VA Guarantee Reinsurance Market Direct Writers Perspective Kirk - PDF document

Equity-Based Insurance Guarantees Conference Nov. 5-6, 2018 Chicago, IL VA Guarantee Reinsurance Market – Direct Writer’s Perspective Kirk Evans SOA Antitrust Compliance Guidelines SOA Presentation Disclaimer Sponsored by

VA Guarantee Reinsurance Market – Direct Writer’s Perspective KIRK EVANS Vice President – Sammons Financial Group Monday, November 5, 2018 Session 1B: 1045 – 1215 hours

Agenda • Background • Product Design Considerations • Risk Management Options • Benefits of Reinsurance • Conclusion 2

Background 3

Background • Historically Focused on Spread Products • Life Insurance • Fixed Annuities • 2012 Diversified into Fee Products (% AUM) • Mutual Funds • Variable Annuities • IOVA Focused • Limited market • Desire to Expand VA Presence • Hybrid VA – currently not an option • Non-GLWB VA guarantees small % of market • GLWB space still an opportunity 4

Guaranteed Living Benefit Sales (in $ Billions) $27.6 $24.9 VA Sales - GLB Elected $21.3 $20.8 $24.9 $19.0 $16.5 Indexed Sales - GLB Elected $13.5 $10.0 $9.6 $8.3 $8.0 $6.7 $6.5 $7.4 $3.9 $4.9 $4.6 $4.5 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2011 2012 2013 2014 2015 2016 2017 2018 Source: LIMRA Secure Retirement Institute , U.S. Individual Annuities survey, VA & Indexed GLB Election Tracking Survey VA GLB sales exclude GMAB sales Analysis includes new/existing sales and excludes sales of FRD annuities with a GLB rider 5

VA Sales With and Without Guaranteed Living Benefits (in $ Billions) VA Sales - GLB Elected $20.6 VA Sales - Non-GLB $17.3 $19.5 $13.5 $12.2 $10.4 $11.0 $10.0 $9.8 $9.7 $9.3 $8.3 $10.0 $9.8 $9.7 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2014 2015 2016 2017 2018 Source: LIMRA Secure Retirement Institute ,: The Variable Annuity Market, Second Quarter 2018 6

GLWB Opportunity • Drivers of VA GLWB Sales Slide • Limited upside – volatility controlled funds • Limited benefit levels • High fees • Competition from FIAs • GLWB Still About 50+% of VA Sales • ~$45B annual sales • Need an Innovative Product Design • Unique GLWB benefit feature • Need AV upside potential • No volatility control funds 7

Product Design Considerations 8

Product Design Considerations • Focus on GLWB • Base VA, no DB • Unique GLWB Design • After a certain date LPAs continue • No rider charges • AV not reduced for LPAs • GLWB Roll-up • Unique participating roll-up • 2% + Max[0, 75% of S&P500] • Limit the fixed rate component • Participating component adds upside potential 9

Product Design Considerations • Funds • Provide upside potential for the AV • No volatility control funds • Up to 80% allocation to equity funds • Hedgeable • All equity funds are tied to S&P500 • All bond funds are broad based high quality bond funds • GLWB Rider Charge • Set to permit risk management • Cover expected hedge costs • Cover expected reinsurance costs • Ability to change on inforce 10

Risk Management Options Explored 11

Risk Management Options Explored • Go Naked • Limit exposure via sales management • Limits sales potential • Not really risk management • Outsource Hedging • Limited ability to develop internal expertise • Need scale to keep relative costs down • Retain hedge “breakage” risk • Build VA Hedging Platform • Expensive • Long lead time • Questionable Cost/Benefit given low early sales • Retain hedge “breakage” risk 12

Risk Management Options Explored • Capital Markets Reinsurance • Investment Bank offered solution • Does not cover actuarial risks • Traditional Reinsurance • Coinsurance across entire VA contract • Does not modify risk profile • Includes base VA - prefer to retain that exposure • Coinsurance on GLWB only • Coverage limited to risk of concern • Covers capital market risks • Covers actuarial risks 13

Benefits of Reinsurance 14

Benefits of Reinsurance • Entered into Coinsurance on GLWB only • Provide desired economic coverage • Does not include transfer of base VA economics • Covers GLWB Claims • Reinsurance fee set at contract issue • Minimize the uncertainty of GLWB claims cost • Includes actuarial assumptions • Cover funds’ basis risk • Reserve Credit • Reduces uncertainty of reserve impact under uncertain future market conditions • Certified Reinsurer in domiciliary state • Meet risk transfer requirements (A-791) • Meet NAIC guidelines “Credit for Reinsurance Model Regulation” 15

Economic Profile Without and With Reinsurance 16

Statutory Reserve Profile Without and With Reinsurance 17

Conclusion 18

Conclusion • Invested Partner • Structured Reinsurance to Meet Our Objectives • Covered GLWB claims risk (LPAs payments made by us) • Meet Risk transference requirements (reserve credit) • Indirect Pricing Validation • Actuarial assumptions • Pricing scenarios • Pricing models • Provides Avenue for New Entrant/Small VA Player • Lower upfront costs and less lead time than building internal hedge program • More certainty than hedging 19