2009 Annual Meeting ● Assemblée annuelle 2009 Halifax, Nova Scotia ● Halifax (Nouvelle-Écosse) 2009 Annual Meeting ● Assemblée annuelle 2009 Halifax, Nova Scotia ● Halifax (Nouvelle-Écosse) Canadian Institute of Actuaries Canadian Institute of Actuaries L’Institut canadien des actuaires L’Institut canadien des actuaires

AGENDA Denise Lang Overview of the GMWB product, need it fills and impact of the economic crisis Pierre Vincent Risks in the product – modeling, risk appetite, risk & capital management Dave Wylie Product Perspective – different approaches to risks in the product, product changes, industry reaction 2009 Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009

AGENDA Background - Demographic changes Retirement Challenges Needs in Retirement Typical GMWB (Guaranteed Minimum Withdrawal Benefit) product features Impact of the economic crisis 2009 Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009

Some headlines & research findings Boomers age 47 to 60 make up roughly 22% of Canadian population – Boomers & retirees in Canada Secondary research – July /06 In under 10 years Canadians 55 years of age and older will control over 70% of investment assets – Investor Economics, household balance sheet report 2005 Of leading edge boomers only 15% feel prepared for retirement, 45% feel they need same or more income – Strategic Guidance Consulting 50% of Canadians expect to live into their 90’s – BMO Retirement study findings quoted in Investment Executive article Jun 1 /06 48% of 50-something boomers are unsure of the best choices for retirement savings, 32% are worried their standard of living will drop once they reach retirement – Jonathan Chevreau, National post articles “Boomer gender battle in retirement?”, Jul 17/06 and “Stressed Boomers”, Jul 13/ Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009

Changing Demographics in Canada Canadian population is aging Life expectancy continues to increase Implications  Consumer focus will shift from wealth accumulation to management and payout of accumulated wealth  Savings must fund a longer retirement period  Product allocation increasingly important as more baby boomers approach and enter retirement years 2009 Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009

New Challenges in Retirement Longevity Interest Rates and Inflation Market Volatility Inflation Control and Access 2009 Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009

Challenge: Market Volatility Investors will face their greatest risks and challenges in the few years just before and after retirement Choosing the right investment products is critical 2009 Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009

Accumulation Phase Same Average Return = Same Accumulation Result 2009 Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009 Average return is key during accumulation

Payout Phase Sequence of returns makes a big difference in the distribution phase 2009 Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009

What do Canadians want? The majority of Canadians prefer a monthly income stream in retirement Many are concerned that they may outlive their savings Canadians will have a strong preference for products that provide risk management income management tax efficiency GMWB products designed for these needs 2009 Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009

GMWB Products Income is predictable, sustainable and potentially increasing Products allow investments in a variety of funds – usually a limit on equity exposure Initially a 20 year guarantee - now ‘ for life ’ Upside potential in guarantees – resets - lock in market gains – Annual bonus (on guarantee withdrawal balance) if no withdrawal taken 2009 Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009

How do guarantees work? Product example: Lifetime guarantee 5% p.a. if start at age 65 5% bonus on WB annually if no withdrawals Guaranteed value resets every 3 rd anniversary 100% Death benefit Client deposits $500,000 At issue: Guaranteed Withdrawal Benefit = $500,000 Death Benefit Guarantee = $500, Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009

Guarantee Example - #1 Client starts taking 5% withdrawals in first year All numbers in table are in thousands and GWB – Guaranteed Withdrawal Benefit, DB – Death Benefit, MV – Market value of funds 2009 Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009 * At end of Year 3, If MV < 425K: GWB = DB = $425K If MV > 425K: GWB = DB = MV DateGWB at End of Policy Year Income During Policy Year DB at End of Policy Year Issue500 Year Year Year 3 * 25 *

Guarantee Example - #2 Client does not take any withdrawals in early years 2009 Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009 At end of Policy Year 3, If MV < 500K: DB = 500K, GWB = 575K If 500 < MV < 575: DB = MV, GWB = 575K, If MV > 575: DB = MV, GWB = MV If MV > 500K at 3 rd anniversary, the annual bonus amount will typically be reset to 5% of that MV going forward DateGWB at End of Policy Year BonusIncome During Yr DB at End of Policy Year Issue500 Year Year Year 3 * 250 *

Impact of the Economic Crisis Reserves and required capital are typically very small at issue for GMWB products When equity market declines occur, actuarial liabilities and capital increase considerably even though –benefits are very long dated with guarantees stretching many years into the future –guaranteed benefits cannot be accelerated by the policyholder –the best estimate liability for the guarantees is typically very small compared to the liability required Reserves and capital can also be very sensitive to interest rate changes 2009 Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009

Impact of the Economic Crisis The increases in reserves and capital have caused companies to take a number of actions, including: – Raising capital – Increasing risk management activities (e.g. hedging, reinsurance) – Product design and pricing changes to reduce risks 2009 Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009