This document provides an overview of individual annuity products. It discusses sales trends showing growth in fixed indexed annuities after 2008. Various annuity products are described including their tradeoffs around control over assets, upside potential, and downside protection. Developments since 2008 focused more on downside protection with products like deferred income annuities and guaranteed lifetime withdrawal benefits attached to variable annuities. The annuity landscape also changed with more private equity acquisitions of annuity blocks.

1. INDIVIDUAL ANNUITY OVERVIEW
Winter Liu FSA, CFA, FRM
Atlanta Actuarial Club 2015 Spring Luncheon
June 10, 2015

2. Agenda
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 Sales trend
 Product overview
 Post 2008 product development
 Change in market landscape

3. Glossary
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 BB – benefit base
 BV – book value (FDA)
 DIA – deferred income annuity
 FDA – fixed deferred annuity
 FIA – fixed indexed annuity
 GMxB – guaranteed minimum xxx benefit
 GLWB – guaranteed lifetime withdrawal benefit
 IA – indexed annuity, same as FIA
 IVA – immediate variable annuity
 MVA – market value adjustment (on FDA)
 SPIA – single premium deferred annuity
 VA – variable annuity
 VIA – variable indexed annuity

4. U.S. Individual Annuity Sales Trend
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2008 Variable 2014 Variable
Company Share Company Share
TIAA 9% Jackson National 16%
MetLife 9% Lincoln 9%
ING 9% AIG 9%
AXA 9% TIAA 9%
Lincoln 7% Transamerica 7%
Prudential 6% Prudential 7%
John Hancock 6% AXA 7%
AIG 5% MetLife 4%
Hartford 5% Nationwide 4%
Pacific Life 5% Riversource 4%
Riversource 5% Pacific Life 3%
Jackson National 4% New York Life 3%
Other 20% Other 16%
 Overall annuity sales held relatively steady since the Great Recession
 VA recovered somewhat but still far below the 2007 record; some major players quit
 Fixed annuity sales ballooned during the 2008 crash, partly due to liquidity driven incentives
 Fixed annuity saw steady growth lately due to popularity of indexed annuity
184
156
128 141
159 147 145 140
67
103
105 76
76
67 79 90
-
50
100
150
200
250
300
2007 2008 2009 2010 2011 2012 2013 2014
U.S. Annuity Sales ($billions)
VA
Source: LIMRA

5. U.S. Fixed Annuity Sales Trend
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 Fixed annuity product landscape changed significantly
 Post crisis, traditional fixed deferred annuities losing ground to indexed annuity
 Fixed Indexed Annuity (“FIA” or “IA”) increasingly popular, creating new market leaders
 Latest weapon to defend retirement security: Deferred Income Annuity (“DIA”)
2008 Fixed 2014 Fixed
Company Share Company Share
AIG 10% Allianz 14%
New York Life 8% New York Life 8%
Aviva 7% AIG 6%
MetLife 6% Security Benefit 5%
AEGON 6% American Equity 4%
Allianz 5% Forethought 4%
Jackson National 4% Great American 4%
Allstate 4% Symetra 3%
Principal 4% MetLife 3%
Hartford 3% Pacific Life 3%
Other 45% Other 46%
Source: LIMRA
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2007 2008 2009 2010 2011 2012 2013 2014
Fixed Annuity Market Share by Type
FIA
FDA
SPIA
DIA

6. Annuity Product Design
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 As baby boomers approached retirement ages, huge amount of savings are up for grabs.
Companies have been trying to develop the perfect product to capture this market.
Control over
assets
Downside
protection
Upside
potential
 What do consumers want?
 “I want to be able to access my saving
when I need it.”
 “I want to participate in equity market
growth.”
 “I do not want to lose more than xx% of
my savings” or “I want to receive at
least $xx a month during retirement.”
“Holy Grail” = Offer all three at a cost
acceptable to company and consumer

7. Single Premium Immediate Annuity (“SPIA”)
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 Basic idea: Periodic payout = Lump sum deposit / an
 an is driven by interest rate and mortality assumption
 Variations: life vs. certain; CPI indexed
1. Control over assets – withdrawal is
not allowed
2. Upside potential – payout level is
determined at issue
3. Downside protection – payout level
is determined at issue
Source: Bogleheads.org
SPIA payout ratio has been declining largely
due to persistently low interest rates

8. Fixed Deferred Annuity (“FDA”)
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 Basic idea: medium term savings account that pays a credited rate. The credited
rate is reset periodically but no less than a guaranteed rate.
 Surrender charge applies, typically 3 to 7 years; free withdrawal allowed, typically 10%
 Positioned between multi-year CD and bond fund; “book value” withdrawal
 Credited rate typically follows a N+1 structure: initially guaranteed for N years, then
reset annually; determined based on portfolio yield less a spread
 Guarantee rates prescribed, now between 1.0% ~ 1.5%
 Significant variation: Market Value Adjustment (“MVA”), shifting some interest risk to
policyholders. Otherwise, contracts referred to as Book Value FDA.
1. Control over assets – withdrawal is allowed
2. Upside potential – declared rates follow a stable bond portfolio yield
3. Downside protection – principal is not at risk; credited rate has guarantee

9. Fixed Indexed Annuity (“FIA”)
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 Basic idea: a variation of FDA, where the credited rate is based on equity index
performance; typical credited rate = max [0, min (cap, index return)]
1. Control over assets – withdrawal is allowed
2. Upside potential – index credit intended to improve upside, but declining cap
over the years limits upside potential
3. Downside protection – principal is not at risk
-0.4
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
0.4
-0.3 -0.2 -0.1 0 0.1 0.2 0.3
Return
Index performance
FIA Payoff Profile
Equity return
Credited rate
 Surrender charge applies, typically 5 to 12 years;
free withdrawal allowed, typically 10%
 Index credit period: typically 1 year
 Index method: point-to-point (European); annual
average (Asian); other
 Index benchmark: S&P, NASDAQ, multiple-index
 Cap: solved; used to be 10-12%, now 3-4%
 Hedging / inforce management

10. Variable Annuity – Base product
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 Basic idea: a mutual fund type account with tax deferral advantage
 Surrender charge applies, typically 4 to 6 years; free withdrawal allowed, typically 10%
 Multiple investment options, with management fees from 10bps to 200bps
 Fixed rate account sometimes available, similar to FDA
 Loads or fees deducted from account value
 Often sold with riders (GMxB)
1. Control over assets – withdrawal is allowed
2. Upside potential – return similar to mutual funds
3. Downside protection – similar to mutual funds, principal is at risk

11. Pursuit of the Holy Grail
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 How can we design a product that offers all three major selling points?
 VA appears to be the starting point
 VA is the largest market
 Fascination with equity market exposure (i.e., attention on upside)
 Biggest risk is not taking any risk at all: principal protection ≠ downside protection
SPIA FDA FIA VA ??
Control over assets
Upside potential
Downside protection
Product variation IVA MVA, FIA GMxB
VA GLWB

12. Guaranteed Lifetime Withdrawal Benefit (“GLWB”) Rider
The pursuit of Holy Grail is over – VA with GLWB rider
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 Basic idea: GLWB allows policyholder to withdraw x% of Benefit Base (“BB”)
every year for life, regardless of account value performance, even if fund runs
out completely
-
500
1,000
1,500
2,000
2,500
1 2 3 4 5 6 7 8 9 10
Policy year
GLWB Benefit Base Growth Pattern
AV
BB - Ratchet
BB - Rollup
 Benefit Base is a side calculation
Ratchet BBt = max (AV, BBt-1 )
Rollup BBt = BBt-1 x (1 + rollup rate)
 Withdrawal %age increases by age when
GLWB is exercised (e.g., 4% at age 60)
 Once GLWB is triggered, BB does not
decline unless excess withdrawal
 GLWB type riders soon dominated VA sales
 Companies designed complex dynamic hedging process to manage
cost and risk of GLWB … … Everything worked until it didn’t

13. Consumer Taste Change after 2008 Crash
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 Insurance industry went through the Great Recession relatively unscathed, except for
major VA carriers. VA players cut back sales, increased rider fee, quit, etc.
Control over
assets
Downside
protection
Upside
potential
 Consumer preferences are changing
 “Lost decade” in equity market
 Once bit twice shy
 Prolonged low interest rate environment
 Consumers shifting from “upside potential”
focused to “downside protection” focused; more
willing/realistic with compromise
 “Will I outlive my saving?”
 What’s your (retirement) number campaign
 Defined Benefit over Defined Contribution

14. Post 2008 Product Trend
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 The GLWB Holy Grail failed, or did it?
 VA development
 Back to basics (i.e., no significant living benefit rider) - but sales still driven heavily by
GLWB due to consumer desire for downside protection
 Volatility control funds – shift some hedging to consumer side; consumers appear to be
willing to shoulder the (implied) cost
 Introduce a deferred income annuity (“DIA”) element
 FIA development
 Innovation in indexing strategy, e.g., Variable Indexed Annuity (“VIA”)
 FIA a better chassis for GLWB? Lower AV volatility, more predictable Benefit Base pattern
 GLWB popularity powered FIA sales; more than 85% FIA sold carries GLWB
Downside protection sells

15. Deferred Income Annuity (a.k.a. Longevity Annuity)
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 Periodic payout = Deposit / an
Is it time for mortality to shine?
 How to make a payout annuity more attractive than SPIA
 Make it “deferred”
 Make it “flexible premium”
 Make it combo
 Make it tax efficient
 Death benefit?
 Challenges
 How to balance death benefit with payout ratio
 VERY long obligation requires VERY high rating
 Investment management
Payout phase
Payout phaseDeferral PhaseContribution Phase
SPIA
DIA

16. Change in Market Landscape
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 Private equity and alternative buyers enter market via acquisition
 Inforce blocks viewed as a cheaper way to acquire assets under management
 FDA / FIA particularly popular
 Asset intensive
 Relatively simple liabilities
 Unattractive under market consistent valuation framework
 Wave of M&A activities in the past 4 years
 Apollo / Athene - RBC USA 2010, Aviva USA (annuity) 2012
 Guggenheim - Security Benefit 2010, Equitrust 2011, SunLife USA (Annuity) 2012
 Harbinger - Old Mutual 2010
 Goldman / Global Atlantic - Forethought 2013, Aviva USA (life) 2013
 Resolution - Lincoln Benefit 2013

17. New Valuation / Appraisal Framework
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 New players with significant banking and asset expertise brought in a new
valuation/appraisal approach
 Liability cost of fund (“COF”)
Asset transfer upon sales = NPV(COF, Product cash flow)
 ROE = (Asset return – COF) x Leverage + Asset return
where Leverage = Liability / Required Surplus
Assuming 10x leverage
Asset return (over Swap)
COF (over
Swap) 1% 2% 3%
0% 11.0% 22.0% 33.0%
1% 1.0% 12.0% 23.0%
2% -9.0% 2.0% 13.0%

18. Questions?
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Winter Liu
wliu2@munichre.com