Overview of Life Insurance Crediting Rates

NameTitle December, 2013

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M Financial Group

M Financial Group is one of the nation’s premier financial services design and distribution companies, serving ultra-affluent individuals and Fortune 1000 companies through a network of more than 135 independent Firms.

Independent research suggests that more than 20% of all life insurance sales to ultra-affluent clients in the U.S. are made by M Member Firms. (Source: Spectrem Group)

M Financial was founded in 1978 to change how insurance companies served successful producers with exceptional business.

From the beginning, M Financial has been a community of sharing, entrepreneurship, innovation, and success.

M Financial began with 13 Firms—today there are more than 135 Member Firms in 36 states, Canada, the United Kingdom and more than 600 producers.

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Major Business Lines

Life Insurance▬ Wealth Transfer / Estate Planning

▬ Executive Benefits

▬ Institutional Market

Individual Disability Income and Long Term Care Insurance Annuities Corporate Benefits

▬ Group Life, LTD, and LTC

▬ 401(k)

Wealth Management

Life and DI lines are reinsured through M Financial Re.

Insurers invest in high-quality bonds and mortgages (Aaa and Baa)

New money fixed income rates have generally declined for 25+ years

Portfolio yields lag new money rates and continue to drop Continued downward pressure on UL crediting rates which

are tied to portfolio yields Portfolio crediting rates will continue to drop even if new

money rates gradually increase due to lag factor

UL Crediting Rate Considerations

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Decline In Historical New Money Rate

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Note approximate100 bps rate increase over last year

Rolling Average Represents Portfolio Yield, Lags New Money, Continues To Drop

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Strong Correlation Between UL Crediting Rates And 5 Year Rolling Average

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The current benchmark new money rate is approximately 50 bps below the portfolio yield benchmark

▬ Carriers have been shifting asset allocations to Baa in order to obtain additional yield

▬ Carriers have also been investing further out on the yield curve in order to obtain yield

The portfolio yield and crediting rates will continue to merge to the new money rate

Continued Downward Pressure On Crediting Rates Even With Recent Increase In New Money Rates

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November 2013Crediting Interest Rate Change Indication

Aaa BaaMoody's New Money Rate 4.6% 5.4%

Moody's 5-Year Rolling Average 4.6% 5.9%

Future Crediting Rate Indication 0.0% -0.5%

There Will Be Continued Portfolio Yield Drops Even If New Money Rates Increase Due To Lag Factor

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• Assumes new money rate increases 50 bps in next year• Projected portfolio yield continues to drop for two years

before increasing• Maximum projected cumulative drop is 40 bps

Carrier Actions: current and guaranteed crediting rate reductions and premium restrictions

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

Declining Crediting Rate Implications

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