GRTV

Lifetime 2.0

Philip Macalister interviews Ralph Stewart MD and founder of Lifetime Income about the journey to Lifetime 2.0.

Six years ago, Ralph Stewart had the ambitious goal of setting up NZ's first variable income business. Lifetime Income was aimed at giving investors a guaranteed retirement income for life, however long they lived. Last year, they were forced to do a capital raise, $15 million was the minimum needed, $22 million the goal, but that didn't happen. Now, it's time for Lifetime 2.0. Tell me, how did it all start? The business was going well. You'd raised capital a few times. You had sales which exceeded expectations. Then what happened?

If we can take this back to June 2019, between June and December the business really started taking off, $15, $20 million worth of sales per month.

And low interest rates were a driver?

Very much so, and that's a twosided sword for us. One is obviously that complicates the guarantee, but also acts as a sales driver, so you've got to find the balance. During June and December, we were recalibrating our variable annuity (VA) to recognise low interest rates and introduce a quote system and a variable rate process. Previously, we used a rate card, but with low interest rates, we needed a rate per person. That was going on while sales were growing fast, and the recalibration was a bit slow. So during June and December, we challenged our solvency.

We solved that by raising capital from shareholders in January '20. We had the big period, June to December '19, and were pretty excited at that point. We were flying with the right amount of capital, good solvency, good surplus of solvency capital. Covid came along. That challenged, again, our hedging. VAs require you to hedge risk, both mortality and investment. The volatility from Covid mid- March was severe. We stood up well, but we were targeting 80% hedge effectiveness. We came in at 60%, which created noise in the solvency standard.

This is the standard of the Reserve Bank?

Yep. We were nervous, because back in March '20, you don't know what's going to happen in April. We thought we'd better shore things up further and went to Hanover, and during lockdown we reinsured the business. We had some volatility experience, we had some reinsurance experience, and we had some rapid growth experience. Put all three together, and it indicated we probably should look at capital a bit differently. We talked to the Reserve Bank about that, who were very cooperative and helpful. Between April and September ‘20 with the new information we had we reviewed the solvency standard and the process. It was decided that more capital was needed.

Who decided that?

The Reserve Bank.

So what was the change?

Effectively the new information. Having observed how the standard worked with more volatility, with relatively rapid growth June to December '19, and the inclusion of reinsurance, the new factors that the standard hadn't really encountered before.

This standard was created for Lifetime? At that stage, was that standard correct, or did it need to change?

I think it was the best it could have been when we started out. The reinsurance data and some rapid growth identified that probably we could do things a bit differently in the standard.

Did the standard get reviewed?

It did.

And what happened?

It was agreed with the Reserve Bank that we should hold more capital, both retrospectively and looking forward.

To recognise that period when we had the big growth, to recognise the impact that had on the total volume they determined we had to have $15 million, $10 million more than the standard.

That was your minimum?

Yes.

You entered the market for $22 million, was your goal.

We were holding $15 million.

So plus another $15 million, was $30 million. Going to the market for capital was time-consuming. So, we looked forward for the next five years and determined how much capital we'd need for a five-year period from the period at which we raised the $15 million. We added seven to get to $22 million, and that would have covered us for the next five years.

You weren't successful raising that capital?

We were not.

Was that capital amount that the Reserve Bank prescribed, fair?

I think in the context of the recent experience of the period June to December '19, the volatility of Covid and the reinsurance, yes. What I discovered was that capital markets were not so keen on regulated capital guarantee products.

Is that because it's regulated?

I think, uncertainty. We discovered some information that we didn't know in 2015, which we knew in 2019. From an investor's perspective … what else do you not know that you might need to know?

You talked to a number of organisations, and they were quite keen, but you couldn't get them across the line?

We hired Forsyth Barr – they were the lead manager for the raise. Shareholders contributed about $6 million. We went through countless rounds, but the other 10 didn't emerge.

What happened then?

We looked at every option to continue. We tried four different things. The regulators, I can't use the word helpful, but were cooperative. First, we looked at, could we mutualise the VA?

We worked through that process, and it didn't make a lot of sense, so we didn't pursue that. We sat down with the FMA and our lawyers, and looked at, could we convert it into a defined benefit superannuation scheme? There are aspects that may have made that possible, but it probably wasn't the best protection for policy holders.

Then we thought about it differently again. We built an allocated pension product, which is nine-tenths of a VA, put it to the VA policy holders, and 80% said, "We like it."

Tell me what's happened now.

So 80% of the old investors in the Lifetime Income Fund came across into the new product.

How much is that in terms of dollar value?

The old VA hit about $129 million. There's now $98 million in the new fund.

What was the threshold you needed to make it work?

We needed more than 70%. We got about 80%.

But the business was built around a guaranteed income for life, no matter how long you lived.

Yes.

You can't do that anymore?

We can't. There's no implicit guarantee. What we do is we calculate an annuity factor per person.

Under the old scheme, you effectively developed an annuity factor for the fund.

How important was it to have that guaranteed element to it? Did you need to do that at the start?

In hindsight, you wonder. If we knew what we know now, we might've gone straight to the …

You might have gone straight to Lifetime 2.0?

Yes.

It's easy to look at it in retrospect, but were there factors which made this unforeseeable?

The intention was to meet the need. How do I get guaranteed income for life? Between 2013 and 2016, we did lots of R&D. There was no doubt at that time, the VA was the best option.

We deconstructed, and we built it for a KiwiSaver environment. I think with what we knew then, it was the Rolls-Royce.

What we didn't anticipate was lower interest rates and capital volatility.

Yeah. It's not the Rolls-Royce now, but it's not a Holden either.

I'd say it's the Bentley.

One of the goals when you set up this business was to prove the concept of annuities in the market.

Yes.

Do you think you've done that?

I think we set this up to meet the need, which is regular, safe retirement income for retired people. The VA was one way of achieving this. The need remains. We found another way of doing the same thing.

Also, one of your goals for the original business, was trying to work with KiwiSaver providers? Does the new fund enable you to do that?

It does. We're at a bit of a crossroads, and I think it's going to be exciting. As you know MBIE and, I guess, through the FMA, have effectively outlined what has to be on a KiwiSaver statement, relative to how you project a fund balance and how much income that might produce in the future. That's pretty static. I think it's 2.5% return after age 65, and everyone dies when they're 90. It just won't work. So, the opportunity to do that properly with some science, some recognition for ageing and individual situations, is huge.

Where to now for Lifetime? You've got your new, I call it 2.0 out there, but you call it the next generation Lifetime Fund.

Look, it was tough going to our policy holders and saying, "Listen, the guarantee that you bought last year can no longer apply."

Customer loyalty has been outstanding. We’ve got to now serve that customer loyalty.

Well, all the best, Ralph. Fascinating story.

Thank you.