Piecing Together the IUL Puzzle J. Craig Collins Senior Vice President, Business Development and Head of HighCap Financial

Life Product Distribution 2nd Quarter 2017

Universal Life Sales 2nd Quarter 2017

Indexed UL

UL and IUL: Alike but Different All UL and IUL contracts are general account life insurance products All general account insurance products, no matter the interest crediting methodology, work off of the same general account portfolio

How UL Interest Crediting Is Funded

How Do Carriers Provide Market-Linked Crediting with a Fixed Product?

Indexed Universal Life Interest dictated by performance of an underlying index rather than the company’s portfolio return.

Call Options A call option contract gives the holder the right, but not the obligation, to buy a specified amount of an underlying security at a specified price, within a specified time Buyer View – expects the price of the underlying instrument will go above the call’s strike price, before they expire Sellers View – expects the price of the underlying instrument to stay below the strike price

How IUL Interest Crediting Is Funded

How IUL Interest Crediting Is Funded

How IUL Interest Crediting Is Funded

Options Budget Companies have a finite amount of money to purchase options Defined by: Portfolio yield - Company spread for profit - Guaranteed interest rates = The balance is available to purchase options to “hedge” the upside potential

Options Expense The same amount of money (“options budget”) is spent for options –regardless of crediting strategy Cap or Uncapped Participation High Par Point-to-Point Duration (1 year vs. 5 year) Averaging

How are Participation Rates and Caps Determined and What Causes them to Change? Two main factors that influence the Participation Rate or Crediting Cap: The cost of the options The current level of long-term interest rates (portfolio rate)

Volatility Important factor in option pricing Measures the amount underlying asset is expected to fluctuate in a given period of time Speed of change in the market Measured by VIX (CBOE) 30 day forecast of S&P index annual change Fear Index

VIX & SPX

Option Pricing Simply stated . . . The higher the volatility the more expensive the options The lower the volatility the less expensive the options

Impact on Option Pricing Higher Options Prices Higher volatility Shorter option duration (i.e. 1 year vs. 5 year) Higher Cap or Participation Rate Lower Option Prices Lower volatility Longer option duration (i.e. 5 year vs. 1 year) Lower Cap or Participation Rate

Impact on Option Pricing Higher Options Cost Lower Option Cost Volatility Higher Lower ✔ ✔

Impact on Option Pricing Higher Options Cost Lower Option Cost Volatility Higher Lower Duration Shorter Longer ✔ ✔ ✔ ✔

Impact on Option Pricing Higher Options Cost Lower Option Cost Volatility Higher Lower Duration Shorter Longer Caps High ✔ ✔ ✔ ✔ ✔ ✔

Impact on Option Pricing Higher Options Cost Lower Option Cost Volatility Higher Lower Duration Shorter Longer Caps High Participation Rates ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔

Effects of Long Term Interest Rates Assuming options costs are static: If long term interest rates rise More investment income Larger options “budget” Higher Cap and Par rates allowed If long term interest rates decline Less investment income Smaller options “budget” Lower Cap and Par rates required

Historical Indexed UL Cap Rates

2017 Whole Life Dividend Interest Rates Carrier 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2016-17 Change 2008-17 CHANGE Northwestern Mutual1 7.50 6.50 6.15 6.00 5.85 5.60 5.45 5.00 -0.45 -2.50 MassMutual 7.90 7.45 6.85 6.80 7.00 7.10 6.70 -0.40 -1.20 MetLife 6.25 5.50 5.25 5.10 4.70 -0.30 -1.55 Ohio National 6.65 6.40 5.75 -0.25 -0.90 Guardian 7.25 7.30 6.95 6.05 -0.20 -1.40 Penn Mutual 6.34 None -0.16 New York Life 6.79 6.14 6.11 5.80 5.90 6.20 -0.59 National Life of VT -0.50 1Northwestern Mutual also reportedly increased the administrative expenses component of its 2017 dividend scale, further reducing its dividend.

Carriers with Multiplier or Participation Rate Enhancement Features Product Applicable Accounts Multiplier Factor Applicable Years Nationwide IUL Protector IUL Accumulator 1-Year S&P P-to-P with Multiplier 1-Year Multi-Index with Multiplier 1.15 All Allianz Life Pro+ 1.15 (max 100 bps) 11+ Penn Mutual Accumulation Builder Select 1.10 Prudential Index Advantage UL Indexed Account with Multiplier Minnesota Life Orion IUL 1-Year S&P 500 with Multiplier Pacific Life Pacific Discovery Xelerator Formula 3+ John Hancock Accumulation IUL 17 1.05 6+ Not meant to be an exhaustive list

6% 1.10 6.6% 0% 1.10 0.0% Multiplier Example Indexed Rate Earned (and Illustrated Rate to which AG49 Applies) Multiplier Factor (Applied in Excess of Cap) Effective Rate Earned (Reflected in Illustration) 0% 1.10 0.0% Indexed Rate Earned Multiplier Factor (Applied in Excess of Cap) Effective Rate Earned

Carriers with “Buy-Up” Accounts Product Standard Cap Standard AG49 Rate Buy-Up Cap Buy-Up Cost Buy-Up AXA BrightLife Grow 9.50% 5.79% 11.50% 50 bps 6.69% BrightLife Grow Survivorship Transamerica TransNavigator IUL 10.50% 6.26% 15.00% 100 bps 7.65% Pacific Life Pacific Indexed Perf. LT 2 Pacific Indexed Accum. 5 Pacific Indexed Pro. 2 Pacific Indexed Estate Pres. 2 6.29% 13.50% 80 bps 7.49% Pacific Discovery Xelerator 10.25% 6.17% 13.25% 7.40% American General Max Accumulator IUL 10.00% 6.13% 13.00% 25 bps Yrs 1-5 75 bps Yrs 6+ 7.31% Minnesota Life Orion IUL 12.50% 7.13% 14.50% 7.85% John Hancock Accumulation IUL 17 10.75% 6.39% 7.84% Global Atlantic Lifetime Provider Lifetime Foundation 11.00% 6.51% 3% Spread Lifetime Builder 12.00% 6.92% 16.50% Survivorship Builder 9.75% 5.94% Not meant to be an exhaustive list

“Buy-Up” Account Example 6.29% 0 bps Max AG49 Rate Cost for Buy-Up Effective Illustrated Rate 7.49% 80 bps 6.69% Max AG49 Rate Cost for Buy-Up Effective Illustrated Rate +40 bps Effective Illustrated Rate Increase

Possible Ways to Illustrate Indexed ULUL Average = 50th percentile ½ time greater ½ time lower Looking Back Historical Frequency (Percentiles) - 20 Year Periods Current Cap/Floor 12.50%/0% 12.25%/0% 11.25%/1% 10.25%/0% 100% Historical Frequency 90% 80% Historical Average 6.54% 7.26% 7.47% 7.98% 6.45% 7.16% 7.37% 7.86% 6.39% 7.02% 7.20% 7.63% 5.63% 6.27% 6.88% A percentile is the frequency in which a given Compound Average Growth Rate (CAGR) was achieved over rolling blocks of time periods, beginning each trading day during the overall historical time period measured, based on historical S&P 500 Price Returns and hypothetical indexed account parameters. For example, assuming a 10.25% cap and 0.00% floor, the 20 year 90th historical percentile since the start date is 6.27%. That means that the indexed strategy, based on the assumptions above, would've achieved a hypothetical annual CAGR of 6.27% or better in over 90% of the rolling 20 year time periods.

Possible Ways to Illustrate Indexed ULUL Looking Back Historical Frequency (Percentiles) - 20 Year Periods Looking Forward Translated Rates based on Equity Return Assumptions Current Cap/Floor 12.50%/0% 12.25%/0% 11.25%/1% 10.25%/0% 100% Historical Frequency 90% 80% Historical Average 6.54% 7.26% 7.47% 7.98% 6.45% 7.16% 7.37% 7.86% 6.39% 7.02% 7.20% 7.63% 5.63% 6.27% 6.88% 10% Total Equity Index Return 8% Total 6% Total 4% Total 7.05% 6.52% 6.00% 5.47% 6.95% 6.44% 5.92% 5.41% 6.85% 6.41% 5.98% 5.54% 6.14% 5.70% 5.26% 4.83% A percentile is the frequency in which a given Compound Average Growth Rate (CAGR) was achieved over rolling blocks of time periods, beginning each trading day during the overall historical time period measured, based on historical S&P 500 Price Returns and hypothetical indexed account parameters. For example, assuming a 10.25% cap and 0.00% floor, the 20 year 90th historical percentile since the start date is 6.27%. That means that the indexed strategy, based on the assumptions above, would've achieved a hypothetical annual CAGR of 6.27% or better in over 90% of the rolling 20 year time periods. www.IULTranslate.com, created by John Hancock. This approach translates an assumed long-term return for the selected index into a hypothetical assumed rate for an IUL illustration. It applies an algorithm that takes into account a stated expectation for long-term equity return, the current costs of supporting the index strategy, and the general theory that investments with similar risk should be expected to yield similar return.

In Summary IUL is growing and here to stay General Account product All products utilize an “options budget” Many products have “enhancement” features How to determine which product/carrier to select? Company structure (i.e. mutual vs. stock) Financial Strength How they have historically treated policyholders History of raising and lowering caps and par rates (outside the trend) History of increasing mortality charges Trust, relationship and partnership with carriers you understand

Indexed Universal Life IUL Myths & Facts

Myth #1 MYTH: Carriers keep any amount above the cap or above the participation rate FACT: Options are built to mirror the specific indexing strategy (i.e. Caps and Participation rates) FACT: There is no “more”!

Myth #2 MYTH: Companies arbitrarily determine participation rates and caps. FACT: Participation rates and caps are a reflection of the availability of company funds to provide a “hedge” for potential interest rate exposure. This is accomplished by purchasing “call options” on the underlying index. Call Option - the right to “sell” an option on a given date based on a predetermined purchase price Option increases in value - sell for a gain Option decreases in value - expires without value

Myth #3 MYTH: Participation rates and caps reflect the company’s profitability, thus a lower participation rate or cap means a company will have higher profit than a company with a higher participation rate or cap. FACT: Participation rates and caps are determined primarily by two factors Current interest rates earned by the company Call option price Driven by market volatility Higher market volatility = higher price, visa versa In General, the higher the upward growth measurement potential, the higher the cost of the call option.

Myth #4 MYTH: One indexing method is better than another Caps are better than participation rates Participation rate are better than caps FACT: Over time, it is impossible to predict which method, if any, will outperform the others. Each linking method could potentially result in nearly the same or different outcomes. Too many variables to say one is better than the other.

Myth #5 MYTH: Illustrated interest rates reflect the actual performance of a product or the likelihood of interest crediting potential. FACT: Like other universal life product illustrations, the interest rates used are merely a projected rate for illustrative purposes ONLY.

Myth #6 MYTH: The determination for illustrated interest rates is the same from company to company, therefore they are all equal. FACT: While AG49 attempts to control the illustrated interest rates by determining historical performance over a common period of time (“look back”), other policy provisions such as “bonuses” or “enhancements” are reflected in the projected values but not in the illustrated rate. Read the fine print.

Myth #7 MYTH: Since AG49 provides a common method for determining the illustrated interest rate, a product with the highest illustrated rate will perform best in the future. FACT: As with other products, the projected credited rate is only a part of the story. There are other factors such as mortality costs, policy expenses and charges that, along with interest credits, will ultimately determine future product performance.

Myth #8 MYTH: All policies loans are create equal. FACT: Loans come in various forms. Some may create opportunity for greater cash value growth (indexed loans) but at higher risk and potential cost. While other loans (traditional, “fixed” or “wash”) have less risk but eliminate the opportunity for increased growth. Loan features and interest rates vary from carrier to carrier and based on type of loans. Timing and purpose of loans may factor into decisions. Short term vs. long term Income tax exposure in the event of lapse Loan repayment plans Don’t assume all illustrated loans are the same. Read the fine print.