Information Memorandum September 2014

Information

Memorandum

CONTENTS

Opportunity

2

Value proposition

4

NZIG background

4

Product

6

Business model

7

Go to market strategy

8

Competitive landscape

11

Future development

12

International development

13

Key people

14

Company overview

15

Contact

16

Technical overview

17

Important information

20

OPPORTUNITY

FIRST MOVER OPPORTUNITY IN THE WORLD’S MOST INFLUENTIAL GROWING

DEMOGRAPHIC

Insured Retirement Income Group, through it’s first subsidiary in New Zealand, NZIG, is revolutionising the way retirees in the Asia Pacific region manage their savings in retirement. A simple, transparent, low cost combination of basic fund management and insurance principles allows investors to secure a minimum income guarantee for life. There are no products of this type available in New Zealand today. Retirees self-manage the uncertainty of not knowing what their retirement income will be or whether their savings will be sufficient to last throughout their lifetime.

VISION

“NZIG gives retirees the opportunity to convert part or all of

their savings into reliable, sustainable, retirement income that

will last their lifetime, however long that may be.”

MARKET OPPORTUNITY

In 2007, the New Zealand Government introduced the KiwiSaver programme, a semi-compulsory national retirement savings scheme. The scheme has been hugely successful with over 2,000,000 members enrolled. Scheme members who have reached 65 years of age (the retirement age in New Zealand) may withdraw all their savings without penalty. Over the next 15 years, over 500,000 people will be eligible to leave the scheme with accumulated savings of $36b (fig1.)

0.605 1.367 2.291 3.415 4.716 6.258 8.021 10.083 12.457 15.217 18.269 21.147 24.358 28.025 32.080 36.552 0.000 5.000 10.000 15.000 20.000 25.000 30.000 35.000 40.000 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 $ b

Fig 1. Value of accumulated KiwiSaver accounts eligible for withdrawal over the next 15 years

.

 525,000 maturing KiwiSaver accounts over the next 15 years

 Estimated total value of $36B

 Average account balance to grow from $NZ19k to $110k

 Current account balance of high value accounts is $65k

 High value accounts that represent over 35% of the value of all KiwiSaver savings is $13B

 Over 150,000 KiwiSavers are high value today Working with local

actuarial consultants Melville Jessup Weaver, we were able to forecast contribution savings rates, earnings rates, lapse rates and withdrawal rates to estimate the value and volume of maturing KiwiSaver accounts

DEMOGRAPHIC POWERHOUSE

The significance of the retirement demographic is not unique to New Zealand. Towers Watson US actuarial consultants recently reviewed 13 countries and found that schemes similar to New Zealand’s KiwiSaver held retirement savings assets of $18 trillion today.

The challenge of building retirement products that give retirees a stable retirement income that will last their lifetime, and are both economic to the retiree and insurer, is the subject of global innovation and development.

In the US, product development began in the 1970s with standard annuity products which were adapted to take advantage of tax incentivised retirement savings initiatives. The industry has not been without challenges, with early product design failing to meet market volatility tests. Today, the industry has over $2 trillion invested in insured retirement investment products.

European development has followed the US with significant developments in the management of market risk and the establishment of new solvency standards applying to all EU countries. The European insured retirement investment industry is diverse, with different product variations across Europe; the combined industry is now estimated to be in excess of $800billion.

Japan has the greatest personal savings rates in the world, the lowest interest rates, and a rapidly aging population. Deregulation of financial markets in 2000 allowed insured retirement products to be sold by foreign insurers. Intially, development was rapid. However, the global financial crisis highlighted poor risk managemant policies, which resulted in significant product redesign. The Japanese market is now growing again, and estimated to hold $200 billion in retirement assets.

The New Zealand product draws on over 30 years’ international experience to deliver a simple, transparent solution that has immediate application for local KiwiSavers, term deposit holders, and retirees in Australia and Asia.

 40 million individuals aged 65 or over today

 13% of the population

 $2 trillion invested in insured retirement products

 19 of the world’s 20 oldest countries

 18% of the population are 65 today

 $800 billion invested in insured retirement products

 25% of all Japanese are aged 65 years or older

 By 2033, one in three Japanese will be 65 years or older

 $15 billion invested in insured retirement products in 2013 alone

 600,000 people aged 65 years or older today

 Expected to double in the next 20 years

 New Zealand has no insured retirement products, Australia is developing with $50billion and Asia x?? Japan emerging.

VALUE PROPOSITION

THE NEW ZEALAND PRODUCT DESIGN WAS DEVELOPED IN CONJUNCTION WITH GLOBAL

ACTUARIES MILLIMAN INC, BASED IN CHICAGO; THE INSURED RETIREMENT INSTITUTE OF

AMERICA, AND LOCAL INDUSTRY SPECIALISTS.

“Retirees have the opportunity to convert retirement savings into an income

that will last their lifetime. Retirees no longer have to surrender their capital to

secure a regular income. The value of their investment is always available

and can be called upon at any time. In the event of early death, the balance of

the investment becomes the property of the estate.”

HISTORICAL ANNUITY PRODUCTS

 Tax inefficient

 No liquidity

 Low returns

 No flexibility

 Expensive

 High withdrawal costs

 Poor profitability

NEW INSURED RETIREMENT PRODUCTS

 Regular income payments tax free

 Redeemable at any time

 Garanteed minimum income of 5%

 No contractual term

 Max 2.4%

 No withdrawal costs

 Shareholder IRR 35%

The product delivers to retirees 65 years or older:

 Ownership of retirement savings throughout retirement

 A guaranteed minimum level of income throughout retirement

 The ability to redeem their capital less withdrawals at any time

 The ability for the balance of savings after withdrawals to be paid to the estate on early death.

NZIG BACKGROUND

OVER 30 YEARS IN THE MAKING

NZIG was founded in February 2013 by Ralph Stewart, and was conceived by combining a 30-year career in financial services locally and internationally. Ralph spent 10 years as Chief Executive of New Zealand’s largest retail asset manager, 3rd _{largest insurer and manager of one of the first providers of KiwiSaver funds in New Zealand.}

Detailed research of improvements in the post-retirement financial services market worldwide has enabled the development of a new, simple, transparent solution that can be applied to KiwiSaver in New Zealand and the wider Asia-Pacific Region.

Product development has been a function of learned innovation, international experience and the drawing together of industry experts locally and internationally.

THE NZIG DEVELOPMENT TEAM AND ADVISORY BOARD COMPRISES BOTH LOCAL AND

INTERNATIONAL LEADERS AND SPECIALISTS IN RETIREMENT INCOME PRODUCTS AND

SERVICES

Advisory Board

Diana Crossan: was New Zealand’sRetirement Commissioner for 10 years. She was Senior Executive with AMP in the UK and New Zealand and held senior leadership roles in the public sector and SOE sector, including Education, Justice, and Energy. Her Directorships include Mighty River Power and New Zealand Post. Diana was Chair of Ngai Tahu’s saving scheme,Whai Rawa, for 7 years.

Murray Hilder: is a Fellow of the New Zealand, London and Australian Society of Actuaries. He has over 30

years’ experience in actuarial consulting and senior management in financial services, risk modeling, information services and international business. His consulting practices include employee benefits, healthcare, life insurance and financial services.

Timothy Paris: is a Fellow of the Society of Actuaries, a Member of the American Academy of Actuaries,

and a graduate of the University of Connecticut. Timothy consults to the project on behalf of RUARK Insurance Advisors, providing consultative services to manage risks relating to longevity, mortality and guarantees to policyholders.

Martin Hawes: Martin is one of New Zealand’s leading personal financial planning commentators. An

authorised financial planner, Martin has authored multiple books and publications on personal financial planning and is a current columnist for the Sunday Star Times.

SPECIALIST TEAM

The Project draws on specialist consultants from around the world to design, test, build and contribute to the ongoing development of the new product.

 Founded in 1947, the world's largest providers of actuarial and related products and services

 The world's largest provider of low-cost mutual funds and exchange traded funds (ETFs)

 At 28 February 2014, provided outsourced investment services for 27 clients for funds under

administration in excess of $13.3b

 New Zealand's largest trustee organisation, and is guaranteed under The Public Trust Act 2001.

PRODUCT

A PRACTICAL SOLUTION TO A GROWING PROBLEM

The product is simple, transparent and flexible, allowing the retiree to choose at what age they would like to start drawing their retirement savings in regular income payments. The payments will continue after the retiree’s capital has been depleted. In this simple illustration below (Fig 3.):

 The investor deposits a portion of the retirement savings (normally 35%) with NZIG.

 The funds are held in a simple, low-cost balanced investment similar to the fund used to build their retirement fund.

 The funds can be withdrawn in part or in total at any time without penalty.

 The retiree has elected to commence guaranteed income payments when they turn 70.

 The guaranteed income level for life is 6.5% after tax.

 The investor’s capital will be depleted when they are 93 (example only), if they live longer than this the payments continue until they die.

 If they die earlier than 93 (example only), the balance of their capital is returned to their estate.

To achieve the same result under an old annuity or pension product, the retiree would not have had the same flexibility or security.

 The retiree would have had to surrender their capital to an insurer for either a fixed term or for life.

 The returns would have been based on fixed income returns and would have been lower.

 The retiree would have paid tax on the income payments.

Fig 3. Example of a retiree joining NZIG at age 65 and electing guaranteed income at age 70

BUSINESS MODEL

A PRACTICAL BUSINESS MODEL

 The asset management business delivers long-term revenue from investment in straightforward exchange traded funds (ETF’s) with a conservative balanced asset allocation. The result is either the same or a lower risk profile than an investor experienced in the final years of saving for retirement.

 The asset allocation is hedged to reduce volatility and help improve the longevity of capital, at an additional incidental margin for the reduction in return volatility.

 The separate insurance business receives an individual premium from each investor to provide for the event of outliving their retirement capital. The premium is a function of the cost of capital required to meet the liability and can increase over time.

Fig 4. A simple model that unbundles investment and risk into two different entities delivering specific benefits and generating independent earning streams

GO TO MARKET STRATEGY

A PRAGMATIC APPROACH TO SALES IN THREE TIERS

242 587 85 205 200 700 527 1,492 - 200 400 600 800 1,000 1,200 1,400 1,600 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 NZ$ M Years TIER 1 - Retail TIER 2 - Institutional TIER 3- Defined Benefit TOTAL

TIER 1 - $841 million in funds under management

The first product is a simple alternative to investing retirement savings in bank deposits or managed funds. The target audience is retirees who have been earning more than $80,000 p.a. while saving for their retirement.

This group represents 35% of the total KiwiSaver market over the next 15 years or $13b (Fig 2.).

Fig 2. Value ($B) of high-value KiwiSaver accounts eligible for withdrawal over the next 15 years These investors are accessed by authorised financial advisers (AFAs)

 NZIG established an online forum (retirementadvising.co.nz) for authorised financial advisers (AFAs) in New Zealand in January 2014 to raise awareness for insured retirement investment products. Of the total population of AFAs (1,800), 320 have registered and are actively involved with developing the concept. If current registrations to the forum refer two clients ($100k each) per year, NZIG will achieve its stage 1 sales targets.

 NZIG have been active at New Zealand investment advisory conferences since September 2013, securing either key note or specialist topic speaking at all major events with strong interest and endorsement.

TIER 2 - $205 million in funds under management

Saving for retirement is commonly known as accumulation and spending in retirement is referred to as de-accumulation. Accumulation is the realm of the banks and insurers, with over 80% of all current KiwiSavers managed by six institutions. The KiwiSavers cannot withdraw funds until the age of 65, after which there are no limitations or tax influences on how the funds can be used.

Because of the modular structure (NZIG is two distinct entities, an asset manager and an insurer, Fig 4.), it is possible to provide white label guaranteed income solutions to institutions, which already have KiwiSaver accumulation funds. Due diligence is being actively carried out on NZIG product and process by two banks and one insurer making up 45% the KiwiSaver accumulation market.

Working with the New Zealand tax authorities made it possible to apply average New Zealand income data by age across the KiwiSaver data set. This enabled NZIG to estimate the volume and value of KiwiSaver account balances at given ages, based on individuals’ earnings prior to reaching age 65.

The illustration below estimates the value and volume of future KiwiSaver maturities (age 65) for the major KiwiSaver providers today.

As KiwiSaver grows and maturities increase, more and more funds are being withdrawn. The current experience is 38%2

of all maturing accounts are withdrawn at age 65.

“The Retirement Commissioner

is worried too many people are

blowing their KiwiSaver payouts.”

“People can withdraw their funds when they hit 65 if they have been in the scheme for at least five years, but figures released to 3 News show more than a third of retirees are pulling out their money and spending it on travel, cars and boats.

Probably the single biggest thing that people are doing is going on holiday," says Retirement Commissioner Diane Maxwell.

TOO MANY KIWIS BLOWING KIWISAVER PAYOUTS –

RETIREMENT COMMISSIONER…

NZIG is under active due diligence by two major trading banks and New Zealand’s largest insurer to include the insured retirement investment products on their adviser recommended lists. A further two direct KiwiSaver providers are engaged in developing business cases to allow NZIG to provide underlying white label product and liability management services to their existing KiwiSaver product suite.

TIER 3 - NZ$700m in funds under management

In the last 20 years there has been a huge reduction in the number of defined benefit contribution (DB plans offered by employers. The traditional defined benefit pension was paid by a company on the basis of an employee’s length of service and final salary. Companies are now retreating from such promises because of the costs, poor returns, people living longer, and the success of the national defined contribution scheme – KiwiSaver.

New Zealand is a good example of this, where, in the last 20 years, the number of defined benefit schemes offered to employees has dropped from 1,200 to just 873_{. The residual value of defined benefit schemes in New Zealand is $5b}4_.

NZIG, through the local actuarial community, is aware of a large number of companies who are interested in removing their pension liabilities, winding up their schemes and funding NZIG to provide the lifetime benefits provided under the old DB scheme.

NZIG have been approached by two of New Zealand’s largest trustee companies, representing the majority of the 87 remaining work place defined benefit (DB) superannuation schemes in New Zealand, to ascertain if the insured retirement schemes could be used to replace the old legacy DB schemes. The NZIG product is a unique replacement product removing the burden of future pension payments from employers.

COMPETITIVE LANDSCAPE

FIRST MOVER BENEFITS IN A COMPETITIVE MARKET

The proposition is unique in New Zealand, although established in the US and Europe and growing rapidly in Australia and parts of Asia and Japan. The market opportunity, however, is large and unclaimed in New Zealand. It can only be assumed that market success will attract competition. The key first mover benefits NZIG incorporates include:

 Licensing – New Zealand regulations do not expressly

provide for insured retirement products. NZIG has worked extensively with the Reserve Bank to co-ordinate product design and solvency requirements to secure the first license.

 Embedded IP - A New Zealand-specific product design that cannot be immediately replicated. Material

customisation of similar product offered by Australian Banks operating in New Zealand would be required to match NZIG, price, benefit and solvency levels.

 Capital – Insured retirement income products are balance sheet based, requiring specific statutory account provisioning. For a bank, provisioning will compete with existing mainstream products; for a fund manager, additional operating capital will be required.

 Distribution – NZIG is experienced in financial services distribution and will lead the adviser education and accreditation process, and is already claiming early distribution credibility in de-accumulation.

3 _{New Zealand Government Actuary 2012} 4 _{New Zealand Financial Markets Authority}

FUTURE DEVELOPMENT

ESTABLISHED FUTURE APPLICATIONS INCLUDE PRE-RETIREMENT CAPITAL PROTECTION

AND THE USE OF GUARANTEED INCOME TO MANAGE THE COST OF HEALTH CARE IN

RETIREMENT

Innovations in health insurance management mean serious care products can be purchased at age 65 for a fixed period at a fixed premium, avoiding the impact of medical inflation in retirement. Early research suggests a $100k lump sum will support a guaranteed minimum annual income after tax of $5k for life.

This, in turn, is enough to buy a serious care medical insurance that will not cost more than $5k p.a for at least 10 years from age 65. 3000 3500 4000 4500 5000 5500 6000 65 66 67 68 69 70 71 71 72 73 74 75 76 77 Level Major Medical Premium Stepped Major Medical Premium

Fig 7 Major medical – Funded Premium

The most obvious next step opportunities lie in the product’s flexibility, liquidity and transparency, which enable it to compete with traditional term deposits over not just lifetimes, but also fixed terms. The term deposit market in New Zealand is now over $120b in cash deposits.

The graph below shows the sales progress of an Australian provider (Challenger) who commenced their business by offering fixed term products, and is experiencing a significant shift in demand to lifetime products like NZIG.

-200 400 600 800 1,000 1,200 1,400 1,600 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2014 2014 2013 2012 2011 2010

Fixed term Life me

INTERNATIONAL DEVELOPMENT

JAPAN

Japan is a unique market, launching insured retirement income products in 2000 after market deregulation, largely in alliance with American insurers. After the GFC, Japan has been world leading in designing more flexible and better managed insured retirement income products.

NZIG visited one of the first domestic providers in 2013, Tokio Marine Nichido (TMN) as part of early market research. TMN have been active in product redesign, sharing developments and key features with NZIG. Product development co-operation continues and is expected to lead to further design developments. Market participants estimate that total sales for variable annuity products in 2013 were 11 billion – an increase of more than 50% over sales in 2012.

KEY PEOPLE

RALPH STEWART,

Managing Director and founder of New Zealand Income Guarantee. Diploma in Business Administration from Victoria University and a Masters in Business Administration from Manchester University.

Previously CEO of ACC and AXA New Zealand. 30 years experience in New Zealand financial services, establishing one of the first KiwiSaver default schemes in 2007. Previously been chair of investment advisory businesses, Spicer’s Portfolio Management and Advicefirst, a director of AMP, National Mutual Nominees, Mortgage Backed Bonds Limited, Jardine Fleming China, The Financial Telephone Company, and the Victoria University Faculty of Commerce Advisory Board.

RHYS GWILYM,

BSc (Hons) in Physical Oceanography and Masters in Business Administration from Manchester University. Previously based in Europe, working in operations, commercial and marketing roles for some of the world’s largest multinationals. Worked as Head of Marketing for a FTSE100 company. Has also worked as a management consultant based in London. Since moving to New Zealand nine years ago, Rhys has established himself as an independent management consultant capitalising on his operational and marketing experience. He has worked for a number of large financial services assignments in Wellington.

MURRAY HILDER,

MSc Hons in Mathematics, University of Auckland. He is a Fellow of New Zealand Society of Actuaries, a Fellow of Institute of Actuaries of London and a Fellow of the Institute of Actuaries of Australia. 30 years experience in actuarial consulting and senior management, mainly in the areas of financial services, risk modeling, information technology and international business. President of the New Zealand Society of Actuaries 1994 – 1995, Chair of the Professional Practice Committee of the New Zealand Society of Actuaries.

TIMOTHY PARIS,

Fellow of the Society of Actuaries, a Member of the American Academy of Actuaries, and a graduate of the University of Connecticut, BS in Mathematics. He is CEO of RIA, providing consultative reinsurance brokerage services that help insurance companies manage risks related to longevity, mortality, and guarantees to policyholders. Prior to joining RIA in 2009, Tim was an officer at several insurance companies, with responsibilities that included product management, pricing, valuation, expense management, financial reporting and asset-liability management. He has been published in National Underwriter, Investment News, American Banker, Annuity News, Retirement Income Journal and Reinsurance News.

WADE MATHESON,

Fellow of the Society of Actuaries of Australia and Principal of Milliman, Sydney. Milliman is a large, international, independent actuarial and consulting firm. Founded in Seattle in 1947, by Wendell Milliman and Stuart A. Robertson, the firm operates 54 offices worldwide with 2,500 employees, including more than 1,300 consultants and actuaries. Milliman is owned and managed by approximately 350 principals. Milliman's primary business includes consulting practices in employee benefits, healthcare, investment, life insurance and financial services, and property and casualty insurance. Clients include a spectrum of business, financial, government, union, education, and nonprofit organizations.

COMPANY OVERVIEW

INDUSTRY

 Financial Services

 Retirement Income Specialists

 Passive asset management

 Risk management

 Life longevity risk management.

COMPANY

 Founded in February 2013, Wellington, New Zealand

 Staff of 3, Wellington and Auckland. EXTERNAL ADVISERS

 OLIVERSHAW, Tax specialists

 DLA Phillips Fox, Legal Advisers

CONTACT

RALPH STEWART,

Email [email protected]

RHYS GWILYM,

Email [email protected]

NEVILLE JORDAN

,

This technical summary was extracted from Variable Annuities - An Analysis of Financial Stability, prepared by the Geneva Association in March 2013. The Geneva Association (The International Association for the Study of Insurance Economics) is the leading insurance think tank for strategically important insurance and risk management issues. The Association identifies fundamental trends and strategic issues where insurance plays a substantial role, or which influence the insurance sector.

Established in 1973, the Geneva Association is based in Geneva, Switzerland, and is a non-profit orginisation funded by its members.

APPENDIX – IMPORTANT INFORMATION

This document has been prepared by New Zealand Income Guarantee Limited (NZIG). This document and all information which may subsequently be given to the recipient are supplied on the basis set out below. If these terms are not acceptable to the recipient, this document must be returned immediately without being read or copied.

This document includes only a selected summary of information regarding NZIG and is not intended to provide the sole basis of an evaluation of NZIG. The reader should obtain whatever information they believe is necessary to make an informed investment decision, including requests for additional information required from NZIG.

NOT AN OFFER TO THE PUBLIC

This information memorandum is neither a prospectus that is required to be registered in terms of the New Zealand Securities Act 1978, nor an “authorised advertisement” for the purposes of the Securities Act. This investment overview is not a registered prospectus or an investment statement under the Securities Act 1978. Only “eligible persons” as defined in section 5(2cc) of the Securities Act 1978 and/or persons to whom section 3(2a) of the Securities Act applies may invest in NZIG under this investment offer.

EXCLUSION OF LIABILITY

Neither NZIG, nor any of their respective agents, advisors, directors, officers, shareholders, or employees warrant or represent the origin, validity, accuracy, completeness or reliability of any statement in this document, or accept responsibility for errors or omissions in this document. Nor do they accept any, and they hereby disclaim and exclude all, liability for losses, claims, damages, demands, costs or expenses of any nature whatsoever (including, but not limited to, liability in contract or in tort (including negligence), in equity or (to the extend permitted by law) for breach of statutory or other duty arising in any way out of or in connection with this document).