Timothy C. Pfeifer, FSA, MAAA Pfeifer Advisory LLC October 23, Annual Conference

2 Is this really true? When was the last time 1OYT rates were this low?

3 What about the long end of the curve?

4 How does the steepness of the Treasury Yield Curve compare?

5 Insurers take on risk spread though. What has happened to credit spreads over the past 18 months?

6 Declared Rate Fixed Annuities Fixed Index Annuities Immediate Annuities Fixed Universal Life Indexed UL Par WL Term Life Variable Product Low High

Lower commissions Developed more market value adjusted products Lengthened maturity on asset portfolios Reduced investment asset quality Exited lines of business Developed indexed products, especially those with GLWBs Increased explicit charges to permit higher credited rates Managed to higher spreads on in force business 7 Lowered guaranteed credited rates Lowered current credited rates

Extend retirement timeline even more Postpone life insurance and annuity purchases, other investments On Life side, look for other features, like LTC combos Examined alternative investments Fewer lapses/better persistency on older business 8 Explored indexed products Lowered expectations

9 What alternatives are there to improve asset yields in today's environment? Take credit risk Take duration risk Explore less traditional assets Use separate accounts Regulatory capital punishes Softer regulatory capital treatment Investment partnerships, venture capital Regulatory concern emerging

10 Quality Maturity AAAAAABBBBBB None Source: Bloomberg Composite as of September 30, 2011

11 Insurers feel that they understand and are good at taking credit risk, better than rating agencies, in fact. Capital formulas punish credit risk on a security-by-security basis Duration risk on assets is more efficient from a capital perspective, especially if carrier has a large diverse portfolio of business. Implication – Go longer!

12 Fixed Annuities Eliminate return of principal guarantees Add more powerful MVAs Add more GLWBs Portfolio rate crediting Indexed Annuities Continue focus on income sale Sweetened death benefits More use of participation rate Simple binary design

13 Life Insurance Increased focus on indexed products with attractive caps supported by mortality/expense margins More interest in products with ancillary benefits like LTC Minimum credited rates dropped to zero Larger surrender (and higher) for certain types of products

14 Pricing with leverage Strong interest in purchasing mature blocks Significantly lower profit hurdles = risk-free plus a margin (500 bps) Production capacities increased

15 Carriers Reconsider offering periodic, flexible premium annuities. Manage asset-based businesses in aggregate. Actively push for regulatory changes in market value adjusted life and lower minimum annuity credited rates. Refine interest rate hedging practices. Market consistent outlook? Customers Shop for products which show upside when interest rates fall (interest rate floors, bond funds). Diversification is still as prudent as ever. Despite underestimating when interest rates are low, tax deferral is still quite valuable. Be smart – look for clues as to rising or falling rates (unemployment).

Timothy C. Pfeifer, FSA, MAAA