1. MEMBERS Horizon – The Value of Risk Control
Ryan Stowe, FSA, MAAA
Director – Pricing & Product Management
MHA

2. Agenda The Value of Risk Control – A Qualitative Approach
Actual vs. Rational Investor Behavior
Historical Look at Expected Portfolio Return and Risk
The Value of Risk Control – A Quantitative Approach
Case Studies
Sequence of Returns Risk & Drawdown Risk
How Important is Market-Timing?
The Impact of Expenses on Overall Return

3. In order to gain from the market, clients have to be in the market
Investor Behavior
In order to gain from the market, clients have to be in the market
Bottom line, for your clients to gain from the market, they have to be in the market. And the more anxious they are, the more likely they are to pull themselves out at the wrong time.

4. MEMBERS Horizon - Background
MEMBERS product strategy is built around solving problems
with simple and transparent solutions
MEMBERS Horizon was built to address the fundamental problem of keeping investors in the market
Risk Control Accounts provide a new and innovative method to help manage – even control – investment risk in a portfolio
By leveraging an annuity chassis, we can provide the safety of guaranteed floors on investment performance tied to an index – a risk management tool other traditional investment solutions cannot provide

5. Risk and Return Characteristics Have Changed

6. Solution: MEMBERS Horizon
Bond
International Stock
US Stock
Specialty
Variable Subaccounts
Money Market
Allocation
Secure
(0% Floor)
Growth
(-10% Floor)
S&P 500
EAFE
Risk Control Accounts
The MEMBERS Horizon Variable Annuity can be customized to meet each customer’s unique investment objectives. There are two components: The Risk Control Accounts and Variable Subaccounts.
First, customers will decide how they want to split their funds between full growth potential of the market (and full downside risk) vs. risk control.
The customer simply decides how much of the investment they want to protect in the Risk Control Accounts. Risk Control Accounts allow customers to provide a downside floor for the portion of the assets allocated to these accounts.
Once it’s determined how much they want to protect, the Risk Control Accounts have more than one index option, the S&P 500 Index versus the MSCI EAFE Index. The customer may choose to allocate assets to either or both of these indices.
The next step is to determine how much downside protection they want associated with each index. They determine the amount they want in the Secure Account or the Growth account.
The Secure Account protects principal from market volatility. Dollars invested in this account have a 0% floor, are safe from market downside, and benefit from modest growth potential.
The Growth Account offers the potential for greater market growth in exchange for taking on downside risk of no more than -10%.
By combining them, the customer sets a blended “zone” of protection for dollars linked to each index.
Finally, the customer determines how much of the investment to apply to the various Variable Subaccounts available.
New approach to risk management using risk control accounts
Risk control can be used in a variety of market cycles

7. Case Study #1: Sequence of Returns & Drawdown Risk
Year
60% Equity
40% Bond
50% Risk Control
30% Equity
20% Bond
2004
108,265
108,629
2005
112,507
112,386
2006
125,119
126,337
2007
132,730
132,393
2008
106,048
112,449
2009
125,403
131,145
2010
140,018
147,158
2011
146,184
150,425
2012
162,686
168,950
2013
192,983
197,417
CAGR
6.8%
7.0%
Recovery time depends on the magnitude of the drawdown
Sequence of returns can affect client behavior
Emotional investment decisions can affect overall returns
For the 60/40 portfolio:
If you get out in 2008, sit in cash for 1 year, then get back in at 60/40 your ending balance is $163,198 or 5.02% CAGR
If you get out in 2008, sit in cash for 3 years, then get back in at 60/40 your ending balance is $139,998 or 3.42% CAGR
If you get out of the market in 2008 and sit in cash your ending balance is $106,048 or 0.59% CAGR
If you take out ½ of your money in 2008 and put it into cash your ending balance is $96,492 or -0.36% CAGR
Equity Fund uses the S&P 500 Total Return Index
Bond Fund uses the Barclays U.S. Aggregate Bond Index
Risk Control uses the S&P 500 Price Index; floor = -10% and cap = 15.00%
All values shown before the application of any fees

8. Case Study #2: How Important is Market Timing?
Looking at 10-year holding periods from 1950 – 2005,
if you invested in at:
The peak of the index during the year:
The trough of the index during the year:
Average over all index trading days:
*As you look at more recent market performance the difference becomes smaller:
1970 – 2005: 100 bps
1995 – 2005: 65 bps
4.8% CAGR
6.0% CAGR
*Being in the market is more important than timing when to get into the market.
5.6% CAGR
Assumes an index floor of -10% and index cap of 15%.
CAGR = compound annual growth rate

9. Case Study #2 (Continued)
Looking at the average over all 10-year holding periods:
Correlations between equity and fixed income change based on market conditions; controlling investor behavior during volatile market cycles makes these returns difficult to achieve
Risk control can provide stability in volatile market cycles at reasonable cost of average return
Portfolio
1/1995 – 12/2005
CAGR
1/2000 – 12/2005 CAGR
60% Equity
40% Fixed Income
5.95%
5.66%
50% Risk Control
30% Equity
20% Fixed Income
5.44%
5.45%
Assumes an index floor of -10% and index cap of 15%.
CAGR = compound annual growth rate

10. Case Study #3: Impact of Expenses on Overall Return
Recall from Case Study #1 that a $100K investment in 2004
grew to the following amount by 2013:
Assuming 2% and 3% “All-In” fees the same portfolio would have
the following investment performance:
Year
60% Equity
40% Bond
50% Risk Control
30% Equity
20% Bond
2013
$192,983
$197,417
CAGR
6.8%
7.0%
Year
2% All-In Fees
CAGR
3% All-In Fees
60% Equity
40% Bond
$158,034
4.7%
$142,992
3.6%
50% Risk Control
30% Equity
20% Bond
$162,539
5.0%
$147,373
4.0%
CAGR = compound annual growth rate

11. But wait…

12. The Real & Perceived Cost of Investment Products
Why are annuities perceived to be so expensive?
Annuities provide guarantees that other investment products
cannot offer (investment performance, annuitization, guarantees of
principal, living & death benefits, tax deferral for NQ, etc.)
Investment products can have significant fee structures too; you have to look at the “all-in” fees to accurately compare products.
Example - sticker price of a car on the lot vs. the cost to drive it off the lot
Transparency and level of fees will undergo significant change in a post-DOL world

13. Product/Solution Comparison: Apples-to-Apples

14. Horizon vs. Managed Money
Assumptions
$100K premium
MEMBERS Horizon
Aggressive (Active + Passive express portfolio)
Managed Money
Lockwood Asset Allocation Portfolios.
Lowest possible client fee assumed (range from 1-3%)
Assumes no 12b-1 fees; actual fund selections may include these fees
Minimal advisory fee assumed arbitrarily – 0.50%
Will get information around the FTJ ETF platform should questions be posed during Q&A.

15. Questions?