That Annuity Show
Last week we looked back at 2022. This week we’re looking ahead at 2023 with Scott Hawkins, Managing Director and Head of Insurance Research for Conning. Scott will also be a keynote speaker at our upcoming Retiretech conference in NYC on March 27th. More details will follow.
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Episode Transcript
The discussion is not meant to provide any legal, tax, or investment advice with respect to the purchase of an insurance product. A comprehensive evaluation of a consumer’s needs and financial situation should always occur in order to help determine if an insurance product may be appropriate for each unique situation.
paul_tyler:
i this is paul tyler and welcome to another episode of that annuity show no good to see you oh
bruno_caron:
good to see you paul
paul_tyler:
isa welcome again
tisa_rabun_marshall:
morning paul
paul_tyler:
ramsey
bruno_caron:
yeah
paul_tyler:
good morning
ramsey_d_smith:
always glad to be here and very excited about today’s conversation
paul_tyler:
as am
bruno_caron:
yeah
paul_tyler:
i so last episode if you didn’t listen to it you
bruno_caron:
m
paul_tyler:
should we went did a really kind of i thought we did a good job
tisa_rabun_marshall:
m
paul_tyler:
talking through some
bruno_caron:
oh
paul_tyler:
of the themes and topics that were of significant importance in twenty twenty two and i think when
bruno_caron:
yeah
paul_tyler:
we did these some of these shows we didn’t realize they would be as important as they would and timing was
ramsey_d_smith:
m
paul_tyler:
perfect okay our guests is r scott hawkins who is the managing director
bruno_caron:
oh
paul_tyler:
and head of insurance research for conny scott welcome
scott_hawkins:
good morning welcome everybody
paul_tyler:
yeah
scott_hawkins:
glad to be here
paul_tyler:
it has been it was been two years since we had you on our show
scott_hawkins:
two years since i was last on here
ramsey_d_smith:
wow
scott_hawkins:
yeah
paul_tyler:
unbelievable so well first of all thanks for coming back and we’re also looking forward to an event you will be key
scott_hawkins:
m
paul_tyler:
noting for us in march we’re going to be doing another retirement innovation program called retire tech i think we’ll call it retire tech i don’t know three dot
ramsey_d_smith:
m
paul_tyler:
ramsey to i don’t know two
ramsey_d_smith:
sure
paul_tyler:
point five three
bruno_caron:
yeah
paul_tyler:
o
scott_hawkins:
a
paul_tyler:
but first and foremost scott maybe you can just tell us
ramsey_d_smith:
m
paul_tyler:
first
ramsey_d_smith:
yeah
paul_tyler:
you know we talk about
ramsey_d_smith:
yeah
paul_tyler:
this just briefly before the show tell people um who exactly is conning and then let’s talk about your
scott_hawkins:
yeah
paul_tyler:
rolling and a dive into what
ramsey_d_smith:
oh
paul_tyler:
this year
scott_hawkins:
sure
paul_tyler:
may bring
scott_hawkins:
so for those of you who don’t know conning is a global asset manager been in business for over a hundred and ten years primary headquarters in hartford
bruno_caron:
yeah
scott_hawkins:
so from that you get the sense that our primary focus in is true is servicing the general account assets of insurance companies life annuity p c and health that said over a hudreteen years we
ramsey_d_smith:
m
scott_hawkins:
become global wearing hong kong type the u k cologne outside of denmark one of the ways we have been differentiating ourselves for at least fifty plus years in the market place against other
bruno_caron:
yea
scott_hawkins:
asset managers
paul_tyler:
yeah
scott_hawkins:
is providing really top levels t g research aimed at the sea level
ramsey_d_smith:
m
scott_hawkins:
executive to help them understand what’s going on in their market in their
ramsey_d_smith:
m
scott_hawkins:
products and what’s striving profit ability and what’s changing the risk they’re facing in terms of profitabil so we’ve been producing this research for our set management clients we also make it available on a stand alone basis for non asset management clients but but the ultimate aim is to help that executive understand what on in their market place why should they be focusing on and how does it affect their bottom line because for an insurance company at the end of the day bottom line is what matters
bruno_caron:
and it goes
ramsey_d_smith:
and
bruno_caron:
far beyond that of course i mean the
scott_hawkins:
m
bruno_caron:
asset application it’s not just you know one check the box item for every insurance company it’s it’s there the key fundamental of to your point of bottom line but also of balance sheet strength company strength
scott_hawkins:
yeah
bruno_caron:
capital requirement and
ramsey_d_smith:
yeah
bruno_caron:
that that drives many of
ramsey_d_smith:
m
bruno_caron:
the stories and
ramsey_d_smith:
m
bruno_caron:
that’s going to be a good seguin for our conversation today
ramsey_d_smith:
m
scott_hawkins:
and to your point bruno you kno if you’re managing the assets that you’ll hear the phrase asset liability matching that that’s the approach to insurance companies generally take but for the asset manager you have to understand those liabilities are
ramsey_d_smith:
m
bruno_caron:
uh
scott_hawkins:
how they’re changing those liabilities
bruno_caron:
ah
scott_hawkins:
vary by the types of investments that you have as well as the types of products your offering and the risks
paul_tyler:
oh
scott_hawkins:
associated with those products and ultimately need to come up with an asset strategy that matches those liabilities for that individual insure which may be different from another client that you
ramsey_d_smith:
oh
scott_hawkins:
have
ramsey_d_smith:
so scott
scott_hawkins:
oh
ramsey_d_smith:
one of the things that we were talking about ahead of this discussion was
bruno_caron:
yeah
ramsey_d_smith:
really about
bruno_caron:
oh
ramsey_d_smith:
trends in the market trends in the annuity market and you know it could
bruno_caron:
okay
ramsey_d_smith:
al element around that is one of capacity so
scott_hawkins:
hm
bruno_caron:
yes
ramsey_d_smith:
very very interested to hear you can share with our audience you know where you think
bruno_caron:
yeah
ramsey_d_smith:
the market is in terms of capacity and how what sorts of trends were seeing to increase capacity in the life and annuity
scott_hawkins:
oh
ramsey_d_smith:
space
scott_hawkins:
so ran one of the things that we produce as i mentioned the types of research one of them is a three year forecast
ramsey_d_smith:
oh
scott_hawkins:
for all the major lines of business property casually life and an annuity so what that means is we’re looking at three years down the road right now through twenty twenty four of the full income statement for
ramsey_d_smith:
oh
scott_hawkins:
the individual annuity line at an aggregate level right and that’s based upon statutory data from years before we keep track of all that
ramsey_d_smith:
a
scott_hawkins:
so in our forecast that we produce at the end of the year we’re looking at at the individual net market and we’re really seeing a market that’s really being set up for growth and profitability overall when you look at the factors driving premium there’s a lot of them that are really positive that we see
ramsey_d_smith:
hm
scott_hawkins:
a lot of them you’ve talked about on your show in the past there’s a demographic wave that’s coming in for the senior market as
ramsey_d_smith:
m
scott_hawkins:
more
ramsey_d_smith:
oh
scott_hawkins:
people are retiring they’re gonna be looking to somehow
ramsey_d_smith:
m
scott_hawkins:
generate
ramsey_d_smith:
oh
scott_hawkins:
a secure retirement income from their accumulated
ramsey_d_smith:
m
scott_hawkins:
i r a four one k assets you certainly have secure act two point o that’s come into play which is really attractive for a lot of the younger plan members that’s going to open up a whole new opportunity for them when you look at d b plan members you know we’re
ramsey_d_smith:
yeah
scott_hawkins:
looking at the possibility of
ramsey_d_smith:
m
scott_hawkins:
continued growth
bruno_caron:
oh
scott_hawkins:
for pension rest transfers coming in all of which comes in at a time when interest rates are improving and when interest rates are improving the spreads on fixed income annuities fixed annuities index annuities are improving so that’s where you’re seeing the growth and crediting rates those products that also means that the insurers are making a little bit more
ramsey_d_smith:
yeah
scott_hawkins:
profit on the net investment income
ramsey_d_smith:
oh
scott_hawkins:
net investment income for instance accounts about twenty five per cent on average of the total revenue that an annuity cut it generates on a year and year out basis the fees on separate accounts or about another ten per cent
bruno_caron:
m
scott_hawkins:
so we’re looking at a situation over the next three years where there’s a really strong potential for growth in p you start to see a bit of that this year and twenty twenty two we think that’s going to continue which means ultimately a profit ability but the thing about
ramsey_d_smith:
yeah
scott_hawkins:
the insurance industry is a regulated environment we’re adding these liabilities on these guarantees investment returns the ability to pay a
ramsey_d_smith:
m
scott_hawkins:
income stream for life if you have a spa that you’ve
ramsey_d_smith:
m
scott_hawkins:
purchase um and if you’re going a have a wrapped product guarantee the ability
paul_tyler:
oh
scott_hawkins:
pull those withdraws out all of those create a certain amount of risk which the insurance company bears and in order to remain solvent the regulators wisely created a capital structure referred to this risk base capital that sort of reflects the risk that the insurance company has assumed in terms of investment risk and product risk and insurers have to maintain capital levels in order to remain solvent and make sure that the regulators don’t come in and for us to your point about pacity if you look at the size of the opportunity created by secure
ramsey_d_smith:
m
scott_hawkins:
created by the fact that there are boomers looking to retire and monetize their iras now you’re talking about a multi trillion dollar opportunity and right now the industry the individual annuity industry is leveraged at about ten to one
bruno_caron:
yeah
scott_hawkins:
which means there’s about a dollar of allocated capital
ramsey_d_smith:
yeah
scott_hawkins:
every ten dollars general account annuity liabilities right so there’s about one point nine
bruno_caron:
oh
scott_hawkins:
trillion dollars of general account annuity liabilities is what we’ve estimated
bruno_caron:
ye
scott_hawkins:
and when you compare with the opportunity that could come in from all of these factors that are really positive for growth that
ramsey_d_smith:
oh
scott_hawkins:
leads us to the question is there enough capital to support
ramsey_d_smith:
m
scott_hawkins:
that if it all happened all at once and that’s an area we’ve been looking at since starting in two thousand eleven i first did a study on that
paul_tyler:
yeah
scott_hawkins:
when the first boomer turned sixty five so we think that
paul_tyler:
yes
scott_hawkins:
this issue around capacity
ramsey_d_smith:
m
scott_hawkins:
is going to be resolved but there’s gonna be a wide variety of ways that that’s going happen and we’ve already seen some of them emerge over the last decade so
bruno_caron:
yes
scott_hawkins:
i’ll pause ere if there’s
ramsey_d_smith:
ye
scott_hawkins:
any questions
ramsey_d_smith:
oh
bruno_caron:
so how did you react it i mean she started that that study back in two thousand eleven
scott_hawkins:
hm
bruno_caron:
we all know the inflow of capital that has been taking place in the last let’s say twelve years in the period how did that
ramsey_d_smith:
oh
bruno_caron:
stack up against
ramsey_d_smith:
ye
bruno_caron:
your you know our forecast prediction
ramsey_d_smith:
oh
bruno_caron:
of capital availability in the market
scott_hawkins:
yeah in
ramsey_d_smith:
m
scott_hawkins:
two thousand leven the conclusion that i made in that study was that we were looking then so this is pretty
ramsey_d_smith:
yeah
scott_hawkins:
secure act but we were just looking
ramsey_d_smith:
m
scott_hawkins:
at the demographic wave of boomers
bruno_caron:
h
scott_hawkins:
moving in
bruno_caron:
m
scott_hawkins:
and we said if everythin were to happen there wasn’t enough capital to support that as a result our conclusion was the annuity industry and annuity insures we’re going to have to look outside their traditional
bruno_caron:
oh
scott_hawkins:
pattern of capita growth which is the operating results to find third party capital
ramsey_d_smith:
oh
scott_hawkins:
to come into the market that would be attracted
bruno_caron:
oh
scott_hawkins:
to come in
ramsey_d_smith:
oh
scott_hawkins:
and sure enough a couple of years later
ramsey_d_smith:
m
scott_hawkins:
you start to see the emergency
ramsey_d_smith:
yeah
scott_hawkins:
of these asset manager in private equity back re insurers who are coming in and either doing reinsurance treaties or issuing new paper out there in the marketplace and that influx of third party capital as been continuing
ramsey_d_smith:
oh
scott_hawkins:
and the dynamics of that market shifting um were talking little bit earlier that one of the changes is that we’ve seen the rise of all these new players in terms of sales ranking because there actively out there trying to grow liabilities while some of the established players are looking perhaps scaled back because they have large blocks of business so clearly bringing new capital in was what we included we’ve certainly seen that happen and we’ve been tracking that ever since then with a multiple series of reports
ramsey_d_smith:
yeah
scott_hawkins:
and this year what i’m really
ramsey_d_smith:
m
scott_hawkins:
looking at in terms of
ramsey_d_smith:
ye
scott_hawkins:
new solutions that’s emerging on the life annuity side is the use of side cars which have been very prevalent on the property casually side for a long time and if you’re all familiar with a side car and how that’s working
paul_tyler:
yea
scott_hawkins:
out
bruno_caron:
yeah
paul_tyler:
why do you explain it
ramsey_d_smith:
at
paul_tyler:
to
scott_hawkins:
yeah
paul_tyler:
listeners because of course we are experts on side cars scott with a wink
bruno_caron:
yeah
paul_tyler:
said
scott_hawkins:
so
paul_tyler:
with a wink
scott_hawkins:
so if you think from
bruno_caron:
yeah
scott_hawkins:
the property casually world right
bruno_caron:
yeah
scott_hawkins:
they’re insuring a lot of natural catastrophe risk so the issue around how do you
paul_tyler:
yeah
scott_hawkins:
make sure that you have a capital capacity
ramsey_d_smith:
yeah
scott_hawkins:
when you have a cat five hurricane hit florida h one of the solutions that p c industry over time came up with was insurance link securities where they could bundle up risks and sell them off to the capital markets but also what’s known as a side car now in a way a side car is a way that third party capital institutional investors can participate in the reinsurance space without actually forming a re insure or investing directly in the insurance company so what happen is there will be a reinsurance company created and then there will be a third party institution apollo’s created one global’s created one cuvari recently created one where they go out and they raise capital from other institutional investors along with some of their own capital to supply additional capital support to that re insure as it takes on more business and then if you’re a
paul_tyler:
yeah
scott_hawkins:
primary insurer if you’re out there writing
bruno_caron:
yeah
scott_hawkins:
new annuity contracts or if you have a block of existing fixed annuities or index annuities that you want to move off your balance sheet so that your existing
bruno_caron:
yeah
scott_hawkins:
capital can be re deployed you can move that to that reinsurance company and that reinsurance company then can tap the capital in that side car that’s why it’s often
ramsey_d_smith:
oh
scott_hawkins:
referred to as a side car the investors over time you know they
bruno_caron:
yeah
scott_hawkins:
their return on the investment and the profitability of the reinsurance company
bruno_caron:
oh
scott_hawkins:
and for that institutional investor they’re not fully tied to the underlying success of the insurance company if they want to liquidate their part of the side car at some point in the future they can so it’s it’s a more liquid structure for an institutional investor who wants to assume some of the insurance risk in return without directly investing in an insurance company or a re insure long
ramsey_d_smith:
yeah
scott_hawkins:
way of saying it’s it’s a new source of getting capital it’s been around on the p n c side for a long time the last couple of years were now i move into the annuity space
paul_tyler:
i
scott_hawkins:
and we think that that
tisa_rabun_marshall:
yeah
scott_hawkins:
will be a very attractive opportunity for institutional investors and provides another way to bring
bruno_caron:
oh
scott_hawkins:
third party
tisa_rabun_marshall:
oh
scott_hawkins:
capital into the annuity space to support
ramsey_d_smith:
yeah
scott_hawkins:
the growth opportunity
paul_tyler:
yeah
ramsey_d_smith:
so
paul_tyler:
this business is just as scott as you know so counter intuitive ramsey bruno tis a
bruno_caron:
oh
paul_tyler:
right it’s
tisa_rabun_marshall:
oh
paul_tyler:
oh interest rates going up are a good thing oh they went up too fast that
bruno_caron:
uh
paul_tyler:
was a bad in
ramsey_d_smith:
yah
tisa_rabun_marshall:
m
scott_hawkins:
yeah
paul_tyler:
our bonds
tisa_rabun_marshall:
m
ramsey_d_smith:
hm
paul_tyler:
just got marked down
ramsey_d_smith:
m
paul_tyler:
no so
ramsey_d_smith:
hm
paul_tyler:
it’s my mental
ramsey_d_smith:
m
paul_tyler:
model scott
bruno_caron:
yeah
paul_tyler:
is generally there’s some good things that happen to this business
ramsey_d_smith:
m
paul_tyler:
but if anything happens even
scott_hawkins:
hm
paul_tyler:
a good thing it happens too quickly it’s usually
ramsey_d_smith:
m
paul_tyler:
a bad thing so
tisa_rabun_marshall:
kay
paul_tyler:
what are some of the quick shifts we could see in this market maybe we can play out a few scenarios one is interest rates get you know recession hits hard and interest rate spike even more than we’ve seen we see
bruno_caron:
oh
paul_tyler:
what are the implications here for you know the
ramsey_d_smith:
m
paul_tyler:
annuity outlook if that’s if that pins
scott_hawkins:
so for the for the annuity outlook you know you could look for for the retail investor you’re probably going to see an increase in crediting rates to attract business right that would go up to your point if a particular company gets too far ahead and starts really seeing an influx of new sales you know they have to reserve for that they have to have the capital
bruno_caron:
yes
scott_hawkins:
capacity
ramsey_d_smith:
m
scott_hawkins:
to support that
bruno_caron:
ahead
scott_hawkins:
so they’ll be mine during that
ramsey_d_smith:
m
scott_hawkins:
at an individual
bruno_caron:
a
scott_hawkins:
company level right before their assets you know that creates some pressure on them because his interest rates go up most of the holdings of an asset and a life company are in fixed income securities interest rates go up your existing portfolio values go down a bit there’s reserves to help offset some of that that’s the good news aroun that the other challenges is you know you’re looking at what
ramsey_d_smith:
a
scott_hawkins:
we refer to as the overall portfolio rate which we’ve been
bruno_caron:
ah
scott_hawkins:
since two thousand ten and eleven we started
bruno_caron:
okay
scott_hawkins:
tracking the portfolio rate for the individual annuity
bruno_caron:
oh
scott_hawkins:
business
bruno_caron:
yeah
scott_hawkins:
which is you know we say actuaries on our teams were to say here’s what’s rolling off at an aggregate level in terms of liabilities and here’s what new sales are coming on and here’s what the interest rates for the tin ear are and that gives
ramsey_d_smith:
m
scott_hawkins:
us an india ation is sort of where the portfolio rates are headed when you look at like philly fed surveys until this year at the end of this year that portfolio forecast had always been going down and it was like i know you’ve talked about the low interest rate environment that puts pressure
ramsey_d_smith:
m
scott_hawkins:
on insures to be able to afford to offer
ramsey_d_smith:
m
scott_hawkins:
fixed incommanuities or
ramsey_d_smith:
m
scott_hawkins:
media annuities because they were under spread pressure now we’re seeing
ramsey_d_smith:
oh
scott_hawkins:
that portfolio rate swing positive and start to recover so in that scenario interest rate spike the insurance that will be bringing the end will be investing at higher rates rather than at lower rates even as older fixed income securities roll off so that will be positive for investment spreads enabling them to support more profitable products may encourage them to actually go out and write more business
paul_tyler:
so so
ramsey_d_smith:
yeah
paul_tyler:
the
bruno_caron:
it
paul_tyler:
new
scott_hawkins:
that’s
paul_tyler:
is so the new
scott_hawkins:
that’s
paul_tyler:
end
scott_hawkins:
the rising interest rate
paul_tyler:
yeah
scott_hawkins:
scenario
paul_tyler:
so so that scenario will probably favor some of these companies we haven’t heard of until last two years the ones with a smaller
bruno_caron:
oh
paul_tyler:
enforced block in there
ramsey_d_smith:
oh
paul_tyler:
y’re writing de novo scott
bruno_caron:
yeah
paul_tyler:
is
scott_hawkins:
yep
paul_tyler:
it
ramsey_d_smith:
so we could i want to put i want
bruno_caron:
yeah
ramsey_d_smith:
to put further lens on that because i think that’s that’s it’s super important it so we have a lot of factors that are going to translate into much much greater demand there is sort
scott_hawkins:
hm
ramsey_d_smith:
of this historical capital onstraint um you’ve got legacy legacy players who are structurally more inclined or structurally philosophically more inclined to grow in a more measured way and then you have these new these new entrance that are that are incentivized to grow much more aggressively and
bruno_caron:
yeah
ramsey_d_smith:
quickly now what’s interesting is that sometimes depend you talk to in the industry you know there are different attitudes the different attitudes about the new third party capital providers there are some that would say well they take too much risk in their portfolios there’s
bruno_caron:
oh
ramsey_d_smith:
there’s there’s
scott_hawkins:
hm
ramsey_d_smith:
various today some of it’s marketing noise some of it’s some of its reasonable sort of questions but i think that the overriding theme here is
bruno_caron:
oh
ramsey_d_smith:
that we don’t have any choice like for this business to work let me know if you you know you think would agree with this statement or if i’m overplaying but it doesn’t seem like at this works at we that the industry reaches its full potential unless we have those the third party providers like we need them full stop is that fair
scott_hawkins:
absolutely
ramsey_d_smith:
yeah
scott_hawkins:
that that was what we saw in two thousand
ramsey_d_smith:
yeah
scott_hawkins:
eleven it still holds true today
ramsey_d_smith:
yeah
scott_hawkins:
and it’s even more so because if you think two thousand eleven we’re just looking at the potential retirement of the boomers and that that you
ramsey_d_smith:
m
scott_hawkins:
know silver sunamiiswher
bruno_caron:
m
scott_hawkins:
were referring to
ramsey_d_smith:
yeah
scott_hawkins:
it back then coming down what would that happen
ramsey_d_smith:
oh
scott_hawkins:
if their assets started to anuitize now you’ve got secure act which has opened up a whole new avenue of growth as well as pensioners
ramsey_d_smith:
m
scott_hawkins:
transfers which have been a growing business as d v plans look off load their retires
ramsey_d_smith:
oh
scott_hawkins:
liability on to an annuity company true that’s usually done on a group basis
ramsey_d_smith:
yeah
scott_hawkins:
but still that consumes capital
bruno_caron:
uh
scott_hawkins:
so to your point there’s great
bruno_caron:
h
scott_hawkins:
potential
bruno_caron:
oh
scott_hawkins:
ahead for growth the constraint is going to be will there be enough capital if the solution to that is you’re going to have to figure out a way to
ramsey_d_smith:
oh
scott_hawkins:
effectively tap third party capital institutional investors to come in and yes these these new companies these new entrance there’s people that like them people that are concerned about them to your point some of that concern valid thers though might be for their own reasons
bruno_caron:
m
scott_hawkins:
why they’re against it things like these side cars though are another way
ramsey_d_smith:
oh
scott_hawkins:
of doing it because
ramsey_d_smith:
oh
scott_hawkins:
when you just look at the overall if all you were going to do is grow based up your organic
ramsey_d_smith:
m
scott_hawkins:
profit ability and the individual annuity line overall is has been profitable about at an aggregate level and that’s about on a staff basis about eighteen nineteen billion a year on average years a ittle bit more some years little bit less but that’s not enough to support the opportunity and and you know you can sort of say well not everybody’s in for one case immediately on to move
ramsey_d_smith:
oh
scott_hawkins:
everything in not everybody and ira
bruno_caron:
yeah
scott_hawkins:
is going to immediately go out and buy a spear that that’s certainly true
bruno_caron:
oh
scott_hawkins:
but just the amount of assets in those areas some of those will and they’re gonna be encouraged to do so by by financial advisors by plan sponsors by
bruno_caron:
m
scott_hawkins:
the broader media as you’re retiring to think about how are you going to generate a guaranteed retirement income off of some of your assets and you go that’s going to lead and open up the discussion around well maybe we should consider an annuities somehow and that’s even before you start thinking about the people in who are younger employees joining
tisa_rabun_marshall:
m
scott_hawkins:
a for one if there into a annuity like product because i see a lot of innovation coming along there and i’m not quite certain what
bruno_caron:
m
scott_hawkins:
that will look like but that’s why i refer to him as annuity like those types of assets will start to build over time as well so i think this issue around capital
tisa_rabun_marshall:
oh
scott_hawkins:
could be a big constraining factor on this really strong opportunity we see for growth
ramsey_d_smith:
m
tisa_rabun_marshall:
other question
bruno_caron:
well that was
tisa_rabun_marshall:
go ahead bron
bruno_caron:
go ahead please
tisa_rabun_marshall:
so kind of on that theme of the constraint of capital and growth and the new products out there
bruno_caron:
ye
tisa_rabun_marshall:
i guess i wanted to go back on this idea of the generations right so you talked about two thousand eleven being important as the first boomer turned sixty five so now we’re like you know ten eleven years into that so my question is as we look at the boomers maybe approaching that age eighty the oldest boomers right like what does that picture look like what are the demands there they’ve been living in retirement for about a decade they’re reaching older ages maybe there’s health care concerns medical cost those kinds of things
scott_hawkins:
hm
tisa_rabun_marshall:
and right behind them right oldest gen x r is starting to hit retirement or has maybe five to seven years left a plan better for retirement given what has happened in the last ten years so you know products trends like do both generations have the same demand or is everyone focused on that guaranteed income or does the product types type to start to shift based on the generations
scott_hawkins:
there is a definite generation difference the for that older age group mean one of the areas we look at is we refer to it’s the senior market which is a combination of risks and insurance based solutions that are offered
tisa_rabun_marshall:
m
scott_hawkins:
their income solutions or one but long term care
tisa_rabun_marshall:
hm
scott_hawkins:
medic care supplements or advantage products around there and there’s distributors coming into that space and advisors to help that group understand that and that carries its own set of risks and challenges as well from a consumer point of view know you’ve done podcasts around you know some of the health and issues of dealing with an older age consumer as an adviser you know but we see that as for the for the boomers that’s going to be a growing are and we treat that more broadly and in the sense of all these others things that there needed to really meet that generational demand with the secure two point o act which we’ve been looking at pretty intensely over the last couple of months really trying to now that it’s out there really what that means is you can really start looking at generation x the millennial gen season you know would sure there’s a dip in gen x in terms of absolute numbers but the millennials and gin zese are as large if not larger than the baby boomers and secure two point o now opens up an annuity opportunity through in plan annuities in those four or one case
bruno_caron:
oh
scott_hawkins:
spaces to those younger consumers and they’ll start building assets some of them will those those annuities which is creating a whole new opportunity for advisors and insurance companies
bruno_caron:
oh
scott_hawkins:
to figure out how do we provide services to that age group which traditionally not perhaps been target for a annuity sale because they hadn’t accumulated the assets at that point in time
bruno_caron:
oh
scott_hawkins:
and we think those
ramsey_d_smith:
oh
scott_hawkins:
generations will start to attract some of the attention those obviously they have always been a factor
bruno_caron:
oh
scott_hawkins:
look the life insurance business those younger consumers are usually the prime buying age twenty four to fifty four to sixty four
tisa_rabun_marshall:
m
scott_hawkins:
for buying life insurance and traditionally to have been associated with life stages you know getting married buying a home having a child interestingly enough when you look at those life stages that are key financial decision moments those are getting pushed later and later people are getting married later they’re buying homes later they’re having children
ramsey_d_smith:
yeah
scott_hawkins:
later and if you look ahead that will have
ramsey_d_smith:
m
scott_hawkins:
to have to have life insures thinking about when are we approaching people when are they going to be receptive to
bruno_caron:
oh
scott_hawkins:
buying an insurance policy probably the same is a little bit true for the annuities but the four one k
bruno_caron:
oh
scott_hawkins:
an plan annuity sort of eases them
tisa_rabun_marshall:
yeah
scott_hawkins:
into the idea of i’m accumulating money for for retirement on an income basis
ramsey_d_smith:
oh
tisa_rabun_marshall:
a little earlier
scott_hawkins:
i hope that helps a little
ramsey_d_smith:
you
scott_hawkins:
bit
ramsey_d_smith:
are you
tisa_rabun_marshall:
yeah
ramsey_d_smith:
are you are so preaching to the choir
tisa_rabun_marshall:
oh
ramsey_d_smith:
here at least i’ll
bruno_caron:
uh
ramsey_d_smith:
speak
scott_hawkins:
o
ramsey_d_smith:
for myself so and definitely
bruno_caron:
uh
ramsey_d_smith:
have a clear vision of what that might look like um
bruno_caron:
oh
ramsey_d_smith:
the interesting
bruno_caron:
yeah
ramsey_d_smith:
thing though is like um it’s just sort of the adoption cycle the adoption cycle has not been as quick as as i think many of us would like it to see and there’ve been some there’ve been some providers if you will that have been trying to do this for ten years so uh a lot of it comes down to who the decision makers are so in some sense it’s planned participants for in plan but really the often the keep so it’s going to be person or persons that’s going to be the the investment committee or the the manager that’s in charge of the that’s in charge of the defined contribution plan and so i’m is in your travels right in the work that you’re doing at conning um are you having those conversations yet are you are you seeing plant sponsors sort of start to to examine that is that is that is that a conversation that you’ve been involved because i think i think that over time it’s one that but that intellectually you should be involved in because you guys have the you guys have the you guys have valuable information and perspective that i think would be useful for plan sponsors i’m curious if they are if they are part of your client base yet
scott_hawkins:
uh so they’re not part of our client based
ramsey_d_smith:
hm
scott_hawkins:
but the people we
ramsey_d_smith:
yeah
scott_hawkins:
talk with
ramsey_d_smith:
yeah
scott_hawkins:
and the way we’ve been viewing this is especially true for secure to point out uh secure point one gave the fiduciary safe harbor rule for selecting which was
ramsey_d_smith:
oh
scott_hawkins:
a big stumbling block
ramsey_d_smith:
hm
scott_hawkins:
right secure two point really does a lot more
ramsey_d_smith:
oh
scott_hawkins:
and what we’ve been hearing in our converse ation um is the changes required to implement these so think are now perhaps a stumbling block for full adoption let me give ou an example so
ramsey_d_smith:
oh
scott_hawkins:
suppose you’re a plan sponsor and a record eeper
ramsey_d_smith:
oh
scott_hawkins:
and you now want to put an annuity product
ramsey_d_smith:
oh
scott_hawkins:
inside your four one offering well you’ve got an infrastructure built on being able to do all the record keeping and trans transaction stuff with a mutual fund company right you’ve got data standards in place that makes that efficient
ramsey_d_smith:
m
scott_hawkins:
and effective to do you’ve got to build all that to go to an annuity company and those are probably going to be different and if you have multiple annuity companies you’re dealing with is there a standard inter face for all of those do you have to build one for each time
ramsey_d_smith:
hm
scott_hawkins:
these are all new questions that we think plan sponsors and record keepers are having to think through and
paul_tyler:
yeah
scott_hawkins:
come up with with answers and solutions to that and i know
paul_tyler:
yeah
scott_hawkins:
from conversation i know thing is spark is
ramsey_d_smith:
m
paul_tyler:
yeah
scott_hawkins:
is trying to work out
ramsey_d_smith:
oh
scott_hawkins:
on their own because there’s going to be demand from plan members to sort of say
bruno_caron:
oh
scott_hawkins:
you know how much of my you know be hearing about this my financial wellness apse telling me i should be thinking about this my statement saying here’s what my retirement income could be based on this is there some sort of annuity like solution for that so the opportunities there i think i’m not seeing a reluctance from you know philosofh fecal reluctance now to include it it’s more of a technical operational issue
ramsey_d_smith:
so can you
scott_hawkins:
and that that will be resolved but its gonna take a little bit of time
ramsey_d_smith:
for our audience can you tell them who spark is
scott_hawkins:
so spark is a association
bruno_caron:
m
scott_hawkins:
for plan record keepers so they deal you know is primarily everybody that you know between the
ramsey_d_smith:
m
scott_hawkins:
plan
ramsey_d_smith:
oh
scott_hawkins:
sponsor a defined contribution plan and then
ramsey_d_smith:
oh
scott_hawkins:
the fund companies all those records that have to be kept of your account balances
ramsey_d_smith:
m
scott_hawkins:
beneficiaries transactions all that those are those services that do that and it’s a scale business so they have to
paul_tyler:
yeah
scott_hawkins:
be very efficient at doing that and they’re
paul_tyler:
oh
scott_hawkins:
you know being asked because of this great opportunity now we have to really start plugging into a whole new set of product providers solution providers that we’ve never really done that before
ramsey_d_smith:
m
paul_tyler:
yeah interest
bruno_caron:
and
ramsey_d_smith:
go ahead bruno
bruno_caron:
interest yeah interesting and that’s a lot to look forward to but i want to get back on the on the balance sheet and
ramsey_d_smith:
yeah
bruno_caron:
you mentioned you know that that ten to one ratio liabilities to capital h makes perfect sense it’s very very consistent to
ramsey_d_smith:
m
bruno_caron:
everything i’ve observed you have deferred annuities in tex annuities pension risk transfers spas all of those you now require
ramsey_d_smith:
oh
bruno_caron:
roughly speaking ten percent
ramsey_d_smith:
yeah
bruno_caron:
capital for for for liability block um and of course i don’t want to dump down risk adjusted caitalization to this i mean there’s there’s a lot
scott_hawkins:
yeah
bruno_caron:
more on the asset side on the liability side that goes into the risk adjusted capitalization and um but what i’m really interested is the other thing is those liabilities are fairly straightforward as well again i don’t want to jump down all the actuorial work that is out there present
scott_hawkins:
yeah
bruno_caron:
you have future benefits present value of future premiums you have you know you have a liability if if we switch that into the context
ramsey_d_smith:
yeah
bruno_caron:
of variable
ramsey_d_smith:
yeah
bruno_caron:
annuity with living benefits now
scott_hawkins:
hm
bruno_caron:
these have been issued you know a few decades ago now we’re in time when you know technically policy holders
ramsey_d_smith:
oh
bruno_caron:
can and should utilize them um those liabilities and those capital requirements for those particular benefits are not as clear as you know some of those those
scott_hawkins:
yeah
bruno_caron:
other or more straightforward annuities do you have any sense or any any views on
ramsey_d_smith:
yes
bruno_caron:
how those policies are
ramsey_d_smith:
oh
bruno_caron:
going to play out
ramsey_d_smith:
m
bruno_caron:
over next decade
scott_hawkins:
well
bruno_caron:
oh
scott_hawkins:
first of all you’reactulutely right to sort of carve out the variable annuity space because you know a plain vanilla va without any of those imbedded garran would typically have
ramsey_d_smith:
ye
scott_hawkins:
a lower capital charge because all the investment risk which is a big risk factor on a immediate or fixed deferetinuity that’s assumed by the contract holder but the moment
bruno_caron:
m
scott_hawkins:
you put a guaranteed
bruno_caron:
m
scott_hawkins:
minimum
bruno_caron:
oh
scott_hawkins:
withdrawal benefit or a death benefit any of those guaranteed benefits the insurance company s assumed some level of risk and if you look at the v a bus this and i cut my teeth in it in the in the mid eighties um
ramsey_d_smith:
oh
scott_hawkins:
it’s been those
ramsey_d_smith:
yeah
scott_hawkins:
changes in
ramsey_d_smith:
oh
scott_hawkins:
those equity linked guarantees
ramsey_d_smith:
yeah
scott_hawkins:
that have
bruno_caron:
my
scott_hawkins:
really led to massive reserve try just when equity markets went down after
ramsey_d_smith:
m
scott_hawkins:
the insure tech bust in the
ramsey_d_smith:
m
scott_hawkins:
tech bust in two thousand two thousand eight currently with all the equity market volatility in response all of the insurance companies that are in that space have really had to up there their risk management game in terms of their hedging very dynamic hedging to maintain that to your now if people start
ramsey_d_smith:
m
scott_hawkins:
using those guaranteed benefits
ramsey_d_smith:
m
scott_hawkins:
so i’m pulling out say i have a guaranteed minimum withdraw benefit ten per cent and i am actually going to start executing that that has to factor into how they’re managing all their options and risk management that’s going around that i think it’s also why you might be seeing i might have seen as we mentioned earlier some of those more established players ing back because they had you know a lot of them had very large va blocks
ramsey_d_smith:
m
scott_hawkins:
business even though they were scaling that back nd they’re still on their books and they’re trying to figure out what can we do with those risks and a lot of these new reinsurance companies have been focusing on blah s have closed fixed deferred annuities or maybe some index annuity flow re insurance but it’s only recently that we’ve seen any meaningful
bruno_caron:
hm
scott_hawkins:
reinsurance deals and i
ramsey_d_smith:
yeah
scott_hawkins:
think the reason is if you’re going to be
bruno_caron:
yes
scott_hawkins:
taking on those types of liabilities from a v a with all those imbedded guarantees you’ve got to have as that re insure you’ve got to have a really strong risk management game and when you look at the two companies that have been involved as the re insure
bruno_caron:
yeah
ramsey_d_smith:
oh
scott_hawkins:
they spun out of companies that had very very large va blocks to begin with
bruno_caron:
oh
scott_hawkins:
and they had that capability in house not all of these
bruno_caron:
yah
scott_hawkins:
new reinsurance companies have been formed over last decade have that level of capability which is not to say they couldn’t do it but you know to the extent that there are those that can do it there’s a lot of opportunity for insures primary insures
ramsey_d_smith:
yes
scott_hawkins:
to re structure
ramsey_d_smith:
oh
scott_hawkins:
their balance sheet by removing
ramsey_d_smith:
h
scott_hawkins:
those that gets back to the pacity issue that freeze up capital they can deploy elsewhere
bruno_caron:
oh
scott_hawkins:
but it’s gonna be interesting to see if people do start to to utilize their gmwbs or some of the other imbedded guarantees how that plays out
paul_tyler:
let me just pull that thread
bruno_caron:
m
paul_tyler:
a little bit
ramsey_d_smith:
yeah
paul_tyler:
i do think generally people criticize the insurance business for not delivering enough value but then
bruno_caron:
oh
paul_tyler:
when you always look back ten years
bruno_caron:
yeah
paul_tyler:
late for some of these products there was too much value in there and we end up with a lot of hangovers you know disability hang overs long term care hangover
ramsey_d_smith:
m
scott_hawkins:
m
paul_tyler:
v a hangovers now you mentioned the lifetime guarantee benefit
ramsey_d_smith:
m
paul_tyler:
writers now
ramsey_d_smith:
m
paul_tyler:
on another podcast
ramsey_d_smith:
m
paul_tyler:
that we do called prime life which is
bruno_caron:
m
paul_tyler:
focused on consumers where been interviewing a lot of people focused on longevity and how long will people and can people really live and you know the technology scot you know is changing dramatically
scott_hawkins:
yep
paul_tyler:
people are changing a lot of people are doing the right things exercise diet
bruno_caron:
oh
paul_tyler:
changing
bruno_caron:
oh
paul_tyler:
behavior that it’s just common sense but we’ve got new drugs on the horizon um medical technology is improving dramatically what happens if you know the action estimates of
ramsey_d_smith:
m
paul_tyler:
of our life’s span are wrong the say we live ten years longer what kind of impact does that have with our current generation products as your team looked at this yet yes
scott_hawkins:
we haven’t looked at in terms of annuities now but you know where if you’re looking for a parallel for that scenario look at individual long term care when that product came out there were assumptions about
ramsey_d_smith:
m
scott_hawkins:
longevity and
ramsey_d_smith:
m
scott_hawkins:
utilization as well as interests that were baked into the pricing and while you know they’re on like an annuity you’re paying ongoing premiums uh and those assumptions for longevity those assumptions around utilization didn’t play out the way it was thought when those
ramsey_d_smith:
m
scott_hawkins:
products were first designed
paul_tyler:
eh
scott_hawkins:
there was a lot more utilization than was
ramsey_d_smith:
m
scott_hawkins:
expected there was much stronger increase in a longevity than was
bruno_caron:
yah
scott_hawkins:
expected and as a result if you follow that
paul_tyler:
yeah
scott_hawkins:
space you know that those insurance with those blocks quit writing the business and those that are that had blocks were still in there they’re going back and saying i need a significant rate increase from the insurance commissioners in their respective
bruno_caron:
oh
scott_hawkins:
states and getting pushed back
paul_tyler:
oh
scott_hawkins:
and now think about the v a space when they’re coming up with those imbedded options ten fifteen years ago selling those products there were certain assumptions based on longevity and usual satan and if those don’t play out that
paul_tyler:
m
scott_hawkins:
increases the risk for the insurer because
paul_tyler:
ah
scott_hawkins:
they made the guarantee
bruno_caron:
oh
scott_hawkins:
that you’re gonna be able to do that
paul_tyler:
right
scott_hawkins:
and it leads back to sort of
paul_tyler:
oh
scott_hawkins:
okay what does that do to profit ability and also
ramsey_d_smith:
oh
scott_hawkins:
for capital
paul_tyler:
hey well listen we’re near the top of the
bruno_caron:
oh
paul_tyler:
end of our time
ramsey_d_smith:
yeah
paul_tyler:
bruno any final
ramsey_d_smith:
oh
paul_tyler:
thoughts questions for scott
bruno_caron:
i mean
ramsey_d_smith:
oh
bruno_caron:
i mean in terms of you know where capitals is going where liabilities
ramsey_d_smith:
m
bruno_caron:
are going i think that’s a could be a topic for for another
ramsey_d_smith:
yeah
bruno_caron:
episode but no
ramsey_d_smith:
oh
bruno_caron:
thank you appreciate you coming in and
paul_tyler:
yeah
bruno_caron:
and commenting
ramsey_d_smith:
m
bruno_caron:
on on those those difficult issues
tisa_rabun_marshall:
yes
paul_tyler:
yeah it’s
scott_hawkins:
yeah
paul_tyler:
scott is great you know we always think specifically
ramsey_d_smith:
m
paul_tyler:
about products we don’t really don’t think about the acid the balance for the industry
bruno_caron:
oh
paul_tyler:
you know fascintine topic
ramsey_d_smith:
m
scott_hawkins:
i think that you know and
bruno_caron:
oh
scott_hawkins:
i listen to the show and and the way i view if you’re a distributor if you’re an advisor if you’re a consultant
ramsey_d_smith:
m
scott_hawkins:
you’re absolutely right you’re focused
tisa_rabun_marshall:
oh
scott_hawkins:
on product differences how the playing out and all
tisa_rabun_marshall:
oh
scott_hawkins:
of that but ultimately your client may come back to you and say you know i have this annuity that’s now just been re insured by somebody else i’m trying to understand why things are happening and as an advisor knowing the products knowing how they
bruno_caron:
oh
scott_hawkins:
play out crucial but also understanding what’s going on in the broader market affecting the issue of that annuities is crucial so
paul_tyler:
tis a what do you think
tisa_rabun_marshall:
yes ah well it’s a pleasure to meet you scott thanks for all of the insights and i think we have
paul_tyler:
yeah
tisa_rabun_marshall:
the title of today’s episode
paul_tyler:
ye
tisa_rabun_marshall:
the industry’s balance sheet so wait
bruno_caron:
ye
tisa_rabun_marshall:
paul you just
ramsey_d_smith:
m
tisa_rabun_marshall:
you just came up with
ramsey_d_smith:
m
tisa_rabun_marshall:
it as we were
bruno_caron:
yeah
tisa_rabun_marshall:
as we
paul_tyler:
yeah
tisa_rabun_marshall:
were wrapping up
ramsey_d_smith:
m
paul_tyler:
yeah
ramsey_d_smith:
yeah
paul_tyler:
ramsey
ramsey_d_smith:
yeah so many things because it touches on so many areas of interest
bruno_caron:
oh
ramsey_d_smith:
for me i think just a number of things one is i think we live in a world where
bruno_caron:
a
ramsey_d_smith:
the
bruno_caron:
yeah
ramsey_d_smith:
the difficulty of basically providing the risk coverage and getting the capital capacities under appreciated by the market right and i hope that the big people that are listening to this and other sort of understand how difficult it is to price
bruno_caron:
oh
ramsey_d_smith:
risk and you know and ultimately provide what is critical services for for this country and beyond that you know how much how much third party capital we need to come into the space in order to essentially meet you know are americas need if you will and so i’m very hopeful and excited
bruno_caron:
oh
ramsey_d_smith:
about what the future holds and really appreciate the perspective you gave on how we need to get there
scott_hawkins:
you
paul_tyler:
yeah thank scott for for people who want to learn more about conning get access to your research connect with you what’s the best way
scott_hawkins:
you can go to conning dot
ramsey_d_smith:
oh
scott_hawkins:
com and there will be a link right down to our research which will tell you how to get hold of us either v phone call or
ramsey_d_smith:
m
scott_hawkins:
through email
paul_tyler:
excellent all right well scott we look forward to having you on center stage at our event in new york march
ramsey_d_smith:
yeah
scott_hawkins:
looking forward to that
paul_tyler:
march twenty seventh more details to follow um bruno
ramsey_d_smith:
oh
paul_tyler:
thanks tis a
bruno_caron:
oh
paul_tyler:
thanks ramsey thanks as usual and listen give us feedback and look forward to having you join us again next week for another episode of that annuity show thanks m
scott_hawkins:
yes
bruno_caron:
oh
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