timothy c. pfeifer, fsa, maaa pfeifer advisory llc october 23, 2011 2011 annual conference
TRANSCRIPT
Timothy C. Pfeifer, FSA, MAAAPfeifer Advisory LLC October 23, 2011
2011 Annual Conference
22
Is this really true?
When was the last time 1OYT rates were this low?
When was the last time 1OYT rates were this low?
33
What about the long end of the curve?
44
How does the steepness of the Treasury Yield Curve compare?
55
Insurers take on risk spread though.What has happened to credit spreads over the past
18 months?
66
Declared Rate Fixed Annuities
Fixed Index Annuities
Immediate Annuities
Fixed Universal Life
Indexed UL
Par WL
Term Life
Variable Product
Low
High
Lower commissionsDeveloped more market value
adjusted products
Lengthened maturity on asset portfolios
Reduced investment asset quality
Exited lines of businessDeveloped indexed products, especially those with GLWBs
Increased explicit charges to permit higher credited rates
Managed to higher spreads on in force business
77
Lowered guaranteed credited rates
Lowered current credited rates
Extend retirement timeline even more
Postpone life insurance and annuity purchases, other
investments
On Life side, look for other features, like LTC combos
Examined alternative investments
Fewer lapses/better persistency on older business
88
Explored indexed productsLowered expectations
99
What alternatives are there to improve asset yields in today's
environment? Take credit risk
Take duration risk
Explore less traditional assets
Use separate accounts
Regulatory capital punishes
Softer regulatory capital treatment
Investment partnerships, venture capital
Regulatory concern emerging
1010
QualityMaturity AAA AA A BBB BB B
2
5
7
10
20
30 - -
- -
- -
- N
one
- -
- -
- -
Source: Bloomberg Composite as of September 30, 2011
1111
• Insurers feel that they understand and are good at taking credit risk, better than rating agencies, in fact.
• Capital formulas punish credit risk on a security-by-security basis
• Duration risk on assets is more efficient from a capital perspective, especially if carrier has a large diverse portfolio of business.
• Implication – Go longer!
1212
Fixed Annuities
• Eliminate return of principal guarantees
• Add more powerful MVAs
• Add more GLWBs
• Portfolio rate crediting
Indexed Annuities
• Continue focus on income sale
• Sweetened death benefits
• More use of participation rate
• Simple binary design
1313
Life Insurance
• Increased focus on indexed products with attractive caps supported by mortality/expense margins
• More interest in products with ancillary benefits like LTC
• Minimum credited rates dropped to zero
• Larger surrender (and higher) for certain types of products
1414
Pricing with leverageStrong interest in purchasing mature
blocks
Significantly lower profit hurdles = risk-free plus
a margin (500 bps)
Production capacities increased
1515
Carriers• Reconsider offering periodic,
flexible premium annuities.
• Manage asset-based businesses in aggregate.
• Actively push for regulatory changes in market value adjusted life and lower minimum annuity credited rates.
• Refine interest rate hedging practices.
• Market consistent outlook?
Customers• Shop for products which show
upside when interest rates fall (interest rate floors, bond funds).
• Diversification is still as prudent as ever.
• Despite underestimating when interest rates are low, tax deferral is still quite valuable.
• Be smart – look for clues as to rising or falling rates (unemployment).
