Developing A New Crediting Method Jeff Hanschmann

Why Develop a New Crediting Method? Feedback and planned enhancements Options for customers Simplicity Innovation 2

Common Crediting Methods Annual Point-to-Point Difference between ending and beginning annual values Buy a call, sell a call. Monthly Average* Difference between average and beginning annual value Geometric Asian option Monthly Sum Sum of monthly returns Monthly cap (1%) 3

4 Other Crediting Methods Rainbow Method* Weighted average of best performing indices ING, American General Trigger Method* Brand new to life insurance industry (Why hasn’t any company come out with it before?) Common in FIA industry

Rainbow and Asian Option Index Correlation risk (for blended indexes) Cholesky Decomposition In a loose, metaphorical sense, as the matrix analogue of taking the square root of a number The Cholesky decomposition is commonly used in the Monte Carlo method for simulating systems with multiple correlated variables: The covariance matrix is decomposed, to give the lower-triangular L. Applying this to a vector of uncorrelated samples, u, produces a sample vector Lu with the covariance properties of the system being modeled. Excel Sheets** 5

New Trigger Method 6 * * * * 10% 13%

Illustration Rates Annual Point-to-Point Monthly Average Monthly Sum S&P %-7.71% Nasdaq %-7.61% Blended9.13%7.98%- 7 - Assumes annual participation rate of 100% - Can be subjective…

Illustrations What initial cap are we able to provide? Why do we need to blend current and long term if we statically hedge? Avoid fluctuating caps! Estimate bank “mark-up” 8

Challenges What’s the story? Growing vs. stable market No more 0% returns than APP Hedging Static vs. Dynamic hedge What are advantages and disadvantages? High Tracking error when delta hedged daily (10,000 sims)* IT costs Implementation costs are high Down to last indexing space Modification will increase costs YearTrigger (10% Cap)APP (13% CAP) % % %13.00% %8.99% %3.00% %13.00% %3.53% % %13.00% %12.78% 9

Implementation Process Product Development partners with… Concepts (June 2011) MMPI (Market Research) Design CRM (Assumptions and risk evaluation) Hedging and AIM Requirements Marketing (Marketing plan) IT (Product validation plan) Implementation (Jan. 2012) Operations Suitability Distribution (Training) Filing 10

Q/A Thank you!