1

2
Source: AnnuitySpecs

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Full year 2011 VA Sales – Top Ten Companies ($ in millions)
12/31/
11
Rank
Company 2011
Sales
% Chg. vs. 2010
Q4 11Mkt
Share
1 Allianz Life $6,319 -7.8% 19.5%
2 Aviva 4,506 -13.9% 13.9%
3
4
American Equity
GAFRI
4,371
1,847
6.4%
115.1%
13.5%
5.7%
5
6
7
North American
Lincoln National
Midland National
1,673
1,615
1,554
8.4%
-20.3%
-1.5%
5.2%
5.0%
4.8%
8 Jackson National
9 ING
10 Security Benefit
1,497
1,361
941
-11.0%
-23.4%
New
4.6%
4.2%
2.9%
Source: AnnuitySpecs

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 Surrender Charges
 Over 50% have 10-year SC
 Over 75% have SC <= 10-years
 Continued but slowing trend toward 10 / 10
 IIPRC, Florida
 Agent Commission
 Modest trend toward lower commissions
 In low rate environment, seems like there will have to be additional cuts
 In Bank annuity space clear trend to trade comp for volume
 Bonuses
 Vast majority of sales include a bonus
 Typical bonuses are 5 – 10%
 Vesting schedules are a typical way to recoup bonus
 Portion of bonus might come with a rider
 Average Issue age is 65 unchanged
 Qualified percent is unchanged
 Average size unchanged
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6
 GLWBs
 GLWBs are not as prevalent as on the VA side but growing
 On some products, portion electing GLWB > 95%
 Overall election likely in the 50 – 60%
 Typical Structure
 Premiums accumulated at a set percent
 6% to 8% compound
 7% to 10% simple
 Often for 10 years with one renewal available
 Payout factors that are similar to VA side
 5.0% to 5.5% at 65
 Charge is typically bps of benefit base assessed against AV
 Challenges
 Low interest rate environment
 Actuarial Guideline 33
 Continued need for bonus and comp

7
 Current fixed buckets in FIAs between 1.0% and 1.5%
 Current caps are around 3 to 4% on S&P 500 strategies
 Difficult to tell upside story
 How does a company
 Blended indices
 Blend S&P 500 with a fixed crediting rate
 Fixed crediting rate might be low to subsidize S&P portion
 0% credited interest Floor applied in aggregate
 Use of spread instead of cap to get more upside
 Alternative indices
 Use a index with lower volatility than S&P 500
 Trading off return potential for lower costing option
 Challenges
 Need to be able to buy option, less liquid than S&P
 Limited number of option sellers
 No historic experience – Must rely on backcasting

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 Four Inputs into the price of an option
 Examples assumes a 2% option budget which would be able to buy a 4% cap or a 20% participation rate
 Risk-free interest rate
 Typically the swap curve rate for the maturity of the option
 1-yr swap curve on 6/14/2012 was 54 bps
 Capped strategy
 If rate rose to 104 bps, cost of option only increases by a few bps
 But, if my option budget increased by 50 bps, could buy 5% cap
 Participation rate strategy
 If rate rose to 104 bps, cost of option only increases by a few bps and pushes participation rate to 19%
 But, if my option budget increased by 50 bps, could buy 25% participation rate

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 Implied Volatility
 Volatility is not just a single number but is a complicated surface
 1-yr at-the-money vol in example is 19.26%
 Capped strategy
 If vol cut to 15%, cost of option only decreases by a few bps
 Still can only offer 4% cap
 Participation rate strategy
 If vol cut to 15%, cost of option cut by 19%, pushing participation to 25%

10
 Dividend Rate
 Since crediting strategies typically use index without dividend, the dividend rate is an input in the option pricing formula
 In example dividend assumed to be 2.0%
 Capped strategy
 If dividend increased to 3%, cost of option decreases by 10 bps allowing cap to increase to 4.25%
 Participation rate strategy
 If dividend increased to 3%, cost of option cut by 5%, pushing participation to 22%

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 Length of Option
 The last input into the option pricing formula is length
 In example assumed 1-year option
 Capped strategy
 If length extended to 2 years, cost of option increases by 11 bps
 But, since I only have to buy the option every 2 years I have double the option budget or 4%
 Can push cap up to 8%
 Participation rate strategy
 If length extended to 2 years, cost of option increased by 55%
 But, since I only have to buy the option every 2 years I have double the option budget or 4%
 Can push participation rate to 25%

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 Suppose wanted to create a, 100% participation, uncapped crediting strategy with no spread
 Willing to push crediting length to 5 years
 Gives an option budget of 5 times 2% = 10%
 S&P 500 option would cost around 21.4%
 Need to find index with lower volatility
 Low Vol S&P 500 uses the 100 stocks subset with the lowest vols
 Option would cost around 15%
 Defensive funds
 Option could cost around 12%
 Other possibilities
 Blend fund with bond fund or other low correlation fund
 Blend with a fixed account paying a crediting rate less than option budget

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 Use of spread
 Products that have used a spread have traditional back-casted well
 S&P 500 has thicker tails (meaning more extreme good and bad years) than option pricing assumes
 Getting all of the good years after the first x%
 Very sensitive to implied volatility
 Buying-up the crediting parameter
 Use of a charge to increase the option budget and increase what is offered
 Mixed results to date
 Extending option reset period beyond 5-years
 12-year S&P 500 option in theory could be uncapped with 100% participation and no spread
 Would need to find investment bank to price it.

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 Backcasting
 Most indices that would be considered are based on set formula
 Substitutions can be found for indices that didn’t exist
 Third party should be used to do calculation
 Marketing
 Challenges of gaining acceptance versus familiar
 Purchasing options
 Limited sources to buy options
 Likely best to find a single partner and agree upon parameters
 Regulatory
 Insure that no way index could be manipulated
 Transparency critical
 Need to carefully craft marketing materials

15
 Vast majority of sales still through IMOs
 Continued attention on GLWBs
 Significant activity in new indices
 Continued and accelerated attention from Banks and
Wirehouses
 Partial due to challenges on VA side
 Desire to tell income story
 Moderated product
 Sales likely flat due to low interest rate environment
 Progress (hopefully) made on AG 33 issues