 2017
Affiliated vs Unaffiliated Transaction History ($000s)
Unaffiliated Affiliated
Source: S&P Global Market Intelligence
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Affiliated vs Unaffiliated Transaction History as of 12/31/2017 by Contract Effective YearWith Pruco deal removed
12
Source: S&P Global Market Intelligence
© 2018 Willis Towers Watson. All rights reserved.
-
10
20
30
40
50
60
2012 2013 2014 2015 2016 2017
Affiliated vs Unaffiliated Transaction History (Counts)
Unaffiliated Affiliated
-
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
30,000,000
35,000,000
40,000,000
45,000,000
50,000,000
2012 2013 2014 2015 2016 2017
Affiliated vs Unaffiliated Transaction History ($000s)
Unaffiliated Affiliated
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U.S. vs Non-U.S. Transaction HistoryMost of the U.S. transactions are Mod Co.
13
Source: S&P Global Market Intelligence – Pruco transaction removed
© 2018 Willis Towers Watson. All rights reserved.
-
10
20
30
40
50
60
2012 2013 2014 2015 2016 2017
U.S. vs Non-U.S. Transaction History (Counts)
U.S. Counterparty Non-US Counterparty
-
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
30,000,000
35,000,000
40,000,000
45,000,000
2012 2013 2014 2015 2016 2017
U.S. vs Non-U.S. Transaction History($000s)
U.S. Counterparty Non-US Counterparty
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Non-Domestic Reinsurance Treaty Numbers by CountryBermuda reinsurers continue being more attractive than others. Will the trend change as the Covered Agreement with EU takes in effect?
14
0
2
4
6
8
10
12
2012 2013 2014 2015 2016 2017
Number of Reinsurance Treaties by Country
Bermuda IrelandCayman Islands Republic of the Marshall IslandsUnited Kingdom of Great Britain and Northern Ireland BarbadosSwiss Confederation Turks and Caicos Islands
Source: S&P Global Market Intelligence
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Bermuda Ireland
Cayman Islands Republic of the Marshall Islands
United Kingdom of Great Britain and Northern Ireland Barbados
Swiss Confederation (Amount not avaliable) Turks and Caicos Islands (Amount not avaliable)
Non-Domestic Reinsurance Amount by Country
15
2012 2013 2014
2015 2016 2017
Source: S&P Global Market Intelligence
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Non-Domestic Reinsurance Amount by Country ($billions)
16© 2018 Willis Towers Watson. All rights reserved.
2.1
41.6
3.6 7.2
0.0
10.3 1.9
0.9 0.1
0.1
1.7
0.0 0.4
0.0
0.0
0.6
2011 2012 2013 2014 2015 2016 2017 2018
Bermuda Ireland
Cayman Islands Republic of the Marshall Islands
United Kingdom of Great Britain and Northern Ireland Barbados
Swiss Confederation (Amount not avaliable) Turks and Caicos Islands (Amount not avaliable)
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Annuity transactions – recent larger transactions Based on publically available data
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• TO BE COMPLETED
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Contact Information
18© 2017 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.
Mike Kaster, FSA, MAAA, MBAExecutive Vice President, Life Solutions Group
T +1 212 915 8332E [email protected]
ANNUITY REINSURANCE –KEY CHALLENGES WHEN EXECUTINGSOA LIFE AND ANNUITY CONFERENCE, BALTIMORE MAY 8, 2018
2
DISCLAIMER
The information included in the following presentation is for educational purposes only and is intended to be general information and should not be relied upon without appropriate review by professionals. I am not a law firm or accounting firm, and am not providing legal, accounting or tax services or advice. Some of the information included in this presentation might involve the application of law; accordingly, I recommend consulting with and involving their legal counsel and other professional advisors to ensure that they are fully advised. Additionally, material developments may occur subsequent to this presentation rendering it incomplete and inaccurate. Transamerica or myself assume no obligation to advise or update the presentation to reflect such developments.
3
CONSIDERATIONS WHEN EXECUTING
•Meet company objective•Work within company governance and policies
•Obtain best terms possible with the right partner
4
OBJECTIVE - BUSINESS STRATEGY
CONFIDENTIAL – DO NOT SHARE OR DISTRIBUTE
• A
5
OBJECTIVE – EXECUTE WITH REINSURANCE
• Fee based• Spread based
• How do you go from spread based to fee based?• Reinsurer to exchange asset management for fee
• Establish need, priority, and metrics• Solicit interest RFP• Determine final deal by negotiating specific details
•At all times must comply with governance and policies
6
GOVERNANCE & POLICY - COUNTERPARTY•What is the size of the bucket?•How full is the bucket?
7
COUNTERPARTY – CALCULATE AND MANAGE
• Current exposure• Assets• Liabilities
• Potential exposure• Model outcomes• 1 in 10 event versus 1 in 200 event• Amounts at risk increase or decrease?
• Types of risk• Investment• Mismatch• Underwriting• Operational
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COUNTERPARTY - NEGOTIATE
•Investment • Asset classes and allocation
•Mismatch• Liability transferred, allowable duration
•Underwriting • Direct provider
•Operational • Executing provisions and expectations
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TERMS - INVESTMENT GUIDELINES
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INVESTMENT GUIDELINES – LIMIT VOLATILITY
YIELDS EXPLODE HIGHER:ABS >10%, CMBS >15%
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INVESTMENT GUIDELINES – LIMIT MISMATCH
• True-up factor• Lower risk for more frequent measurement
• Diversification factor• Lower risk if helps diversify entire asset portfolio
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NEGOTIATIONS – LIMITATIONS TO FLEXIBILITY
•Meet objectives and company governance and policies
•Reinsurer also has a capital strategy and limitations
•Collateral used to address regulatory and strategic differences
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COLLATERAL ARRANGEMENTS - TYPES
•Additional security• Over collateralization• Letters of Credit
•Deal Structure• Funds withheld• Modified Coinsurance
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COLLATERAL ARRANGEMENTS - ALLOW FOR FLEXIBILITY
•Deal size constraints• Available exposure not worth effort• Additional collateral necessary
•Deal adjusts to current events• Regulatory changes• Structure changes• Collateral less important
15CONFIDENTIAL – DO NOT SHARE OR DISTRIBUTE
•Obtain best reinsurance treaty possible given the right partner
•Meet company Objectives
•Stay within governance and policies