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Annuity Market Update

Southeastern Actuaries Conference (SEAC) Fall Meeting

Guillaume Briere-Giroux, FSA, MAAA, CFA

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Agenda

 Sales trends

 Product trends

 Pricing and risk management topics

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73.5 114.0 116.0 128.5 134.0 137.5 160.0 186.0 157.5 127.1 140.0 159.0 150.8 38.9 71.5 98.6 81.6 84.4 73.0 70.0 66.6 103.1 102.0 75.0 72.8 77.0 0 50 100 150 200 250 300 1996 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012*

Variable annuity sales Fixed and equity indexed annuity sales1

Annuity Sales ($billion) 112.4 1996-2000 2000-2001 2001-2005 2005-2007 2007-2009 2009-2011 Overall CAGR VA = 17.0% (17.2)% 4.8% 16.3% (9.0)% 11.8% 5.3% CAGR FA = 7.9 35.4 .5 (4.5) 4.0 (13.1) 4.7 CAGR Total = 14.1 (2.6) 3.2 9.5 (5.2) 3.0 5.1

1 Includes immediate annuity sales ($7.5 billion in 2010)

* 2012 Sales based on YTD data through Q2, annualized

Source: Variable sales from Towers Watson VALUE Survey (“VALUE”), includes all non-pension variable annuity premiums (first-year and renewal, separate account and fixed account). Fixed sales from LIMRA, includes deferred and immediate annuities, EIAs, and MVA (excludes structured settlements).

Mix of U.S. Annuity Gross Sales

185.5

214.6 210.1 218.4 210.5 230.0

252.6 260.6

Annuity sales have declined in 2012, largely influenced

by economic conditions

229.1 215.0 236.0 223.6 4

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Fixed annuity sales continue to decline, but FIAs exhibit

significant strength

 Fixed annuities continue to suffer from low interest rate environment

 Fixed indexed annuities continue to grow driven by attractive GLWB features,

equity market upside

Q2 2012 Q1 2011 % Chg YTD 2012 YTD 2011 % Chg Total Variable 38.6 40.6 -5% 75.4 80.1 -6% Book Value 5.5 8.3 -34% 11.3 16.8 -33% Indexed 8.6 8.1 +6% 16.7 15.2 +10% MVA 1.2 1.4 -14% 2.5 2.8 -11% Immediate 3.1 3.5 -11% 5.9 6.5 -9% Total Fixed 18.4 21.3 -14% 36.4 41.3 -12% Source: LIMRA, sales in billions

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Indexed Annuity Sales (1995 – 2012)

© 2012 Towers Watson. All rights reserved.

Source: AnnuitySpecs.com’s Indexed Sales & Market Report, 2Q2012 and LIMRA. 2012 sales extrapolated based on HY2012 sales of $16.8 billion

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Top Variable Annuity Carriers (2011-2012)

1 Through Q2 2012 2 Through Q2 2011

Source: Towers Watson VALUE Survey

Ranking Sales Volume ($ billion) Market Share (%) YTD 20121 YTD 20112 Company Name YTD 20121 YTD 20112 YTD 20121 YTD 20112

1 2 Prudential Financial 10.3 11.4 13.5 14.0

2 3 Jackson National 9.6 9.5 12.6 11.8

3 1 MetLife 9.5 12.7 12.5 15.6

4 4 TIAA-CREF 7.6 6.9 9.9 8.5

5 5 Lincoln National 4.9 4.9 6.4 6.0

6 6 AIG / SunAmerica / American General / VALIC 4.5 3.8 5.9 4.6

7 8 AXA Financial / MONY 4.5 3.4 5.9 4.2

8 9 Riversource Life Insurance Company 2.8 3.3 3.6 4.1

9 10 Transamerica Companies 2.5 2.6 3.3 3.2

10 7 Nationwide Life 2.5 3.8 3.3 4.6

11 11 Allianz Life 2.0 1.9 2.6 2.4

12 12 Pacific Life 1.9 1.7 2.4 2.1

13 14 New York Life 1.3 1.2 1.7 1.5

14 13 Thrivent Financial for Lutherans 1.3 1.2 1.7 1.5

15 15 Fidelity Investment 0.9 1.1 1.2 1.4

Total Top 15 69.7 73.0

Market Total Estimate 76.4 81.0

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Top FIA Carriers (2008-2012)

The

2008 2009 2010 2011 2012 HY

Rank Company Share

% Company Share % Company Share % Company Share % Company Share %

1 Aviva 27% Allianz Life 18% Allianz Life 21% Allianz Life 20% Allianz Life 17%

2 Allianz

Life 16% Aviva 18% Aviva 16% Aviva 14% Aviva 14%

3 American Equity 8% American Equity 12% American Equity 13% American Equity 13% American Equity 10% 4 Midland National Life 6% Jackson National Life 7% Lincoln National Life 6% Great American 6% Great American 7% 5 ING 5% Lincoln National Life 7% ING 5% North

American 6% F&G Life 6%

Total 62% 62% 61% 59% 54%

Source: AnnuitySpecs.com’s Indexed Sales & Market Report, 2008-2012

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Key Issues Impacting Products – Economic Environment

 High volatility / low interest rate environment of GFC forced large product

de-risking efforts

Persisting low interest rate environment continues to be a significant burden

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Variable Annuity Product Trends

 Reduction in guaranteed income via rollups / income rates

 Target volatility funds

 CPPI strategies

 Features indexing

 Hybrid products

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Indexed Annuity Product Trends

 Sales are propelled by competiveness of income riders

 Some notable changes happened during the year (next slides)

 Income rate decreases

 Rollup decreases / make simple interest / limit rollup period

 Some fee increases

 Key drivers: low new money yields and 2012 valuation rates

 Several carriers decreased commissions

 Examples: Great American, Allianz Life, Lincoln, Equitrust, Genworth

 Premium bonus decreases

 Very low caps / credited rates

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FIA GLWB Competitive landscape as of January 2012

Average of effective withdrawal rates (includes impact of bonuses and rollups) for 1) issue age 55, wait 5 years, 2) issue age 65, immediate 3)

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FIA GLWB Competitive landscape as of June 2012

Average of effective withdrawal rates (includes impact of bonuses and rollups) for 1) issue age 55, wait 5 years, 2) issue age 65, immediate 3) Issue age 60, wait 5 years and 4) Issue age 60, wait 10 years

© 2012 Towers Watson. All rights reserved.

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Pricing and Risk Management Topics – Variable Annuities

 Product changes

 Hedging

 Pricing methodology

 Financial modeling

 Policyholder behavior assumptions

 Inforce management (e.g., “buyouts”)

 Carriers exiting

 M&A

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Pricing and Risk Management Topics – Indexed Annuities

 Product changes

 Statutory reserving for GLWB

 Asset liability management

 Assumption benchmarking  GLWB-related assumptions  Dynamic lapses  Financial modeling  New entrants  M&A

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Contact

Guillaume Briere-Giroux, FSA, MAAA CFA Senior Consultant

Hartford, CT

phone: (860) 843-7083

guillaume.briere-giroux@towerswatson.com

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References

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