Recent Developments in Indexed Annuity Disclosure and Illustrations Actuaries Club of Boston Annual Meeting September 22, 2011 Kathryn Dowdell, FSA, MAAA Product Actuary, Director Product Compliance John Hancock Kathryn Dowdell, FSA, MAAA Product Actuary, Director Product Compliance John Hancock

2 of 28 Outline Background Annuity Disclosure Updates Annuity Illustration Standards Fixed Indexed Annuity Illustration Standards

3 of 28 Background Current Illustration Environment –Annuities are out of scope for Life Insurance Illustrations Model Regulation –No specific FINRA standards for VA Illustrations –Result can be a non-level playing field Subject to each company’s standards Subject to interpretation of reviewers Future State –Proposed FINRA Rule 2211 –Revised Annuity Disclosure Model Regulation

4 of 28 Buyer’s Guide and Disclosure Document –Variable Annuities no longer exempt Buyer’s Guide Disclosure Document after January 1, 2014 Illustration Standards do not apply –Disclosure Document Fixed Indexed Annuity disclosure document must include >Explanation of elements of the indexed credit including caps, participation rates and spreads >Explanation of the calculation of the indexed- based interest Annuity Disclosure Updates

5 of 28 Annuity Illustration Standards General Compliance Standards –Clearly label as illustration –Use company authorized software –Do not imply that non-guaranteed elements are guaranteed –Clearly label guarantees –Number all pages – Page x of y –Describe assumed timing of all cash flows Additional Disclosure Standards –Illustration must reference the Buyer’s Guide and Disclosure Document –Illustration must be accompanied by the Disclosure Document

6 of 28 Annuity Illustration Standards - continued Content –Narrative Summary –Numeric Summary Guaranteed Non-Guaranteed –Explanation of MVA if applicable

7 of 28 Annuity Illustration Standards - continued Narrative Summary –Brief explanation of contract, riders and features illustrated –Brief explanation of riders, features or options elected but not illustrated –Definition of column headings and key terms –Explanation of minimum guarantees –Explanation of impact of surrender prior to maturity –For contracts subject to Required Minimum Distributions – an explanation of the impact of RMDs on contract benefits –Explanation of when surrender charges will recur if applicable –Explanation of any conditions for payment of bonuses –Description of annuity options available Earliest (or only) Maturity Date Periodic income amount at guaranteed rates for at least one guaranteed option at later of age 70 or contract year 10

8 of 28 Annuity Illustration Standards - continued Additional Narrative Summary Requirements for Fixed Indexed Annuities –Explanation of the elements used to determine the index-linked interest Indices Indexing Method Index Term Participation Rate Cap Spread –Explanation of how index-based interest is credited –Explanation of when company can change caps, spreads and participations rates –Details of any fixed rate accounts and ability to allocate those accounts

9 of 28 Annuity Illustration Standards - continued Additional Narrative Summary Requirements for Fixed Indexed Annuities (continued) –The following or a similar statement must be included "This illustration assumes the index will repeat historical performance and that the annuity’s current non- guaranteed elements, such as caps, spreads, participation rates or other interest crediting adjustments, will not change. It is likely that the index will not repeat historical performance, the non-guaranteed elements will change, and actual values will be higher or lower than those in this illustration but will not be less than the minimum guarantees. The values in this illustration are not guarantees or even estimates of the amounts you can expect from your annuity. Please review the entire Disclosure Document and Buyer’s Guide provided with your Annuity Contract for more detailed information"

10 of 28 Annuity Illustration Standards - continued Nonguaranteed Values for Fixed Indexed Annuities –Three scenarios Most recent 10 calendar years The 10 consecutive calendar years of the last 20 that would result in the lowest growth The 10 consecutive calendar years of the last 20 that would result in the highest growth Must show geometric mean annual effective rate for each scenario –Have until April to update for most recent calendar year –Can not illustrate an index unless it has been in existence for at least 10 calendar years

11 of 28 Annuity Illustration Standards - continued Nonguaranteed Values for Fixed Indexed Annuities (continued) –If an index has been in existence for at least 10 years but less than 20, the highest and lowest 10 consecutive calendar years are determined from the available performance –If the numeric summary requires performance for more than 10 years, repeat the initial 10 years of performance –If allocations to more than one index are illustrated use the same allocations for all three scenarios the highest and lowest 10 year periods are determined separately for each index

12 of 28 Annuity Illustration Standards - continued Nonguaranteed Values for Fixed Indexed Annuities (continued) –Caps, spreads and participation rates should not be more favorable than current –Variations for low and high scenarios Surrender Values are not required to be illustrated Do not illustrate beyond 10 years These scenarios should show every type of adjustment that may be made to the performance of the index. Must indicate any type of adjustment that is not illustrated due to the historical performance. –Must include a graph showing changes in the account value over the 10 year period under each scenario

13 of 28 Annuity Illustration Standards - continued Market Value Adjustment –Include a description of potential impact of MVA on Value at surrender Death Benefit –Describe both upside and downside impacts A disclosure statement for the narrative summary is included in the model –Must include a separate page that shows the impact of the MVA in one positive and one negative scenario may be a graphical presentation –Illustration should reflect any floors and ceilings on MVA

14 of 28 Annuity Disclosure Model Status –Adopted by Life Insurance and Annuities (A) Committee on August 3, 2011 –Was expected to be considered for final adoption at the NAIC Summer National Meeting

Recent Developments in Indexed UL Disclosures Actuaries Club of Boston Annual Meeting September 22, 2011 Michael L. Barsky, FSA Assistant Vice President Life Product Management John Hancock Michael L. Barsky, FSA Assistant Vice President Life Product Management John Hancock

16 of 28 Outline What is Indexed UL? IUL Industry Sales Illustrating Indexed UL Formation of IUL Illustrations Task Force Summary of Recommendations –Indexed UL vs Indexed Annuities Current Status / Next Steps What is Indexed UL? IUL Industry Sales Illustrating Indexed UL Formation of IUL Illustrations Task Force Summary of Recommendations –Indexed UL vs Indexed Annuities Current Status / Next Steps

17 of 28 What is Indexed UL? UL where interest credited is based on the performance of (one or more) external indexes Interest credited is subject to a minimum (floor), maximum (cap), and participation rate –Floor and cap are usually non guaranteed Various methods / time periods for index calculation –Most popular: annual point-to-point –Others: monthly point-to-point, annual multi-year Various Indexes –Most popular: S&P500 –Others: S&P 400 midcap, Russell 2000, “Rainbow” Most products are accumulation-focused, high funding Most are nonregistered UL where interest credited is based on the performance of (one or more) external indexes Interest credited is subject to a minimum (floor), maximum (cap), and participation rate –Floor and cap are usually non guaranteed Various methods / time periods for index calculation –Most popular: annual point-to-point –Others: monthly point-to-point, annual multi-year Various Indexes –Most popular: S&P500 –Others: S&P 400 midcap, Russell 2000, “Rainbow” Most products are accumulation-focused, high funding Most are nonregistered

18 of 28 IUL Industry Sales First IUL product introduced in 1997 by Transamerica Sales started slow but steadily climbing, especially since 2006 –Now 11% market share First IUL product introduced in 1997 by Transamerica Sales started slow but steadily climbing, especially since 2006 –Now 11% market share

19 of 28 Illustrating Indexed UL Covered by the NAIC Illustrations Model Regulation The caps, floors and participation rate are subject to DCS testing as any other nonguaranteed element However, need to translate these into to an appropriate illustrated rate Currently a variety of approaches by company –Lookback method is the prevailing approach –Periods range from years –Different assumed issue dates by company –Result: identical products can be illustrated at different rates Indexed loans –Do applicants understand it is not a risk-free arbitrage Covered by the NAIC Illustrations Model Regulation The caps, floors and participation rate are subject to DCS testing as any other nonguaranteed element However, need to translate these into to an appropriate illustrated rate Currently a variety of approaches by company –Lookback method is the prevailing approach –Periods range from years –Different assumed issue dates by company –Result: identical products can be illustrated at different rates Indexed loans –Do applicants understand it is not a risk-free arbitrage

20 of 28 IUL Illustrations Task Force Formed in June 2010 Now 32 participants across 16 companies –Represents 87% of industry IUL sales Goals: –Education – make it easier for applicants to understand how product works and the associated risk –Consistency – ensure that otherwise identical products can be illustrated at the same maximum rate –Product Development – do not want to restrict innovation Formed in June 2010 Now 32 participants across 16 companies –Represents 87% of industry IUL sales Goals: –Education – make it easier for applicants to understand how product works and the associated risk –Consistency – ensure that otherwise identical products can be illustrated at the same maximum rate –Product Development – do not want to restrict innovation

21 of 28 Draft Summary of Recommendations Recommendation #1: Standardized Lookback Method –25 year lookback period (for one year point-to-point crediting methods) If less than 25 years history, use what is available and include a footnote For multiyear index periods, want 25+ years of endpoints, so use more than 25 years of history –Use all available days –Maximum rate = arithmetic average over all data points –Use current caps/floors/participation rates –For multiple indices, use separate bucket for each index –Example: 12% cap, 0% floor, 100% participation rate based on the S&P 500 Use period from Jan – Dec Calculate geometric average for 25 year period for each possible issue date >Ex: Jan 1 = 7.27%; Jan 2 = 7.15%,…Dec 31 = 7.27% Then take arithmetic average of each day, resulting in overall average of 7.53% Recommendation #1: Standardized Lookback Method –25 year lookback period (for one year point-to-point crediting methods) If less than 25 years history, use what is available and include a footnote For multiyear index periods, want 25+ years of endpoints, so use more than 25 years of history –Use all available days –Maximum rate = arithmetic average over all data points –Use current caps/floors/participation rates –For multiple indices, use separate bucket for each index –Example: 12% cap, 0% floor, 100% participation rate based on the S&P 500 Use period from Jan – Dec Calculate geometric average for 25 year period for each possible issue date >Ex: Jan 1 = 7.27%; Jan 2 = 7.15%,…Dec 31 = 7.27% Then take arithmetic average of each day, resulting in overall average of 7.53%

22 of 28 Draft Summary of Recommendations Recommendation #2: Historical Tables –Index History Yearly history of the index and resulting crediting rates for each of the most recent 20 calendar years Helps applicants to understand that yearly returns will fluctuate –Indexed (aka Variable) Loan History Yearly history of the loan rates and index crediting rates for each of the most recent 20 years Helps applicants to understand that indexed loans are not a risk-free arbitrage, and that yearly crediting rates may be more or less than the loan rate Would be required whenever indexed loans are available, whether or not they are actually illustrated Recommendation #2: Historical Tables –Index History Yearly history of the index and resulting crediting rates for each of the most recent 20 calendar years Helps applicants to understand that yearly returns will fluctuate –Indexed (aka Variable) Loan History Yearly history of the loan rates and index crediting rates for each of the most recent 20 years Helps applicants to understand that indexed loans are not a risk-free arbitrage, and that yearly crediting rates may be more or less than the loan rate Would be required whenever indexed loans are available, whether or not they are actually illustrated

23 of 28 Draft Summary of Recommendations Recommendation #3: Alternative Lookback Period Table –To help applicants understand how the index would have performed over shorter/longer time periods –Describe the resulting rates as “hypothetical interest rates” –Example: Assumed Lookback Periods 10 yrs 20 yrs 25 yrs 30 yrs 40 yrs Hypothetical Interest Rates*5.40% 7.35% 7.53% 7.43% 7.05% *The non guaranteed values in this illustration are based on the hypothetical illustrated index credit rate not to exceed the maximum hypothetical illustrated rate, current cost of insurance rates, and current expense charges. The maximum hypothetical illustrated rate is 7.53%, based on a daily average of the annual compound index rates of return for a 25-year historical period through 12/31/2010. This maximum hypothetical rate applies current growth cap rates, participation rates and guaranteed minimum interest rates to the past performance. The hypothetical rate of return using the same methodology but with other historical reference periods are shown in the above table Recommendation #3: Alternative Lookback Period Table –To help applicants understand how the index would have performed over shorter/longer time periods –Describe the resulting rates as “hypothetical interest rates” –Example: Assumed Lookback Periods 10 yrs 20 yrs 25 yrs 30 yrs 40 yrs Hypothetical Interest Rates*5.40% 7.35% 7.53% 7.43% 7.05% *The non guaranteed values in this illustration are based on the hypothetical illustrated index credit rate not to exceed the maximum hypothetical illustrated rate, current cost of insurance rates, and current expense charges. The maximum hypothetical illustrated rate is 7.53%, based on a daily average of the annual compound index rates of return for a 25-year historical period through 12/31/2010. This maximum hypothetical rate applies current growth cap rates, participation rates and guaranteed minimum interest rates to the past performance. The hypothetical rate of return using the same methodology but with other historical reference periods are shown in the above table

24 of 28 Draft Summary of Recommendations Recommendation #4: Optional Historical Supplemental Illustrations –To help applicants understand the volatility of the index and the impact on their values, a supplemental historical illustration is recommended –Would assume that policy was issued 25 years ago and show resulting policy values based on actual calendar year returns –Would be based on the same premiums, loans and policy changes as in the basic illustration –Resulting final values may be more or less than those in the basic illustration Recommendation #4: Optional Historical Supplemental Illustrations –To help applicants understand the volatility of the index and the impact on their values, a supplemental historical illustration is recommended –Would assume that policy was issued 25 years ago and show resulting policy values based on actual calendar year returns –Would be based on the same premiums, loans and policy changes as in the basic illustration –Resulting final values may be more or less than those in the basic illustration

25 of 28 Indexed UL vs Indexed Annuities

26 of 28 Indexed UL vs Indexed Annuities

27 of 28 Indexed UL vs Indexed Annuities

28 of 28 Current Status / Next Steps Task force preference is to make the IUL changes through ASOP 24 Also, through updates to the AAA Practice Note (last updated in 2009) Other approaches being considered Task force preference is to make the IUL changes through ASOP 24 Also, through updates to the AAA Practice Note (last updated in 2009) Other approaches being considered