Timothy C. Pfeifer, FSA, MAAA Pfeifer Advisory LLC May 21, 2012

2 I. Declared Rate Fixed Deferred Annuities II. Fixed Indexed Annuities III. Single Premium Immediate Annuities IV. Deferred Income Annuities

3 18% of DRFDA sales were in products with MVAs It should be noted that a quarter of indexed annuity sales are directed to declared rate accounts Banks and S&Ls sold 54% of non- MVA fixed and 22% of MVAs Combined MVA and non-MVA sales ($34B) in 2011 lowest in last ten years Lower compensation Eliminate automatic ROP Cut renewal credits to minimums First year bonuses Invest in longer durations Prevalent reactions to low interest rate environment: Over half (58%) of non-MVA fixed sales in 2011 involved IGPs of more than one year (3- and 5-year dominate)

4 Average industry crediting rate about 2.8% for last six months Heaped surrender charges (1 st year SC% >> years of SC) RULE of THUMB: 1% surrender charge in one year worth one basis point Heaped surrender charges (1 st year SC% >> years of SC) RULE of THUMB: 1% surrender charge in one year worth one basis point Greater use of limited market value adjustments (reserve and capital relief) Some increased use of Bailout Provisions Limited number of LTC Rider provisions – modest sales

5 Part 1 Approximately 45% market share last two years 7% from banks in 2011 Little securities regulation chatter Focus is on income sale (GLWB with attractive BB roll-ups) Caps/Participation rates fallen to weak levels (e.g., caps of 3%) Commissions down slightly, but still on high-end Focus on simple crediting approaches and S&P index due to options budgets Current Profile: The Strong Sector of the Fixed Annuity Market

6 Part 2 For the first time, specific guidance on illustrating FIA returns Backcasting based on ten-year period (last 10, best 10 out of 20, worst 10 out of 20) New indexes may not be illustrated State adoptions NAIC Annuity Disclosure Model Death benefit enrichment, including DFD treatment Enhanced guaranteed income under GLWB for LTC, etc. Uncapped designs are of significant interest Binary/Performance Trigger for banks, simple sale Strong Design Creativity Key Elements in the Indexed Annuity World

7 Part 3 The Future of FIAs Indexed SPIAs (finally!) More efficient hedging/option budget Lower average compensation More multi-year terms All of this assumes a continued low interest rate environment

8 Sales reached $7.7B in 2011 Sales up 9% over carriers wrote >$100 Million Continued growth and traction, despite low interest rates Favorable demographics Education of reps, customers Appealing ALM Favorable strain characteristics Drivers of Sales Capital burden on SPIAs Expenses allocated to SPIAs Liquidity features What Differentiates Carriers? Still very price driven, commodity-like business

9 One main character success story: Captive producers, large SPIA player Four other carriers in market: Little success, little effort (in some cases) Better attempts at packaging as part of complete retirement plan, evaluate on “full IRR” basics, incorporating survivorship benefits Future: WHY? So far, More Smoke Than Fire Low rates Inadequate liquidity Learning curve in how to package, sell

Timothy C. Pfeifer, FSA, MAAA