Equity-Based Insurance Guarantees Conference Nov. 5-6, 2018 Chicago, IL Equity Based Insurance Guarantees Inforce Management Stephen Gruber SOA Antitrust Compliance Guidelines SOA Presentation Disclaimer Sponsored by
EQUITY BASED INSURANCE GUARANTEES INFORCE MANAGEMENT Stephen Gruber, FSA, MAAA Stephen.gruber@axa-equitable.com November 5, 2018
Agenda ➢ History ➢ What is an Inforce Management Group? ➢ What does Inforce look like? ➢ What has been done so far? ➢ Buyout Offers 2
Since the Introduction of VA’s in the 1990’s they have had a Tumultuous History Wave 3 Retreat and Redeployment Wave 2 ▪ With balance sheets severely crippled, The Global Financial Crisis U.S. VA writers were forced to re-think their strategy ▪ ING, who had $12.3 billion in sales in Wave 1 2008 ranking #4 among sellers, exited The Arms Race the VA business and separated its legacy policies from its on-going ▪ With the onset of the financial crisis business – Now VOYA sold to Apollo some of the most successful players Capital skidded into trouble ▪ Ameriprise discontinued wholesale ▪ Between October 2007 and March sales at the end of 2010 2009, six of the ten largest publicly ▪ Starting in the 1990s, sales of variable ▪ Hartford exited the VA business and listed VA issuers in the U.S. lost annuities soared in the United States sold its new business capabilities to a about 90 percent of their market strategic buyer ▪ The growth of variable annuities (VAs) capitalization. ▪ Met Life Divested Brighthouse in 2016 as indirect, tax-deferred investments ▪ Industry profitability sagged under particularly for wealthy customers was ▪ Ohio national, 2018 no commissions rising guarantee values, the a phenomenon propelled by a stream collapse of earnings from mutual ▪ Firms that chose to stay in the VA of increasing the variety of guarantee fund fees, negative hedging results, business systematically altered their options. and exploding hedging costs. operations: created dynamic hedging ▪ As a result, many companies’ credit programs, inforce performance ratings were downgraded by the monitoring, launched buyout offers rating agencies. ▪ GMxB Benefits became less robust 2007 2010 2011+ 1990’s 3 |
Individual Annuity Sales Lowest in 17 years at ~100 Billion ▪ VA sales reached a pre-crisis high of $184 billion and decreased and then been fluctuating for 6 years and a decrease in the last 2 years ▪ Immediately following the crisis, many companies began increasing their mix into the non- GMxB market and introducing several new Non-GMxB products ▪ Guaranteed benefits remain a large component of the VA market, and many moved to weaker guarantees / higher fees and other VA products 184 VA Sales - $Billions 160 158 156 147 146 140 141 137 133 134 129 128 117 111 116 98 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 *LIMRA U.S. Individual Annuity Yearbook 2017 4 |
New Products Impact ▪ Introduction of Floating Rate Rollup Product ▪ Introduction of Structured Annuities ▪ Asset Transfer Program becoming more wide spread ▪ Fund Substitutions – Move to Inactive Management (Index/Allocation) funds and to reduce basis risk ▪ Funds Embedded with a Volatility Tool ▪ Investment only VA (Tax Benefit) 5
Inforce Management ▪ Annuity Inforce Management mission is to gain greater insights into understanding the important drivers of in-force annuity businesses while implementing actions that will: ▪ Enhance and grow earnings and embedded value, ▪ Reduce the overall size of legacy GMxB blocks of business, ▪ Reduce Risk – Greeks / Hedging ▪ Improve the performance of the remaining liabilities ▪ Better understanding of Policyholder Behavior ▪ Measuring success is very simple ▪ Delivery against various risk measures ▪ Delivery of projects as predicted ▪ Impacts on all parties – Company, Policyholders, Agents, Regulators, Public Markets ▪ Additionally, continue to partner with internal and external teams to better understand policy holders and what drives their behavior as it relates to their financial and retirement decisions. 6
What does an Individual Annuity Inforce Book Look Like? Efforts differently across the Inforce GMxB book vs. other nonGMxB Annuity blocks ➢ Guaranteed Minimum “x” Benefit (GMxB) – reduce volatility and capital burden to support cash generation and new business Variable Annuity Products ➢ Evaluate the Block of business by ➢ Policy Count ➢ Account Value ➢ GMxB Benefit Base / Net Amount at Risk ➢ Other inforce books – improve efficiency of capital usage, drive customer behavior to improve value creation (e.g. lapse, premium continuance, G/A usage, etc.) Other includes NonGMXB VA, Individual, Single Premium Immediate Annuity, Single Premium Deferred Annuity (SPDA), Immediate Annuity (Payout), Structured Settlements 7
What is risk? Risk (as defined by Merriam Webster): • • 1 : possibility of loss or injury, peril • 2 : someone or something that creates or suggests a hazard • 3a : the chance of loss or the perils to the subject matter of an insurance contract; also : the degree of probability of such loss 8
Market Trends – S&P, Interest Rates and Volatility 10 Year Treasury Rate S&P 500 7 /3/13 1,615.4 1700 4.5% 12/31/09 1600 4.0% 3.85 12/31/12 3.5% 1500 1,426.2 7/3/13 12/31/11 3.0% 12/31/10 1400 12/31/10 1,257.6 2.52 1,257.6 3.30 2.5% 12/31/11 1300 12/31/09 12/31/12 1.89 1,115.1 1.78 2.0% 1200 1.5% 1100 1.0% 1000 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Equity Volatility (VIX) 50 40 12/31/09 12/31/11 30 12/31/10 21.68 23.40 12/31/12 17.75 7/5/13 18.02 14.89 20 10 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 9
Concepts to consider when Implementing an Inforce Plan ▪ The inforce pillar is composed of three specific action plans aimed at decreasing the risk posed by the legacy book of business Inforce Policyholder Offers Policyholder Behavior Risk Transfer Enhance analytic capabilities to Further explore risk transfer options Continue to execute buyout better understand policy holder in order to unlock value within the initiatives and repeat offers aimed at behavior and help drive value from inforce block and decrease the legacy business the inforce book liability exposure ▪ Lump Sum Buyout ▪ Experience Studies ▪ Reinsurance Transactions Initiatives Initiatives Initiatives ▪ Buyout Offers ▪ Assumption Analysis ▪ Third Party Transactions ▪ GWL Conversion ▪ Predictive Analytics ▪ New Business Reinsurance ▪ Call / Advisor Analytics 10
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