1. For Broker Dealer Use only. Not for Use with the Public.
“Life Insurance Pricing, Underwriting & Trends” Presented by: Rodger Hergendrader - VP, Underwriting M Financial Group & Wayne Tonning – VP, M Financial Distribution Pacific Life Insurance Company
For Broker Dealer Use only. Not for Use with the Public.
Page 1 of 32

2. Two Generic Categories of Life Insurance: Term and Cash Value
Term Life Insurance
Pays the policy face amount if the insured dies during the policy term, which is a specified number of years, such as 10 or 20 years, or to a specified age, such as age 65.
If the insured lives beyond the set term, the policy expires, meaning that it terminates with no value.
Term life insurance usually provides either a level or decreasing death benefit.
Premiums either increase with age or remain level.
Term policies with level death benefits and increasing premiums are commonly referred to as being renewable. Thus, yearly renewable term (YRT) – also called annual renewable term – provides term insurance whose premiums increase yearly.
Page 2 of 32

3. Two Generic Categories of Life Insurance: Term and Cash Value
Cash Value Life Insurance
Combines term insurance and internal savings – called the cash value – within the same contract; that is, it accumulate funds that are available to the policyowner, much as with a savings account with a bank.
A policy’s full cash value is not available on some policies if they are terminated within the first few policy years. Rather, a type of “penalty for early withdrawal” is applied in the form of a surrender charge that is subtracted from the policy’s cash value to yield what is often called the policy’s cash surrender value or simply surrender value.
Thousands of variations of cash value policies exist, consistent with insurers’ product differentiation and target market strategies. Virtually every cash value policy falls into one of two categories: (1) universal life insurance or (2) whole life insurance.
Page 3 of 32

4. Universal Life
Universal life (UL) insurance policies are flexible-premium, adjustable death benefit contracts whose cash values and coverage periods depend on the premiums paid into them and can range to the whole of life to shorter periods.
UL policies are usually nonparticipating (i.e., they are not eligible for policy dividends), but they routinely share in the insurer’s operational results via non-guaranteed policy elements other than dividends.
Non-guaranteed policy elements, also called current assumptions, are those that are not guaranteed and that the insurer may change (more or less favorably), subject to contractual guarantees. They commonly include mortality and loading charges and interest credits.
Page 4 of 32

5. Whole Life
Whole life (WL) insurance typically requires the payment of fixed premiums and promises to pay a death benefit whenever the insured dies and, therefore, is life insurance intended to remain in effect for the insured’s entire lifetime.
WL policies often are participating (i.e., are eligible for policy dividends).
Insurers selling par policies typically price them conservatively. This conservative pricing means that the policies as a group are highly likely to generate profits – called surplus. Following each year’s operations, the insurer’s board of directors decides how much of these surplus funds – called divisible surplus – may be passed on to par policies in the form of dividends.
Page 5 of 32

6. Life Insurance Pricing
The pricing of all life insurance policies involves four basic factors: mortality, investment earnings, expenses and taxes, and persistency.
Life Insurance Pricing Factors:
Insurer Perspective
Policyholder Perspective
(Pricing Factors)
(Assumptions)
Mortality Experience +
Mortality Margin
===
Mortality Charge
Investment Earnings -
Interest Spread
Interest Credit
Expenses & Taxes
Expense Margin
Loading Charges
Page 6 of 32

7. Life Insurance Policy Mechanics
Beginning Cash Value
For Universal Life, which has flexible premiums, policy coverage remains in force as long as the cash value remains positive (the policy lapses when the cash value goes to zero
For Whole Life, the fixed premium schedule ensures a positive cash value for life.
(+) Premium
(-) Loading Charges
(-) Mortality Charge
(+) Interest Credit
(=) Ending Cash Value
(-) Surrender Charge
(=) Surrender Value
Page 7 of 32

8. Mortality Charge
The Importance of pre-funding to reduce the net amount at risk (NAR) in order to reduce late duration mortality charges (e.g. Cost of Insurance or COI)
Illustration of a Level-Premium Cash Value Policy Funded to Endow at Age 21
Page 8 of 32

9. Putting It All Together
Life insurance pricing components can be and are mixed in different ways by insurers to accomplish different marketing and profit objectives. The precise mix will be driven by the competing interests of policy performance and profitability, coupled with the insurer’s underlying mortality, investment, expense, and persistency experience. Strong results in each category can lead to good policy performance and sound profitability for the insurer.
Page 9 of 32

10. Universal Life , Indexed Universal Life & Variable Universal Life
Universal Life (UL)
Portfolios typically includes bonds & mortgages
Guaranteed minimum crediting rate
Continued downward pressure on portfolio yields
Variable Universal Life (VUL)
100% opportunity and risk transfer
No guaranteed minimum crediting rate in the subaccounts
Indexed Universal Life (IUL)
Indexed-based interest credit upside potential with downside protection
Some VUL products offer all three options within one product
Page 10 of 32

11. For Broker Dealer Use only. Not for Use with the Public.
UNIVERSAL LIFE
For Broker Dealer Use only. Not for Use with the Public.
Page 11 of 32

12. Bonds & Mortgages Help Support UL Crediting Rates
Page 12 of 32

13. History of Declining Interest Rates
Rates in Percentage%
Source: Moody’s BAA, access date 3/1/17
Page 13 of 32

14. Portfolio Yields Chase New Money Rates
Rates in Percentage%
Source: Moody’s BAA, access date 3/1/17
Page 14 of 32

15. Source: Moody’s BAA, access date 3/1/17
BAA 7 Year Rolling Average a Good Proxy for UL Crediting Rate Movements
Rates in Percentage%
Credit Rating used by Moody’s
**MVP Fixed LT
Source: Moody’s BAA, access date 3/1/17
Page 15 of 32

16. New Money Rates Still Below Portfolio Yields
Rates in Percentage%
Source: Moody’s BAA, access date 3/1/17
Page 16 of 32

17. Continued Downward Pressure on UL Crediting Rates based on Moody’s Data Analytics
New money rates are approximately 50bps* below General Account portfolio yields
Approximate 50bps* of downward pressure on UL crediting rages
Source Data: Moody’s BAA access date 3/1/17
This is not indicative of Pacific Life’s crediting rate process
*basis points
Page 17 of 32

18. Declining UL Crediting Rate Projection
Rates in Percentage%
Source: Moody’s BAA, access date 3/1/17
Page 18 of 32

19. Declining Crediting Rate Implications
Carrier Actions: current and guaranteed crediting rate reductions, IUL cap rate reductions, premium restrictions or added policy charge for larger premium dollars into the fixed account.
New Business Policyholder Implications
Fund appropriately (i.e., with conservatism)
Run downside scenarios (i.e., lower crediting rates) to assess appropriate funding
In-Force Business Policyholder Implications
Perform annual reviews
Use in-force illustrations to assess impact of lower crediting rates (include scenario testing)
Take appropriate action to keep the policy on track
Additional premiums
Reduce face amount
1035 exchange
Page 19 of 32

20. Indexed UL How Does it Work?
To provide strong growth opportunity with protection, Indexed Accounts credit interest based on an equity index without directly participating in any stock or equity markets. The actual interest credited will never be less than the Floor or greater than any Caps imposed by the carrier.
Typical Interest Crediting Process
The index performance, as a percentage, is measured over the Segments Term.
The Index Performance Rate is then multiplied by the Segment’s Participation Rate. The Participation Rate is the percentage of the Index Performance Rate. The product of these two rates is called the Growth Rate.
The Growth Rate is applied to the Segments Growth Cap (which limits it on the upside) and its Floor (which limits it on the downside and is also the guaranteed minimum interest rate).
Page 20 of 32

21. For Broker Dealer Use only. Not for Use with the Public.
UL vs. IUL vs. VUL
For Broker Dealer Use only. Not for Use with the Public.
Page 21 of 32

22. UL vs. IUL vs. VUL Background for following historical charts:
Historical UL crediting rates are actual rates of one* UL product introduced in the early 1980’s
S&P 500 historical returns include dividends and a 50 bps investment management fee assumption. The returns are calendar year returns 1/1 to 12/31.
IUL historical crediting rates are hypothetical based on a 11% cap, 0% floor, and a 100% participation rate on the historical returns of the S&P 500 without dividends (calendar year returns).
*Pacific Life VersaFlex
Source: Yahoo Finance, access date 3/1/17
Page 22 of 32

23. UL vs. IUL vs. VUL Source: Yahoo Finance, access date 3/1/17
Historical returns are no guarantee of future performance.
Page 23 of 32

24. 25 Year Look Back Strong Equity Market Returns
Source: Yahoo Finance, access date 3/1/17
Historical returns are no guarantee of future results.
Page 24 of 32

25. 17 Year Look Back IUL Upside Potential with Downside Protection
Source: Yahoo Finance, access date 3/1/17
Historical returns are no guarantee of future results.
Page 25 of 32

26. Historical S&P 500 Total Returns
Average long term (20 years or greater) historical S&P 500 total returns exceed 10%
Minimum long term historical S&P 500 total returns exceed 7%
85% of 10 year S&P 500 total returns exceeds 5%
Source: Yahoo Finance, access date 3/1/17
Page 26 of 32

27. Hypothetical IUL Results
90% of 25 year S&P 500 returns with 10% growth cap and 0% floor exceed 5%
AG 49 Historical Percentile Distribution*
Cap
Min
90%
80%
70%
60%
50%
40%
30%
20%
10%
Max
8.0%
3.42%
4.22%
4.50%
4.70%
4.88%
5.10%
5.30%
5.46%
5.58%
5.75%
6.48%
8.5%
3.55%
4.43%
4.73%
4.94%
5.13%
5.37%
5.74%
5.88%
6.05%
6.79%
9.0%
3.69%
4.63%
4.95%
5.17%
5.38%
5.62%
5.85%
6.02%
6.16%
6.34%
7.09%
9.5%
3.82%
4.82%
5.16%
5.39%
5.63%
6.11%
6.29%
6.43%
6.62%
7.38%
10.0%
3.95%
5.00%
5.36%
5.86%
6.12%
6.37%
6.56%
6.70%
6.90%
7.68%
10.5%
4.07%
5.18%
5.56%
5.82%
6.09%
6.36%
6.61%
6.80%
6.96%
7.16%
8.00%
11.0%
4.18%
5.35%
6.30%
6.59%
6.85%
7.05%
7.21%
7.41%
8.30%
11.5%
4.29%
5.52%
5.93%
6.22%
6.51%
6.81%
7.08%
7.28%
7.45%
7.66%
8.59%
12.0%
4.40%
5.68%
6.10%
6.40%
6.71%
7.03%
7.31%
7.51%
7.69%
7.90%
8.89%
12.5%
4.52%
6.26%
6.58%
7.23%
7.73%
7.91%
8.13%
9.16%
13.0%
5.96%
6.42%
6.76%
7.42%
7.72%
7.95%
8.35%
9.42%
13.5%
4.74%
6.92%
7.26%
7.61%
7.92%
8.15%
8.34%
8.57%
9.66%
* Percentage of AG 49 daily compound annual growth rates for 25-year periods from that exceed shown rate (10,091 CAGRs).
Source: PacificLife.com, access date 3/1/17
Page 27 of 32

28. Ultra Affluent Sales Distribution
For Broker Dealer Use only. Not for Use with the Public.
Page 29 of 32

29. Ultra Affluent Sales Show Balanced Product Distribution
2016 Trends
Significant increase in PPLI sales
Decline in survivorship sales perhaps due to higher estate tax exemption and estate tax uncertainty
VUL continues to be M’s #1 product due to control and flexibility in a low cost product chassis
Page 29 of 32

30. Life Insurance Product Considerations
NLG
Peace of mind (particularly attractive for older age clients)
Lack of cash values
Lock in price based on today’s low interest rate environment with no ability for upside UL
Offers cash, less volatile crediting rates, guaranteed minimum crediting rate, and upside potential
Low crediting rates with continued downward pressure
Slow to react (e.g., lagging) when new money interest rates increase
IUL
Upside potential with downside protection
More of a UL replacement than VUL
May have higher charges
Page 30 of 32

31. Life Insurance Product Considerations
VUL
Strong upside potential via separate account and provides cash
Fund flexibility and control: separate account, fixed account, index account
Transparency and low charges (UL like)
Historical long term equity market results out perform bonds/mortgages
Recommendation – Hedge Your Bets
Use product or multiple carriers and products that offer options/flexibility for changing risk/reward profile, changing economy, and changing regulatory and tax environment
Consider allocations to all product types and investment options
Fund conservatively, monitor policy performance, and take corrective actions when needed
VUL at 5-6% with high confidence interval and high upside potential for younger clients with long time horizons
Consider MDNLGs
Page 31 of 32

32. Critical In-Force Policy Management Items
The importance of in-force policy reviews due to the non-guaranteed nature of product performance
Policy maturity
Products issued prior to 2009 may mature at age 95 or 100
Mature – Death benefit coverage ceases and cash value paid out with associated income tax consequences
Many carriers reduce the face amount to the cash value and carry post maturity
Importance of premium funding to drive high cash values
Very expensive to get back on track in the attained age 90s
Timing of no-lapse guarantee UL premium payments
Late and early premium payments can reduce the guaranteed coverage period
Must continue to review (i.e., do not file in a drawer never to be looked at again)
Page 32 of 32