Oliver Wyman Annuity Market Update Hartford Actuarial Club May 2014

© 2014 Oliver Wyman

Guillaume Briere-Giroux, FSA, MAAA, CFA

Annuity Market Update

Actuaries’ Club of Hartford & Springfield – 2014 Annual Meeting

Hartford – May 21, 2014

© 2014 Oliver Wyman 1 1 © 2014 Oliver Wyman

Agenda

I. Market dynamics

II. Product trends

III. Pricing, valuation and risk management issues

IV. Watch list


Market dynamics

Section 1


Annuity sales trends (2007-2013) Fixed indexed annuity (FIA) and deferred income annuity (DIA) sales are growing

Variable

Indexed

MVA

Book value

SPIA

DIA

Sales data from LIMRA

Mark

et

risk fo

r p

oli

cyh

old

er

Lo

wer

Hig

her


Indexed annuity sales trends (2001-2013) FIA sales have grown at a robust 7.8% annual rate since 2007

Source: Wink’s Sales & Market Report (2006 and prior) and LIMRA (2007 and later)

$ B

illi

on

s

6.8

11.8

14.4

23.1

27.2

25.3 25.0 26.7

29.9

32.1 32.2 33.9

39.3

0

5

10

15

20

25

30

35

40

45

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

7.8% CAGR


Top annuity writers in 2013 (1-10)

High

Low

Rank

(2013)

Company 2013 Sales

($ Billions)

2012 Sales

($ Billions)

YoY Change

(%)

Variable Indexed Fixed

1 Jackson National 23.2 22.4 3.5%

2 AIG 17.5 12.0 45.5%

3 Lincoln 16.6 13.4 23.2%

4 TIAA-CREF 13.9 14.1 -1.1%

5 MetLife 12.4 19.5 -36.4%

6 Prudential 12.0 22.4 -46.3%

7 AXA 9.7 8.9 9.7%

8 New York Life 9.7 7.5 29.2%

9 Allianz Life 9.1 8.8 3.3%

10 Transamerica 8.6 5.4 57.2%

Composition of sales

Source: LIMRA


Top annuity writers in 2013 (11-20)

Rank

(2013)

Company 2013 Sales

($ Billions)

2012 Sales

($ Billions)

YoY Change

(%)

Variable Indexed Fixed

11 Pacific Life 7.4 7.5 -0.9%

12 Nationwide 6.9 7.5 -7.9%

13 Security Benefit 6.4 3.9 65.0%

14 Ameriprise 5.5 5.6 -2.5%

15 American Equity 4.2 3.9 6.7%

16 Great American 4.0 2.9 36.0%

17 MassMutual 3.6 2.3 56.6%

18 Thrivent Financial 3.6 3.2 10.6%

19 Protective Life 2.6 3.3 -22.9%

20 Symetra 2.5 1.4 80.8%

Source: LIMRA

High

Low

Composition of sales


Symetra

Expansion of the FIA market Today’s FIA market has a broad range of players with increasing representation outside of the independent channel

Source: Wink’s Sales & Market Report and Oliver Wyman Research

Phoenix

Banks and wirehouses

Independent and banks

Independent organizations

Priva

te E

quity

Ow

ned

US

Sto

ck

Com

panie

s

Fore

ign

Subsid

iari

es

Mutu

al

Com

panie

s

Ow

ners

hip

Str

uctu

re

Lower Higher Credit Rating

A++ A A- B++ B+ B

Market share and dominant distribution channels by ownership structure and credit rating

Priva

tely

H

eld

Career

Size of bubbles represents 2013

market share

Primary distribution channels

A+

Allianz Life

Sagicor Life

Jackson National

Security Benefit

American Equity

Great

American

EquiTrust

Athene Fidelity &

Guaranty Life

North

American Midland

National

Lincoln Benefit Life

VOYA

Genworth

AIG

National Western

Lincoln

Protective Life CNO Companies

Pacific Life Nationwide

OneAmerica

Western &

Southern

All other

companies

Forethought

National Life Group

15.5

10.4

11.7

7.1

7.9

%

%

%

%

%


Economic conditions The yield environment favors longer duration fixed annuities

Source: Federal Reserve of St Louis, Treasury data and BofA Merrill Lynch US Corporate Option-Adjusted Spreads

Select Bond Yields Credit and Maturity Spreads

Credit spreads returned to pre-crisis levels, but the yield curve is steeper. This environment

favors longer duration products such as FIA with GLWBs.


Annuity M&A activity is being driven by private equity and alternative buyers Acquirer/Seller (date)


Recap of annuity market dynamics

1 Stable VA sales, but shifting players

2 FIA market is expanding fast

3 Risk premiums back to pre-crisis levels

4 Significant M&A activity dominated by private equity and alternative buyers


Product trends

Section 2


Key annuity product trends

1 VA / FIA hybrids

• Short surrender charge designs with floors less than zero, registered and no minimum

contract value

• Can be VA or FIA by design

• Downside protection via “protection buffers” or “protection floors”, but higher upside

• Sellers include AXA, Allianz Life, MetLife and CUNA Mutual

2 Volatility control

strategies

• Firmly established in VA space

• Emerging in FIA space

3 Nursing home

benefits

• Up to double the GLWB income for a number of years if cannot perform 2 of 6 ADLs

• Increasingly common in FIA space

4 Deferred income

annuities

• Predictable deferred income

• Level income, constant increases, CPI increases or dividend increases


Key annuity product trends (continued)

5 VA sales with no

living benefits

• Certain carriers successful in driving VA sales with no living benefit guarantees

• Lower cost designs

• Investment and tax deferral play

6 Stacked rollups • Emerging in FIA space

• AG 33 friendly

7 Flexible designs • At issue: Tie income rates to rate environment

• After issue: Indexing product features

8 Buyback programs • Variable annuities: AXA, The Hartford and Transamerica

• Fixed annuities: The Harford


Pricing, valuation and risk

management issues

Section 3


Pricing considerations

1 Lapses

• Base rate + impact of GLB

• Policy year skew

• Dynamic rate (base contract for FA / FIA)

• Dynamic rate (GLB in-the-moneyness driven)

2 Age Mix / GLWB

Election

• Utilization cohorts

• Utilization skew (feature driven)

• Utilization skew (attained age driven)

3 Mortality • Base rate

• Mortality improvement


Valuation and regulatory radar

AG 33 GLWB

statutory reserves

(in progress)

Valuation and capital for

FIA / VA hybrids (in

progress)

Solvency 2

(2016 or later)

VM-22 (2016)

Risk-based capital

(2014 updates)

2012 IAR table (2014-

2015)

IFRS 9 (2018)

US GAAP targeted updates

(TBD)

NAIC Private Equity

Issues (E) Working Group


Risk management radar

ORSA (2015)

Dynamic lapses

Emerging GLWB

utilization experience

Low rate environment /

Federal Reserve actions

Inforce blocks

approaching end of the

surrender charge period

Hedging of GLWBs

Hedging of interest rates

Volatility as an asset class


Watch list

Section 4


1 Interest rates

2 M&A activity

3 Product innovation

4 Behavioral assumptions

Watch list

Business

Oliver Wyman Annuity Market Update Hartford Actuarial Club May 2014