1. Piecing Together the IUL Puzzle
J. Craig Collins
Senior Vice President, Business Development
and Head of HighCap Financial

2. Life Product Distribution 2nd Quarter 2017

3. Universal Life Sales 2nd Quarter 2017

4. Indexed UL

5. UL and IUL: Alike but Different
All UL and IUL contracts are general account life insurance products
All general account insurance products, no matter the interest crediting methodology, work off of the same general account portfolio

6. How UL Interest Crediting Is Funded

7. How Do Carriers Provide Market-Linked Crediting with a Fixed Product?

8. Indexed Universal Life
Interest dictated by performance of an underlying index rather than the company’s portfolio return.

9. Call Options
A call option contract gives the holder the right, but not the obligation, to buy a specified amount of an underlying security at a specified price, within a specified time
Buyer View – expects the price of the underlying instrument will go above the call’s strike price, before they expire
Sellers View – expects the price of the underlying instrument to stay below the strike price

10. How IUL Interest Crediting Is Funded

11. How IUL Interest Crediting Is Funded

12. How IUL Interest Crediting Is Funded

13. Options Budget
Companies have a finite amount of money to purchase options
Defined by:
Portfolio yield
- Company spread for profit
- Guaranteed interest rates
= The balance is available to purchase options to “hedge” the upside potential

14. Options Expense
The same amount of money (“options budget”) is spent for options –regardless of crediting strategy
Cap or Uncapped
Participation
High Par
Point-to-Point
Duration (1 year vs. 5 year)
Averaging

15. How are Participation Rates and Caps Determined and What Causes them to Change?
Two main factors that influence the Participation Rate or Crediting Cap:
The cost of the options
The current level of long-term interest rates (portfolio rate)

16. Volatility Important factor in option pricing
Measures the amount underlying asset is expected to fluctuate in a given period of time
Speed of change in the market
Measured by VIX (CBOE)
30 day forecast of S&P index annual change
Fear Index

17. VIX & SPX

18. Option Pricing Simply stated . . .
The higher the volatility the more expensive the options
The lower the volatility the less expensive the options

19. Impact on Option Pricing
Higher Options Prices
Higher volatility
Shorter option duration (i.e. 1 year vs. 5 year)
Higher Cap or Participation Rate
Lower Option Prices
Lower volatility
Longer option duration (i.e. 5 year vs. 1 year)
Lower Cap or Participation Rate

20. Impact on Option Pricing
Higher Options Cost
Lower Option Cost
Volatility
Higher
Lower ✔ ✔

21. Impact on Option Pricing
Higher Options Cost
Lower Option Cost
Volatility
Higher
Lower
Duration
Shorter
Longer ✔ ✔ ✔ ✔

22. Impact on Option Pricing
Higher Options Cost
Lower Option Cost
Volatility
Higher
Lower
Duration
Shorter
Longer
Caps
High ✔ ✔ ✔ ✔ ✔ ✔

23. Impact on Option Pricing
Higher Options Cost
Lower Option Cost
Volatility
Higher
Lower
Duration
Shorter
Longer
Caps
High
Participation Rates ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔

24. Effects of Long Term Interest Rates
Assuming options costs are static:
If long term interest rates rise
More investment income
Larger options “budget”
Higher Cap and Par rates allowed
If long term interest rates decline
Less investment income
Smaller options “budget”
Lower Cap and Par rates required

25. Historical Indexed UL Cap Rates

26. 2017 Whole Life Dividend Interest Rates
Carrier
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Change
CHANGE
Northwestern Mutual1
7.50
6.50
6.15
6.00
5.85
5.60
5.45
5.00
-0.45
-2.50
MassMutual
7.90
7.45
6.85
6.80
7.00
7.10
6.70
-0.40
-1.20
MetLife
6.25
5.50
5.25
5.10
4.70
-0.30
-1.55
Ohio National
6.65
6.40
5.75
-0.25
-0.90
Guardian
7.25
7.30
6.95
6.05
-0.20
-1.40
Penn Mutual
6.34
None
-0.16
New York Life
6.79
6.14
6.11
5.80
5.90
6.20
-0.59
National Life of VT
-0.50
1Northwestern Mutual also reportedly increased the administrative expenses component of its 2017 dividend scale, further reducing its dividend.

27. Carriers with Multiplier or Participation Rate Enhancement Features
Product
Applicable Accounts
Multiplier Factor
Applicable Years
Nationwide
IUL Protector
IUL Accumulator
1-Year S&P P-to-P with Multiplier
1-Year Multi-Index with Multiplier
1.15
All
Allianz
Life Pro+
1.15 (max 100 bps)
11+
Penn Mutual
Accumulation Builder Select
1.10
Prudential
Index Advantage UL
Indexed Account with Multiplier
Minnesota Life
Orion IUL
1-Year S&P 500 with Multiplier
Pacific Life
Pacific Discovery Xelerator
Formula 3+
John Hancock
Accumulation IUL 17
1.05 6+
Not meant to be an exhaustive list

28. 6% 1.10 6.6% 0% 1.10 0.0% Multiplier Example
Indexed Rate Earned (and Illustrated Rate to which AG49 Applies)
Multiplier Factor
(Applied in Excess of Cap)
Effective Rate Earned (Reflected in Illustration) 0%
1.10
0.0%
Indexed Rate Earned
Multiplier Factor
(Applied in Excess of Cap)
Effective Rate Earned

29. Carriers with “Buy-Up” Accounts
Product
Standard Cap
Standard
AG49 Rate
Buy-Up Cap
Buy-Up Cost
Buy-Up
AXA
BrightLife Grow
9.50%
5.79%
11.50%
50 bps
6.69%
BrightLife Grow Survivorship
Transamerica
TransNavigator IUL
10.50%
6.26%
15.00%
100 bps
7.65%
Pacific Life
Pacific Indexed Perf. LT 2
Pacific Indexed Accum. 5
Pacific Indexed Pro. 2
Pacific Indexed Estate Pres. 2
6.29%
13.50%
80 bps
7.49%
Pacific Discovery Xelerator
10.25%
6.17%
13.25%
7.40%
American General
Max Accumulator IUL
10.00%
6.13%
13.00%
25 bps Yrs bps Yrs 6+
7.31%
Minnesota Life
Orion IUL
12.50%
7.13%
14.50%
7.85%
John Hancock
Accumulation IUL 17
10.75%
6.39%
7.84%
Global Atlantic
Lifetime Provider
Lifetime Foundation
11.00%
6.51%
3% Spread
Lifetime Builder
12.00%
6.92%
16.50%
Survivorship Builder
9.75%
5.94%
Not meant to be an exhaustive list

30. “Buy-Up” Account Example
6.29%
0 bps
Max AG49 Rate
Cost for Buy-Up
Effective Illustrated Rate
7.49%
80 bps
6.69%
Max AG49 Rate
Cost for Buy-Up
Effective Illustrated Rate
+40 bps
Effective Illustrated Rate Increase

31. Possible Ways to Illustrate Indexed ULUL
Average = 50th percentile
½ time greater
½ time lower
Looking Back
Historical Frequency (Percentiles) - 20 Year Periods
Current Cap/Floor
12.50%/0%
12.25%/0%
11.25%/1%
10.25%/0%
100%
Historical Frequency
90%
80%
Historical Average
6.54%
7.26%
7.47%
7.98%
6.45%
7.16%
7.37%
7.86%
6.39%
7.02%
7.20%
7.63%
5.63%
6.27%
6.88%
A percentile is the frequency in which a given Compound Average Growth Rate (CAGR) was achieved over rolling blocks of time periods, beginning each trading day during the overall historical time period measured, based on historical S&P 500 Price Returns and hypothetical indexed account parameters. For example, assuming a 10.25% cap and 0.00% floor, the 20 year 90th historical percentile since the start date is 6.27%. That means that the indexed strategy, based on the assumptions above, would've achieved a hypothetical annual CAGR of 6.27% or better in over 90% of the rolling 20 year time periods.

32. Possible Ways to Illustrate Indexed ULUL
Looking Back
Historical Frequency (Percentiles) - 20 Year Periods
Looking Forward
Translated Rates based on Equity Return Assumptions
Current Cap/Floor
12.50%/0%
12.25%/0%
11.25%/1%
10.25%/0%
100%
Historical Frequency
90%
80%
Historical Average
6.54%
7.26%
7.47%
7.98%
6.45%
7.16%
7.37%
7.86%
6.39%
7.02%
7.20%
7.63%
5.63%
6.27%
6.88%
10% Total
Equity
Index
Return
8% Total
6% Total
4% Total
7.05%
6.52%
6.00%
5.47%
6.95%
6.44%
5.92%
5.41%
6.85%
6.41%
5.98%
5.54%
6.14%
5.70%
5.26%
4.83%
A percentile is the frequency in which a given Compound Average Growth Rate (CAGR) was achieved over rolling blocks of time periods, beginning each trading day during the overall historical time period measured, based on historical S&P 500 Price Returns and hypothetical indexed account parameters. For example, assuming a 10.25% cap and 0.00% floor, the 20 year 90th historical percentile since the start date is 6.27%. That means that the indexed strategy, based on the assumptions above, would've achieved a hypothetical annual CAGR of 6.27% or better in over 90% of the rolling 20 year time periods.
created by John Hancock. This approach translates an assumed long-term return for the selected index into a hypothetical assumed rate for an IUL illustration. It applies an algorithm that takes into account a stated expectation for long-term equity return, the current costs of supporting the index strategy, and the general theory that investments with similar risk should be expected to yield similar return.

33. In Summary IUL is growing and here to stay General Account product
All products utilize an “options budget”
Many products have “enhancement” features
How to determine which product/carrier to select?
Company structure (i.e. mutual vs. stock)
Financial Strength
How they have historically treated policyholders
History of raising and lowering caps and par rates (outside the trend)
History of increasing mortality charges
Trust, relationship and partnership with carriers you understand

34. Indexed Universal Life
IUL Myths & Facts

35. Myth #1
MYTH: Carriers keep any amount above the cap or above the participation rate FACT: Options are built to mirror the specific indexing strategy (i.e. Caps and Participation rates) FACT: There is no “more”!

36. Myth #2
MYTH: Companies arbitrarily determine participation rates and caps.
FACT: Participation rates and caps are a reflection of the availability of company funds to provide a “hedge” for potential interest rate exposure. This is accomplished by purchasing “call options” on the underlying index.
Call Option - the right to “sell” an option on a given date based on a predetermined purchase price
Option increases in value - sell for a gain
Option decreases in value - expires without value

37. Myth #3
MYTH: Participation rates and caps reflect the company’s profitability, thus a lower participation rate or cap means a company will have higher profit than a company with a higher participation rate or cap.
FACT: Participation rates and caps are determined primarily by two factors
Current interest rates earned by the company
Call option price
Driven by market volatility
Higher market volatility = higher price, visa versa
In General, the higher the upward growth measurement potential, the higher the cost of the call option.

38. Myth #4 MYTH: One indexing method is better than another
Caps are better than participation rates
Participation rate are better than caps
FACT: Over time, it is impossible to predict which method, if any, will outperform the others. Each linking method could potentially result in nearly the same or different outcomes. Too many variables to say one is better than the other.

39. Myth #5
MYTH: Illustrated interest rates reflect the actual performance of a product or the likelihood of interest crediting potential.
FACT: Like other universal life product illustrations, the interest rates used are merely a projected rate for illustrative purposes ONLY.

40. Myth #6
MYTH: The determination for illustrated interest rates is the same from company to company, therefore they are all equal.
FACT: While AG49 attempts to control the illustrated interest rates by determining historical performance over a common period of time (“look back”), other policy provisions such as “bonuses” or “enhancements” are reflected in the projected values but not in the illustrated rate. Read the fine print.

41. Myth #7
MYTH: Since AG49 provides a common method for determining the illustrated interest rate, a product with the highest illustrated rate will perform best in the future.
FACT: As with other products, the projected credited rate is only a part of the story. There are other factors such as mortality costs, policy expenses and charges that, along with interest credits, will ultimately determine future product performance.

42. Myth #8 MYTH: All policies loans are create equal.
FACT: Loans come in various forms. Some may create opportunity for greater cash value growth (indexed loans) but at higher risk and potential cost. While other loans (traditional, “fixed” or “wash”) have less risk but eliminate the opportunity for increased growth. Loan features and interest rates vary from carrier to carrier and based on type of loans.
Timing and purpose of loans may factor into decisions.
Short term vs. long term
Income tax exposure in the event of lapse
Loan repayment plans
Don’t assume all illustrated loans are the same. Read the fine print.