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To watch the full interview, download an audio podcast or to read the full transcript, visit: goodreturns.co.nz/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?
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 midMarch 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.
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.
This is the standard of the Reserve Bank?
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. 10 | ASSET 04 | 2021
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.
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.
Who decided that?
That was your minimum?
The Reserve Bank.
Yes.
