Session 106 PD, Annuity Hot Topics Moderator: Dean Andrew Kerr, FSA, ACIA, MAAA

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Session 106 PD, Annuity Hot Topics

Moderator:

Dean Andrew Kerr, FSA, ACIA, MAAA

Presenters:

Meghan Belinski, FSA

Dean Andrew Kerr, FSA, ACIA, MAAA

Timothy C. Pfeifer, FSA, MAAA

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© Oliver Wyman

CONSULTING ACTUARIES

106PD - 2014 SOA ANNUAL MEETING & EXHIBIT

October 28, 2014

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© Oliver Wyman 1

Session overview

Dean Kerr

– Introductions

– Overview of current hot topics and trends in the annuity space

– Hybrid (aka structured) annuities – industry view

Meghan Belinski

– Hybrid annuities – company view

Tim Pfeifer

– Variable annuities

– Fixed indexed annuities

– Contingent deferred annuities

– Deferred income annuities

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2 2 © Oliver Wyman

Annuity sales: 2004 - 2013

88 80 78 73 109 111 82 80 72 85 133 137 160 184 156 128 140 158 147 145 0 50 100 150 200 250 300 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Fixed Variable D o lla r b illio n s Year

Source: LIMRA Secure Retirement Institute, U.S. Individual Annuity Sales Survey

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© Oliver Wyman 3

Annuity trends

Year-to-date sales ($ billions)

YTD 2014

YTD 2013

% change

Variable

Separate account

55.3

58.4

-5%

General account

15.1

14.9

1%

Total variable

70.4

73.3

-4%

Fixed

Fixed deferred

40.1

28.3

42%

Indexed 24.3 17.2 41% Fixed-rate deferred 15.8 11.1 42% Book value 11.2 8.2 37%

Market value adjusted 4.6 2.9 59%

Fixed immediate

5.1

3.6

42%

Structured settlements

2.6

2.5

4%

Deferred income

1.3

0.9

43%

Total fixed

49.1

35.3

39%

Total

119.5

108.6

10%

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© Oliver Wyman 4

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© Oliver Wyman 5

Hybrid annuities

Consumer appeal

• Fills risk spectrum between FIAs and accumulation VAs invested in an index fund

• Higher index cap than traditional FIA

• Buffer design

No losses if index drop remains within buffer

– Uncapped losses after buffer breached

• Floor design

– Immediate losses with index drops

Losses are limited to floor

Hybrid annuities provide consumers with higher index-linked upside potential

relative to traditional FIAs in exchange for sharing some downside return risk

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© Oliver Wyman 6

Indexed-linked account value growth profile (before fees)

FIA with annual cap

Hybrid annuity – floor design

Hybrid annuity – buffer design

Variable annuity

AV growth

Index return

AV growth

AV growth

AV growth

Index return

Index return

Index return

1Assumes no dividends.

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© Oliver Wyman 7

Hybrid annuities

Comparison of annuity design elements

Fixed indexed annuity

Variable annuity

Hybrid annuity

No downside risk

1

Unlimited downside risk

Downside risk with some protection

via buffer or floor

Participate indirectly in the

performance of the underlying

index

Invest directly in separate

accounts/funds

Participate indirectly in the

performance of the underlying

index

Choice of index, crediting method

and term

Choice of investment options

Choice of index, crediting method,

term and protection level

Guaranteed minimum crediting rate

No guaranteed minimum crediting

rate outside of the fixed account

No guaranteed minimum crediting

rate

Fixed account is available

Fixed account is often, but not

always, available

Fixed account is not usually

available (only one carrier offers a

fixed account in the investment

options)

Guaranteed living benefits are

usually available

Guaranteed living benefits are

usually available

Lack guaranteed living benefits

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8 8 © Oliver Wyman

M&E fee

• None

M&E fee

• Present

Investment allocation

• Policyholders can allocate to one or more

segments/accounts

Investment allocation

• Policyholders can allocate between variable

options and structured investment/index

options

Crediting mechanism

• Each segment/account credits a return based

on the underlying index, term, buffer or floor

Crediting mechanism

• Variable options behave like a traditional VA,

and an investment expense applies

• Structured investment/index options behave

similarly to "FIA like" products

Design considerations

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© Oliver Wyman

Hybrid annuities

Product development and pricing considerations

Complexity

Policyholder

behavior

Regulatory

Impact of

hedging

Reserving

• Lack of

guaranteed

living

benefits

simplifies

pricing

• Leverage

synergies with

FIA and VA

designs

Interest-sensitive

and

index-sensitive

dynamic

lapses

• Administration

• Management of

non-guaranteed items

• No

well-established

US Statutory

or US GAAP

frameworks

• Modeling and

implementation

of frameworks

complex

• Model

regulations

and laws

• Reduce costs

• Increase

competitiveness

• Filing and

regulatory

concerns

• General risk

management

• Modeling

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© Oliver Wyman 10

The future outlook for hybrid annuities is bright

• Consumer appeal

• Access to new distribution

• Balancing product profile

• Offsetting VA guarantee risks

• Sustainable design in a low rate environment

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©UFS

Meghan Belinski, FSA

AVP & Actuary, MetLife Retail Retirement Products

October 28, 2014

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Registered Single Premium Deferred Annuity sold by

prospectus

No M&E or annual contract fee

Six year surrender charge period

Optional Return of Premium death benefit

2

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Product Overview

3

Shield 10

Shield 15

Shield 25

Shield 100*

1-Year

Term

• S&P 500® Index

• S&P 500® Index Step Rate • Russell 2000® Index • NASDAQ-100 Index® • MSCI-EAFE Index • Bloomberg Commodity IndexSM N/A N/A • S&P 500® Index • S&P 500® Index Step

Rate

3-Year

Term

• S&P 500® Index

• S&P 500® Index Step Rate • Russell 2000® Index • NASDAQ-100 Index® • MSCI-EAFE Index • Bloomberg Commodity IndexSM • S&P 500® Index • Russell 2000® Index • MSCI-EAFE Index N/A N/A

6-Year

Term

• S&P 500® Index • Russell 2000® Index • MSCI-EAFE Index • S&P 500® Index • Russell 2000® Index • MSCI-EAFE Index • S&P 500® Index • Russell 2000® Index • MSCI-EAFE Index N/A

*Shield 100 is not available in all states.

For Financial Professional Use Only. Not for Use with the General Public.

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Policyholder elects a 3 year, Shield 10 with 20% Cap Rate

4 Cap of 20% Shield 10

For Financial Professional Use Only. Not for Use with the General Public.

Account value will be reduced by any negative index performance beyond the elected level of protection. If the Shield 100 or the Fixed Account is not chosen, there is a risk of substantial loss if the index declines more than the level of protection.

-8% -12% 15% 26% 0% -2% 15% 20% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30%

Down Market (1) Down Market (2) Up Market (1) Up Market (2) Index Performance Policyholder Performance

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Customer Value Proposition

Protect

your retirement assets

Participate

in growth opportunities

Personalize

your strategy

5

For Financial Professional Use Only. Not for Use with the General Public.

All contract guarantees, including the optional death benefit and annuity payout rates, are subject to the claims-paying ability and financial strength of the issuing insurance company.

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6

Fixed Income

Diversifies variable annuity block

Product payoff can be easily replicated

Periodic rate-setting

Policyholder invests $100 in Shield 10, 1 year term, with a cap of 5.0%

For Financial Professional Use Only. Not for Use with the General Public.

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Product Challenges

Regulatory considerations

Firm approvals

Distribution acceptance

Increasing competition

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Sales

*

Q2 2013

Q3 2013

Q4 2013

Q1 2014

Q2 2014

Total

$14.3

$65.4

$81.2

$73.5

$75.7

$310.2

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Clients have the flexibility to allocate your purchase payment among the indices that are available with a chosen

Shield Option, or the Fixed Account. These indices are diversified among large and small cap stocks, international

stocks and commodities. Please note not all indices are available with all Shield Options.

• The S&P 500®IndexAincludes 500 large cap stocks from leading companies in leading industries of the U.S. economy, capturing

approximately 80% coverage of U.S. equities.

• The Russell 2000®IndexBincludes approximately 2000 small cap companies and provides a comprehensive and unbiased

small-cap barometer of US equities.

• The NASDAQ-100 Index®Cincludes 100 of the largest domestic and international nonfinancial securities listed on The Nasdaq

Stock Market based on market capitalization.

• The MSCI EAFE IndexDincludes over 1000 international stocks intended to measure major developed international equity

markets in Europe, Australasia and Far East (EAFE).

• The Bloomberg Commodity IndexSMEis designed to provide a broadly diversified representation of commodity markets and is

comprised of ETF's on physical commodities.

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AThe S&P 500 Index is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by MetLife Insurance Company of

Connecticut. Standard & Poor’s®, S&P® and S&P 500® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by MetLife Insurance Company of Connecticut. MetLife Insurance Company of Connecticut's Shield Level Selector SMAnnuity is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates, and none of such

parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P 500 Index.

BThe Russell 2000®Index is a trademark of Russell Investments and has been licensed for use by MetLife Insurance Company of Connecticut.

The Shield Level SelectorSMAnnuity is not sponsored, endorsed, sold or promoted by Russell Investments and Russell Investments makes no

representation regarding the advisability of investing in the Shield Level SelectorSMAnnuity.

CNasdaq®, OMXTM, and NASDAQ-100 Index®, are registered trademarks of The NASDAQ OMX Group, Inc. (which with its affiliates

is referred to as the “Corporations”) and are licensed for use by MetLife Insurance Company of Connecticut. The Shield Level SelectorSMAnnuity has not been passed on by the Corporations as to its legality or suitability. The MetLife Shield LevelSelectorSM

Annuity is not issued, endorsed, sold, or promoted by the Corporations. THECORPORATIONS MAKE NO WARRANTIES AND BEAR NO LIABILITY WITH RESPECT TO THESHIELDLEVELSELECTORSMANNUITY.

DThe Shield Level SelectorSMAnnuity is not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any such

products or securities or any index on which such products or securities are based. The Shield Level SelectorSMProspectus contains a more

detailed description of the limited relationship MSCI has with MetLife Insurance Company of Connecticut and any related products.

E“Bloomberg®” and “Bloomberg Commodity IndexSM” are service marks of Bloomberg L.P. and have been licensed

for use for certain purposes by MetLife Insurance Company of Connecticut. Neither Bloomberg Finance L.P. and its affiliates (collectively, “Bloomberg”) nor UBS Securities LLC and its affiliates (collectively, “UBS”) are affiliated with MetLife Insurance Company of Connecticut, and Bloomberg and UBS do not approve, endorse, review, or recommend MetLife Shield Level SelectorSM. BLOOMBERG and Bloomberg Commodity IndexSMare trademarks or service marks of

Bloomberg Finance L.P. and have been licensed to MetLife Insurance Company of Connecticut. Neither Bloomberg nor UBS guarantees the timeliness, accurateness, or completeness of any data or information relating to Bloomberg Commodity IndexSM.

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investing. Availability and features may vary by state. Please refer to the contract prospectus for more complete

details regarding the optional Return of Premium death benefit. MICC may substitute any index at any time.

Shield Level Selector is a long-term investment vehicle designed for retirement purposes and has limitations,

exclusions, charges, termination provisions and Terms for keeping it in force. There is a risk of substantial loss

of principal for losses beyond the Shield Rate your clients select, because your clients agree to absorb all losses

that exceed their chosen Shield Rate. Please refer to “Risk Factors” in the contract prospectus for more details.

All product guarantees are based on the claims-paying ability and financial strength of the issuing insurance

company.

Withdrawals of taxable amounts are subject to ordinary income tax and if made before age 59½, may be subject to a 10%

Federal income tax penalty. Distributions of taxable amounts from a nonqualified annuity may also be subject to the 3.8%

Unearned Income Medicare Contribution Tax if your modified adjusted gross income exceeds the applicable threshold

amount. Withdrawals will reduce the death benefit and account value. Withdrawals may be subject to withdrawal

charges.

MetLife Shield Level Selector Single Premium Deferred Annuity is issued by MetLife Insurance Company of Connecticut

on Policy Form L-22494 (09/12) and is distributed by MetLife Investors Distribution Company (member FINRA). Both are

MetLife companies.

L1014394756[exp1114]

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Timothy C. Pfeifer, FSA, MAAA

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2

2

1.

Fixed Indexed Annuities

2.

Variable Deferred Annuities

3.

Deferred Income Annuities

4.

Contingent Deferred Annuities

The Approach:

Include SPIAs and DRFAs

TOMORROW

Q&A:

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Spawning Imitators

Spread-based products

3

3

Two carriers selling uncapped,

managed volatility indexes

Two carriers selling uncapped,

managed volatility indexes

Market Dominance

Fine-tuning niche competitiveness

Benefits relative to DIA, SPIA

Defined benefit approaches,

stacked benefit bases

Defined benefit approaches,

stacked benefit bases

Income-Focused Products

31% (1

st

half, 2014), 17% (2013)

Products simpler and shorter SC

Greater percentage of sales

from banks, wires, B/Ds

Greater percentage of sales

from banks, wires, B/Ds

Shifting Distribution

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New FIA designs will borrow from the mutual fund, ETF, 401(K)

worlds

New FIA designs will borrow from the mutual fund, ETF, 401(K)

worlds

Penetration of FIAs into banks, wires, B/Ds will serve as impetus

to pull historical FIA carrier naysayers into market

Penetration of FIAs into banks, wires, B/Ds will serve as impetus

to pull historical FIA carrier naysayers into market

Income story will still predominate, but interesting indexes will

make for more compelling accumulation stories

Income story will still predominate, but interesting indexes will

make for more compelling accumulation stories

4

4

Absent a very large increase in interest rates, will continue to

take share from DRFAs and VAs

Absent a very large increase in interest rates, will continue to

take share from DRFAs and VAs

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Some Reinsurance Capacity

VA Buyback Programs

Premium Limitations

5

5

TODAY

Continued Steps to De-Risk

Volatility Controlled Funds

Withdrawal Benefits a Function of

Interest Rates, Volatility

In Addition...

Large Subaccount Menu

Alternative Assets

Few Guarantees

Guaranteed Living Benefits

Re-direct to GMAB

Investment-Oriented VA

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6

6

Fewer Manufacturers Due to

Earnings/Balance Sheet

Volatility

Rise of Privately-Placed Variable

Annuities and Variable Life

Loss of Market Share.

Fewer 1035s Due to Rich

Inforce Guarantees

Continued Evolution of

Buyback programs –

Dial-Downs, Cost Reductions

Carriers Seek Portfolio

Balance of IOVAs with

Lighter Guaranteed VAs

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Some carrier overlap

Some carrier overlap

Full year 2013 sales

finished at $2.2 billion

Full year 2013 sales

finished at $2.2 billion

1

st

half 2014 sales

reached $1.3 billion

1

st

half 2014 sales

reached $1.3 billion

7

7

TODAY

Substantial Sales Growth

Substantial Sales Growth

Similar commissions

Similar commissions

Similar pricing mortality

Similar pricing mortality

DIA vs. SPIA

DIA vs. SPIA

Top 3 account for 85%

Top 3 account for 85%

Three quarters of business sold via

captive channels

Three quarters of business sold via

captive channels

At least 12 active sellers

At least 12 active sellers

Carriers in Market

Carriers in Market

Focus on income competitiveness

Focus on income competitiveness

QLAC status promising

QLAC status promising

Limited liquidity, flexibility

Limited liquidity, flexibility

Product Focus

Product Focus

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Indexing/Inflation component

Indexing/Inflation component

Distinct pricing parameters as experience data emerges

Distinct pricing parameters as experience data emerges

8

8

Linkage with other coverages

Linkage with other coverages

Liquidity

Liquidity

More Product Diversification/Differentiation

More Product Diversification/Differentiation

New Distribution

New Distribution

Packaging with VAs, other products

Packaging with VAs, other products

401(k) Market

401(k) Market

Market Expansion

Market Expansion

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9

9

TODAY

“ Essentially a stand-alone GLWB policy that wraps non-annuity assets

and ensures guaranteed lifetime income”

Covers certain ETFs and

Mutual Funds

Covers certain ETFs and

Mutual Funds

Main hurdle is regulation

Main hurdle is regulation

Finally recognized as a annuity contract

NAIC workgroup reviewing CDAs

across all current annuity regulations

Some states won’t yet approve, but

log jam may be breaking

Pricing nuances of CDAs

Pricing nuances of CDAs

Current market is very thin

Current market is very thin

Only a few insurers

Starting to gain traction

Clearly viewed as a defensive product

by many

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10

10

Regulatory Clarification

Regulatory Clarification

Will play out over next couple of years

State approvals will open up

Some new law will need to be created

Product Design

Product Design

Will not be limited to ETF and Mutual

Fund coverage

401(k) market will be popular

Designs will be simpler than VA GLWBs,

but may not be cheaper

Distribution

Distribution

RIAs are clear, untapped channel

Some broker/dealers would like to de-emphasize

annuities

An annuity license still required to sell CDAs

Bank area is a wild card

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Timothy C. Pfeifer, FSA, MAAA

E-mail:

tpfeifer@pfeiferadvisory.com

Figure

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