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Fixed Index Annuities White Paper

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WealthVest White Paper

  1. 1. Fixed Index Annuities: Lower Risk for Savers, Economic Opportunity for Broker-Dealers Wade Dokken wade@wealthvest.com March 31, 2010 TABLE OF CONTENTS Executive Summary .................................................2 Fixed Index Annuity Sales Growth.......................4 Fixed Index Annuities Sold Away.........................5 FINRA 05-50 ............................................................6 Selling Away Revenue Loss....................................7 Fixed Index Annuity Performance .......................8 Variable Annuity Performance .............................10 Fixed Index Annuity Sales Future........................14 WealthVest Marketing Advantage ........................18 Product Introduction Addendum………………………20 Real World Returns.................................................23
  2. 2. Executive Summary 1. Fixed Index Annuities (FIAs) represent the greatest potential source of independent broker-dealer future profitability. Sales in FIAs have grown 600% over the past decade, while variable annuity sales have declined 28% from their levels a decade ago. Variable annuity sales are now 50% lower than they were at their peak. Sales in FIAs are almost exclusively sold by traditional independent broker-dealer registered reps and insurance agents, who are securities licensed. FIA sales through registered reps are estimated to equal $25 billion, which amounts to 40% of current VA sales through independent broker-dealer registered reps. 2. FIA sales are now disproportionately sold away from the broker-dealer. ING, a major writer of FIAs, claims that 85% of its FIA sales are written by advisors with series 6 or 7 licenses, and only 20% of their sales are written through broker-dealers. Annuity Specs, the principal index annuity research service, calculates that 2.5% of index sales are written through broker-dealers and another 8% through banks. However, it is widely assumed that most of the agency-written index sales are actually written by insurance agents holding a securities license. This is in contravention of FINRA 05-50 directions for broker- dealers to supervise the sales of FIAs. SEC proposed rule 151A is implicitly designed to interpose broker- dealer supervision on the sales practices of errant advisors. 3. NASD Notice to Members 05-50. This August 2005 notice to members leaves little doubt that the NASD strongly desires member firms to supervise the sale of unregistered Fixed Index Annuities. The notice also calls for greater supervision of compliance, marketing, sales presentations, and suitability and requests that this business be written through the member firm. In conversations with Joe Savage, FINRA, it is also clear that FINRA believes all FIA sales where registered products represent the source of funds, should be supervised. 4. Selling away represents a substantial loss of revenue for broker-dealers, in addition to the potential sales practices liability of unsupervised sales. It is estimated that FIA selling away currently represents a lost commission opportunity of $1.236 billion for independent broker- dealers. Furthermore, assuming a net retained margin of 15%, FIA selling away amounts to a $185 million net retained commission loss for independent broker-dealers. 5. Fixed Index Annuities have superior product performance and risk management features. Fixed Index annuities have evolved into products that broker-dealers can be proud to sell, and in this respect, consumer preferences have out-paced broker-dealer comprehension of the fixed index annuity product set. Previous product features have been discarded, contributing, at least in part, to the decline in Commissions to an average of 6.24% in the 3rd quarter of 2009. As interest rates increase, all elements of the index annuity product gain a competitive advantage. The equity market participation rises, and the fixed rate alternative increases. The most popular FIA products for financial advisors commonly carry total fees of 150-200 basis points and historically generate total returns in the 5-6% range, which will in all likelihood also rise as interest rates climb. 6. Alternatively, variable annuities have evolved into increasingly expensive delivery vehicles for equity market performance. Prudential and Jackson National, to name only two of the leading variable annuity sellers, derive a large percentage of their variable annuity sales via a series of options and funds that can cost investors 4.00% or more. These options also require that assets be allocated to 20-30% in bonds and cash. According to Dr. Jeremy Siegel, this asset allocation blend should result in total returns below 8%. Thus, today’s most popular variable annuities seem to be designed to provide total returns in the high 3% or very low 4% range, all the while exposing investors to much of the systemic risk of the U.S. stock market. The market is cognizant of these product versus performance contradictions, and as a result, new money as a percent of overall variable annuity sales have fallen to 14% of sales, while variable annuities have fallen 28% below their level over a decade ago. Page 2
  3. 3. 7. Market forces will continue to drive investors and firms to more guaranteed investments. This BD revenue loss will intensify in the coming years as FIA sales continue their market share growth pattern. a. The past decade of market underperformance is rapidly altering Americans’ savings habits, shifting their preferred savings vehicles from equity-based to more guaranteed rate savings vehicles. b. The ‘Great American Bull Market” in bonds has ended and will soon be replaced by an extended secular bear market in bonds. Unfunded American Medicare and Social Security costs are pushing up public expenditures. Economic stabilization costs, the war debts, and stimulus costs all suggest an expansion of bond yields in the coming years. High nominal rates suppress equity valuations and shift savers to guaranteed rate products (such as fixed and fixed index annuities). c. American demographics for the purchase of fixed annuities will double in the coming years as baby-boomers reach the peak annuity purchasing age. All other factors being equal, fixed annuities are poised to double, firmly supplanting variable annuities in Americans’ savings preferences. 8. Against these consumer preferences and demographic and economic backdrops, WealthVest Marketing can help you capture nearly 100% of your FIA business. We believe that you may conservatively assume current FIA sales to amount to 40% of your variable annuity sales. assuming you presently capture the 2.5% average, your increase would thus correspond to a 47% increase in commission revenue. The gap between your existing FIA sales and this derived number measures the lost commission opportunity of your firm. Overnight, you can gain commission revenue amounting to 47% of current variable annuity commission revenue. Page 3
  4. 4. WealthVest IBD Fixed Index Annuity Strategy Fixed Index Annuities (FIAs) represent the greatest potential source of independent broker-dealer future profitability. The next several pages represent the single largest profit opportunity for your firm today. Fixed Index annuities are currently the fastest growing segment of the annuity business. FINRA and the SEC are both taking steps to require broker-dealers to supervise FIA sales. These products are increasingly becoming the best consumer value in the annuity marketplace. We can show you how to increase your net retained revenue by $450,000 (assuming a 15% net BD margin) for every $100 million in current variable annuity business written. Most importantly, we believe variable annuity sales will continue to decline, while fixed index annuities will continue to grow. Either this revenue opportunity will increase for your firm—if you take action—or the lost revenue will expand as variable annuities decline and fixed index revenue is not retained by your firm. This profit maximization does not require changing the product biases of your registered reps, who can continue to sell the current mix of stocks, bonds, mutual funds, and variable annuities. gains are made possible by capturing index annuity business currently not sold through your firm. Most importantly, by gaining a certain degree of control over this burgeoning insurance product, you can add $2-3 million of enterprise value to your firm for every $100 million of current variable annuity business written. We have included a spreadsheet that allows you to customize these calculations for your own firm, assuming a 6x multiple on the profitability for a broker-dealer. Page 4
  5. 5. FIA Sales are now disproportionately sold away from the Broker Dealer We currently believe that market forces are reversing variable annuity sales and that the tremendous nominal sales growth of variable annuities will be replaced by fixed index annuities. Variable annuities sales are currently 50% of their peak values, while Fixed Index sales are up 600% from 10 years ago. We each have 25 years of broker-dealer experience, and we believe our approach can protect our broker-dealer customers’ financial integrity. Page 5
  6. 6. NASD Notice to Members 05-50 Creates a compelling reason for Broker-dealers to fully supervise FIA sales This August 2005 notice to members leaves little doubt that the “then” NASD strongly desires member firms to supervise the sale of unregistered Fixed Index Annuities. The notice also calls for greater supervision of compliance, marketing, sales presentations, and suitability and requests that this business be written through the member firm. “This Notice to Members addresses the responsibility of firms to supervise the sale by their associated persons of equity-indexed annuities (EIAs) that are not registered under the federal securities laws…” Page 6
  7. 7. Supervision under Rule 3030 and Rule 3040 “Many firms assume that EIAs that are not registered under the Securities Act are insurance products and not securities. These firms treat the sale of unregistered EIAs by associated persons in their capacity as insurance agents as an outside business activity under Rule 3030, beyond the mandated purview of the firm’s supervision. Rule 3030 does not require that the firm supervise or even approve an outside business activity, although a firm may choose to deny or limit the ability of associated persons to engage in the activity. Rule 3030 simply requires that an associated person promptly notify the firm in writing that he is engaging in a business activity outside the scope of his relationship with the firm…” “Firms are encouraged to consider whether other supervisory procedures also might help protect the firm’s customers. For example, a firm could require that all sales of unregistered EIAs occur through the firm. If an associated person is selling the unregistered EIA through the firm, the firm must supervise the marketing material, suitability analysis, and other sales practices associated with the recommendation of unregistered EIAs in the same manner that it supervises the sale of securities…” We interviewed Joe Savage’s regulatory staff for this paper. The opinion of the general industry and specifically FINRA’s staff is that the SEC will continue to request these product be regulated as securities. Further, FINRA expects to continue to place attention on the “source of funds” for the purchase of Fixed Index Annuities. FINRA communicated that if a registered product is sold to facilitate a FIA purchase, the entire transaction should be a supervised activity. Page 7
  8. 8. Fixed Index Sales are Booming Fixed index annuities have been on a steady upward trend for the past decade, with one brief exception. The combination of principal protection they provide coupled with the opportunity to allow market performance to enhance interest rates has proven very attractive to American savers. Over the past decade, FIAs have grown from $5 billion annually to over $30 billion in 2009. It is estimated that index annuity sales now represent nearly 50% of variable annuity sales; a ratio that was once approximately 7:1 nationally is now only 2:1 in the IBD channel. Many financial planners derive a disproportionate percentage of their incomes from the recommendations of this product to their customers. At the same time, Variable annuities have collapsed from a high of $180 billion annually to $98 billion in 2009. Variable annuity sales are now 20% less than they were in 1999, while index annuity sales are 600% greater. Page 8
  9. 9. Fixed Index Annuities are superior products for tomorrow’s investment climate. They possess a core set of product characteristics that allow them to achieve superior investment results in today’s market and the years to come, including: 1. Low fee chassis 2. Low risk strategy a. High Fixed Return Option b. Guarantee of principal—always 3. Low cost for enhanced income benefits 4. Flexible choices between fixed income and equity market participation 5. Sensible commission levels In short, the reality of the Fixed Index Annuity product line is that is deviates greatly from the perceived Fixed Index Annuity product line. The average commission today is 6.24%, and the average surrender charge is 7 years. Increasingly, FIA investors are allowed a series of equity market indices for their investment choices. Guaranteed income options—the driving force behind variable annuity sales today---are 25-50% of the cost of similar guarantees in variable annuities. The core product features of Fixed Index Annuities have evolved to become far superior to their historic features, and now represent a lower risk, lower expense alternative to variable annuities. In fact, in many market cycles, they are not only lower risk—they are higher return. The difference is simple; variable annuities, with their complete exposure to the volatility of equity markets, create an insurance company risk that must be priced. Variable annuity companies failed to adequately comprehend these risks prior to 2008 and paid a severe penalty. The loss in insurance company market capitalization and earnings has resulted in universal reductions in income benefits and increases in benefit costs. Page 9
  10. 10. Today, we find a market where variable annuities have become more expensive and less attractive to consumers. While index annuities have been lowering commissions, lowering spread fees, and shortening surrender periods, variable annuities have trended in the opposite direction. Today the variable annuity market leaders have mortality and expense fees of 1.85%. The underlying mutual fund fees average between 100 and 150 basis points for the most popular asset classes. The riders can be expressed as 70-90 basis points, but this pricing level depends upon the performance of the underlying sub- accounts. If they decline, then the real cost of the riders may well be 120 or 150 basis points. These facts mean that the most popular variable annuities can now have total fees of 375 to 425 basis points. When this is Compared to our core index annuities, the differences could not be more striking. The best-in- class index annuities today have “spreads,” a term referring to the total management fee between the underlying assets’ performance and the net return to the investor. These spreads most commonly range between 150-200 basis points. Index annuities are not registered with the SEC, so these fees are not prospectus disclosed; nevertheless, these are the real pricing assumptions that underlie the products. Thus, the differences are routinely 200 basis points between index annuities and variable annuities, and in extreme cases, a net difference of 300 basis points exists. Over the course of the last 12 years or so, variable annuities have traded places with index annuities. Their fees are lower, and hence, their risk-adjusted returns are higher. Overall fee differences of this magnitude can only mean one thing; over extended periods of time, when the asset classes are similar or a match, the higher fee product will substantially underperform the lower fee products. Ultimately, our business model—yours and mine—is not simply the delivery of superior service and advice, but also depends upon superior investment returns. Variable annuities, often offering quite similar core investor benefits and experiences, have evolved into highly expensive delivery vehicles for equity market participation. Let’s look at the basic assumption around a prospective advisor’s expected rate of return. Page 10
  11. 11. We reveal two substantial biases to variable annuities in this analysis. Most importantly, we have assumed that the next period of time (which we believe will be defined by higher interest rates) will continue to average the long term equities market average rate of return. However, the markets could easily underperform the long term trend-line. Second, and equally as important, is the concept of systemic risk. The risk of this portfolio far exceeds the risk of a fixed index annuity. The best designs in fixed index annuities allow you to lock in each month’s gains—or each year’s gains—and protect those gains from subsequent retreats in future down years. Page 11
  12. 12. “Real World Returns,” the October 5, 2009 Wharton study on Fixed Index Annuities, clearly proves that the product and the value of the benefits are consumer friendly and financially compelling. Page 12
  13. 13. Wharton’s key findings are that fixed index annuities performed 103 basis points above fixed annuity yields, and assuming that previous calculations of gross variable annuity fees are correct, fixed index annuity could thus easily outperform variable annuities on a consistent basis. Page 13
  14. 14. Market forces are aligned to reward fixed index annuity products. Finally, the American Baby Boomers are now reaching their peak annuity purchasing years. Over the next 15 years, the key annuity buying demographic will nearly double. This change is occurring on the heels of one of the worst stock performance decades of the past century. Coupled with the expected rise in nominal rates for government and corporate bonds and the resultant rise in fixed annuity rates, Americans will dramatically increase their participation in annuities. Simultaneously, they are likely to liquidate their variable annuity holdings; yet, with longer retirements, pure fixed annuities may prove lacking. This is where the hybrid fixed index annuity can create a most compelling investment story. We currently believe that market forces are reversing variable annuity sales and that the tremendous nominal sales growth of variable annuities will be replaced by fixed index annuities. Variable annuities sales are currently 50% off their peak values, while Fixed Index sales are up 600% from 10 years ago. We each have 25 years of broker-dealer experience, and we believe our approach can protect our broker-dealer customers’ financial integrity. Page 14
  15. 15. The U.S. equity market has just experienced a vastly disappointing decade from the perspective of investors, advisors, and broker-dealers alike. Many believe that our suffering is far from over. Our American equities market, defined by the Dow Jones Industrial Average, increased from 700 to 14,000 over the course of 25 years, between August 1982 and 2007. This amounts to a 20 times increase in market valuation. The growth in earnings explains roughly 1/3 of this wealth creation; however, 2/3 of this wealth creation can be attributed to P/E expansion. Between 1981 and 1999, the U.S. equities market appreciated a compounded 13.8% per annum in real terms---approximately a 165% premium over the long-term (1802-2008) average for equities. During this period, P/E ratios expanded from 7 times earnings to 21 times earnings. Today, they stand at 15x earnings. Although this P/E ratio is only slightly above the long-term average, this is against a backdrop of historically low interest rates. More important is the fact that historic averages are based upon interest rates 400 basis points above today’s United States 10 year government bond. My friend, Dr. Jeremy Siegel, author of “Stocks for the Long Run,” clearly articulates the power of equities in a personal portfolio over long periods of time. The 206-year real return running average now stands at 9.00%. However, this average includes periods of P/E expansion and P/E contraction. A casual observer of our markets must conclude that we are fundamentally more likely to find ourselves in a period of P/E contraction than P/E expansion for two reasons. Most important is the likelihood of a rise in interest rates, as echoed by Bill Gross and other bond investors. Rising interest rates increase the discount rate of future profits, thus driving down stock market returns generated from the P/E multiple effect. We may also face a prolonged period of lower household demand for equities. The American investor psyche has been severely damaged by the past three years of equity market participation. When this experience is superimposed on the last decade of investor experience, the total return in the equity markets amounts to negative .5% annually, compounded for ten years. This is not dissimilar to the 1966 to 1981 period in the U.S. equity markets. Stock indices reached 995 in February 1966, and they vacillated during this period of time, not reaching 1,000 again until November 1972. What followed was a period of rising interest rates and collapsing P/E ratios. The U.S. 10 year government bond yield rose from 4.82% in 1966 to 13.80% on December 15, 1980. The P/E ratio of the U.S. stock market fell to 7x earnings, before a rebound began in 1982, and stocks reached 1,100 in February 1983. Although the earnings of the S&P 500 rose by 2.5x, the valuation of the U.S. stock market failed to increase. Most damaging of all, the U.S. equity market experienced annual compounded real returns of -0.41% per year from 1966 to 1981. Page 15
  16. 16. Rising interest rates and collapsing P/E ratios. Americans’ reactions to these investment markets—in retrospect—was not difficult to predict. Overwhelmingly, Americans moved their money to fixed income securities (bonds and annuities), and shunned equities and equity mutual funds. The U.S. equity mutual fund market experienced net redemptions from 1971 to 1982 each year. Today, we face a world where our core products, variable annuities, mutual funds, and managed accounts, all rely disproportionately on equity market performance in the 9-12% range. This level of return above fixed income returns allows us to pay for the advisory fees, preferred vendor programs, and commissions which fuel our businesses. However, if you believe, as Bill Gross suggests, (Dow 5,000) and higher interest rates, then we must consider what the impacts to our business model in an environment of 6-10% U.S. ten year bonds are. We believe investor sentiment will focus upon the high nominal rate of fixed income. As stated earlier, we also believe these higher nominal rates will accompany lower P/E ratios, thus creating a very negative environment for stock mutual funds or variable annuities. The developed world debt has emerged as the greatest potential threat to sustained GDP growth. The substantial consumer debt overhang, principally due to The housing debt, and the continued expansion of unfunded entitlement liabilities—at the state and federal level—not only threaten our ability to spark consumer growth, but at the predicted future level, they are widely expected to suppress long-term growth by up to 1% annually (against an average of 3% expected growth.) Page 16
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  18. 18. Wealthvest Marketing Advantage Against this remarkable backdrop of financial advantages For the broker-dealer, the consumer, and the timing of the current stock and bond markets, we strongly believe that variable annuities are poised to be replaced by fixed index annuities. We believe that the most progressive broker-dealers will embrace the consumer friendly aspects of the fixed index product line. We also believe the best approach is a proactive product training, field wholesaling model, in which you take the initiative and help drive further positive consumer favorable features, commissions, and guarantees. WealthVest Marketing believes that we are the partner to help you lead the independent broker-dealer industry into a positive relationship with fixed index annuities. Lincoln and I were among the founders of American Skandia, a variable annuity company that commenced sales in 1988 and had developed into the largest writer of variable annuities in the United States by 2000. The market for variable annuities was $7 billion in 1988 and had grown to $150 billion by 2000, a 20x increase in sales. Our relative market share growth was attributable to three core concepts. We eventually became the CEO and COO of American Skandia, prior to our sale to Prudential Insurance. It was this platform that allowed Prudential to leverage its financial clout and additional development and again grow the acquired company into the largest seller of variable annuities in the United States. 1. First, we built a wholesaling force, which, according to third party analysis, was often regarded as a pre-eminent team of investment sales coaches for financial advisors. 2. Second, we embraced the rapidly changing sentiment on asset managers. We actively managed our portfolio of managers, seeking constantly to offer the best managers for specific asset classes, and secondarily, facilitating the availability of no-load managers for the professional advice community. 3. Finally, we placed a disproportionate level of our sales, marketing, and product development resources into the independent broker-dealer channel. Our sales strategy, pricing, and product design decisions reflected the preferences of this nascent—now dominant—approach to client needs and desires. We believe the same opportunity to change the product and product distribution model at a fundamental level once again lies in the area of fixed index annuities. WealthVest Marketing is committed to empowering and enriching broker-dealers in their sales of fixed annuities and fixed index annuities. WealthVest Marketing was founded by Lincoln Collins and Wade Dokken. We were both founders of American Skandia and COO and CEO, respectively. American Skandia became the #1 largest seller of variable annuities in the broker-dealer channel in the 2nd quarter of 2000, only 12 years after our inception. Lincoln extended his career, becoming the CEO of Hartford Life Europe, which developed into one of the largest underwriters of variable annuities as well as one of the “most admired places to work.” Page 18
  19. 19. WealthVest Marketing accomplishes these substantial economic benefits to your firm via four unique strategies: 1. We work exclusively with the broker-dealers to insure that all of the fixed index annuity business currently being written by your advisors is written through your firm in strict accordance with FINRA 05- 50. This strategy automatically allows you to increase your commission revenue from the fixed index annuities currently written away from your firm. 2. We build a preferred vendor program so that your firm can enhance its revenue—either above the street commission level, or, depending upon your contract with the advisor, simply at a higher commission, of which you receive a pro-rata share. We believe the most progressive broker-dealers are seeking to convert this program into an AUM program, which will create the greatest long-term enterprise value for the firm. 3. Unlike other companies today, we have a dedicated field wholesaling organization. We have employed 32 field wholesalers, making us the largest index annuity specialty wholesaling firm. We expect to build this sales force to over 40 by the 2nd quarter, and we will continue to expand throughout 2010 and 2011. Our plan is to add substantially more value to broker-dealers than any of our competition. Our wholesalers have, on average, 14 years of field experience and over 11 years of annuity experience. They will simultaneously enhance your advisors’ sophistication—and they will expel the message of firms attempting to “sell away” and damage the profitability of your firm. 4. We can create selling agreements between most of the major fixed index companies and your firm, permanently interposing the broker-dealer into the commission hierarchy. You will still make all product approval decisions, but this procedure is the only way to track your advisors’ FIA activity with certainty. They can no longer “sell away” once you are in the commission order. 5. WealthVest has built a key account management group, a product management group, an internal wholesaling group, and a customer service group. Our company is built around annuity wholesaling models like Wood-Logan and Planco. Specialty companies dedicated to innovative product where the distribution skill or capacity does not reside in the underwriting life company. 6. Wealthvest Marketing has added a broad portfolio of value-added services to help the advisor succeed in today’s competitive environment. Page 19
  20. 20. Another key driver in the popularity of FIAs is the vastly improved client value that they offer in comparison to similar alternatives. In the past, fixed index annuities did not come close to offering the client value that the products of today exhibit. The substantial increase in flows into the guaranteed space has resulted in the manufacture of products that are much more favorable to consumers. A similar phenomenon was experienced with the manufacture of variable annuities years earlier. Today, some of the most attractive products are also offered by the most recognized and highly rated insurance companies in the industry. Two stand outs in this regard are RBC Insurance and Allianz Insurance, both rated “A” (Excellent) by A.M. Best. These ratings are of paramount importance as Lifetime Income Guarantees have been a major driver in the rising popularity of FIAs. Advisors and clients alike rely upon superior company ratings to ensure the likelihood that the company will be able to honor these commitments well into the future. Major Product Enhancements Lifetime Income Guarantees Today’s fixed index annuities offer lifetime income streams that are far superior to anything offered by variable annuities. Some of these benefits appear as riders to the contract, while many products offer the benefits as part of the annuity structure. While the asset value reduction of the 2008 market correction had a hugely negative impact on variable products and the benefits they were able to offer, the guaranteed space experienced no such problem. As a result, the most attractive lifetime income benefits in the industry are offered through FIAs. Surrender Charges For years, fixed index annuities have been castigated for their illiquidity – many enforced surrender charges of well over 10 years, and in some case offered a “two tier” structure which required the client to annuitize the contract in order to get their money back. Today, while some of these products persist, insurance companies have by and large worked to follow 10/10/8 guidelines. The most popular products offer ten-year surrender charges, and many are as short as eight or five years. Premium Bonuses When premium bonuses were introduced with variable annuities, they were primarily offered to “buy out” a client who still had surrender charges on non-competitive product. With today’s FIAs, the premium bonus is an integral part of the accumulation value a client will use for lifetime income. In many cases these bonuses are fully vested at the time of crediting, and some are designed specifically to increase the computation value for lifetime income. These bonuses can have a significant positive impact on the amount of income a client will receive over the course of their lifetime. Page 20
  21. 21. RBC Insurance Company Information RBC Insurance: Liberty Life Insurance Company is part of the global insurance operations of Royal Bank of Canada and operates under the RBC Insurance brand. The Royal Bank of Canada is the fourth largest bank in North America and the tenth largest globally. Further accolades include being ranked as the safest bank in North America and the tenth safest globally by Global Finance magazine. A.M. Best has recognized RBC as the third most highly rated insurance company of the organizations that they scrutinize. In fact, RBC is one of only 39 U.S. insurance companies to maintain an A.M. Best rating of “A” or higher for 50 or more years. RBC is a shining example of simplicity and client value: • Straight forward crediting methods with only “one moving part” - no spreads or participation rates. • Consistently superior monthly and annual cap rates compared to major competitors. • Immediate vesting of all contract bonuses. • Additional bonus credits when selecting GLWB or EGLWB riders. • Short surrender periods - meet 10/10/8 compliance guidelines. • Two optional Guaranteed Lifetime Withdrawal Benefit Riders. EGLWB offers a 50% income increase in the event clients cannot meet 2 of 6 activities of daily living. If rider is not selected, client does not pay for the benefit. • World-class service organization provides efficiencies in paperwork processing and contract issuance. • Industry leader in suitability review. Additionally, as capacity issues have affected many companies’ abilities to provide consistent offerings, RBC has priced their products to accommodate high levels of capacity now and in the future. RBC Product Review The best selling product offered by RBC is the Enhanced Choice 10 Fixed Index Annuity. This product provides for a 5% premium bonus which is immediately vested. While the surrender charges apply for ten years, they never exceed 10% in any year, and RBC offers waivers for both confinement and terminal illness. Interest crediting methods offer both the DJIA and S & P 500. Enhanced Choice 8 is built on the same chassis, but offers an eight year surrender period and a 2%, fully vested, bonus. In addition, the client can select one of two lifetime income riders, The Guaranteed Lifetime Withdrawal Benefit (GLWB) and the Enhanced Guaranteed Lifetime Withdrawal Benefit (EGLWB). Each rider offers an annual 7.5% compound interest roll up for 10 years. The GLWB includes an additional bonus amount of 3% to the policyholder, and comes at an added expense of .50%. The EGLWB includes a bonus of 1% to the policyholder, and assesses an additional cost of .60%. The EGLWB also offers a 50% increase in income for any policyholder who is unable to perform 2 of the 6 activities of daily living. This increase does not specify method of care, allowing for maximum flexibility. Page 21
  22. 22. Allianz Insurance Company Information Allianz is one of the most respected and recognized companies in the world, and enjoys a diversified business model – PIMCO, Oppenheimer Capital, and Nicholas Applegate are three companies that belong to the Allianz family. They serve nearly 75 million customers across 70 countries, and are the second largest insurance company and asset manager in the world. Allianz offers: • Innovation leader in the area of product development. • Expansive roster of interest crediting methods, including multiple indexes and a blended index. • Consistently attractive cap and spread rates. • Recognized manufacturer of advisor oriented offerings – short surrenders while still offering lifetime income options. • Consistently attractive cap and spread rates. • Lifetime income benefits that allow for COLI adjustments. • Industry leader in technology usage – website tracks advisor appointment status, submitted business status, and all production information. ALLIANZ Product Review The Allianz Master Dex X is the best selling product at Allianz, and has been an industry leader for years. It packages a number of attractive features in one contract to allow for maximum flexibility. Master Dex X offers policyholders a 10 % premium bonus, vested over the ten year surrender charge period. In addition, interest crediting options include S&P 500, Nasdaq 100, Dow Jones Eurostoxx 50, and a blended index. Allianz also offers nursing home benefits. Master Dex X also offers an extremely attractive lifetime income benefit, called The Simple Income II Rider. For an additional fee of .60%, the policyholder will enjoy an 8% simple interest rollup of their lifetime income value until they achieve age 90. When the policyholder elects to begin taking income, they can choose an option for level income, or one that allows for an increasing income stream. The Endurance Elite Fixed Index Annuity offers a great example of client value, and is designed specifically for clients looking for guaranteed lifetime income. This product offers a five year surrender charge structure. It also offers a lifetime income benefit, called The Enhanced Withdrawal Benefit (EWB), which does not assess an asset fee. When the client purchases a contract, the purchase is credited with a 10% bonus, which applies only to the income benefit of the EWB. Rather than offer a fixed credit to increase the income rollup value, any amount credited to the account value will provide a 105% rollup credit to the EWB value. In addition, when the client elects to take lifetime income, any year that the client’s account receives a positive interest credit, their annual income will increase by the same amount – and be guaranteed never to decrease. This inflation hedge strategy is very attractive to clients who sensitive to the negative impact inflation can have on their purchasing power. Page 22

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