Winning BIG With Guarantees

Winning BIG With Guarantees

But Not Everything is Golden

The Birth of Guarantees….

In the 1990’s no-lapse secondary guarantees were created to… Jumpstart a stagnant UL life product

market Accommodate consumers’ growing

need for security Adjust to a rising economy coupled

with bear stock market

Carriers competing, sometimes with alleged overly aggressive pricing/ assumptions

Exaggerated possibility circulated by carriers not in this market who predict the downfall of any carrier marketing no-lapse products

Ratings agencies and industry watchdogs heightening the concern

What is the Debate About?

Estate Planning Works in Pension Max Table 4 term (best with 20 yr) table

shave Term to 100

Purpose of the Product

Examining No-Lapse Products

Guaranteed death benefit Specified minimum premium that will

guarantee death benefit Minimal cash value Not comparable to a savings account

Impact of policy modifications UL policy overall UL no lapse specifically

Policy loans face amount Switching DB option Rider additions

Reinstatement provisions Catch up provisions

Understanding the Product

One cannot buy a refrigerator and expect it to bake a cake!

Solvency Issues Aggressive pricing assumptions Portfolio yield Lapse rates Mortality rates

Regulator Response (NAIC)

More stringent NAIC testing guidelines “Our pricing assumptions, including lapse

assumptions are considered proprietary in nature. That being said, all of our universal life products, including LPR secondary guarantee products, meet the requirements of the National Association of Insurance Commissioners (NAIC) illustration testing (under which one test assumes no lapses after 5 years)”

-Andrew Niedzielski, VP, Fixed Life BusinessLincoln Financial Group

Regulator Response (AXXX) Guideline AXXX specifically calls for

companies selling no-lapse guarantees to establish reserve requirements using a mortality table and interest rates considerably lower than pricing and using a zero lapse assumption

On the other hand, Moody’s describes a set-up of 7% yields, 6% lapse rates and 100% mortality as “good”

Regulator Response Why the discrepancy between guideline AXXX’s

zero lapse rate and Moody’s 6% lapse rate? Ben Wolzenski, President, Actuarial Collaboration,

notes, “That is because the assumptions required in statutory reserve calculations are conservative. This reflects the fact that the state regulatory authorities’ primary duty is to ensure the solvency of insurance companies, not to facilitate lower prices for consumers. So a carrier might well assume, realistically, that there will be some lapses.”

XXX/AXXX Regulations Regulation XXX added reserving

requirements to level term life insurance programs.

Actuarial Guideline AXXX (effective 1/1/03), which increased the reserving basis on universal life policies with long-term secondary guarantees. (See tabs entitled “XXX/AXXX An Explanation”)

Industry Response Letters of Credit (LOC) Ongoing analysis and refinement Price adjustments Capital market solutions

Moody’s states that, “there will be more capital market solutions developed in order to help companies meet the requirements.”

Specific comments of rating agencies

(See tab entitled “Carrier Rating Reports”)

Carrier Wherewithal

“The rating outlook for AXA is stable. Fitch ratings expects AXF (stock market symbol) to further strengthen its operating earnings due to pricing and expense controls. Despite strong growth, risk-based capital is expected to remain above 300% going forward, and leverage is expected to remain below 25%. Fitch believes the subsidiaries of AXA/AXF will continue to receive parental support in order to facilitate acquisition or maintain the company’s current financial/ ratings position.”

Fitch Ratings on AXA

“John Hancock has one of the most carefully managed books of business in the industry and keeps its non-credit risk profile (liquidity, rollover/refinance, and interest rate risks) within tight pre-established tolerances.”

Moody’s on John Hancock

““Manulife sells universal life products which have long-term cost-of-insurance (COI) and ‘no-lapse’ guarantees. Regulation XXX was designed to make reserving practices for term and universal life insurance products with long-term level premiums more conservative. Regulation AXXX ,which is in effect for 2003, addresses some forms of secondary guarantees found in universal life products not already captured by XXX, including those products with ‘no lapse’ guarantees. As is the case for many U.S. insurers offering these products, we expect there will be some impact on the company’s U.S. statutory results, but that on consolidated Canadian GAAP basis there should be no impact {emphasis added}”

Moody’s Manulife Report:

Overall review

Revealed no definitive negative comments on other insurance carriers

Validity of Individual Rating Reports

Expression of opinions based on variable assumptions

Predictions, not certainty

Historical financials Current ratings Investment diversification Market focus Guarantee is only as good as the

company offering it

Due diligence

Head pricing actuary must comply with NAIC standards to follow guidelines or face fines; insurance co. can lose credentials

Even IF…pricing were to not meet all AXXX criteria, worst case scenario, insurance companies make lower profits, not necessarily become insolvent

Lapse assumption pricing concerns have been addressed through NAIC guidelines under AXXX; however products including no-lapse are still being projected to stay on a company’s books for an average of 8-10 years

We Have Reassurances:

Annual reviews Education Ethical selling and placement If selling a company with 30 day

reinstatement window, be sure to request the company sends billing 60-90 days before due dates(See tab entitled “Life Insurance Review”)

Fiduciary Responsibilities

Husband and wife (ages 71/68) bought 4 SUL policies 1992-1996

Purpose was estate liquidity Total premiums = $260,374 Total cash value = $147,694 $10M death benefit total Both husband and wife issued

standard

Case Study #1

A Few Case Studies…

Wanted cash value in policy in case estate tax repealed

Would like to lower gifts to trust Could qualify for preferred non-

smoking rate Some policies would lapse soon

without increased premium

Review revealed clients…

Case Study #1

1035 all 4 policies into $10M secondary guaranteed UL product

Results Lower annual premiums to $194,345

(reduced from $260,374) Client saves $66,029 per year Cash surrender value on current non-

guaranteed factors= $1,052,087

Action Proposed

Case Study #1

Male, age 70, $500,000 Face Existing Policy Gross Cash Value= $247,318 Outstanding Loan=$110,576 In-force projection: Lapses in 7 years

at age 77 on current factors 1035 Exchange into a secondary

guaranteed loan rollover product

Loan Rollover

Case Study #2

Result: Loan not repaid; loan interest charged=

policy crediting rate on loaned cash value

No further planned premiums $500,000 death benefit; db at issue net

of loan= $389,424 Even with loan outstanding, policy

stays in force until age 110 on a guaranteed basis

Loan Rollover

Case Study #2

Male, age 66, SNT, $75M face policy, $25M CV $12.5M outstanding loan Policy reprojections show lapse within 5

years on current factors Goals: avoid “phantom income” and

maintain net level db of $62.5M 1035 into guaranteed product, no loan

repayment

Jumbo Loan Rollover

Case Study #3

Results Maintained guaranteed net level db of

$62.5 No phantom income with guaranteed

db Annual cash outlay to keep guaranteed

level death benefit at $62.5M ($75M – 12.5M)= $1,003,959 (premium + loan interest)

Case Study #3

Jumbo Loan Rollover

David W. Simbro, FSA,Northwestern Mutual

“Will the rebirth of fixed life products via UL/SG work financially for insurance companies: Insurance companies are paid to take risks. Whether the prices they charge are sufficient for the risks they take can only be known over time, as experience unfolds.”

“We believe that long-term winners in this market will have a full understanding of their exposure to secondary guarantees, will exhibit pricing discipline and will have addressed the potential problem of reserve strain well ahead of the time it could become an issue for the company.”For individual company product information see tab

entitled “Company Product Information”

Moody’s Special Comments

- July 2004

NLG vs. Current Scenario Valued Male, Age 45 Preferred Non-Smoker

DB $1,000,000Company Product Premium Company Product Premium

Contin UL $8,399Elite G $9,187

Protector G $8,600

JFP Legend300 Plus

$9,308

JPF Legend300 XG

$8,799

Linc. Life UL-LPR5 $8,447 Linc. Life UL-DB$7,581(4.50%)

Manulife/ JH ULG (04) $10,520 Manulife/ JH Performance UL$8,484(5.40%)

MONY/ Equi Athena II $8,390 MONY/ Equi Athena II$7,768(4.75%)

Sun Life Protector LP2 $8,794 Sun Life Protector Plus$6,502

(yrs1-9 5.35%yrs 10+ 5.85%)

TransACE EX $9,050

TransACE GL $9,050

Travelers MVP $8,041 Travelers MVP$7,210

(yrs 1-10 4.65%yrs 10+ 5.15%)

Jeff PilotJPF Legend

300$7,962(4.85%)

TransAmerica TransAmerica Trans Ultra EX$8,669(4.75%)

Jeff Pilot

Solving for premiums being paid all years for a Fully Guaranteed Death Benefit

Solving for premiums being paid all yearsfor a CV as close to $1.00 at maturity

Amer. Gen. Amer. Gen. Elite 03$8,452(4.85%)

NLG vs. Current Scenario Valued Male, Age 45 Standard Non-Smoker



Protector G $9,900

JFP Legend300 Plus

$11,540

JPF Legend300 XG

$10,091





(yrs1-9 5.35%yrs 10+ 5.85%)

TransACE EX $11,540

TransACE GL $11,540


(yrs 1-10 4.65%yrs 10+ 5.15%)

Solving for premiums being paid all years for a Fully Guaranteed Death Benefit

Solving for premiums being paid all yearsfor a CV as close to $1.00 at maturity


Jeff Pilot Jeff PilotJPF Legend

300$9,462(4.85%)


NLG vs. Current Scenario Valued Male, Age 55 Preferred Non-Smoker



Protector G $12,900

JFP Legend300 Plus

$14,423

JPF Legend300 XG

$13,617





(yrs1-9 5.35%yrs 10+ 5.85%)

TransACE EX $14,100

TransACE GL $14,100


(yrs 1-10 4.65%yrs 10+ 5.15%)

Jeff PilotJPF Legend

300$13,911(4.85%)


Jeff Pilot

Solving for premiums being paid all years Solving for premiums being paid all years


NLG vs. Current Scenario Valued Male, Age 55 Standard Non-Smoker



Protector G $16,000

JFP Legend300 Plus

$16,940

JPF Legend300 XG

$16,037





(yrs1-9 5.35%yrs 10+ 5.85%)

TransACE EX $17,500

TransACE GL $17,500


(yrs 1-10 4.65%yrs 10+ 5.15%)

Solving for premiums being paid all years Solving for premiums being paid all years


Jeff Pilot Jeff PilotJPF Legend

300$16,145(4.85%)


Baker Associates

For more information contact our sales staff: Email us at: [email protected] Call us at: 1-888-899-6599

www.bakco.com

• Why are the companies that are raising the red flags not carrying no-lapse products?

Thank you

One Final Thought…

Baker Associates7502 E Pinnacle Peak Rd, Ste 116B

Scottsdale, AZ 85255

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Winning BIG With Guarantees