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Winds of Change In the Universal Life Market

Winds of Change In the Universal Life Market. Tommy Smoot Life Product Development & Support November 2012. Important Information.

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Winds of Change In the Universal Life Market

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  1. Winds of Change In the Universal Life Market Tommy Smoot Life Product Development & Support November 2012

  2. Important Information • The information in this presentation is designed to be general in nature and for educational purposes only. The complete text, with nothing taken out of the context, is the only manner in which it should be used. It should never be used as an argument for the replacement of any life insurance policy. The Guardian Life Insurance Company of America, its subsidiaries, agents and employees do not give tax or legal advice. You should consult your tax or legal advisor regarding your individual situation. • PAS representatives are not permitted to sell any company’s non-registered IUL products.

  3. Thomas Smoot • Tommy began his career in the insurance industry in 1997 after graduating from Duke University with a Bachelor of Arts degree in Economics. • As the son of a life insurance agent, Tommy was exposed to the insurance industry at a very young age. • Among his fondest memories are those of accompanying his father on business trips to New York City to meet with other insurance representatives. • Tommy joined Guardian in early 2010 as a Second Vice President in charge of Competitive Intelligence and Product Development. • Among his responsibilities, Tommy oversees efforts to provide both life product support and conservation support to field representatives. •  In his prior position with New York Life. Tommy developed a broad understanding of the insurance industry through positions of increasing responsibility--Financial Analysis, Strategic Marketing, Competitive Research and Product Development/ Management.

  4. TheWorld Today:Top 15 Individual Life Insurers Source: LIMRA, year end 2011. *Ranks and percentages based on annualized premium

  5. The World Today: Breakdown of Life Sales • 2011 Industry sales = $12.5B, up 4% over 2010 • Most nominal growth driven by Whole Life, up 9% for the year Source: LIMRA, year end 2011. Ranks and percentages based on annualized premium

  6. The World Today: Lots of Action, Not All Good-I • Other Big Happenings: • SunLife out of Life Market • Hartford out of Life Market • Hancock exits VA space • Aviva on the block • Key Themes: • Carriers pulling back on SG & Dump Ins • Moving into IUL • Major pressure on European & Canadian subsidiaries Note: the DIR is only one of three components of a dividend For Internal Use Only. Not to be used with the public. 7

  7. The World Today: Lots of Action, Not All Good-II • Other Big Happenings: • SunLife out of Life Market • Hartford out of Life Market • Hancock exits VA space • Aviva on the block • Key Themes: • Carriers pulling back on SG & Dump Ins • Moving into IUL • Major pressure on European & Canadian subsidiaries For Internal Use Only. Not to be used with the public. Note: the DIR is only one of three components of a dividend 8

  8. The World Today: Indexed UL Rising Sales of IUL have continuously increased since the introduction of the product in 1996 23% 5 Year CAGR Source: AnnuitySpecs.com’s Indexed Sales & Market Report For Internal Use Only. Not to be used with the public. 9 9

  9. The World Then vs. Now: Top 15 Individual Life Insurers *Ranks and percentages based on annualized premium ** American Amicable was acquired by PennCorp Financial Group in 1994, and sold to Thoma Cressey PE Partners in 2000 Source: LIMRA

  10. The World Then vs. Now: Breakdown of Life Sales 1982 2011 WL Term WL Term INDUSTRY LIFE SALES $4.9B $12.5B Source: LIMRA; percentages based on annualized premium

  11. The Thesis Statement • The rapid rise and gradual decline of interest rates in the late 1970’s and early 1980’s forced innovation • Coupled with the spectacular run up in equity markets, this combined to create the perfect setting for new products and new company structures that appeared to be very logical strategic bets at the time they were made

  12. Key Macro Force #1: Interest Rates • After spiking in the late 1980s, interest rates have trended down and are now at historic lows • U.S. Federal Reserve confirmed the plan to keep short-term interest rates near zero through late 2014 For Internal Use Only. Not to be used with the public. 13

  13. Key Ramification #1: New Products – Universal Life Market Share by Product 10 Year Treasury Rate Invention of UL- E.F. Hutton 17.5% 15.0% 12.5% 10 Yr Treasury Yield 10.0% 7.5% % of Sales 5.0% 2.5% 0% Source: LIMRA; Federal Reserve Bank of St. Louis

  14. Key Market Force #2: Market Returns • Investors experienced a tremendous rise in the stock market that lasted almost 25 years, with only 3 down years from 1975 – 1999 • Carriers saw tremendous opportunities in capital markets CAGR 17.3% CAGR 17.3% $5,477 54X 54X 1975 1999 $100 1975 1999 Source: http://www.moneychimp.com/features/market_cagr.htm

  15. Key Ramification #2: Demutualization & Consolidation • The 1990s and 2000s saw a flurry of demutualizations and mergers • Nationwide* (1997) • MONY (1998) • Manulife (1999) • Transamerica (1999) • MetLife (2000) • John Hancock (2000) • SunLife (2000) Demutualizations • Prudential (2001) • Principal (2001) • Phoenix (2001) • Equitable (1992) 1990-1995 1996-2000 2001-2005 2006-2010 • AEGON merges with Western Reserve (1991) • AXA invests in Equitable (1992) • Allstate Spun Off (1993) • Mass Mutual merges with Conn. Mutual (1996) • First Colony acquired by GE (1996) • AEGON merges with Transamerica (1999) • Chubb Life acquired by JP (1997) • Axa/Equitable Merger (2000) • Guardian merges w Berkshire (2001) • AIG buys American General (2001) • MetLife acquires General American (2002) • Manulife/Hancock merger (2003) • Travelers merges with Citi (2002) and acquired by MetLife (2005) • MetLife acquires New England (2006) • Lincoln acquired Jefferson Pilot (2006) Mergers & Acquisitions * Life Company IPO. Shares later repurchased For Internal Use Only. Not to be used with the public. 16 Source: AM Best Reports

  16. Key Ramification #3: New Products – Variable Life Market Share by Product Bull Market and Dot Coms Rise of Variable Life 1,500 1,000 S&P 500 Index S&P 500 Index 500 10 Source: LIMRA

  17. The Rise and Fall: Variable Life • Unending rise in the market came to an end • Even though the market had an average return of 2.4%, it didn’t feel like it 1999 2002 2005 2008 • Sources: S&P 500; LIMRA

  18. Key Ramification #4: ULSG and Indexed UL Market Share by Product Indexed UL is Growing UL Secondary Guarantees Lincoln Invented Source: LIMRA

  19. Universal Life:Where We Are Today. . .

  20. Universal Life:Key Macro Forces • Interest Rates • Regulatory Pressure Internationally • Regulatory Pressure Domestically – AG38 21

  21. Universal Life:Interest Rate Implications Rates are at all time lows, and there are four paths out 22

  22. ULSG Reserves:Interest Rate Implications • Secondary Universal Life (ULSG) requires high levels of reserves per dollar of premium and is highly lapse and interest rate sensitive. Source: Guardian models: Male, Age 55, Second to Best Risk Class

  23. ULSG Dynamics:The Big Interest Rate Call • Secondary Universal Life requires high levels of reserves per dollar of premium and is highly lapse and interest rate sensitive. • NYS and NAIC Question AG38 • Canadian GAAP & IFRS Exacerbate Issue Internal Rates of Return on UL SG

  24. ULSG:Regulatory Pressure Internationally • Major pressure on European & Canadian subsidiaries due to accounting rules. Some carriers are out of the market altogether • SunLife is out of life market • Hancock • Exited VA space as well as a number of life insurance lines • Repricing SG to WL prices • AXA and most recently ING have pulled SG products • ING spin off • Aviva and subsidiaries are for sale • Doesn’t matter what you are selling – it matters what you sold

  25. ULSG:Regulatory Pressure Domestically – AG38 • Late 2010, NYSID raised concerns about the reserving method used by companies for shadow account based NLGs • In September 2011, LATF suggested AG 38 was being misapplied with regards to reserving • Suggested a bifurcated approach – changes applied prospectively • Effective 1/1/13, all companies must use the revised approach for statutory reserve valuation under AG 38

  26. Changes to ULSG:Impact to Competitors-I • And many more, including Prudential, being forced to rapidly raise prices.

  27. Changes to ULSG: Impact to Competitors-II • And many more, including Prudential, being forced to rapidly raise prices.

  28. Market Landscape:Evolution of “Lifetime Guarantee” UL The number of pricing and product changes have significantly increased over 2011 as carriers are scrambling to react to the low interest rate environment and new AG 38 regulations. 29

  29. Changes to ULSG:Impact to Guardian • ULSG / SULSG • Some incremental reserve impact to ULSG and SULSG • No product changes • CAUL Hybrid • Technical adjustment • Should have no impact on marketability • If we did not make this change we would incur $40M of additional statutory losses for every $5M of sales

  30. The Thesis Statement Redux • The rapid rise and gradual decline of interest rates in the late 1970’s and early 1980’s forced innovation • Coupled with the spectacular run up in equity markets, this combined to create the perfect setting for new products and new company structures that appeared to be very logical strategic bets at the time they were made • Those bets are no longer paying off

  31. You Are the CEO:What Would You Do? • Your international parent tells you that UL SG is too costly to market and US states are telling you to hold more reserves. . . • You have a dwindling career agency force. . . • You need a product that is kinder to your balance sheet. . .

  32. Let’s See What They Did Source: LIMRA, year end 2011. **Indicates less than 50% of life production from career agents

  33. Indexed Universal Life What You Need to Know

  34. Question #1 • Who was the first major carrier to market IUL? • Transamerica • Aviva • Minnesota Life • Pacific Life

  35. Key Punching Points • Does the policy have guaranteed cash values and death benefits? • How do bad market years impact policy performance? Show me. . . • How often does index interest get credited? • What happens if we assume a more conservative rate of return? • Can my potential upside change? If so, how often? Has it ever for this policy? • Do I get the benefit of stock dividends?

  36. Whole Life: Tried and True Source: Guardian Illustrations. July 2012

  37. What is Indexed Universal Life?

  38. Indexed UL Rising • Sales of IUL have continuously increased since the introduction of the product in 1996 • Over 10% of the market today 23% 5 Year CAGR Source: AnnuitySpecs.com’s Indexed Sales & Market Report

  39. Universal Life:Basic Mechanics • Understanding IUL requires understanding traditional UL. . . The Company The Client (1) Policy owner pays a monthly or annual premium into the contract (3) The company removes the policy cost from the policy’s cash value on a monthly basis (2) After upfront charges, premiums are added to the policy’s cash value and earn interest from the General Account

  40. Universal Life:Basic Mechanics • Understanding IUL requires understanding traditional UL. . . The Company The Client (1) Policy owner pays a monthly or annual premium into the contract (3) The company removes the policy cost from the policy’s cash value on a monthly basis (2) Indexed UL credits interest based on a market index rather than the company’s general account

  41. Indexed Universal Life in a Nutshell • A Universal Life product that credits interest based on the performance of an external index • Value proposition: upside potential with a floor You give up all the earnings above this line… …to protect against losses below this line

  42. Question #2 • TRUE or FALSE: Policy Caps are Guaranteed? • True • False ..but at a very low level…e.g. 3-4%...

  43. IUL Key Components

  44. IUL Crediting:Basic Mechanics • General Account provides the floor • General Account yield provides an options budget • Assume 5% Portfolio Yield / 0% Floor • Assets retained to back up Guaranteed Floor • 95.3% * 1.05 = 100%

  45. IUL Crediting: Basic Mechanics • Options Budget 100% Investment Return $4,762 Options Budget 9.54% increase in Index Source: OWROpinion

  46. IUL Crediting:Basic Mechanics • Effect of Options Return 9.524% Crediting Rate $9,524 $4,762 $100,000 $95,238 x 1.05 = Source: OWROpinion

  47. Caps and Floors:How They Work You give up all the earnings above this line… S&P 500 Index …to protect against losses below this line Source: http://pages.stern.nyu.edu/~adamodar/pc/datasets/histretSP.xls

  48. IUL Premium Flow Source: Competitor Illustrations. July 2012 Note: PacLife Indexed Accumulter 4, Male, Best Class Age 40, $1M Face DBO1, 7.25% Credit Rate

  49. IUL L121 Premium Policy Collapses @ Age 59 Market Risk/Return Source: Competitor Illustrations. July 2012 Note: PacLife Indexed Accumulter 4, Male, Best Class Age 40, $1M Face DBO1, 7.25% Credit Rate

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