Sales and Trends in Indexed Annuity Product Development

Sales and Trends in Indexed Annuity Product Development Iowa Actuaries Club February 22, 2008 Sheryl J. Moore President and CEO Annuity. Specs. com Advantage Group Associates, Inc.

Source: Annuity. Specs. com

Indexed Annuity Sales

9 2 Q 8 9 3 Q 8 9 4 Q 8 9 1 Q 8 9 2 Q 9 9 3 Q 9 9 4 Q 9 9 1 Q 9 0 2 Q 0 0 3 Q 0 0 4 Q 0 0 1 Q 0 0 2 Q 1 0 3 Q 1 0 4 Q 1 0 1 Q 1 0 2 Q 2 0 3 Q 2 0 4 Q 2 0 1 Q 2 0 2 Q 3 0 3 Q 3 0 4 Q 3 0 1 Q 3 0 2 Q 4 0 3 Q 4 0 4 Q 4 0 1 Q 4 0 2 Q 5 0 3 Q 5 0 4 Q 5 0 1 Q 5 0 2 Q 6 0 3 Q 6 0 4 Q 6 0 1 Q 6 0 2 Q 7 0 3 Q 7 0 4 Q 7 07 1 Q Inverse Relationship with CD Rates and IA Sales 8000 8. 00 7000 7. 00 6000 6. 00 5000 5. 00 4000 4. 00 3000 3. 00 2000 2. 00 1000 1. 00 0 0. 00 Index Annuity Sales (in millions) CD Rates

4 Q 2007 Indexed Annuity Sales Allianz Life $1, 537, 573, 801 23. 89% 1, 062, 241, 588 16. 50% American Equity 524, 847, 349 8. 15% Old Mutual 447, 006, 778 6. 95% Midland National Life 401, 500, 000 6. 24% ING 293, 020, 947 4. 55% North American Company 247, 200, 000 3. 84% GAFRI 227, 359, 390 3. 53% Equitrust 221, 033, 241 3. 43% 214, 339, 502 $6, 449, 054, 723 3. 33% AVIVA Jackson National Life Total Sales

Indexed Annuity Sales 2007 Allianz Life $5, 423, 663, 031 21. 53% AVIVA 4, 346, 357, 951 17. 25% American Equity 2, 093, 575, 756 8. 31% Old Mutual 1, 960, 027, 363 7. 78% Midland National Life 1, 655, 900, 000 6. 57% ING 1, 312, 603, 929 5. 21% GAFRI 1, 007, 147, 390 4. 00% Jackson National Life 893, 500, 575 3. 55% Equitrust 878, 471, 063 3. 49% 783, 926, 525 $25, 192, 760, 288 3. 11% Conseco/Bankers Life Total Sales

Sunshine in your email box! n Annuity Writers Face More Regulatory Control Over Sales, But Less Control Over Those Who Sell Them n Quick Q&A on Fixed Indexed Annuities n The DOWNSIDE to Market Proof Annuities

Sunshine in your email box! n New Regs, Lawsuits Help Make Annuities Less Restrictive n NAIC Releases List of Top Annuity Consumer Complaints n Iowa Tests Annuity Disclosure Documents

Sunshine in your email box! n The Trade-Offs of Annuity Guarantees n Regulators Announce Joint Suitability Project n Official Settles One Annuity Suit, Starts Another n Allianz Life Arm Agrees to Pay $10 million Fine

Sunshine in your email box! n California Official Settles Annuity Suitability Action n Allianz to Pay $10 Million to Settle Lawsuit n Annuity Writers Face Issues of Sales Suitability n Insurance Commissioner Poizner Announces $10 Million Settlement with Allianz for Allegedly Deceiving Seniors into Purchasing Unsuitable Annuities

Sunshine in your email box! n Insurance Chief Says Allianz Life Insurance Company of North America Sold Ill-Fitting Policies to Seniors n Fixed Annuity Companies Pledge Help to Stop Unfair Sales Practices n Minnesota Settles Annuities Case for Senior Citizens

Sunshine in your email box! n Allianz Life Reaches $10 Million Dollar Settlement with Calif. Over Annuity Sales Suitability n American Equity Reports $5 Million Loss in Fourth Quarter n American National’s Fourth Quarter Profit Down 51. 9% on Drop in Investment Income

Sunshine in your email box! n Service provided to my clients for a single month – A single positive article? – Three neutral articles – Sixteen different negative articles n All public sources of information – Ready and available for our clients on Google!

How did we get here?

How can we stop it?

Popular Product- Then n Direct 16 – 14 -year surrender charge/25% scale year one – 70% @ 3% minimum gtd. surrender value – 4 daily AVG strategies and a fixed – No bonus – Full AV upon death, 10% PF w/ds year 2 – Issued to age 75 – Street level commission of ? ? ?

Top Ten Product Analysis- Then 2 Q 2003

10/10 States

10/10 Rule and Product Development n What is it? – Desk drawer regulation limiting surrender charges and scales on policy forms for annuities § 10 years/10% scale n How has it changed products /distribution? – B/Ds in the mix n Product trends since 10/10 – Surrender charges, bonuses, compensation, vesting

Lower Surrender Charges on the Rise No. of Products by Surrender Period 29. 8% 24. 4% 20. 2% 13. 9% 10. 8% 1. 2% 5 Yr & Less 6 - 7 Yr 8 - 9 Yr 10 Yr 11+ Yr Annuitize

Premium Bonuses: Price For All That You Can… 16. 5% 15. 0% 13. 4% 11. 0% 10. 2% 9. 4% 7. 9% 6. 3% 4. 7% All Others 12. 5% 10% 8. 0% 7. 5% 6 -7% 5% 4% 3% < 3% Premium Bonus Percentage

Comp- All Over the Board… Products by Agent Commission Level 22. 0% 17. 4% 12. 7% 9. 6% < 4% 10. 6% 5% 10. 6% 6% 7% 9. 0% 8% Commission Amount 8. 4% 9% > 9% All Others

Compensation Trends n Indexed Annuity commission received by the agent averaged 7. 74% of premium as of 4 Q 07 – A reduction of 0. 31% from 3 Q 07 n Average SLC for all products on the market as of 4 Q 07 is 6. 93% – A reduction of 0. 02% from 3 Q 07 n Presently, street level compensation ranges from 1% 13% on all products – A single product paying 13%, one paying 12%, then several paying 11%

Popular Product- Now n Index Fortifier X – 10 -year surrender charge/12% scale year one – 100% @ 3% minimum gtd. surrender value - SC – Ann. PTP, Mo. AVG, Mo. PTP and a fixed – 5% up-front bonus – Greater of full AV or MGSV upon death, 10% PF w/ds year 2 – Issued to age 85 – Street level commission of 8. 50%

Top Ten Product Analysis- Now 4 Q 2007

What are Carriers Doing? n Lowering Surrender Charges n Lowering Bonuses/using vesting schedules n Lowering Compensation with new product dev. n Lowering Issue Ages n Pulling non-compliant products

What are Carriers Doing? n Not developing new crediting methods n Keeping crediting methods simple n Revising marketing materials n Requiring suitability forms in all states

IA Rider Product Development n Guaranteed Minimum Death Benefits (GMDBs) – Guarantee 4 – 5% accumulation on the DB, in exchange for a 0. 50% annual charge from the Account Value § i. e. such as on the BPA products from American Investors – Guarantee that beneficiaries will receive up to 200% accumulation on premiums, less withdrawals, in exchange for lower rates, caps, etc. § Offered on a series of Conseco products

IA Rider Product Development n Guaranteed Minimum Withdrawal Benefits (GLWBs) – Guarantee annual withdrawals “for life” (at a % usually based on client’s age), regardless if Account Value goes to zero, in exchange for a charge § Explicit charge as a % of the Account Value § Lower caps, participation rates, and fixed rates in exchange for the benefit § Some other inherent pricing mechanism, i. e. defer product ten years, then take out lifetime income

IA Rider Product Development n Fifteen IA carriers currently offering these benefits – Two more currently filed or pending launch – Only three one year ago – Four carriers have already revised their first versions n Designs range from simple to complex and deserve proper training – Some charge for the rider even in the event there is no gain – Some permanently lower the rates once lifetime income is initiated

IA Rider Product Development n Benefit Base Bonus- credits a premium bonus on the Benefit Base of a Guaranteed Lifetime Withdrawal Benefit (GLWB) product; three products in the market feature this type of bonus and riders as well – HUGE propensity for miscommunication on this bonus, which is not up-front – Client cannot “walk away” with the bonus if they were to cash surrender – Must take income stream in order to receive bonus – Bonuses as high as 15% presently

IA Rider Product Development n Enhanced Benefits on GLWBs provide a higher withdrawal percentage, in the event on Long Term Care situations – – Require that rider must have been in force for five years Annuitant must meet 2/6 ADLs Situation must be expected to be permanent Not available on joint life § Where a single life payout percentage may have provided 5% withdrawals for life for a client aged 60, this enhanced benefit would provide 8% withdrawals for life

IA Rider Product Development n Long Term Care (LTC) riders – Two carriers offer such a benefit today – More carriers in the wings, due to Pension Protection Act n Benefits increase liquidity in time of need – – – Client must not be able to 2/6 ADLs, and be receiving care Qualification period may be required (rider on IA for six years) Elimination period must be met (45 -90 days) – – – No underwriting or simplified issue Benefit cost differs: 0. 55% or 0. 27%- 2 -00% based on age/sex Either increase value for withdrawals, or take full liquidity over # of yrs

Other Indexed Annuity Trends n Rainbow crediting methods- where you perform your normal index crediting strategy calculation, but use a blend of indices, and either perform a lookback, or use a weighting of the indices – Annual Point-to-Point or Monthly Averaging thus far – Propensity to use international indices on these strategies § § § FTSE 100 DJ Euro Stoxx 50 Nikkei 225

Other Indexed Annuity Trends n Rainbow crediting methods – “Everybody’s doin’ it” § Allianz: weighting – DJIA 35% – Lehman 35% FTSE 20% Russell 10% § American Investors Life: lookback – S&P 500, Nasdaq-100, DJIA – 50%, 30%, 20% to Best, Next best, Least best performing § Aviva Life and Annuity: lookback – S&P 500, Nasdaq-100, DJIA – 50%, 30%, 20% to Best, Next best, Least best performing § ING: weighting – S&P 500 70% – DJ Euro Stoxx 50 30% – Four more carriers with pending strategies

Other Indexed Annuity Trends n Ten year, 10% bonus products – How? n Products with lower comp. , higher rates – Why? n New BPA Select products- charging clients an explicit AV charge for indexed allocations – This is in addition to charging for optional GMDB/premium bonus

Overall… n Sales are down, but so are CD rates n Things should start looking better in 2008 n Looks like the regulators are cleaning things up n But some carriers are trying to mess things up for the rest of us

Overall… n Looks like by cleaning up our product development, it is creating less problems with suitability n It looks like GLWB are beginning to drive sales… n And it is a GREAT time to be a consultant!

Any Questions?

Sheryl J. Moore sheryl. moore@annuityspecs. com (515) 262 -2623