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Life and Annuity 2012 Symposium Annuity Market Trends

Life and Annuity 2012 Symposium Annuity Market Trends. Panel Discussions 14 and 32. Timothy C. Pfeifer, FSA, MAAA Pfeifer Advisory LLC. May 21, 2012. Topics for this Presentation. Declared Rate Fixed Deferred Annuities Fixed Indexed Annuities Single Premium Immediate Annuities

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Life and Annuity 2012 Symposium Annuity Market Trends

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  1. Life and Annuity 2012 Symposium Annuity Market Trends Panel Discussions 14 and 32 Timothy C. Pfeifer, FSA, MAAA Pfeifer Advisory LLC May 21, 2012

  2. Topics for this Presentation Declared Rate Fixed Deferred Annuities Fixed Indexed Annuities Single Premium Immediate Annuities Deferred Income Annuities

  3. Declared Rate Fixed Deferred Annuities Struggling in Low Interest Rate World Prevalent reactions to low interest rate environment: Combined MVA and non-MVA sales ($34B) in 2011 lowest in last ten years • Lower compensation • Eliminate automatic ROP • Cut renewal credits to minimums • First year bonuses • Invest in longer durations • 18% of DRFDA sales were in products with MVAs • It should be noted that a quarter of indexed annuity sales are directed to declared rate accounts • Banks and S&Ls sold 54% of non-MVA fixed and 22% of MVAs Over half (58%) of non-MVA fixed sales in 2011 involved IGPs of more than one year (3- and 5-year dominate)

  4. Declared Rate Fixed Deferred Annuities Design Activities Average industry crediting rate about 2.8% for last six months Heaped surrender charges (1st year SC% >> years of SC) RULE of THUMB: 1% surrender charge in one year worth one basis point Greater use of limited market value adjustments (reserve and capital relief) Some increased use of Bailout Provisions Limited number of LTC Rider provisions – modest sales

  5. Fixed Indexed Annuities Part 1 The Strong Sector of the Fixed Annuity Market • Approximately 45% market share last two years • 7% from banks in 2011 • Little securities regulation chatter Current Profile: • Focus is on income sale (GLWB with attractive BB roll-ups) • Caps/Participation rates fallen to weak levels (e.g., caps of 3%) • Commissions down slightly, but still on high-end • Focus on simple crediting approaches and S&P index due to options budgets

  6. Fixed Indexed Annuities Part 2 Key Elements in the Indexed Annuity World Strong Design Creativity NAIC Annuity Disclosure Model • For the first time, specific guidance on illustrating FIA returns • Backcasting based on ten-year period (last 10, best 10 out of 20, worst 10 out of 20) • New indexes may not be illustrated • State adoptions • Death benefit enrichment, including DFD treatment • Enhanced guaranteed income under GLWB for LTC, etc. • Uncapped designs are of significant interest • Binary/Performance Trigger for banks, simple sale

  7. Fixed Indexed Annuities Part 3 The Future of FIAs More efficient hedging/option budget Indexed SPIAs (finally!) Lower average compensation More multi-year terms All of this assumes a continued low interest rate environment

  8. Single Premium Immediate Annuities (SPIAs) Continued growth and traction, despite low interest rates • Sales reached $7.7B in 2011 • Sales up 9% over 2010 • 16 carriers wrote >$100 Million Drivers of Sales What Differentiates Carriers? • Favorable demographics • Education of reps, customers • Appealing ALM • Favorable strain characteristics • Capital burden on SPIAs • Expenses allocated to SPIAs • Liquidity features Still very price driven, commodity-like business

  9. Deferred Income Annuities/Longevity Insurance (DIAs) So far, More Smoke Than Fire WHY? WHY? Low rates Inadequate liquidity Learning curve in how to package, sell One main character success story: Captive producers, large SPIA player Four other carriers in market: Little success, little effort (in some cases) Future: Better attempts at packaging as part of complete retirement plan, evaluate on “full IRR” basics, incorporating survivorship benefits

  10. Thank You! Timothy C. Pfeifer, FSA, MAAA E-mail: tpfeifer@pfeiferadvisory.com www.pfeiferadvisory.com

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