Session 23 Panel Discussion Annuity Product...

Session 23 PD, Annuity Product Update

Moderator:

Kevin W. Rabin, FSA, MAAA

Presenters: Aatman Naresh Dattani

Yuan Tao, FSA, CFA, MAAA Judith Zaiken, CLU, ChFC

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SOA 2017 Life & Annuity SymposiumU.S. Macro Annuity TrendsMay 8, 2017

Judy ZaikenLIMRA Secure Retirement Institute

2

Sales Trends – Product Mix

3

Annuity Sales Mix Over Time

$110.8

$126.1 $131.5

$163.5

$189.9 $185.3

$219.9 $218.8 $220.8 $216.4

$238.7

$256.8 $265.0

$238.6

$222.4

$238.4

$219.7 $229.8

$235.8 $235.7

$222.1

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Variable Fixed-Rate Deferred Indexed Income / SS

Source: LIMRA Secure Retirement Institute, U.S. Individual Annuities survey

4 Source: LIMRA Secure Retirement Institute, U.S. Individual Annuities survey

Back a decade ago…

VA$184b

FIA$25b FRD

$35b

SPIA$7b

SS$6b

5

VA$105b

FIA$61b FRD

$39b

SPIA$9b

SS$6b

DIA$3b


To Now

6

VA$184b

FIA$25b FRD

$35b

SPIA$7b

SS$6b


VA$105b

FIA$61b FRD

$39b

SPIA$9b

SS$6b

DIA$3b

2007 2016

Annuity sales have shifted dramatically

7 Source: LIMRA Secure Retirement Institute, U.S. Individual Annuities survey

Total annuity sales pulled down by VA’s

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2012 2013 2014 2015 2016

Total Variable Annuity Fixed Annuity

2012

$219.7b

2013

$229.8b2014

$236.9b2015

$235.7b 2016

$222.1b

8

VA Sales have only seen 1 quarterof growth since 2012

U.S. Individual Variable Annuity Sales (in billions)

$36.9

$38.7

$36.8 $35.0

$35.3

$38.0

$35.7

$36.4

$34.2

$36.2 $35.5

$34.2

$32.4

$36.0

$32.9

$31.7

$26.6

$26.9

$25.9$25.3


2012 2013 2014 2015 2016

Source: LIMRA Secure Retirement Institute, U.S. Individual Annuities survey.

9

$36.9$38.7

$36.8$35.0 $35.3

$38.0$35.7 $36.4

$34.2$36.2 $35.5

$34.2$32.4

$36.0

$32.9$31.7

$26.6 $26.9 $25.9 $25.3


2012 2013 2014 2015 2016


Risk management key factor in slow decline


10

$36.9$38.7

$36.8$35.0 $35.3

$38.0$35.7 $36.4

$34.2$36.2 $35.5

$34.2$32.4

$36.0

$32.9$31.7

$26.6 $26.9 $25.9 $25.3


2012 2013 2014 2015 2016



Fiduciary regulation accelerated decline

11

VA GLB sales now make up less than half of total VA Sales

Variable Annuity Sales

57% 56% 58% 54% 53% 53% 54% 53% 51% 48% 47% 44%

27% 28% 27% 30% 30% 32% 29% 29% 30% 32% 33% 35%

16% 16% 15% 16% 17% 15% 16% 18% 20% 20% 20% 21%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2014 2015 2016

VA Employer Plan Sales VA sales - No GLB, Either not Available or not Elected VA sales - GLB Elected

Source: LIMRA Secure Retirement Institute, U.S. Individual Annuities surveyLIMRA Secure Retirement Institute, VA GLB Election Tracking Survey

12

Income Later Sales – Less Dominated by GLWB

Source: LIMRA Secure Retirement Institute, U.S. Individual Annuities survey, VA & Indexed GLB Election Tracking SurveyVA GLB sales exclude GMAB salesAnalysis includes new/existing sales and excludes sales of FRD annuities with a GLB rider

$24.9

$21.3$19.0

$16.5

$13.0$10.8

$4.6 $4.5$6.5 $6.7

$8.0 $7.6

$0.16 $0.40 $0.62 $0.56 $0.73 $0.56


2012 2013 2014 2015 2016

VA sales - GLBElected

Indexed sales - GLBElected

Deferred IncomeAnnuities

13

66% of retail VA assets now have a GLB rider

2015

$838 B2015

$838 B2015

$838 B2014

$843 B2014

$843 B2014

$843 B2012

$661 B2012

$661 B2012

$661 B2010$521 B

2010$521 B

2010$521 B

2008$272 B

2008$272 B

2008$272 B

Note: Retail = VA with GLB + VA without GLB; Excludes individual annuities in employer plans. Source: U.S. Individual Annuity Yearbook – 2015 and Quarterly Variable Annuity Guaranteed Living Benefit Election Tracking Survey, LIMRA Secure Retirement Institute, 2016.

2016

$884 B

IN-Force VA Assets with GLB

14

Record indexed annuity sales in 2016



2012 2013 2014 2015 2016

2012

$33.9b

2013

$39.3b

2014

$48.2b

2015

$54.5b

2016

$60.9b

15

A positive reaction to the initial DOL fiduciary proposal

U.S. Individual Indexed Annuity Sales (in billions)

$11.3

$13.0

$11.9 $12.2$11.6

$12.5

$14.3

$16.1$15.7

$16.2

$15.0

$14.0

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2014 2015 2016

April 2015 – Release of initial DOL fiduciary rule listing FIA’s under

84-24 exemption


16

$11.3

$13.0

$11.9 $12.2$11.6

$12.5

$14.3

$16.1$15.7

$16.2

$15.0

$14.0

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2014 2015 2016

Indexed sales momentum changed in 2016

U.S. Individual Indexed Annuity Sales (in billions)

April 2016 – Release of final DOL fiduciary rule listing FIA’s

under BICE


17

FRD sales strong in 2016 despite low interest rates

Source: LIMRA Secure Retirement Institute, U.S. Individual Annuities survey.Fixed rate deferred = Market value adjusted + Book value


2012 2013 2014 2015 2016Fixed Rate Deferred Book Value MVA

2012

$24.7b

2013

$29.3b2014

$30.8b2015

$30.9b

2016

$38.7b

18

Disappointing end to 2016 for income annuities

2.5 2.6 2.3 2.3 2.0 2.2 2.3 2.6 2.5 2.5 2.2 2.0

0.62 0.710.67 0.68

0.570.61 0.68

0.83 0.74 0.87

0.610.58

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2014 2015 2016

Fixed Immediate Deferred Income


19

Sales Trends – Investor Objectives

20

Total Retail Annuity Sales by Investment Objectives

$123.8 $117.3 $118.3 $109.0$92.7

$21.7 $27.5 $29.4$28.8

$36.6

$14.7 $18.2 $20.0 $26.8 $28.4

$22.8 $33.3 $39.0 $40.0$34.0

$183.1$196.3

$206.7 $204.7$191.7

2012 2013 2014 2015 2016

Guaranteed income Principal protection Protection + Market growth Market growth

Guaranteed income is the largest component of annual annuity sales.

Source: U.S. Individual Annuity Yearbook – 2015 and VA GLB Election Tracking Survey, LIMRA Secure Retirement Institute, 2016.Note: Totals are for retail sales only and exclude sales in employer plans and structured settlements. Guaranteed income bucket includes VA sales with GLWB/GMIB/GMWB rider elected, fixed indexed sales with GLWB rider elected, immediate income annuity (SPIA) and deferred income annuity (DIA).

21

Income Guaranteed

$1.1 Trillion* invested in annuities for guaranteed lifetime income/withdrawals Annuity Assets Direct ly Associated wi th

Guaranteed Li fet ime Income/Withdrawals – 2015

Source: U.S. Individual Annuity Yearbook – 2015, LIMRA Secure Retirement Institute, 2016.*An important component, already annuitized assets in variable, fixed-rate and indexed annuities, is not reflected due to non-availability of the data. **Estimates of year-end annuity assets in reserve.

22

Average Annual Guaranteed Lifetime Income from Annuities - 2015

$10,342Per Year

Fixed ImmediateBased on 34,530 contracts

$10,849Per Year

Deferred IncomeBased on 11,497 contracts

$8,167Per Year

VA with GLWBBased on 456,603 contracts

Annuity owners draw $8,000 – $11,000 in annual guaranteed lifetime income or withdrawals

Source: Income Annuity Buyer Study, and Guaranteed Living Benefits Utilization: 2014 Experience, LIMRA Secure Retirement Institute, 2016. The income payout amounts are based on 34,530 fixed immediate and 11,497 deferred income annuity contracts issued in 2015.VA-GLWB withdrawals are based on 456,603 VA-GLWB contracts issued before 2014 and taking only systematic withdrawals in 2014.

23

Focus on changing fiduciary requirements goes well beyond sales

$100 Billion*Annual salesunder BIC-E


IMPACT OF DOL FIDUCIARY RULE ON ANNUITY ASSETS

Transfers between contracts/ companies

& withdrawals


& withdrawals $725 BillionIRAs in VAs$725 BillionIRAs in VAs$191 BILLION

IRAs in Indexed$191 BILLIONIRAs in Indexed

Rollover/WithdrawalsRollover/Withdrawals$652 BILLION

Employer Plans in VAs

$652 BILLIONEmployer

Plans in VAs$14 BILLION

Employer Plans in Indexed

$14 BILLIONEmployer Plans in Indexed


IMPACT OF DOL FIDUCIARY RULE ON ANNUITY ASSETS


& withdrawals $725 BillionIRAs in VAs$191 BILLION

IRAs in Indexed

Rollover/Withdrawals$652 BILLION

Employer Plans in VAs

$14 BILLIONEmployer Plans in Indexed

Source: U.S. Individual Annuity Yearbook - 2015, and DOL Viewpoints: Annuities are in the Eye of DOL Storm, LIMRA Secure Retirement Institute, 2016. *$100 billion refers to 2015 IRA sales in variable and indexed annuities that would come under BIC-E provision.

24

$750 Billion may be converted into guaranteed lifetime income

Opportunity for Annuity with Guaranteed Lifetime Income in Retirement (in billions)

Sources: Retirement Income Reference Book, LIMRA Secure Retirement Institute, 2015. The analysis is based on 2013 Survey of Consumer Finances, Federal Reserve Board, 2014 and LIMRA Retirement Study—Consumer Phase, 2014.

25

LIMRA Annuity Sales Forecast

LIMRA Annuity Sales Forecast

26

The VA landscape will continueto be shaped by regulation

2016$104.7b↓21%

2017↓10-15%

2018↓10-15%

Individual Variable Annuity Sales Forecast

Source: LIMRA Secure Retirement Institute, April 2017. Updated periodically on: www.limra.com/DOL.

27

Distribution disruptions will hinder indexed annuity sales

2016$60.9b↑12%

2017↓5-10%

2018↓15-20%

Individual Indexed Annuity Sales Forecast


28

Fixed-rate deferred annuity sales are expected to grow

2016$38.7b↑25%

2017↑0-5%

2018↑15-20%

Individual Fixed-Rate Deferred Annuity Sales Forecast


29

Income annuity sales will increase but not until 2018

2016$12.0b↑2%

2017↓5-10%

2018↑10-15%

Individual Income Annuity Sales Forecast


30

Annuity market will see singledigit declines in next two years

2016$222.1b↓6%

2017↓5-10%

2018↓0-5%

Individual Total Annuity Sales Forecast


SOA Life and Annuity SymposiumVariable Annuity Market Trends

Aatman Dattani

May 8-9, 2017

Agenda

Variable AnnuitiesOverview of the Market Sales by Company Sales by Distribution Channel Guaranteed Living Benefits – Sales, Distribution Channels and Elections

Product Related Updates Recent Product Changes Milliman Hedge Cost Index Structured Variable Annuities Predictive Model as a Potential Tool for Pricing and Product Development

Assets

Global Response to the Low Interest Rate Environment

Overview of the Variable Annuity Market

2016 Variable Annuity Sales (“VA”) declined by 21% vs. 2015 The VA sales to equity market correlation does not hold anymore

Source: LIMRA

Variable Annuity Sales by Company

There has been a reshuffling in ranks of the top 10 VA writers vs. 2012

De-risking, diversification of product offerings, changes in regulation (fair value, DOL) likely impacted sales

Sales in $ billionsSource: LIMRA

Variable Annuity – Sales by Distribution Channel

Sales by distribution channel have stayed consistent in spite of an overall decline in sales

11% 12% 13% 12% 13% 12%

24% 25% 24% 24% 25% 27%

11% 12% 12% 11% 12% 15%

34% 33% 35% 36% 34% 32%

19% 17% 16% 16% 15% 14%

2011 2012 2013 2014 2015 2016Banks Career Direct Indep. B-D Full service Nat. B-D

Source: LIMRA

Variable Annuity – Guaranteed Living Benefit Sales

The percentage of VA’s available without GLB’s has risen from 7% in 2013 to 20% in 2016

GLWB is the most elected rider (around 70% of the time) with GMIB a distant second (7-10%)

Source: LIMRA

67% 64% 59% 56% 52% 48%

9% 9% 12% 15% 14% 12%

7% 9% 11% 13% 17% 20%

17% 19% 17% 16% 16% 20%

2011($158bn)

2012($147bn)

2013($145bn)

2014($140bn)

2015($133bn)

2016($105bn)

Employer Plan GLB Not Available

Variable Annuity – Guaranteed Living Benefits Sales - Continued

Independent Agents are the largest seller for GLWBs while Career Agents lead in GMIB and GMAB

GLB elections, when available, have typically declined

21% 13% 11% 21%

44%34%

8%

63% 49%

19%41%

84%

8%16% 12% 7% 17% 31%

GLWB GMIB GMAB GMWB Hybrid

Rider Sales by Channel 2Q 2016

Wirehouses Independent Career BankSource: LIMRA

Variable Annuity Market Product ChangesVA products in the last year have been de- risked using the following strategies:

Increase in Rider

Fees

Benefits that Differ

by Age

Links to VIX, Treasury Indexes

Reduction in Benefits

New Products e.g. IOVA

Closing Existing Products

Fund Allocation Limitations

Limitations in Contributions

Volatility Control Funds

Milliman Hedge Cost Index Estimated Hedge Cost for a typical Lifetime GMWB

Rider fee of 1.15%; M&E and Investment Management Fees of 2.25%

Annual 5% rollup and resets; lifetime withdrawal rates of 4-6% depending on attained age

Modeling Assumptions based on typical actuarial and behavioral assumptions used by VA writers

Target fund volatility of 10%; calculations based on end of month US swap rates

60708090

100110120130140150160170180

Dec

-13

Feb-

14

Apr

-14

Jun-

14

Aug

-14

Oct

-14

Dec

-14

Feb-

15

Apr

-15

Jun-

15

Aug

-15

Oct

-15

Dec

-15

Feb-

16

Apr

-16

Jun-

16

Aug

-16

Oct

-16

Dec

-16

Feb-

17

(bps

)

Structured Variable Annuities Companies introduced this product to diversify their product offering

Built on VA chassis but share downside risk with policyholder

Sales have increased over 100% in 2016 to $5.4 billion

Impact of rising interest rates

Demographics of buyers

Source: LIMRA

Predictive Modeling – Potential Tool for Product Development Rating Agencies and Regulators are placing higher scrutiny on company assumptions

Predictive modeling of policyholder behavior offers a statistically defensible framework for demonstrating assumption effectiveness to internal and external stakeholders

Milliman GLWB utilization study (2m policies from 7 VA writers, 2007-2015 experience):

Policyholders who are older at issue are up to 30 times more likely to begin withdrawals in the first quarter

Policyholders are half as likely to utilize on a policy with a roll-up than one without, regardless of length of roll-up period

Less than half of policyholders utilize their lifetime benefits with 100% efficiency

Variable Annuity Assets 2015 VA Assets declined for the first time since the financial crisis

Stagnant equity markets and negative net flows resulted in the drop Outflows exceeded inflows in all four quarters

Source: LIMRA

1,39

7

1,51

7

1,15

1 1,38

9 1,56

1

1,59

3 1,76

2 1,90

8

1,96

7

1,92

2

1,98

4

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Dol

lars

in B

illio

ns

Strategic shift

Low Rates here to stay

Move away from interest rate risk

Focus on unit linked and protection products

Pension reforms

Low Rates here temporary

Continue writing protection products

Optimize capital efficiency and reduce costs

Negative Interest Rates

USD, AUD and NZD denominated products replaced GMAB (JPY)

SPWL with VA Features

Variable Life with GMDB converted to fixed life in 15-20 years (FIT)

Premium invested in two buckets during FIT: stable + aggressive

Stable fulfills guarantee, aggressive allows for upside

Q1 2016 Sales dropped 8% in UK, 45% in France and 18% in Rest of Europe.

GMWB sales dropped while GMAB sales rose.

Product De-risking to blame?

Global Impact of the Low Interest Rate Environment on VAs

Thank youAatman [email protected]

Milliman is among the world's largest providers of actuarial and related products and services. The firm has consulting practices in healthcare, property & casualty insurance, life insurance and financial services, and employee benefits. Founded in 1947, Milliman is an independent firm with offices in major cities around the globe. For further information visit milliman.com. The material and content is the proprietary information of Milliman or the party that provided the Content to Milliman, and Milliman or the party that provided the Content to Milliman retains all right, title, and interest in the Content. This presentation, including all Content, is copyrighted and protected by international copyright laws and treaty provisions. You agree to comply with all copyright laws worldwide in your use of this presentation, and agree that the Content may not be copied, distributed, republished, uploaded, posted, or transmitted in any way without the prior written consent of Milliman, except that you may print out a copy of the Content solely for your personal use. No intellectual property rights are transferred to you. You may use this presentation solely for personal, non-commercial purposes. You may not use this content for any other purpose, including any commercial purpose. For example, you may not co-brand or frame this content without the express prior written permission of Milliman.

© Oliver Wyman

Yuan Tao, FSA, MAAA, CFA

Fixed and Indexed Annuity Product Update

Sessions 23 & 35 PD

2017 Life and Annuity Symposium

Seattle - May 8, 2017

47© Oliver Wyman 47

Agenda

1 Sales and market trends

2 Impact of DOL

3 Product trends

4 Key takeaways

4848© Oliver Wyman

Indexed annuities continue to gain in importance while income annuities remain a small segment

Variable

Indexed

MVA

Book value

SPIA

DIA

Source: LIMRA and Wink Sales Market Report

Mar

ket r

isk

for p

olic

yhol

der

Low

erH

ighe

r

2016

2015

20142013201220112010200920082007

4949© Oliver Wyman

Top 10 FIA writers make up nearly 70% of industry sales

High

Low

FIARank(2016)

Company 2016 YE Sales ($ Billions)

2015 YE Sales ($ Billions)

YoY Change (%)

% Indexed (2016)

% Fixed (2016)

% Variable (2016)

1 Allianz Life 10.20 8.75 17%

2 American Equity 5.86 6.95 -16%

3 Athene 4.63 2.55 82%

4 Great American 3.75 3.69 2%

5 AIG 3.63 3.30 10%

6 Midland National 2.89 2.40 20%

7 Nationwide 2.69 2.49 8%

8 Global Atlantic 2.17 1.53 42%

9 North American 2.05 1.47 39%

10 Symetra 2.00 2.39 -16%

Composition of sales

Source: Wink’s Sales & Market Report and LIMRA


Impact of DOL Fiduciary RuleIf the Rule survives…

Potential impact

Sales / distribution

• Lower FIA sales, particularly in IMOs due to BICE financial institution requirement

• Higher fixed-rate annuity sales, due to less onerous requirements under PTE 8424

• Shelf standardization by distributors

• More focus on RIA channel

Product design

• More fee-based products

• Simpler designs

• Downward pressure on commissions

• Pressure to reduce size and length of surrender charge

Product pricing

• Lower and more dynamic lapse behavior

• More rational GLWB utilization behavior

• Lower commission

• Higher acquisition and maintenance expenses for DOL compliance


FIA product trendsHalf of FIA writers have or plan to introduce a fee-based FIA in 2017, according to LIMRA

Great AmericanLaunching Indexed Protector

7 (August 2016)

Allianz LifeLaunching New Retirement Foundations ADV Annuity

(February 2017)

LincolnLaunching Lincoln Core

Capital and Lincoln Covered Choice 5 and 7(February 2017)

Fee-based FIAs had insignificant market share in 2016 (~1%)

Recent launches are shown below:

The success of fee-based FIAs remains to be seen


FIA product trends (continued) Hybrid indices continue to gain popularity

0%

20%

40%

60%

80%

S&P 500 Hybrid Fixed All other

FIA Sales by Index

4Q2015

Trend

S&P 500 • Continues to be the most popular choice but losing market share

• Slightly less than 50% of sales as of 4Q 2016

Hybrid

• Gaining popularity, representing 30% of sales as of 4Q 2016

• Often proprietary, typically volatility controlled

• Typically used for uncapped strategy

• Often “illustrates” more favorably

Fixed • Increased share, possibly due to relative attractiveness of fixed rate

Other • Combined share less than 7%Source: Wink’s Sales and Market Report


FIA product trends (continued)GLWBs continue to be the main driver of sales with secondary features helping writers differentiate

Trend

GLWB index-linked income growth

• “Stacked” rollups (e.g. 4% + account value performance)

• “Turbocharged” account value driving income

• Income increases after income start

Other GLWB structures

• Rollups are compound / simple / or absent (e.g., vary income by age / duration)

• Less breakpoints in income bands

• More income options (flat, guaranteed increase or index-linked increases)

Nursing home income riders

• Offered for free or additional charge (e.g. 10 bps)

• Typically doubles the income for up to 5 years if cannot perform 2 of 6 ADLs

• Complex to price from first principles

Enhanced death benefits

• Offered with or without GLWB (sometimes for an additional charge)

• Maximum payout

• Payout periods / reduced lump sum


Fixed annuity product trendsGLWB riders on fixed deferred annuities provide an attractive alternative to DIAs

Case Study: Male, 55-year old, $100,000 single deposit *

FA with GLWB Deferred Income Annuity

Deferral Period 10 years 10 years

Annual Increase Rate 5% compounding N/A

Income Base end of Deferral Period $ 162,889 N/A

Guar Lifetime Withdrawal Rate 5.5% N/A

Monthly Lifetime Income Amount $ 747 $ 760 (with cash refund)

* Product features and quote are based on Fidelity.com as of April 4, 2017

Several writers offer a GLWB rider on fixed deferred annuities: New York Life (entered in 2015), American Equity, Midland National and National Life


Key takeaways

1 FIAs continue to be the fastest growing annuity segment

2 DOL ruling is driving the near-term market outlook

3 Writers and product will continue to adapt


Session Q&A

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