life and annuity market update...v:\_towers watson internal\rcs\people\sands,...

$: Life and Annuity Market Update...V:\_Towers Watson Internal\RCS\People\Sands, Ann-Marie\POWER\SEAC-Life and Annuity Market Update-Nov 14.pptx 14 Life insurance sales remain low Life$
Life and Annuity Market Update

John Fenton, FSA, MAAA

November 2014

Southeastern Actuaries Club

Proprietary and Confidential. For Towers Watson and Towers Watson client use only.

Overview of presentation

U.S. Annuity Market

Sales trends

Key issues

Products

U.S. Life Market

Sales trends

Key issues

Products

Regulatory Outlook

Longevity Trends

towerswatson.com

OVERVIEW

1

V:\_Towers Watson Internal\RCS\People\Sands, Ann-Marie\POWER\SEAC-Life and Annuity Market Update-Nov 14.pptx

U.S. Annuity Market


Total annuity sales levels have been fairly stable over

recent years

*Excludes structured settlements

Sources: Towers Watson VALUE Survey, LIMRA

5.0 5.5 6.8 11.8 14.4 23.1 27.2 25.3 25.2 26.7 30.1 32.3 32.2 33.9 39.3 45.2 37.1 47.3 64.7

86.8 67.2 61.3 45.8 44.7 41.4

76.2 75.1 44.0 43.2 33.4

39.7 44.4

122.0

137.7 114.0

116.0 128.5 134.0

137.5 160.0

186.0

157.5 127.1

140.0 159.0

146.9 146.5

141.0

0

50

100

150

200

250

300

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014A

$ B

illi

on

s

Indexed annuity sales Fixed annuity sales* Variable annuity sales

ANNUITY MARKET

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3



Interest rates have risen since early in 2013, although rates

remain low; 10 year Treasury yield now approximately 2.x%

© 2014 Towers Watson. All rights reserved.

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4

4.63

3.66 3.26 3.21

2.78

2.04 1.82

1.64 1.71 1.95 1.99

2.71 2.75 2.76 2.62 2.50

5.89

7.28 6.31

4.52 4.22

3.74 3.52

2.95 2.72

2.94 3.20

3.74 3.68 3.54 3.36 3.36

6.24

7.84 7.48

5.12 4.80

4.37 4.25

3.80 3.58 3.72

4.01

4.63 4.50 4.29

3.96 3.96

8.52 8.19

7.72

7.11 7.23

6.72 6.46

6.19 6.17

6.61 6.28

5.99 5.62

5.79

0

1

2

3

4

5

6

7

8

9

20

07

20

08

20

09

20

10

20

11

1Q

2012

2Q

2012

3Q

2012

4Q

2012

1Q

2013

2Q

2013

3Q

2013

4Q

2013

1Q

2014

2Q

2014

3Q

2014

Yie

ld (

%)

Period

Average Yield Rates from January 2007 to June 2014

10 Year CMT A Yield BBB Yield High Yield

Double digit high

Source: Bloomberg (BofA Merrill Lynch US Corporate 7-10y Yields and CMT data)

ANNUITY MARKET


VA product/market trends

Prior market leaders — Prudential and Met — continue their pullback

Others try to manage sales (expect year-end restrictions)

Continued implementation of volatility controlled funds

Now accounts for approximately $200B of total funds

Initially on new products but several insurers have now implemented on inforce

Products with living benefits remain main sellers but investment only products have gained traction

Jackson National (Elite Access) has quarterly run rate of $1B

Prudential reports 10% of sales, Ameriprise 25%

Jefferson National’s Monumental was sector leader ($200M quarterly run rate)

Others have introduced product fairly recently (Met, Lincoln)

Living benefit products

Some limited enhancements (before interest rates dropped again)

Becoming more common now to vary “rates” (monthly rate sheet)

Buyback programs continue — AXA and Hartford supplemented existing programs, Voya added

Some ongoing changes to inforce

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5

ANNUITY MARKET



Fixed annuity sales have been increasing since 2012

Annualized sales up 18% so far in 2014, strong gains in most product

types

6

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YTD Q2 2014 2013 2012 % Change

(YTD Q2 2014 vs. 2013)

Book Value 11.2 22.4 20.2 +0%

Indexed 24.3 39.3 33.9 +24

MVA 4.6 6.9 4.5 +33

Immediate* 6.4 10.5 8.7 +22

Total Fixed ̂ 46.5 79.1 67.3 +18

* Includes deferred income

^ Excludes structured settlements

Source: LIMRA, sales in billions

ANNUITY MARKET



Key issues in fixed annuity market

Indexed annuity sales continue to grow

Many products use GWLBs to drive sales — focus on income story

Sales expanding to lower commission distribution channels

Major players have added managed volatility funds — and removed cap on

index return (caps have otherwise been in 3-4% range)

More traditional fixed annuities (MVA and BV) have been helped by

rise in rates since 2013

Sales are still relatively low

Companies with alternative asset strategies have helped boost market

Growth in SPIA and particularly DIAs

7

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ANNUITY MARKET



SPIA trends

Several companies refreshing their product pricing

Mortality and investment focus

Refresh pricing models, but few have expanded to full ALM models

Profit margins can be very thin from low statutory reserves

Mortality viewpoints can differ substantially by company

Base mortality

Mortality selection

Mortality improvement

Investment yield assumptions

Quality level, private securities, mortgages and alternative assets usually

driving differences by company

New reserve table in 2015? - 2012 IAR vs. Annuity 2000

8

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ANNUITY MARKET



Common DIA product features

Single or flexible premium

Single or joint life; continuation %

Guaranteed payments

Return of Premium (ROP) or period certain

Wide range of ages/deferrals

Purchase from Age 18 to 70+

Deferral from 1+ to 30 years+/Age 70½ qualified

Change of deferral period

Based on commutation rate and mortality table

Some with limited liquidity

Acceleration of payments (some or all)

Increasing income options

Fixed percentage per year (1%, 2%, 3% or 4%)

Dividend based (Northwestern Mutual)

9

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ANNUITY MARKET



“Hybrid” annuities are gaining interest

More downside risk than IA (can invade principal) but offers some

protection (more than VA)

Greater upside than IA via higher cap rates

Two main design types

Buffer design: first x% of losses is absorbed by company (buffer to

policyholder), but PH pays losses beyond that

Floor design: first y% of losses is paid for by PH, then a floor

AXA had original product, more recent entries by MetLife, Allianz,

CUNA Mutual, and VOYA

Invades principal so must be a registered product

The cost of hedging is generally less due to less volatility in claims

levels, given that the vast majority of investments are in fixed income

securities and index exposure is limited to index based call spreads

10

towerswatson.com

ANNUITY MARKET


U.S. Life Market


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12

LIFE MARKET

12

Source: LIMRA International Market Trends, TW analysis. Based on first-year (weighted) premium; 100% of planned ongoing premium plus 10% of

single premium

Industry Average Annual Growth Rate (Based on Premiums)

Increases generally 4% a year since 2009, jumping up to 6% in 2012

Sales growth by premium have consistently outpaced sales growth by face amount/number of

policies (not shown), indicating that sales growth is coming from premium oriented policies

YTD sales are down in 2014

Ind

ustr

y S

ale

s

($ M

illio

ns)

After a significant decline in 2007-2009, life insurance sales have

increased steadily (but not spectacularly); however, 2013 was flat

1995 – 2005 2007 – 2009

$9,000

$10,000

$11,000

$12,000

$13,000

$14,000

$15,000

1995 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

2009 – 2011 CAGR:

0.0%

2012 2013

6.0% 4.0% -9.9% 6.9% 2.7%

2005 – 2007



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Universal life (including IUL) remains the leading product

type

4 7

36

14 5

82

47

54

23

24 35

38 26

18

39 38

18 11 13

23 23 22

1980 1985 1990 2000 2005 2013

Variable Universal Life Whole Life Universal Life Term

Market Share of Individual Life Insurance by Product Type

(Percent of Total FY Premium)

^ IUL included here and represents 13% of total

Source: LIMRA International. Based on first-year premium. Results based on policies issued would be significantly different.

Sales Growth 2Q YTD

2014 vs. 2013

UL -12%*

WL +1%

Term -3%

VUL +29%

Total -4%

* Includes IUL

LIFE MARKET


^


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14

Life insurance sales remain low

Life insurance sales have rebounded somewhat since GFC (2008)

levels, but still not attracting as much premiums

STOLI has not recovered

Savings dollars going elsewhere

Life insurance agents, in general, are getting older

Life ownership levels lowest in years

We need a new approach

Some believe streamlined underwriting is the answer

LIFE MARKET



15

Elements of a streamlined underwriting approach

Principal’s accelerated underwriting approach is an example of this

Individuals up to age 60 can qualify for face amounts up to $1 million

without paramedical exam or bodily fluids

Combines short-app questionnaire from agent with tele-app, MVR, MIB,

prescription check

Preferred Plus and Preferred risk classes

Underwriting completion within 48 hours from tele-app

Full agent compensation

Issue/UW expense savings help pay for (any) extra mortality

May be possible to take elements of this approach to appeal to young

demographics

Social media based solicitation

Target life style changes

Tie in with affinity groups

LIFE MARKET


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LIFE MARKET

16

Life insurance combo products

Often a rider that can be attached to any type of permanent life

product

Insured can accelerate all or a portion of face amount for LTC benefits

Must meet eligibility requirements

A small percentage (2%-4%) of face available per month until face

exhausted

Extension of benefits option: more than face is available for LTC

Feature is financed via an additional premium or account charge



towerswatson.com

LIFE MARKET

17

Growth of combo products


Life combo product premium grew 12% in 2013 5th consecutive

year of double-digit growth

0.8

1.3

2.2 2.4

2.6

-

0.5

1.0

1.5

2.0

2.5

3.0

2009 2010 2011 2012 2013

Combo Product Premium (billions)

WL 14%

UL 83%

VUL 3%

2013 Product Distribution

Source: LIMRA 2014 Individual Life Combination Products Annual Review

Regulatory Outlook


PBR now appears likely to actually happen

The NAIC (narrowly) approved the Valuation Manual in early December 2012

The Valuation Manual must go through the state legislative approval process

before becoming operative

The Valuation Manual will become operative on January 1st following the first

July 1 in which both of the following occur:

Adoption by 42 states (out of 56 jurisdictions, or 75%); known as the supermajority

Adoption by enough states that represent at least 75% of industry direct premiums in

2008

18 states have already enacted (representing 28.0% of premium)

19 states have indicated they are committed to adopting in 2014/2015

(representing 45.1% of premium)

This leaves 5 states and 1.9% of premium to go

Even without California and New York, there are enough states to push it

across the finish line

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So, we suggest it is time to start planning more earnestly

for this — January 1, 2017 operative date is likely

REGULATORY OUTLOOK

Longevity Trends


U.S. population mortality improvement has seen some

shifts over the past 30 years

21

Annual Average Improvement in Mortality 1979-2010

Period Gender 25-34 35-44 45-54 55-64 65-74 75-84 85+

1979-2000 Male 1.5% 0.8% 1.7% 1.8% 1.4% 1.0% 0.0%

Female 0.8 0.6 1.3 0.8 0.4 0.4 -0.3

Combined 1.3 0.7 1.5 1.4 0.9 0.6 -0.2

2000-2010 Male -0.2 1.8 0.7 1.3 2.7 2.0 1.3

Female -0.1 1.0 0.0 1.8 2.3 1.5 1.1

Combined -0.1 1.5 0.4 1.5 2.4 1.7 1.1

1979-2010 Male 1.0 1.1 1.4 1.7 1.8 1.3 0.4

Female 0.5 0.7 0.9 1.1 1.0 0.8 0.1

Combined 0.8 1.0 1.2 1.4 1.4 1.0 0.2

Combined rates reflect a 50%-50% blend (a simplifying assumption)

Source: Derived from CDC mortality database

LONGEVITY TRENDS



Cause of death trends can be examined to better

understand mortality improvement drivers

22

Historical Annual Mortality Improvement for Selected Causes of Death 2000-2010

Ages: 45-54 55-64 65-74 75-84 85+

Males

Heart Disease 1.7% 3.2% 4.7% 4.1% 2.8%

Malignant Neoplasms (e.g., Cancer) 1.4 1.9 2.4 1.5 1.0

Cerebrovascular Disease 1.6 3.0 4.5 5.0 5.0

Nephritis, Nephrotic Syndrome, and Nephrosis -0.6 -1.5 -0.6 -1.1 -1.3

Alzheimer's -0.8 -0.1 0.0 -2.6 -4.2

Accidents -2.1 -2.3 -0.6 -0.9 -1.2

Females

Heart Disease 0.7% 3.7% 5.0% 4.3% 3.5%

Malignant Neoplasms (e.g., Cancer) 1.3 2.2 1.7 0.8 0.5

Cerebrovascular Disease 2.3 3.7 4.5 4.3 4.4

Nephritis, Nephrotic Syndrome, and Nephrosis -2.0 -0.1 0.0 -1.5 -1.9

Alzheimer's -8.0 -0.2 -1.1 -3.0 -4.1

Accidents -5.6 -2.3 0.0 -1.3 -2.2

Source: Derived from CDC mortality database

LONGEVITY TRENDS



In order to help predict future trends, we have developed

a cause of death projection model

This develops results by major cause of death, varying by period, age,

and gender

In general, shows lower rates of improvement in later years

Roughly 50% of initial rates after 30 years

Our model can also be used to examine the impact of significant

events, e.g., a cure for cancer

We suggest using prudence for longer projection periods

Higher rates for longevity risk

Lower rates for mortality risk

Could also consider netting risks

Expect corporate to provide guidance on this

23

LONGEVITY TRENDS



We have also studied other factors

Socioeconomic

Our analysis suggests up to a 1.5% difference (i.e., 1.0% vs. 2.5%) for low

vs. high earners

Cohort effect (i.e., vary by birth years)

Data show some limited evidence of cohort effect in U.S. (males born in

1930-40, males born in 1920-30, females born in 1930-40)

Smoking prevalence

The reduction in smoking prevalence may have contributed .2-.3% annual

mortality improvement over the past decade (i.e., 1.0% goes to 1.2-1.3%),

but given recent stabilization in smoking prevalence this is unlikely to lead to

future contributions

Obesity

Rising levels of obesity could lead to a .25% per annum reduction in

mortality improvement in the future

24

LONGEVITY TRENDS


All of these are studied in the recent Towers Watson

White Paper “Longevity Trends in the United States”


25

Contact information

CONTACT

towerswatson.com

John Fenton, FSA, MAAA

Director

3500 Lenox Road, Suite 900 T +1 404 365 1619

Atlanta, GA 30326-4238

[email protected]


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