Annuity reinsurance is useful for companies to manage annuity risk. This presentation I created for the Society of Actuaries 2013 Annual Meeting in San Diego. I discuss motivtion, opportunites and strategies for annuity reinsurance. I present a numerical case study on coinsurance and longveity swaps to mitiage longevity risk.

1. 2013 SOA Annual Meeting – San Diego
PD 60 - Annuity Risk Strategies
Annuity Reinsurance
Michael Frings, FSA, MAAA
Vice-President and Senior Actuary, Global Financial Solutions
RGA Reinsurance Company
2013 SOA Annual Meeting - PD 60 - Annuity Risk Strategies | October 20, 2013

2. Table of Contents
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 Motivations for Annuity Reinsurance
 Opportunities for Annuity Reinsurance
 Annuity Reinsurance Strategies
 Longevity Swap Case Study
 Summary

3. Motivations for Annuity Reinsurance
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4.  Premiums/Deposits
 Flexible
 Single
 Crediting Approach
 Fixed
 Declared Rate
 Indexed
 Variable/Unit-linked
 Payout Period
 Deferred
 Immediate
 Extra Benefits
 GMDB, GMIB, GMAB, GLWB,
etc.
Features & Motivations
Key annuity features…
4
Key reinsurance motivations…
 Support new business
 VIF monetization
 Release capital
 Reduce risk

5.  Movement/Actions…
 in financial markets,
 in competitive landscape,
 by annuity owners, and/or
 by agents/representatives
 Aided by…
 Product design weak points
 Ins co management decisions
 Result in Missed Expectations of Ins Co Financial Performance
 Under Statutory, US GAAP, IFRS, Economic, Management reporting
Annuity Risks in General Terms
Manifest in a Cascading Effect of…
5
“Isn’t It Just an Annuity…How Risky Can Those Be?...”

6. Risks in Specific Terms
To Name a Few…
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 Interest Margin/Spread
 Asset Impairment/Default
 Equity
 Hedging
 Longevity
 Expense
 Mortality
 Taxation
 Accounting Volatility
 Valuable, throw-away options
 such as additional deposits
 Liquidity/’Run-on-bank’
 Competition ‘Frenzy’
 Social Media
 Awake the Sleeping Annuity Owner
 Sophisticated Buyers
 Reputation
 Re-pricing Limitations
 Administrative Systems
 Valuation Systems
 Projection/Pricing Systems
 Compliance/Fraud
 Insurance Company Management
 Regulatory Actions
 Rating Agency Actions
Magnified by mis-estimation, mis-prioritzation of risks

7. Opportunities for Annuity
Reinsurance
7

8.  Measuring Risks
 Differences in incidence/frequency.
 Differences in amounts
 Differences in length
 Reporting Risks
 Financial Accounting: US GAAP, IFRS, Local Regulatory (e.g. US Stat)
 Management Accounting: Operating vs Non-operating earnings
 Pricing Risks
 Metrics vary: MCEV, ROE, ROI, ROA, Cost of Funds, Surplus Contribution, etc.
 Regulating Risks
 Local regulatory requirements vary across jurisdictions
 Rating Risks
 Rating agency ratings are important to many—but not all
 Capital requirements diverge: S&P, Moody’s, Fitch, AM Best, etc.
Opportunities Abound!
Often found when a ‘difference in view’ appears in…
8

9. Annuity Reinsurance Strategies
9

10.  Location, location, location…
 Onshore, offshore
 Captive
 Complex mix including SPVs, etc.
 Traditional Forms
 Coinsurance—either with/without funds withheld
 Modified coinsurance
 Combination of above
 Less-Traditional Forms
 Non-insurance, financial guarantees
 Swaps—either as insurance or derivatives
Annuity Reinsurance Strategies
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Next, a case study in longevity swaps to manage annuity risks…

11.  Client
 A large corporation in the US
 Generous defined benefit program upon retirement
 Plan closed: all participants in payout period
 Risks
 Asset default/impairment
 Re-investment
 Longevity
 Characteristics
 Mix 33%/67% M/F
 Ages 70/67 M/F
 $2,000 monthly annuity benefit
 20,000 starting lives
 1% annual benefit escalation
Longevity Swap Case Study
Assume the following…
11
$-
$5
$10
$15
$20
$25
$30
$35
$40
$45
AmountsPaid(inmilions)
Years
Gross Benefit Payments: Expected
Expected Benefits

12.  Coinsurance
 Cede all risks
 Pay upfront consideration
 Markets: Who offers, Who buys
 Characteristics
 Pros/Cons
Longevity Swap Case Study
Two key ways to manage the longevity risk…
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 Longevity Swap
 Cede longevity…keep investment risk
 No upfront payments—net settle
 Market: Who offers, Who buys
 Characteristics
 Pros/Cons
Assumptions:
5% loading of expected benefits
Ceding co discount rate 8%
Reinsurer discount rate 6%
$-
$0.5
$1.0
$1.5
$2.0
$2.5
$-
$5
$10
$15
$20
$25
$30
$35
$40
$45
2014
2019
2024
2029
2034
2039
2044
2049
2054
2059
2064
NetAmounts(inmillions)
GrossAmounts(inmilions)
Years
Cash Flows: Expected
Expected Benefits (floating leg)
Reinsurance Premium (fixed leg)
Net Payments to Reinsurer
$368
$460
$93
$-
$100
$200
$300
$400
$500
Millions
Coinsurance: Initial Values
Ceding Company Liability
Coinsurance Initial Consideration
Net Payment Over Liability Held
A
sizeable
out of
pocket
expense
Payment
deferred
—upside
potential

13. Longevity Swap Case Study
Application of a longevity swap…
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$-
$5
$10
$15
$20
$25
$30
$35
$40
$45
2014 2019 2024 2029 2034 2039 2044 2049 2054 2059 2064
AmountsPaid(inmilions)
Years
Gross Longevity Swap Cash Flows:
Stressed
Expected Benefits
Benefits at 90% qx
Benefits at 110% qx
Benefits at 1.5% improvement
Benefits at -1.5% improvement
Benefits at 90% qx, 1.5% improvement
Benefits at 110% qx, -1.5% improvement
Reinsurance Premium
 Benefits typically settle monthly
 Benefits are especially sensitive to mortality
improvement assumption
 Collateral as a negotiated item
$(8)
$(6)
$(4)
$(2)
$-
$2
$4
AmountsPaid(inmilions)
Years
Net Longevity Swap Cash Flows:
Selected Stressed
Expected
Benefits at 90% qx
Benefits at 110% qx
Benefits at 1.5% improvement
Benefits at 90% qx, 1.5% improvement

14. Longevity Swap Case Study
Case study present values…
14
#
Ceding Company Present Values
@ 8%
Before
Reinsurance
After Swap
Benefits at
90% qx
Benefits at
1.5%
improvement
Benefits at
90% qx, 1.5%
improvement
1 PV(expected benefit payments) $368
2 PV(actual benefit payments) $368 $368 $376 $382 $391
3 PV(reinsurance premium) $386
4 PV(Net payments to reinsurer) $18 $10 $4 $(5)
5 Ratio of 3 to 2 5.00% 2.22% -0.24% -2.90%
 Key pricing parameters:
 Base mortality table, future mortality improvement, premium loading,
collateral
 Arriving at a ‘meeting of the minds’ on terms is not easy
 Longevity swaps a very good way to manage block longevity risk
Takeaways…

15. Summary
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16.  Motivation
 Many motivations
 Opportunities
 May appear when there is a difference in view
 Strategies
 Both traditional & non-traditional approaches abound
 Many variations not discussed here
 Case Study: Longevity
 Longevity swaps offer an efficient way to mitigate future risks of annuitants living
beyond expectations
 A good fit for some opportunities
What We Covered
Annuity Reinsurance Applications…
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17. Thank you for your attention.
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