Overview of the Market Landscape. Presenter(s): Philippe Combescot

Sponsored by and Overview of the Market Landscape Presenter(s): Philippe Combescot

Overview Of The Market Landscape EBIG Conference, 16 November 2015 (0840 0930 hours) Philippe COMBESCOT, Managing Director Global Equity & Commodity Derivatives

$ Billions Annuity Sales over Time Over the last 10+ years annuity sales and the split between fixed and variable have been roughly stable. But significant change within each category : VA separate account went from 55% to 80% of Variable Annuities sales Indexed Annuities went from 16% to 63% of total Fixed Annuity sales Annuity Sales per quarter over the last 10+ years 80 70 60 50 40 30 Variable Fixed 20 10 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: LIMRA. 2

$ Billions Fixed Annuity Sales over Time Over the last 10+ years fixed annuity sales have been roughly stable. But Indexed Annuities went from 16% to 63% of total Fixed Annuity sales Fixed Annuity Sales per quarter over the last 10+ years 35 30 25 Indexed MVA Fixed Book Value 20 15 10 5 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: LIMRA. 3

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015* 50 45 40 35 30 25 20 15 10 Indexed Annuity Market Overview Indexed annuities now firmly established as the second largest annuity segment (beyond variable annuity, 3x FA market) Sizeable issuance growth of 7.8% annual rate since 2007 Coming changes which could increase the FIA size: Low interest rates are driving a search for yield and players with alternatives strategies are becoming prominent. Hybrid Indices are > 20% of sales Baby boomers nearing retirement are nearing peak age for IA sale Sales from 2004-05 (peak year before introduction of IA income rider) are about to exit the surrender charge period US Indexed Annuity Issuance ($Bn) Top 10 2015 Issuance Volumes ($mm) 5 2Q 2015 YTD 2Q 2014 YTD Allianz Life 4,442 6,605 Am erican Equity 3,059 1,913 GAFRI 1,518 1,660 Athene USA 1,381 1,185 Security Benefit Life 1,275 2,352 Am erican GeneralLife 1,179 476 Fidelity & Guaranty 1,111 696 M idland 1,063 899 Sym etra 1,004 735 EquiTrust 876 816 Top 10 2015 Issuers Market Share 0 Source : BNP Paribas. Winks * 4

Variable Annuity Guaranteed Living Benefits Q1 2015 GLB election rate Guaranteed living benefits still popular. Out of $27 billions variable annuity sales over Q2 2014 guaranteed living benefits were elected for $18.5 billions. When GLBs are available election rate has been declining since 2012 from 90% to currently 75%. Source: LIMRA VA Assets with GLB elected GLWB remains the most popular type of benefits representing 82% followed by GMIB for 13%. VA assets with GLBs growing steadily VA assets with GLWB assets elected represents 62%. GLWB assets increased 2.5 times since the end of 2009 vs 1.75 increase in the S&P 500. Very little increase for other types of GLB. Source: LIMRA. 5

Insurance Companies use of Derivatives Derivative hedging per risk type Insurance companies use derivatives to hedge : Interest rate risk: 62% of the total derivatives notional. 67% is through swaps, the rest through caps, floors, and forwards Equity risk: 30% of derivatives notional. 78% of equity risk hedging is done through options. The rest through futures and Total Return Swaps. Foreign Exchange risk: 6.1% of derivatives notional Source: Schedule DB Equity option type Equity option position: 570 billion notional Calls: 33% of total notional. Mainly used to hedge Fixed Indexed Annuity crediting. Puts: 35% of total notional. Underlying is mainly S&P 500. Mainly used to hedge Variable Annuities Source: Schedule DB 6

Insurance Companies Equity Derivatives Option Position Total current exposure through S&P 500 puts $M < 1.5y 1.5y - 5y > 5y Notional 118,052 31,596 18,266 Delta (21,888) (6,452) (3,633) Vega 164 171 148 Avg strike 75% 65% 63% Largest position relative to the overall equity derivatives market is created by S&P 500 puts. Largest vega position. Large forward position Source: Schedule DB S&P 500 vega bought per quarter for maturities > 5y The amount of long term S&P 500 vega bought by insurance companies has significantly decreased since the end of 2012. Activity is correlated with heightened VIX levels This is broadly inline with the rise of the Equity market and long term interest rates. Source: Schedule DB 7

Where are Long term Rates headed? Interest rates have declined over the last 20+ years Focus has been impact of low rates on Product Guarantees, Policyholder behaviour, Liquidity and ALM Focus needs to change for the opposite scenario Long term Rates have been declining for the past 20+ years Source: BLOOMBERG. 8

Where are Long term Rates headed, cont d? Current BNP forecast below. Gradual increase in Rates is the current consensus with bear flattening Year End Forecasts for USD Treasury Rates Spot BNP forecast End 2015 BNP forecast End 2016 BNP forecast End 2017 Fed Funds Target 0-0.25% 0.25-0.5% 1.5-1.75% 2.5% Fed Funds O/N 0.13% 0.25% 1.5% 2.5% 2Y 0.63% 1.0% 2.0% 2.5% 5Y 1.38% 1.6% 2.25% 2.55% 10Y 2.1% 2.15% 2.5% 2.65% 30Y 2.93% 2.9% 3.0% 2.85% Source: BNP Paribas *Spot rates as at 12 October 2015. 9

Variable Annuity Simplified Model Rho exposure computed with simplified BS model Option maturity 20y Average strike in the portfolio from 2008 has increased with increasing Equities 10

Rho Empirical Sensitivity without Ratchet (Monthly 2008-2015) A stronger Rho sensitivity to rates Source: BNP Paribas. 11

Rho Empirical Sensitivity with Ratchet (Monthly 2008-2015) Ratchet feature increase Rho sensitivity to rates Source: BNP Paribas. 12

Rho (Mln/bp) Exposure Sensitivity with Ratchet Feature Rates (bp) Rates (bp) spx (%) -20-15 -10-5 -2.5 0 2.5 5 10 15 20-150 (498) (446) (397) (351) (330) (309) (289) (269) (233) (199) (167) -100 (351) (304) (261) (221) (202) (185) (167) (151) (120) (91) (65) -75 (285) (242) (202) (165) (147) (131) (115) (100) (71) (45) (21) -50 (226) (185) (148) (114) (98) (83) (68) (54) (28) (4) 17-25 (171) (133) (99) (68) (53) (39) (26) (13) 11 32 52 0 (122) (87) (55) (26) (13) 0 12 24 45 64 82 25 (77) (44) (15) 11 23 35 46 56 75 93 108 50 (36) (6) 21 44 55 66 76 85 102 118 132 75 1 28 52 74 84 93 102 111 126 140 152 100 34 59 81 100 109 118 126 133 147 159 170 150 90 110 128 144 151 158 164 170 181 190 199 spx vol (%) -20-15 -10-5 -2.5 0 2.5 5 10 15 20-150 (172) (208) (243) (277) (293) (309) (324) (340) (369) (398) (425) -100 (56) (90) (122) (154) (169) (185) (199) (214) (243) (270) (297) -75 (8) (40) (71) (101) (116) (131) (145) (160) (187) (214) (240) -50 34 4 (25) (54) (68) (83) (96) (110) (137) (163) (188) -25 71 43 15 (12) (26) (39) (52) (65) (91) (116) (141) 0 102 77 51 25 13 0 (13) (25) (50) (74) (97) 25 130 106 83 59 47 35 23 11 (12) (35) (58) 50 153 132 110 88 77 66 55 44 21 (0) (22) 75 173 154 134 114 104 93 83 72 52 31 11 100 190 173 155 137 127 118 108 98 79 59 40 150 217 203 189 174 166 158 150 141 125 108 91 Increased demand for Rho with failing rates and failing stocks Increased demand for Rho rising equity volatility and failing rates Ratchet feature increase Rho sensitivity to rates 13

Impact of Rising Interest Rates US GAAP Embedded derivative values will decrease (FAS-133) Index Credit hedges are less sensitive to risk-free rate Increased persistency pushes cash flows away STAT reserves - Will be lower for new products ALM Mismatches Potential increase in Disintermediation risk 14

Hybrid Options and Pricing Considerations Equity/Rate Hybrid hedges allow hedging to specific scenarios that are cheaper than the sum of the parts Limiting drivers for hybrid options Overall size capped at ~ 20% of underlying vanilla market Pin and gap risk associated with embedded digital risk on rates Utilize spread payouts Diversify across strikes and maturities Correlation exposure given limited supply of ELS and Correlation Swaps Liquidity is mostly in the 3m-2y region Hybrid products allow the hedging the impact from both Rates and Equities that are typically cheaper than the sum of the components SPX Puts (and spreads) contingent on Rates SPX Puts where Notional scales down as Rates increase Payer Swaption contingent on SPX performance 15

Equity/IR Correlation Market SPX/10Y Swap Rate Implied Correlation Levels Expiry Implied Bid Implied Offer 6m 23 34.5 1Y 25 38 2Y 33 42 5Y 36 45 Correlation has stayed at elevated levels due to various crisis Insurance company hedging has certainly contributed to the structural change in the implied correlation. Market for correlation is still developing ELS and correlation swaps. Correlation skew downside equity strikes would have higher implied levels Source: BNP Paribas. 16

-50.0% -45.0% -40.0% -35.0% -30.0% -25.0% -20.0% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% Rate Option Premium Hybrid Option Example Payoff = MAX(0, 0.8 SPX(T) / SPX(0)) * Q(CMS10y < 2%) Discount to Vanilla = 35% 30.00% 20.00% 10.00% 0.00% 2.00% 1.73% 2.28% 20.00%-30.00% 10.00%-20.00% 0.00%-10.00% SPX Return 17

New Product Themes Product design is unrelenting in FIA s Volatility Controlled Indices (uncapped) Guaranteed Lifetime Withdrawal Benefits (special treatment of Benefit Base) Free partial withdrawals Lifetime Income option GMWB rider fees as a function of Rates? 18

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