Variable Annuity Products: Responding to a Low Interest Rate Environment. Presenter(s): Amit Ayer

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1 Sponsored by and Variable Annuity Products: Responding to a Low Interest Rate Environment Presenter(s): Amit Ayer

2 VARIABLE ANNUITY ( VA ) PRODUCTS: RESPONDING TO A LOW INTEREST RATE ENVIRONMENT 11 th Annual Equity Based Insurance Guarantee Conference (Chicago) Session 3A: November 16, 2015 ( hours) Amit Ayer

3 Agenda VA landscape Impacts to / Responses of VA writers to low interest rate environment New business Product Profitability Reinsurance markets Divestiture strategies Alternative products Questions and answers 2

4 VA LANDSCAPE

5 YE 2014 Sales Market Share Industry consolidation continues, as ten VA writers accounted for ~80% of sales in 2014 Market share of sales for top 10 VA writers 18% 17.0% Commentary VA sales are projected to drop 1% in 2015 following a 4% decline in % 14% 12% 10% 8% 6% DAC GAAP value of guarantee fees No living benefits SOP guarantees 9.6% 9.4% 9.2% 7.4% 7.3% 6.8% Lincoln s market share is driven by sales of ChoicePlus Assurance Jackson National continues to dominate VA sales Perspective (B and L shares) Elite Access (no living benefit rider) 4.7% 4.5% 4% 3.3% 2% 0% Jackson Lincoln AIG National Life National SunAmerica Source: JP Morgan Market Share Bible Vol. LXIV TIAA-CREF Aegon / Transamerica Prudential Financial AXA Financial MetLife Nationwide Financial Pacific Life 4

6 Sales market share Market share in VA business has shifted significantly as interest rates continue to remain depressed Historical sales market share of top VA writers 60% 50% 40% 30% 20% 10% 0% 13.4% DAC 15.8% 13.2% 2.8% GAAP value of 6.5% guarantee fees 4.5% 18.5% 3.4% 6.1% 5.2% 10.7% 11.4% 12.3% 7.5% 13.9% SOP guarantees 3.7% 7.3% 6.1% 8.1% 6.0% 10.1% 8.6% 13.8% 14.8% 4.7% 7.3% 7.4% 9.6% 9.4% 17.0% Jackson National Life AIG Am Gen/VALIC Lincoln National Aegon/Transamerica Prudential Financial MetLife Source: JP Morgan Market Share Bible Vol. LXIV Commentary In 2011, MET gained significant share as weaker competitors retrenched PRU s share declined in 2011 due to price hikes and benefit cuts; this trend reversed in 2012 as PRU regained share and MET s sales plummeted due to management efforts to limit volumes In 2015, MET is projected to gain market share and PRU is projected to continue to lose market share Jackson National s market share continues to increase, with Lifeguard Freedom Flex becoming best selling GLWB product in market Lincoln has been more aggressively selling VAs since 2013, driving up market share 5

7 AUM Market Share of Assets (3/31/15) VA AUM forecasted to grow 6-7% annually in the long run AUM market share of top living benefit VA writers (3/31/15) 10% 9% 8% 7% 6% 5% 4% 3% 9.1% DAC GAAP value of guarantee fees 7.9% 7.0% SOP guarantees 6.1% Commentary AUM growth in the VA business is heavily dependent on equity market movements but tends to be less volatile due to allocations to fixed income investments At 3/31/15, 72% of VA AUM was allocated to equity and balanced funds (similar to the high point level of 72% reached in 3Q07), with the remaining 28% in fixed income and cash 5.5% 5.3% Although large fixed income allocations help reduce volatility, it becomes more challenging for assets to grow at guaranteed levels in a prolonged low rate environment 3.9% 3.5% 3.5% 2% 1% 0% MetLife Prudential Financial Source: JP Morgan Market Share Bible Vol. LXIV Jackson National Lincoln National AXA Financial AIG SunAmerica Ameriprise Financial Voya / Reliastar Aegon / Transamerica 6

8 IMPACTS TO / RESPONSES OF VA WRITERS TO LOW INTEREST RATE ENVIRONMENT

9 Executive Summary Impacts to and responses of VA writers to low interest rate environment A B Dimension Impact of low interest rate environment VA writer response New business Product C Profitability D Reinsurance markets E Divestiture strategies F Alternative products Maintaining same new business volumes becomes onerous on balance sheet Expectation of rising interest rates has allowed for VA writers to consider developing riskier products at same prices De-risking of VA product designs, benefits and fees due to persistent low interest rate environment Highlights lack of a stable relationship between reserves and capital Product de-risking has increased GAAP ROEs to low to mid teen levels for new business Higher new business margins from de-risked products have opened up VA reinsurance markets In conjunction with regulatory uncertainty, low interest rates have helped drive divestiture strategies of VA blocks Decelerate VA sales and pivot distribution network to alternative products Curb distribution of VA sales until interest rates mean revert to long term levels Maintain rational products in market, with appropriate equilibrium between benefits and fees Fundamental VA product de-risking mechanisms have been implemented into current products Greater consistency in product features over last 2-3 years NAIC is investigating changes to harmonize statutory framework for VA products VA writers are not appropriately risk-adjusting new business ROEs, since cost of hedging is not incorporated in net income VA writers are actively engaged in VA reinsurance deals Recent M&A activity around VA blocks have involved foreign acquirers Provide compensation to policyholder in exchange for product (exchange offer) Increased sales of FIA w/ GLWB riders and Deferred Income Annuities Impact of response TBD Significant impact to VA writer Insignificant impact to VA writer 8

10 New business IMPACT 1: Maintaining same new business volumes becomes onerous on balance sheet Low interest rate environment causes significant impacts to balance sheet 1 Dimension Statutory Reserves / Capital 2 Claims 3 4 Impact of Low Interest Rate Environment While statutory reserve levels are relatively interest rate insensitive, lower rates will increase volatility of required capital requirement Increase in GAAP reserves (FAS 157) from claims being discounted at lower rates Cost of hedging Higher cost of hedging as options become more expensive Assets supporting fixed funds 5 Profitability Increased difficulty in supporting rates in fixed account due to spread compression in general account Lower ROEs due to lower net income from higher reserve levels Downstream Impacts Higher cost of capital Limited opportunities to earn returns on other products Lower net income Reduces incentive to fully hedge interest rates Disintermediation risk Opportunity cost of earning higher ROEs on other products Balance Sheet Impact Significant impact to balance sheet Insignificant impact to balance sheet 9

11 VA Sales ($bn) YOY sales change New business RESPONSE 1: Curb distribution of VA sales until interest rates mean revert to long term levels (1/2) VA Sales vs. 10-year Treasury rate % 15% 10% 5% 0% -5% -10% -15% -20% -25% DAC Total Industry Sales ($BN) (left) GAAP value of guarantee fees SOP guarantees 10-year Treasury (mid-year) (right) 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Industry sales have dropped steadily over and are expected to fall marginally (1%) in 2015 Commentary Weak empirical correlation between VA sales and interest rates While not primary driver, low interest rate environment has contributed to drop in VA sales (supply-side effect) Onerous impacts of low interest rate environment has caused conscious de-emphasis on distribution of VA products VA sales expected to marginally decrease (year-over-year) in 2015, as rates have fallen further 10

12 New business RESPONSE 1: Curb distribution of VA sales until interest rates mean revert to long term levels (2/2) U.S. 10-year Treasury Security Yield: A Long Downward Trend, * DAC Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a full decade SOP guarantees U.S. Treasury yields plunged to historical lows in 2013, rebounded, and then fell again 2.0 GAAP 1.0 value of guarantee 0.0 fees Commentary We have been in a low interest rate environment for the last decade Interest rates have not recovered to pre-financial crisis levels Artificially low interest rate environment expected to continue through 2015 and 2016 Recession * Monthly, constant maturity, nominal rates, through September 2015 Sources: Federal Reserve Bank at National Bureau of Economic Research (recession dates) 11

13 New business IMPACT 2: Expectation of rising interest rates has allowed VA writers to consider developing riskier products at same prices Yield (%) U.S. interest rate forecast: The end of the Fed s Quantitative Easing program in 2014 and a stronger economy have yet to push longer-term yields higher F 16F 17F 18F 19F 20F 21F Forecast Year Commentary Normalization of interest rates is unlikely until 2018 or later, a decade after onset of global financial crisis Impact of higher expectation of interest rates on VA products: Lower volatility in required capital / cost of capital Lower present value of projected claims Lower cost of interest rate hedges Stronger risk-adjusted ROEs VA writers betting on rising interest rates in 2016 have considered developing more generous products at same prices to increase sales and improve market share Sources: Blue Chip Economic Indicators 12

14 Total VA Fee (M&E + Rider + Fund) New business RESPONSE 2: Maintain rational products in market, with appropriate equilibrium between benefits and fees Benefit features vs. fees of top selling B-share GLWBs 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% Lincoln National ChoicePlus Assurance Lifetime Income Advantage 2.0 Pacific Life Pacific Choice Core Income Advantage Select Lincoln National American Legacy Lifetime Income Advantage 2.0 Prudential Financial Premier VA Highest Daily Lifetime Income 3.0 Nationwide Financial Destination 2.0 Lifetime Income Rider TransAmerica Variable Annuity Retirement Income Choice 1.6 Jackson National Perspective II LifeGuard Freedom Flex 1 Prudential Financial Premier VA Defined Income Benefit Benefit richness is composite score based on weighted average of following variables: Withdrawal rates by age Roll-up rate Roll-up length Step-up rate / frequency Asset allocation criteria Fund selection / fund types 0.0% Benefit Richness 1. Based on 6% roll-up option (5%, 6%, or 7% options offered) Commentary While outliers exist, top selling GLWBs generally maintain a correlation between benefit richness and fees All GLWBs are not de-risked, in particular JNL s LifeGuard Freedom Flex, which affords wide array of investment options and option of a 7% roll-up rate Of top 25 GLWB s, all offer a roll-up rate, exception is Pacific Life s Core Income Advantage Select rider 5% lifetime withdrawal rate starting at age 65 is industry norm Annual step-up is industry norm; exception is Prudential s Highest Daily Lifetime Income 3.0 rider JNL, PRU, MET and LNC have been active in the L-share market, but B- share design is expected to be dominant design 13

15 Product IMPACT 1: De-risking of VA product designs, benefits and fees due to persistent low interest rate environment VA product de-risking cannot fully mitigate impact of low interest rate environment 1 Dimension Impact of Low Interest Rate Environment Product de-risking mitigation Statutory While statutory reserve levels are relatively interest rate Higher fees and lower claims will decrease projected Reserves / insensitive, lower rates will increase volatility of required Accumulated Deficiencies, lowering statutory reserve and Capital capital requirement Total Asset Requirement levels 2 Claims Cost of hedging Assets supporting fixed funds Increase in GAAP reserves (FAS 157) from claims being discounted at lower rates Higher cost of hedging as options become more expensive Increased difficulty in supporting rates in fixed account due to spread compression in general account Profitability Lower ROEs due to lower net income from higher reserve levels Reduced benefit and higher fees will reduce GAAP reserve Prescribed allocation to volatility managed funds will mitigate volatility in GAAP reserve NA NA Streamlining benefits and fees generates higher ROEs 14

16 Product RESPONSE 1a: Fundamental VA product de-risking measures have been implemented into current products (1/2) De-risking measures Description 1 Higher fees Increase M&E and rider fees of product 2 Lower benefits Reduce roll-up rate Move to simple interest for roll-up rate Eliminate or reduce frequency of reset feature Reduce guaranteed withdrawal rates at attained ages 3 Stricter asset allocation limits Higher mandatory minimum allocation to fixed / balanced accounts 4 Mandated automatic subaccount rebalancing Reduces ability of policyholders to time the market 5 Reduction in fund options Restriction in number of equity funds available in sub-accounts 6 Increased use of index funds Increased use of tracker equity and bond funds in subaccounts 7 Shifting of hedging costs to customers 8 Augmented hedging strategies Partial shifting of hedging costs to customers by requiring allocations to funds that embed interest rate hedging within fund Increased use of volatility hedging Adding macro hedges to protect against steep interest rate drops 15

17 Product RESPONSE 1a: Fundamental VA product de-risking measures have been implemented into current products (2/2) Macro view of VA product de-risking (pre-crisis and post-crisis) Prior Feature (2008) Fee Accum. Current Feature Fee Accum. AMP SecureSource 0.65% NA 6.0% SecureSource4 1.25% 6% 3.0%-6.0% AXA GWB for Life 0.65% 7.0% Withdrawal Withdrawal 4.0%- 7.0% GMIB 1.15% 4.0%- 8.0% 4.0%-8.0% Lifetime 5.0%- HIG Income Builder 0.55% NA Not actively selling VAs 8.0% Selects i4life 3.0%- Lifetime Income LNC 0.40% NA Advantage 6.0% Advantage % 5% 3.5%- 5.0% Principal Plus MFC 0.40% 5.0% 5.0% Not actively selling VAs for Life MET GMIB Plus 0.80% 6.0% 6.0% Flexchoice 1.20% 5% % 4.0%- 7% Lifetime NFS L-Inc 0.70% 7.0% 1.20% 7% 3.0%-6.0% 7.0% Income Rider PL SecurePay 0.70% 7.0% 7.0% SecurePay % 5% 5.0% 5.0%- HD Lifetime 3.0 PRU HD Lifetime % 7.0% 1.00% 5% 2.9%-5.9% 8.0% rider Commentary Most insurers have raised fees and lowered guarantee levels in recent years to mitigate the impact of low interest rates While a handful of companies (Aegon, MetLife) have reduced fees and introduced more generous benefits recently, overall terms/conditions remain rational and prices/guarantee levels offered currently are significantly more conservative than those offered prior to the financial crisis Historically, price competition in the VA business has been pro-cyclical, more rational following market downturns and aggressive after recoveries Source: JP Morgan Market Share Bible Vol. LXIV 16

18 Product RESPONSE 1b: Greater consistency in product features over last 2-3 years Market share of sales for top selling living benefit variable annuity contracts in Company Contract Rank Rank Mkt. Sh. Mkt. Sh. 2 2 Jackson National Perspective II 7.0% 7.6% 4 3 Jackson National Perspective L 3.6% 4.0% NA 5 Prudential Premier B series NA 3.4% Financial 5 6 Ameriprise RVS RAVA5 2.8% 2.8% Advantage 12 7 AXA Equitable Ret. Cornerstone 1.8% 2.6% 13.0 (B) 6 8 AIG/VALIC Portfolio Director 2.7% 2.6% 9 9 AIG/AmGen Polaris Platinum III 2.1% 2.6% Nationwide Destination 2.0 (B) 1.8% 2.3% Transamerica TA Variable Annuity B Thrivent Flexible Prem. DVA % 2.2% 1.9% 2.1% Commentary Product features of most popular VA products have stayed relatively consistent through last 2-3 years, with exception of marginal increase in fees for some products since 2012 Consistency in product features evidenced by relatively stable market share of top selling living benefit products 1. TIAA-CREF s Retirement & Supplemental Retirement and JNL s Elite Access both do not have living benefits and were excluded from list 17

19 Product IMPACT 2: Highlights lack of a stable relationship between reserves and capital Illustrative VA portfolio Total Asset Requirement (TAR) Calculated as the larger of: Greatest post-tax deficit in the worst 10% of scenarios in a stochastic simulation Results from the C3P2 Standard Scenario, which prescribes a market decline and actuarial assumptions Differs from AG 43 Standard Scenario Required Capital Reserves Reserves Boundary between reserves and capital Calculated as the larger of: Greatest pre-tax deficit in the worst 30% of scenarios in a stochastic simulation Results from the AG 43 Standard Scenario, which prescribes a market decline and actuarial assumptions Differs from C3P2 Standard Scenario for TAR Volatility in required capital exacerbated by low interest rate environment Different frameworks used to calculate TAR and reserves Interest rate sensitivity of TAR and reserves is not consistent (reserves are largely insensitive to interest rate changes) Impact of differential sensitivity magnified in low rate environment 18

20 Product RESPONSE 2: NAIC is investigating changes to harmonize statutory framework for VA products The NAIC enacted its C3 Phase II ( C3P2 ) standard for capital charges in 2006, followed by AG43 in 2009 Managing competing objectives of GAAP and statutory frameworks in low interest rate environment has been a driver for the use of captives for VA products Recognizing the challenges posed by statutory capital management, NAIC commissioners have pragmatically tried to accommodate the use of captives, while upholding sound standards of prudential supervision The NAIC commissioned an initiative to identify changes to the statutory framework that will mitigate or remove the motivation for insurers to use captive reinsurance and provide an incentive to recapture exposures into the primary entities 19

21 VA GAAP ROE Profitability IMPACT: Product de-risking has increased GAAP ROEs to low to mid-teen levels for new business Illustrative VA GAAP ROE In-force vs. new business 14% 12% Commentary Product de-risking due to low interest rate levels has created healthier margins for new business 10% 8% 6% 4% 8% 5% New business ROEs significantly higher than in-force ROEs due to de-risking strategies Common to see reported GAAP ROEs in low to mid teens (%) for new business, largely driven by derisked product features and increasing equity markets 2% 0% GAAP ROE in-force GAAP ROE new business 20

22 VA GAAP ROE Profitability RESPONSE: VA writers are not appropriately risk-adjusting new business ROEs, since cost of hedging is not incorporated in net income Illustrative VA GAAP ROE Waterfall 14% 12% 10% 8% 6% 4% 2% 0% 8% GAAP ROE inforce 5% New business ROEs significantly higher than inforce ROEs due to de-risking GAAP ROE new business Cost of interest rate hedging is not reflected in net income, thus overstating riskadjusted return -3% Risk-Adjusted GAAP ROE 1% Risk-Adjusted GAAP ROE (reflecting lower Rho hedge target) Many companies have lowered Rho hedging target in current interest rate environment, due to cost 11% Final riskadjusted GAAP ROE new business Commentary Interest rate hedging is more expensive when rates are low Put options are more expensive Pay-fixed / receive-floating swaps lose market value Difference between real-world and risk neutral rates becomes larger (one approximation for cost of hedging) Net income used in calculating ROE does not reflect cost of hedging; thus reported ROEs do not provide a riskadjusted return Risk adjusting reported ROEs reduces ROEs by 2-3% VA writers may opt to significantly reduce or eliminate interest rate hedging if rates fall further 21

23 Reinsurance markets IMPACT: Higher new business margins from de-risked products have opened up VA reinsurance markets (1/2) Markets 1 Reinsurers 2 Banks Description Highly rated reinsurers are increasingly inquisitive about VA risks due to following reasons: Improved transparency around policyholder behavior frameworks Improved transparency around GAAP/IFRS profitability targets Industry emphasis on sustainable products with healthy risk-adjusted profitability margins Increased potential for diversification High margins of new business are primary driver of VA rider coinsurance deals Union Hamilton / Wells Fargo are largest reinsurer of VA riders Other banks are entering market of fully coinsuring VA rider risks (both capital market and actuarial risks) 4-5 banks in market are capable of coinsuring VA rider risks Several VA reinsurance deals are currently in the works 22

24 Reinsurance markets IMPACT: Higher new business margins from de-risked products have opened up VA reinsurance markets (2/2) Time range Supply Description Major products s GMDB reinsurance was commonplace (CIGNA was one of original GMDB reinsurers) GMDB Complexity of reinsurance VA reinsurance dried up with dot com recession, as reinsurance premiums increased drastically Reinsurers entered market as equity markets were rising and interest rates remained at relatively high levels Reinsurance market ceased to exist during global financial crisis GMDB, GMIB GMIB, GLWB GMIB, GLWB Reinsurance market grew slowly post financial crisis GMDB, GMIB, GLWB 6 Present Banks and newer reinsurers have expressed interest in both capital market risks and actuarial risks in VAs Higher margins from new business has increased the supply of reinsurers to (1) hedge capital market risk and / or (2) coinsure all the risks in VA products GMDB, GMIB, GLWB 23

25 Reinsurance markets RESPONSE: VA writers are actively engaged in reinsurance deals (1/3) Structure Risks covered Pros to cedant Cons to cedant Examples in marketplace 1 Quota share of rider only All VA risks (actuarial and capital market) Higher profitability metrics (GAAP ROE / Statutory IRR) since all (or large portion) of M&E fee is retained, while riskiest part of contract (rider) is reinsured De-risking of balance sheet If rider fee does not have sufficient margins/pads, reinsurers will have difficulty meeting profitability targets No expense allowance to help fund acquisition expenses / commissions, since expenses and commissions are normally allocated to M&E fee Union Hamilton (Wells Fargo) 2 Capital market reinsurance with retrocession of actuarial risk All VA risks (actuarial and capital market) Bi-furcation of capital market reinsurance with actuarial reinsurance via retrocessionaire Reinsurance premium pricing is typically not as efficient as full risk transfer / quota share option Majority of banks entering VA reinsurance market Most common industry practice 24

26 Reinsurance markets RESPONSE: VA writers are actively engaged in reinsurance deals (2/3) Illustrative Key considerations Use of intermediary reinsurer is necessary if reinsurer is not legal insurance / reinsurance entity (e.g., investment bank) 50% - 75% coinsurance seen in industry Distribution Admin/ Surrender charges Commissions Policyholders Single Premium Cedant General Account GLWB claims Structured / Dynamic Hedging x% GLWB claims Annual Reinsurance Premium x% of rider fee Presence of trust is negotiated between cedant and reinsurer Reinsurer Separate account reinsurance reserve Modified coinsurance basis M&E Fee Rider Fee Cedant Separate Account Revenue sharing 12b-1 fees Registered Investment Company 25

27 Reinsurance markets RESPONSE: VA writers are actively engaged in reinsurance deals (3/3) Illustrative All underlying liabilities transferred to captive Definition of risk transferred Ins Co ModCo Insurance Captive Reins Premium Reins Claims Reinsurer Captive Retrocession Regulation 114 Trust: held on-shore by cedant due to agreement being ModCo Reinsurer Reinsurance of actuarial risks 26

28 Divestiture strategies IMPACT: In conjunction with regulatory uncertainty, low interest rates have helped drive divestiture strategies of VA blocks Additional capital requirements Lower ROE New capital rule uncertainty Regulatory Implications New regulations Reduce investment returns Increased regulation Commentary Uncertainty in regulatory implications around capital levels has impact on M&A activity VAs are considered noncore business line by certain regulatory bodies Impact dividends/ share buybacks Impact M&A activity Low interest rate environment is just one of the drivers of M&A activity Increased rating agency scrutiny Pertains to low interest rate environment Impact capital requirements / management 27

29 Divestiture strategies RESPONSE 1: Recent M&A activity around VA blocks have involved foreign acquirers Date Announced Target Name Acquiror Name Value ($M) Price / Book Value Aug-15 3, x Jun-14 5, x Sep x Dec-12 1,550 NA Dec-12 1, x Commentary Japanese acquirers have dominated M&A market over last 18 months Even lower interest rate environment in Japan Lack of alternative investment vehicles in Japan for capital Difficulty in growing reserve / capital base due to declining population in Japan Diversification into US markets / demographics Over , VA transactions were dominated by PE firms Source: SNL Financial, Company Filings, J.P. Morgan Research 28

30 Older designs Modern designs Divestiture strategies RESPONSE 2: Provide compensation to policyholder in exchange for product (exchange offer) Assessment of exchange offer target Guaranteed Minimum Death Benefit Guaranteed Minimum Accumulation Benefit Size / Homogeneity Mitigating adverse selection Variance in economic vs perceived value Overall assessment for offer target Commentary Subject to anti-selection if policyholders have non-uniform health status Typically have low perceived value compared to economic value, in particular for enhanced death benefits Enhanced death benefits are excellent offer targets Relatively homogeneous, with low expected lapse rates Low perceived value compared to intrinsic value Benefits that are past surrender charge and are close to expiry are excellent offer targets Guaranteed Minimum Income Benefit Guaranteed Minimum Lifetime Withdrawal Benefit Not homogeneous, as older regimes require election of annuitization not present in modern designs Target older regimes of income benefits that require election of annuitization, as perceived value is likely lower compared to more recent regimes Variety of designs makes product heterogeneous Highly lapse supported product makes mitigating adverse selection difficult High economic values (rich features) and high perceived values (lifetime income desired) make for poor offer targets Significant characteristics across dimension Some characteristics across dimension Minimal characteristics across dimension 29

31 Alternative products IMPACT AND RESPONSE Increased sales of FIA w/ GLWB riders and Deferred Income Annuities Impact Decelerate VA distribution Pivoting of distribution networks to alternative insurance products Response FIA w/ GMWBs Growing sales with strong guarantees Book value accounting benefits Longer surrender charges & some with MVAs s VAs Less visible fees vs. VA SPIAs & DIAs (IAs) DIAs gaining in sales, with more companies offering With less equity accumulation potential in VAs, increased appeal of IAs with lower level of fixed accumulation 30

32 APPENDIX

33 Product IMPACT 2: Highlights lack of a stable relationship between reserves and capital Total statutory funding required MAX Total Asset Req. (C3P2) MAX Difference, if positive, is the RBC C3 charge Reserves (AG43) MAX C3P2 Standard Scenario Amount C3P2 Stochastic Amount AG43 Stochastic Amount AG43 Standard Scenario Amount Weighted avg. Weighted avg. CTE 90 Best-efforts C3P2 run reflecting hedge rebalancing CTE 90 Adjusted C3P2 run not reflecting hedge rebalancing CTE 70 Best-efforts AG43 run reflecting hedge rebalancing CTE 70 Adjusted AG43 run not reflecting hedge rebalancing Legend: TAR Reserves Standard scenario 32

34 Product IMPACT 2: Highlights lack of a stable relationship between reserves and capital AG43 Stochastic C3P2 Stochastic Tail measure CTE 70 Equity scenarios Interest rate scenarios Reflection of hedging E-factor : reflection of hedging effectiveness Behavioral assumptions Revenue sharing reflection Diversification Either pre-packaged scenarios (e.g., from the AAA) or alternative real-world scenarios meeting specified calibration criteria No explicit rules in particular, the long-term mean reversion parameter is unspecified Weighted average (based on the E factor ) of two separate runs: Best-effort : reflects the company s actual hedging practices, with rebalancing Adjusted : currently-held hedges are run off, but no hedge rebalancing is permitted 30% to 70% 100% if hedging increases reserves Prudent best-estimate behavioral assumptions 30% to 90% 100% if hedging increases TAR Revenue sharing reflected based on company expectations subject to limitations on non- guaranteed amounts Allows for full in-force diversification Tax Treatment Pre-tax Post-tax 33

35 Product IMPACT 2: Highlights lack of a stable relationship between reserves and capital AG43 Standard Scenario C3P2 Standard Scenario Standard scenario measure Equity scenarios Interest rate scenarios Reflection of hedging Greatest present value of accumulated net revenue ( GPV ANR ) Immediate 13.5% decline 0% returns for the first year 4% return from years % return from year 6 onward Locked-in rate specified by the SVL constant throughout projection No consistency with CTE discount rates Immediate 20% decline 0% returns for the first year 3% return from year 2 onward Specified as 10-year UST + 50 bps constant throughout projection No consistency with CTE discount rates No hedge rebalancing permitted; all currently-held hedges are liquidated after one year Behavioral assumptions Revenue sharing reflection Prescribed, often unrealistic assumptions Some differ from C3P2 SS assumptions Revenue sharing limited Prescribed, often unrealistic assumptions Some differ from AG43 SS assumptions Diversification Conducted only on a seriatim basis Allows for full in-force diversification Tax Treatment Pre-tax Post-tax 34