SOA 2013 Life & Annuity Symposium May 6-7, Session 78 IF, Life Product Update - Accumulation Market. Moderator: Joseph Kordovi, FSA

Transcription

1 SOA 2013 Life & Annuity Symposium May 6-7, 2013 Session 78 IF, Life Product Update - Accumulation Market Moderator: Joseph Kordovi, FSA Presenters: David R. Beasley, FSA, CERA, MAAA Robert Bhatia, FSA, FCIA Wayne Tonning, FSA Primary Competency External Forces & Industry Knowledge

2 Life Product Update - Accumulation Market Sessions 065 IF & 078 IF Agenda US & Canada Sales Trends Joe Kordovi Accumulation Sales in the U.S. High Net Worth Market? Wayne Tonning Trends in the Life Insurance Accumulation Market in Canada Robert Bhatia Indexed Universal Life David Beasley 1

3 Total Sales Performance By Country LIMRA Q % 6% 5% 4% 3% 2% U.S. Canada Total Premium $10.2B $1.2B 1% 0% Premium Policies Face Amount 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% Sales Performance by Product LIMRA Q UL* VUL** Whole Life Term U.S. * For Canada, we are using Level COI and Limited Pay COI UL as a proxy for UL. ** For Canada, we are using UL Non-Level as a proxy for VUL. Canada 2

4 Premium Sales Mix LIMRA Q U.S. Canada 32% 40% 43% 20% 8% 21% 7% 29% UL VUL Term Whole Life UL* VUL** Term Whole Life * For Canada, we are using Level COI and Limited Pay COI UL as a proxy for UL. ** For Canada, we are using UL Non-Level as a proxy for VUL. U.S. & Canada Protection vs. Accumulation U.S. Variable Universal Life LIMRA Q Canada Universal Life % Change: +9% 20% % Change: -16% 27% Cash Accum 80% % Change: -4% Protection 73% % Change: -11% Protection (Level & Ltd. Pay COI) Accumulation (Non-Level COI) 3

5 U.S. Protection vs. Accumulation LIMRA Q % 35% 30% 25% 20% 15% 10% 5% 0% Universal Life Percentage Change by Category Cash Accumulation Indexed Current Assumption Lifetime Guarantees 4

6 A Distributorʹs View of the High Net Worth (HNW) Accumulation Market Wayne Tonning, FSA Director, Product Management M Financial Group 2013 Life & Annuity Symposium Sessions 065 IF & 078 IF M Financial Group M Financial Group is one of the nation s premier financial services design and distribution companies, serving ultra affluent individuals and Fortune 1000 companies through a network of more than 135 independent Firms. Independent research suggests that more than 20% of all life insurance sales to ultra affluent clients in the U.S. are made by M Member Firms. (Source: Spectrem Group) M Financial was founded in 1978 to change how insurance companies served successful producers with exceptional business. From the beginning, g, M Financial has been a community of sharing, entrepreneurship, innovation, and success. M Financial began with 13 Firms today there are more than 135 Member Firms in 36 states, Canada, the United Kingdom and more than 600 producers. 2 1

7 M Financial Major Business Lines Life Insurance Wealth Transfer / Estate Planning Executive Benefits Institutional Market Individual Disability Income and Long Term Care Insurance Annuities Corporate Benefits Group Life, LTD, and LTC 401(k) Wealth Management Life and DI lines are reinsured through M Financial Re. 3 Disclaimer This presentation is designed to provide educational information in regards to the subject matter covered. It is not intended as an offer to sell. M Financial Group and its representatives do not offer legal or tax advice. Clients should consult their attorney and/or tax advisor as to the applicability of this information to their specific circumstances. This presentation is general in nature and is provided for informational purposes only. There are no guarantees to its accuracy or completeness. Laws surrounding life insurance planning are subject to change, and such changes may affect the use of the insurance plan designs covered in this presentation. Circular 230 Compliance: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this presentation is not intended or written to be used, and cannot be used, for the purpose of (a) avoiding penalties under the Internal Revenue Code, or (b) promoting, marketing, or recommending to another party any transaction or matter addressed herein. All programs and techniques presented are subject to applicable federal and state laws. M Financial Group 1125 NW Couch St., Suite 900 Portland, OR Securities offered through M Holdings Securities, Inc., a Registered Broker/Dealer, Member FINRA/SIPC. M Financial Group is the parent company of M Holdings Securities, Inc. 4 2

8 Important Disclosures Variable Universal Life (VUL) insurance combines the death benefit protection and tax advantages of life insurance with the investment potential of a comprehensive selection of variable investment options. The insurance component provides death benefit coverage and the variable investment option component gives you the flexibility to potentially increase the policyʹs cash value. Variable life insurance products are long term investments and may not be suitable for all investors. An investment in variable life insurance is subject to fluctuating values of the underlying investment options and it entails risk, including the possible loss of principal. Investors should consider the investment objectives, risks, charges and expenses of any variable insurance product and its variable investment options carefully before investing. This and other important information about the investment company is contained in the variable product and fund prospectuses, which can be obtained by calling your advisor. Please read them carefully before you invest. This information has been taken from sources, which we believe to be reliable, but there is no guarantee as to its accuracy. It is not a replacement for any account statement or transaction confirmation issued by the provider. This material is not intended to present an opinion on legal or tax matters. Please consult with your attorney or tax advisor, as applicable. Pursuant to IRS Circular 230, we notify you as follows: The information contained in this document is not intended to and cannot be used by anyone to avoid IRS penalties. Securities referenced in this presentation are offered through various broker/dealers with which Member Firms of M Financial Group are associated, including M Holdings Securities, Inc., member FINRA SIPC. 5 Accumulation Versus Protection Sales 3

9 Accumulation Versus Protection Sales How do you define Accumulation Versus Protection? By Funding Level? Protection: Level/Long Pay, Target $1 age 100 or 120 Accumulation: Limited pay, 7 Pay, Target Endowment at age 100 or 120 By Sales Application? Protection Family Protection Estate Planning: Wealth Transfer, Estate Liquidity, Estate Equalization Business Planning: Key Man, Buy/Sell, Group Term Carve Out Accumulation: Retirement Income, Premium Financing, Deferred Comp/SERP, 162 Bonus, Tax Deferred Cash Accumulation Sales application data very difficult to obtain By Product Type? Protection NLG and CAUL Accumulation VUL and IUL Accumulation and Protection products within same product category 7 HNW Funding Levels Pricing Distribution by Funding Level Protection Accumulation 10 Pay to Endow Age % 50% Pay to Age 120 Endow Age % 25% Single Pay to Endow Age % 10% 7 Pay Max Non MEC Premium 0% 15% Funding level data very difficult to obtain 45% pay to age 120 distribution for Protection versus 25% for Accumulation 15% 7 Pay distribution for Accumulation versus 0% for Protection 8 4

10 HNW Sales Applications HNW Sales Applications Protection Estate Planning/DB IRR: Wealth Transfer, Estate Liquidity Largest driver of HNW sales When Accumulation and Protection product choice offered, approximately 80% of sales to Protection product Accumulation Retirement Income Premium Financing Cash Accumulation SV IRR tax deferred advantage PPLI big transactions; sales have been challenged more recently (hedge fund hit) Higher tax rates may drive Accumulation sales prospectively? Accumulation sales are smaller niche markets with fewer players but can drive large premium volume with potentially lower margins and added risk for the insurer (and the policy owner) HNW may be different than high income professionals who are in the asset gathering phase and may want strong cash values 9 Accumulation Versus Protection Sales Trends Introduction of Accumulation and Protection products within same product category 80% of HNW sales in Protection product IUL and VUL are not necessarily being used for Accumulation sales IUL and VUL with premium allocated to the fixed account VUL funded targeting $1 age 100 (with annual in force policy reviews) IUL and VUL with higher assumed crediting rate used to lower cost Introduction of low cost Protection products with low fixed commissions is driving a majority of the market to the lowest common denominator; even to some degree in the HNW market Competition forces lowest cost but with cash value give up HNW Firms can use reputation and expertise to diminish competition Low commissions are especially challenging for HNW Firms who provide complex consultative services and ongoing annual in force policy reviews supported by knowledgeable and experienced staff 10 5

11 Considerations That Drive Product Selection Strengths: Current Assumption UL Flexibility with cash values Non volatile crediting rate with a guaranteed minimum Interest rates will eventually return to historical norms Challenges: Low crediting rates that continue to decrease and drive up cost Portfolio yield dilution and resulting capacity restrictions Opportunities: Higher portfolio driven crediting rates versus new money rates Alternative to NLG with cash values and upside potential Alternative to VUL and IUL with consistent crediting rate Alternative asset general account product potential enhanced yield Overall sales will remain challenged with declining crediting rates, capacity restrictions, emergence of IUL, and flexibility of VUL 12 6

12 Strengths: Challenges: No-Lapse Guarantee UL Guaranteed protection and price Lack of cash values and flexibility Lack of upside potential Price becoming more expensive (AG 38 and interest rates) CAUL with downside testing (interest at guarantee) versus NLG Potential unexpected results when paying different than illustration Opportunities: Declining crediting rates and equity market volatility drive 1035 and new sales from CAUL and VUL to NLG Overall sales will remain strong if price remains reasonable (long term memory of financial crisis and economic concerns remain; driving emotional need to transfer risk to insurer) 13 Strengths: Variable UL Upside yield potential, cash values, transparency, and tax deferred growth Flexibility of premium allocation Challenges: Over 40% of premium allocated to the fixed account Approximately 10% of premium allocated to the indexed account Less than 50% of premium allocated to the separate account Volatility of returns and lack of guaranteed minimum crediting rate Financial Crisis long term memory Opportunities: i Non correlated separate account funds (reduce volatility) Contingent guarantee based on earned rate Downside protection riders Overall sales will remain strong due to product flexibility 14 7

13 Strengths: Challenges: Indexed UL Yield potential with downside protection, CVs, and transparency Flexibility of premium allocation to fixed account and indexed account Volatility of returns More complex to understand Downward pressure on cap rates Crediting rate abuses Opportunities: New product that has sales growth momentum Recent crediting rate experience has been favorable Non correlated index strategies Participating loans with associated leveraged downside risk Overall sales will remain strong due to enhanced yield potential with downside protection and flexibility with the fixed account 15 High Net Worth Sales Distribution by Product Type 8

14 HNW Sales Are Fairly Evenly Distributed By Major Product Type Historical M Financial Wealth Transfer Sales Distribution by Product Type Product Type UL Single Life 29% 17% 13% 16% 14% Survivorship 6% 5% 7% 10% 5% Total 35% 23% 19% 26% 19% IUL Single Life 1% 2% 7% 8% 13% Survivorship 0% 0% 3% 5% 4% Total 1% 2% 9% 13% 17% NLG Single Life 15% 22% 22% 13% 19% Survivorship 6% 13% 12% 10% 10% Total 21% 35% 34% 23% 29% Variable Single Life 21% 24% 18% 18% 23% Survivorship 11% 5% 6% 8% 6% Total 32% 29% 24% 26% 29% Magnastar 8% 9% 10% 8% 4% Term 3% 3% 3% 3% 2% Total Single Life 77% 76% 73% 66% 75% Total Survivorship 23% 24% 27% 34% 25% Total Wealth Transfer 100% 100% 100% 100% 100% HNW sales distribution of 75% single life and 25% survivorship 17 Decreasing Sales Trend For HNW Current Assumption UL Historical M Financial Wealth Transfer Sales Distribution by Product Type Product Type UL Single Life 29% 17% 13% 16% 14% Survivorship 6% 5% 7% 10% 5% Total 35% 23% 19% 26% 19% IUL Single Life 1% 2% 7% 8% 13% Survivorship 0% 0% 3% 5% 4% Total 1% 2% 9% 13% 17% NLG Single Life 15% 22% 22% 13% 19% Survivorship 6% 13% 12% 10% 10% Total 21% 35% 34% 23% 29% Variable Single Life 21% 24% 18% 18% 23% Survivorship 11% 5% 6% 8% 6% Total 32% 29% 24% 26% 29% Magnastar 8% 9% 10% 8% 4% Term 3% 3% 3% 3% 2% Total Single Life 77% 76% 73% 66% 75% Total Survivorship 23% 24% 27% 34% 25% Total Wealth Transfer 100% 100% 100% 100% 100% Declining UL crediting rates have driven lower CAUL sales The emergence of other product types, such as NLG and IUL, and fixed accounts in VUL, has also contributed to declining CAUL sales 18 9

15 HNW VUL Sales Remain Strong Historical M Financial Wealth Transfer Sales Distribution by Product Type Product Type UL Single Life 29% 17% 13% 16% 14% Survivorship 6% 5% 7% 10% 5% Total 35% 23% 19% 26% 19% IUL Single Life 1% 2% 7% 8% 13% Survivorship 0% 0% 3% 5% 4% Total 1% 2% 9% 13% 17% NLG Single Life 15% 22% 22% 13% 19% Survivorship 6% 13% 12% 10% 10% Total 21% 35% 34% 23% 29% Variable Single Life 21% 24% 18% 18% 23% Survivorship 11% 5% 6% 8% 6% Total 32% 29% 24% 26% 29% Magnastar 8% 9% 10% 8% 4% Term 3% 3% 3% 3% 2% Total Single Life 77% 76% 73% 66% 75% Total Survivorship 23% 24% 27% 34% 25% Total Wealth Transfer 100% 100% 100% 100% 100% 2012 VUL sales driven by fixed account opportunities; not necessarily strong equity market performance 19 HNW NLG Sales Rebounded In 2012 With The Pending AG 38 Price Increase Historical M Financial Wealth Transfer Sales Distribution by Product Type Product Type UL Single Life 29% 17% 13% 16% 14% Survivorship 6% 5% 7% 10% 5% Total 35% 23% 19% 26% 19% IUL Single Life 1% 2% 7% 8% 13% Survivorship 0% 0% 3% 5% 4% Total 1% 2% 9% 13% 17% NLG Single Life 15% 22% 22% 13% 19% Survivorship 6% 13% 12% 10% 10% Total 21% 35% 34% 23% 29% Variable Single Life 21% 24% 18% 18% 23% Survivorship 11% 5% 6% 8% 6% Total 32% 29% 24% 26% 29% Magnastar 8% 9% 10% 8% 4% Term 3% 3% 3% 3% 2% Total Single Life 77% 76% 73% 66% 75% Total Survivorship 23% 24% 27% 34% 25% Total Wealth Transfer 100% 100% 100% 100% 100% Low hanging 1035 opportunities drove initial sales in conjunction with decreasing crediting rates and equity market volatility Will recent NLG price increases driven by AG 38 and lower interest rates drive sales to current assumption products? 20 10

16 HNW IUL Sales Have Experienced Double Digit Growth Rates Historical M Financial Wealth Transfer Sales Distribution by Product Type Product Type UL Single Life 29% 17% 13% 16% 14% Survivorship 6% 5% 7% 10% 5% Total 35% 23% 19% 26% 19% IUL Single Life 1% 2% 7% 8% 13% Survivorship 0% 0% 3% 5% 4% Total 1% 2% 9% 13% 17% NLG Single Life 15% 22% 22% 13% 19% Survivorship 6% 13% 12% 10% 10% Total 21% 35% 34% 23% 29% Variable Single Life 21% 24% 18% 18% 23% Survivorship 11% 5% 6% 8% 6% Total 32% 29% 24% 26% 29% Magnastar 8% 9% 10% 8% 4% Term 3% 3% 3% 3% 2% Total Single Life 77% 76% 73% 66% 75% Total Survivorship 23% 24% 27% 34% 25% Total Wealth Transfer 100% 100% 100% 100% 100% IUL sales now represent 17% of total wealth transfer sales, just behind the 19% distribution for CAUL Clients are looking for enhanced yield with downside protection 21 Institutional Sales Finished 2012 At The Highest Level Since 2008 Historical M Financial Institutional Sales by Product Type Product Type F COLI 6% 8% 10% 0% 0% F BOLI 0% 0% 1% 0% 0% VBOLI 6% 15% 32% 23% 28% VCOLI 65% 48% 46% 77% 65% Magnastar COLI 23% 29% 10% 0% 7% Total COLI/BOLI 100% 100% 100% 100% 100% Total Wealth Transfer 58% 70% 66% 72% 71% Total COLI/BOLI 42% 30% 34% 28% 29% Approximately 30% of total M sales are Institutional 2012 Institutional sales were evenly split between COLI, BOLI, and Credit Union 30% of M Firms had production in an Institutional product in 2012; 75% of total Institutional sales were with 3 M Firms Over 99% of M Carrier Institutional 2012 sales were variable with an estimated 70% of cash value allocated to a fixed account The limitations on fixed account have forced M Firms to spread Institutional business across Carriers 22 11

17 Economic Impact That Is Driving Sales Trends Sales Follow Yield 12.00% Steady Decline In UL Crediting Rates Current Crediting Rates Are At Historical Lows (4%-5%) Historical UL Crediting Rates 11.00% 10.00% 9.00% 8.00% 7.00% 6.00% UL 5.00% 4.00% 3.00% 2.00% 1.00% 0.00%

18 40.00% Volatile S&P 500 Returns Significant Losses and 2008 Historical UL Crediting Rates and S&P 500 Returns 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 5.00% S&P 500 UL 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 40.00% % Hypothetical IUL Historical Returns Provide Downside Protection Historical UL Crediting Rates, S&P 500 Returns, and Hypothetical IUL Crediting Rates 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 5.00% S&P 500 IUL UL 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 40.00% 26 13

19 16.5% 16.0% 15.5% 15.0% 14.5% 14.0% 13.5% 13.0% 12.5% 12.0% 11.5% 11.0% 10.5% 10.0% 9.5% 9.0% 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% The S&P 500 Has Double Digit Returns In 3 Of 4 Years Since The 2008 Financial Crisis 2012 S&P 500 Return and Crediting Rates S&P 500 IUL UL % 5 Year LookBack: S&P 500 Depressed Due To 2008 Crash, Note Protective Value Of IUL Cumulative Annual S&P 500 Return and Crediting Rates 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% S&P 500 IUL UL 28 14

20 10.0% 9.5% 9.0% 85% 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 35% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 25 Year LookBack: 200 & 270 bps Enhanced Yield For S&P 500 Versus IUL & UL Cumulative Annual S&P 500 Return and Crediting Rates S&P 500 IUL UL 29 15

21 * SOA Life & Annuity Symposium May 7, 2013 * 1 Product and Market Overview 2 Trends 3 Risks 4 Outlook 1

22 * PREMIUM $1.4 BILLION POLICIES 755,000 FACE AMOUNT $231 BILLION Term 29% WL 43% UL 28% Term 58% UL 21% WL 21% Term 74% UL 16% WL 10% Source: LIMRA Q YTD Data. Premium excludes excess. * PREMIUM $800 MILLION POLICIES 309,000 FACE AMOUNT $57 BILLION WL 58% UL LCOI 28% UL ART 10% T100 4% WL 44% T100 8% UL LCOI 31% UL ART 17% WL 37% T100 4% UL ART 24% UL LCOI 36% Source: LIMRA Q4YTD Data Premium excludes excess premium. 2

23 * Product Coverage Duration Premium Transparency Investment Component UL with ART Permanent Flexible High Policyholder has a wide range of choices Participating Whole Life Permanent Fixed Low Policyholder invests in the PAR fund * Product Investment Risk Performance in a changing g Economic Environment Guarantees UL with ART Policyholder assumes most of the risk Responsive COI Credited Rates Fund Options Participating Whole Life Risk is shared Delayed & Smoothed Premium Cash Value Insurability 3

24 * Product Optionality Compensation Profitability UL with ART Funding Optimizer COI Switches Loans Higher renewal Profitable Participating Whole Life Dividend id d Options Loans Higher First Year Profitable * 40% 30% 20% 2001: Dot com bubble collapse 2008: Financial crisis % Change 10% 0% -10% -20% -30% -40% Change in Funding Levels for YRTCOI Long Bond Yields Change in Common Stock Returns Source: Munich Re Insurance Surveys ; CIA Report on Canadian Economic Statistics

25 * MIX OF BUSINESS INDIVIDUAL LIFE Average Face (000 s) Average Premium Premiums per 1,000 Average Age by Face %Male by Face % non Smoker by Face UL Level COI Single UL YRT/Other Single Permanent including Par $197 $2,818 $ % 88% $243 $3,232 $ % 82% $142 $3,214 $ % 75% Source: Munich Re 2012 Individual Insurance Survey. * Illustration comparison Par Par Estate Wealth UL with ART 1 Premium to age 65 4,282 4,345 4,282 Rate 7.00% 7.00% 4.88% Cash Value at age , , ,803 Cash Value at age , , ,394 Death Benefit at age , , ,106 Death Benefit at age , , ,394 FYC 1,983 2, PV Comp Yrs 4% 3,513 3,558 3,253 1 This policy will have a side account. 5

26 * 55% 35% 45% 28% 28% 28% 17% 36% 26% Career Independent All Participants WL Term UL Source: LIMRA. * HOW ARE THEY SOLD: CONCEPT DESCRIPTION MARKET Retirement funding Wealth Transfer Leveraged Loan ( 10/8 ) Accumulate tax efficient savings that can be used to maximize retirement income Pass estate to heirs without losing significant value to probate taxes while accumulating tax efficient savings Get economical permanent insurance coverage and obtain tax deferred growth while reinvesting the capital back into the business or another investment eligible Products: UL and Par Younger individuals in the consumer market and business markets Products: UL and Par Older individuals that have large amounts of assets earmarked for heirs. Products: UL Private corporations and affluent individuals 6

27 * Whole Life Long Term Bonds Hypothetical Fund Adjustable/ New Money Universal Life Whole Life 10 % 8 6 Dividend Rate Reductions Cansim Government of Canada marketable bonds, average yield: over 10 years; hypothetical 7yr average smoothing. * EXPECTED TO ACTUAL PREMIUM GROWTH Projected 1 Actual 2 Projected 1 Actual 2 UL Level COI 7% 0% -4% -24% UL YRT COI 4% 0% 5% -11% Other Permanent including Par 15% 18% 10% 26% Total 10% 5% 3% 6% 1 Source: Munich Re 2012 Individual Insurance Survey. 2 Source: LIMRA. 7

28 * PREMIUM GROWTH BY AGE Issue Age Universal Life Market Share 11/10 Growth Market Share Whole Life 11/10 Growth Under 25 5% 3% 11% 24% 25 to to to to and over Total 100% 7% 100% 18% Source: LIMRA s 2011 Canadian Individual Life Insurance Sales. * Risk UL Par Whole Life Uncertain Negative impact to sales Will drive sales to par whole economic outlook and funding for ART life Low interest rates Downward pressure on profitability for LCOI Downward pressure on dividend yields Regulatory Risk Capital rule shifts may impact equity based UL Tax Risk Austerity changes tighten tax rules to lower sales and - reduce funding Distribution Risk Recruitment of brokers Recruitment of brokers - 8

29 * * Policy exempt test changes will impact the UL market and will require product adjustment * Current economic environment will continue to drive sales to par whole life * IUL could gain traction if dividend rates continue to fall but it could be tempered by higher capital requirements * 9

30 Session 65 & 78 Life Product Update Accumulation Market INDEXED UNIVERSAL LIFE May 7, 2013 David R. Beasley 2013 Life & Annuity Symposium Toronto, ON CONSULTING ACTUARIES 2013 OLIVER WYMAN Introduction to Indexed Universal Life (IUL) Similar to other general account Universal Life policies sold in the US Credits interest based on growth in an index Benchmark index - S&P 500 still dominant: 2/3 of 2012 sales - DJIA, NASDAQ, Russell, bond, EuroStoxx 50, Hang Seng, DJ-UBS Commodity Index and others also available - Rainbow is a combination of indices Various crediting methods Point-to-point: 3/4 of 2012 sales Market participation is usually limited by either a participation rate or cap - Reset-able once per anniversary, driven by option costs and option budget Unlike VUL, no securities license is needed to sell IUL Therefore, different carriers offering IUL and VUL Some VUL products have added indexed crediting strategies 2013 OLIVER WYMAN 1 1

31 IUL production has shown significant growth in the last decade 1,400 1,300 1,200 1,100 1, % 36% 31% 45% 5% -1% 88% 34% 48% -3% Sales in 2012 were 35% higher than OLIVER WYMAN Source: AnnuitySpecs.com s Indexed Sales & Market Report 2 Sales appeal of IUL Policyholder attractiveness Greater upside potential than typical UL plans currently crediting 3%-5% Less risk than VUL due to underlying guarantee floor Potentially can work for either accumulation and protection sale Historically an accumulation sale, but long-term no-lapse guarantee ( NLG ) feature allows it to compete for the protection sale as well Leveraged product design due to its bond and option exposure Current illustrated rates on IUL higher than those on accumulation UL products Policyholder can add additional leverage - Indexed policy loans - Premium finance 2013 OLIVER WYMAN 3 2

32 Historical (current) cap comparison, APTP S&P 500 Company Company # % 10.0% 10.0% 9.25% Company #2 Company #3 Company #4 Company #5 Company #6 Company #7 Company # Source: Full Disclosure for Windows Indexed UL 2008, Volume 1; 2010, Volume 2; 2011, Volume 1; LifeSpecs.com This indicates that some carriers lowered caps during 2012 to reflect the current economic environment 2013 OLIVER WYMAN 4 Cost of hedging Historical cost of hedging Annual PTP - 10% cap and 0% floor 6% 100.0% 5% Hedging Cost 95.0% 4% 90.0% 3% 85.0% 2% Cap Vol / Floor Vol 80.0% 1% 1yr Treasury 75.0% 0% Jan 2006 Jan 2007 Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan % 2013 OLIVER WYMAN 5 3

33 Ways to minimize hedge costs Product design can impact hedge costs (and amount hedged) The lower the guaranteed floor, the higher the option budget Some designs base index payout on EOY AV (after all charges and withdrawals are taken out); others based on average AV Some designs take all charges out of short-term account or fixed bucket; thus, only need to hedge premium above this amount Carriers that write both FIAs and IUL will typically aggregate premium for hedging purposes Carriers that also write VAs may have some advantage in terms of scale with counterparties However, variable and indexed d hedges are almost always kept distinct t as they require different administrative systems and reporting requirements 2013 OLIVER WYMAN 6 Sample of current and guaranteed fixed UL crediting rates and indexed cap rates (annual point-to-point) Product Current crediting rate / indexed cap Guaranteed crediting rate / indexed cap Fixed UL #1 5.1% 2% Fixed UL #3 4% 3% Fixed UL #4 3% 3% Fixed UL #5 4.4% 2% Indexed UL #1 10% 2.75% Indexed UL #2 12% 4% Indexed UL #3 13% 3% Indexed UL # % 1% Indexed UL # % 4% Gap between current and guaranteed is larger on indexed products Source: Lifespecs.com 2013 OLIVER WYMAN 7 4

34 Additional features available on IUL Variable loans Loan rate is typically tied to an external bond index, e.g., Moody s Corporate Bond Yield Average Unlike for a fixed loan, AV continues to earn index-linked credits as if no loan had been taken Pricing risk is difference between external bond index and net earned rate Long term care riders Provides accelerated death benefits to cover cost of long term care In exchange for irrevocable election of installment payments upon death, COI charges are reduced over the life of the product Illustration shows higher cash value accumulation 2013 OLIVER WYMAN 8 Challenges for new entrants Lack of a current investment infrastructure to support purchase of derivative investments needed to support IUL New entrants should be prepared to accept a certain amount of basis risk while building scale Hedging could be outsourced, if necessary Administrative system enhancements will likely be necessary to support IUL mechanics and reporting needs Compliance Producer and policyholder education Policy contract language g Illustrations 2013 OLIVER WYMAN 9 5