Annuity Linked TVI Index. Explained

Transcription

1 Annuity Linked TVI Index Explained 1

2 Key Features of the Annuity Linked TVI Index The Index aims to deliver positive returns while moderating volatility regardless of market direction. The Index goal is to be non-correlated to negatively-correlated when compared to traditional assets like stocks and bonds over extended periods, making it an efficient asset allocation diversification tool. 2 The Index generally has a short recovery time from negative periods, due to the ability to buy short in an attempt to profit from falling prices.

3 How a Fixed Index Annuity Provides Value A Fixed Index Annuity offers the best features of a traditional fixed annuity a guarantee of principal and tax deferral combined with the opportunity to increase the value of your retirement savings by offering one or more interest crediting options based on an index. By employing an index as an interest crediting option, a fixed index annuity has the potential to accumulate interest when the index goes up; however, if the index goes down, your purchase payments and previously credited interest are locked in and will not decline. Unlike other savings vehicles where the account balance may fluctuate due to market performance, purchase payments in a fixed index annuity are guaranteed to never go down due to market downturns. Why Use an Index? An index is a way to measure the performance of a select group of financial assets as a benchmark to determine interest crediting. A fixed index annuity increases in value by accumulating interest based on a formula that links to the market index, without the risk of direct participation in those markets. Using an index in a fixed index annuity allows for interest to be credited based on a diversified strategy that is linked to the market or markets represented in that index and its potential gains, without being subject to the potential downturns of the market. Typically, most fixed index annuities offer a simple fixed rate and stock or bond marketlinked index options. Security Benefit has pioneered the use of a new index to provide an alternate crediting strategy, the Annuity Linked TVI Index. What Is the Annuity Linked TVI Index? In order to understand the Annuity Linked TVI Index, it s important to know how it was developed. The Annuity Linked TVI Index is derived from another index, the Trader Vic Index Excess Return or TVI Index. TVI Index The TVI Index is owned and was developed by EAM Partners L.P. (EAM) and is calculated by the Royal Bank of Scotland (RBS) through an exclusive license agreement. The goal of the TVI Index is to provide positive returns through diversification and being non-correlated to traditional markets. The TVI Index is constructed based on 24 highly liquid futures contracts across physical commodities, global currencies and U.S. interest rates. The TVI Index tracks futures contracts prices in the asset classes that are either long or short in an attempt to take advantage of both rising and falling market trends. 3

4 Annuity Linked TVI Index The Annuity Linked TVI Index shares the same components as the TVI Index with the addition of a volatility overlay. The volatility overlay increases exposure to the TVI when the TVI volatility is low and decreases exposure when volatility is high. This volatility overlay is expected to dampen the highs and lows of the asset classes in which the Index invests which should provide less volatility in the returns of the Annuity Linked TVI Index. To the right are some key terms to understand. Key Terms Non-correlation means that there is little to no relationship between two or more items. In this instance, the Annuity Linked TVI Index is historically non-correlated compared to traditional asset classes like stocks and bonds over extended periods. When one moves up or down, the other tends to move independently with no relationship to the other. Diversifi cation is a way to reduce risk by mixing a wide range of asset classes. Volatility is a statistical measure of the range of returns for a given asset over time. Higher volatility means an asset will move up and down in wide ranges over a relatively short period of time, while lower volatility means the value does not fluctuate dramatically, but changes happen at a more gradual pace over time. Long Taking a long position is typically done when an asset is expected to rise in value over time. Typically this is employed in a buy and hold strategy. Short A short position is typically taken when an asset is expected to decline in value over time. 4

5 How Is the Annuity Linked TVI Index Different? The Annuity Linked TVI Index has an underlying architecture that fundamentally differs from more traditional indices which is designed to result in: Non-correlation Diversification Stabilized Volatility Let s examine each of the above in more detail. Non-correlation Among the sectors that comprise the index, each has a low historical correlation between each other over extended periods, but also with the broader equity and bond markets that a more traditional stock or bond index would follow. This provides for a greater degree of independence from the traditional equity and bond markets and may allow for an increased potential for returns when other market segments are down. Diversifi cation The Annuity Linked TVI Index is diversified in two ways: within the Index by buying across several asset classes, and diversified compared to the traditional stock and bond markets. Stabilized Volatility The volatility of the Annuity Linked TVI Index is monitored and stabilized on a daily basis. Who Runs the Annuity Linked TVI Index? The Annuity Linked TVI Index was developed and is owned by The Royal Bank of Scotland (RBS) as an innovative rules-based index designed to provide portfolio diversification. The Annuity Linked TVI Index can be found on Bloomberg at ALTVI:IND. 5

6 Market Components of the TVI Index The TVI Index is comprised of 24 diverse components across physical commodities, global currencies and US interest rates. These components, which were chosen based on fundamental characteristics of liquidity, economic importance, and credit stability, are grouped into 14 sectors. Similar components are grouped together in an attempt to create a more consistent and robust return profile. The TVI Index components are limited to highly liquid, US exchange-listed futures contracts. 6

7 Market Components GLOBAL CURRENCIES Australian Dollar: 2.00% British Pound: 3.00% Canadian Dollar: 1.00% Euro: 11.00% Japanese Yen: 10.00% Swiss Franc: 10.00% ENERGY Heating Oil: 3.40% Light Crude Oil: 9.63% Natural Gas: 4.82% RBOB Gasoline: 3.40% US INTEREST RATES US 30-year Bond: 6.50% US 10-year Note: 6.50% % Global Currencies GRAINS Corn: 4.00% Soybeans: 5.00% Wheat: 2.50% PRECIOUS METALS Gold: 3.50% Silver: 1.75% % Energy INDUSTRIAL METALS High Grade Copper: 5.00% % US Interest Rates SOFTS Cocoa: 1.00% Coffee: 1.00% Cotton: 1.00% Sugar: 1.00% LIVESTOCK Lean Hogs: 1.20% Live Cattle: 1.80% Source: EAM, RBS and Bloomberg, January % Grains 5.25 % Precious Metals 5.00 % Industrial Metals 4.00 % Softs 3.00 % Livestock 7

8 The Annuity Linked TVI (the ALTVI ) is derived from the Trader Vic Index - Excess Return (or TVI ). The ALTVI has a volatility control overlay that is adjusted daily based on recent historical volatility, so that more volatility generally leads to reduced exposure to the TVI and less volatility generally leads to more exposure.* The overlay may thus reduce or increase the potential positive change in the ALTVI relative to the TVI and thus may lessen or increase the interest that will be credited to a fi xed indexed annuity allocated to the ALTVI relative to one allocated to the TVI (which is not available). The overlay also reduces the cost to hedge the interest crediting risk to Security Benefi t Life ( SBL ). As a result, SBL may be able to offer a higher cap, higher participation rate, or lower spread (or potentially no cap, 100% participation, and no spread) on the ALTVI as a crediting option within a fi xed index annuity relative to what it would be able to offer with the TVI as a crediting option. The cost for the volatility control overlay and maintaining the ALTVI is 1.25% per annum. RBS collects this daily through an up front pro rata deduction from the TVI in calculating the ALTVI. * As low as 10% (in the event of very high volatility) to as high as 150% (in the event of very low volatility). Historical average as of April 2012 = 93.7%. Annuity Linked TVI Index, ALTVI, RBS, The Royal Bank of Scotland and the DAISY device logo are trademarks of The Royal Bank of Scotland Group plc and have been licensed for use by The Royal Bank of Scotland Group plc or one of its affi liates. Security Benefi t Life Insurance Company annuities are not sponsored, endorsed, sold or promoted by The Royal Bank of Scotland plc or The Royal Bank of Scotland Group plc. The Royal Bank of Scotland plc and The Royal Bank of Scotland Group plc make no representation and offer no advice with regard to purchasing any Security Benefi t annuity. None of The Royal Bank of Scotland plc or any of its offi cers, employees, representatives or agents accept any responsibility for the appropriateness or suitability of any Security Benefi t annuity for any purchaser, the performance of the Annuity Linked TVI Index or any Security Benefi t annuity or the accuracy or completeness of this document. TVI, TVI Index, Trader Vic Index, EAM Partners L.P., and EAM are trademarks of EAM Partners L.P. ( EAM ). EAM created and owns rights to the methodology that is employed in connection with the Trader Vic Index. RBS has provided a contribution to the Trader Vic Index in a limited manner. RBS s contribution is limited to performing calculations and data distribution in connection with the Index. EAM does not sponsor, endorse, sell, or promote any annuity contract or other vehicle that is offered by third parties and that is based on the returns of the Trader Vic Index, nor shall EAM be liable for any errors, misstatements or omissions in any communications with respect thereto. Prospective purchasers are advised to make such a decision only after carefully considering the risks associated with purchasing such an annuity or other vehicle, as detailed in the materials prepared by or on behalf of the issuer of the annuity contract or vehicle. EAM has developed, maintained and is the sole party responsible for the methodology that is employed in connection with the Trader Vic Index. This brochure is not authorized for distribution unless accompanied by a Security Benefi t Life Insurance Company fi xed index annuity product brochure in which the Annuity Linked TVI Index is an index option. The ALTVI is the index utilized by the 5 Year Annuity Linked TVI Index Account, offered in the Security Benefi t Total Value Annuity, Form 5700 (3-12) and ICC (3-12) (Not approved in all states.) and the Income Rider, Form 5720 (3-12) and ICC (3-12) (Not approved in all states.), and the Death Benefi t Rider, Form 5721 (3-12) (Not approved in all states.) One Security Benefi t Place, Topeka, KS securitybenefi t.com TVAA (3-12) IM /04/30 8