Fixed Index Annuity Vol-Controlled Indices · Fixed Index Annuity Vol-Controlled Indices A A little over two years ago Allianz introduced the next generation volatility controlled

ADVANTAGE COMPENDIUM

FIA Volatility Control Index Overview 1 December 2015

COMPENDIUM

Fixed Index Annuity Vol-Controlled Indices

A A little over two years ago Allianz introduced the next generation volatility controlled index in the

fixed index annuity (FIA) annuity market, the Barclays US Dynamic Balance Index. Today, over a

dozen and a half FIA carriers offer over two dozen volatility controlled indices with roughly a dozen

more new indices either filed with the states or waiting to be filed. Why has there been an explosion of

vol-controlled indexes in the FIA space? How do they differ from one another? What are or should be

the concerns associated with this new interest earning tool? These are the foci of this paper.

Unlike many of the research topics studied by Advantage Compendium that result in a single report,

the attention paid to volatility controlled indexes will be ongoing. This will be a series of reports that

takes snapshots of the specifications of FIA vol-controlled indices used at that point of time as well as

commenting on the then current concerns and events that might affect them. Since index launches follow

an irregular pattern, future studies will be released whenever there are enough changes to warrant a

revised study.

I'll conclude this introduction with the study's conclusion. Volatility controlled index crediting

methods are a creative way to provide more value to the annuityowner in the current low interest rate

environment by effectively raising general index participation. The concept is valid and my modeling

shows that vol-controlled indices could provide higher overall annual returns than those obtained at

current caps and rates on other methods. The main potential problem is one of consumers creating

unrealistic expectations of the interest they may earn and benchmarking the potential returns against the

stock market and not other fixed annuities.

An Idea Borne Of Its Times

Average composite bond yields dropped from around 7% in 2009 to under 4% by 20121. Although

the prices on the options used by carriers to hedge the index-linked interest provided by FIAs remained

competitive from an historical perspective, these falling bond yields meant there was less and less left

over to buy the options. The result was fixed index annuity interest caps of 2% to 3% on broad based

indices for many products. Volatility control indices for fixed index annuities (FIAs) were created due to

the persisting low interest rate environment that made it difficult to get meaningful potential interest

from existing fixed index annuity crediting methods.

Different reasons for vol-control: Securities vs. FIAs

The 1990s were a period of strong market returns and low volatility. The following ten years had

multiple periods of high volatility combined with strong market losses. Looking at this period of time,

Wall Street created 'what if' models that shifted monies to cash when market volatility was high and into

equities when volatility was low. What the models showed was that acting on changes in volatility

would have preserved -much of the gains and caused the severe losses to be more moderate in these

index/cash combinations. This led to the creation of volatility controlled indices to be used as a risk

management tool for securities investors; the volatility control concept received a great deal of attention

after the Crash of 2008. In the securities world, vol-controlled indexes are a way to limit losses.

With securities, vol-controlled indexes limit losses. With FIAs, they limit hedging costs.

Page 2 DRAFT Vol-Controlled FIA Indices December 2015

The use of volatility controlled indices in the fixed index annuity space was spawned by the

protracted very low interest rate environment that has existed since 2011. When 10-year U.S. Treasury

rates are under two percent and top-rated corporate bond yields are in the threes, there simply isn't

enough yield to provide meaningful participation for an FIA in a traditional index. Volatility controlled

indices are a way to buy more potential FIA interest because the overall gain is managed for volatility

and thus the fear of a "long tail" payout is removed (a case where the index shoots up and the interest

credited to the FIA far exceeds the amount received for the hedge). In the FIA world, vol-controlled

indexes are a way to limit costs.

Vol-control indices are a reaction to low bond yields. If bond yields return to the higher levels of

earlier years, and option prices remain relatively low, the hedging cost advantage of using volatility

control dissipates. Simply put, a vol-controlled index in a fixed index annuity would not be needed if

overall bond yields were 3% higher today and volatility remained low. If the annuity pricing

environment permits 10% or 12% interest caps and uncapped designs using yield spreads and averaging

– as it did only a few years ago – you don't need managed volatility to get a competitive return in an FIA

(but you would still use it in the investment world to protect against loss). This is not to say issued FIAs

using current vol-control indices would become uncompetitive, but that other methods would also be

competitive.

What's In A Name Moving from a higher volatility place to a low or no volatility one when volatility spikes is called by different names: Controlling Volatility, Limiting Volatility, Targeting Volatility and Managing Volatility are sometimes used to refer to the same things and sometimes refer to different ones. The possible problem word here is "managed". If you hear the word "managed" in connection with equities, the mind might make a connection with "manager". After all, there are mutual fund managers and advisors that actively manage money, but managed volatility indices in the FIA space are not actively managed. There isn't a manager waking up one morning and moving from equities to cash because his gut is telling him to, nor is another manager selling one stock within the index and buying another because she has a hunch. Instead, all of these indices are rules-based. What that means is portfolios are rebalanced and positions moved between high and low volatility choices based on prescribed set of rules and not on the decisions of a manager. This is something all of these indices have in common. When equity index annuities were launched the name became a problem. Index annuities weren't equities, they were fixed annuities, but as soon as people heard the word "equity" they projected all of the good and bad of equities onto the index annuity. However, equity index annuities were never equities (not to be confused with registered index annuities) and yet some regulators jumped on the equities word as evidence they were securities. The solution was a consensus by the industry to refer to these as fixed index annuities. To avoid any confusion by regulators into thinking that FIA managed volatility indices are in any way similar to managed securities, it might be better to leave the term "managed volatility" to the securities world and avoid it in the annuity one. In this study the concept is referred to as volatility-controlled or vol-controlled indices and the actual volatility limits are referred to as volatility targets.


How It Works Non-volatility-controlled methods try to lower option costs by lowering the effective participation in

the index either by crediting less than 100% of index gains, or capping the gains that will be credited.

Both averaging and monthly cap methods use negative volatility as way to limit gains and thus lower the

costs of participating in index gains. Another way to deal with volatility is by controlling the exposure.

Controlling Volatility

A controlled volatility index approach shifts between an asset class with higher volatility to one with

lower or no volatility and then back again. This currently involves moving between an equity index(es)

and a bond index or a cash account or between different asset classes. In a non-index annuity setting this

approach reduces the probability of big losses. Inside an FIA it reduces the probability of big gains, but

still can provide the potential for more interest than through traditional crediting methods.

Equity

Index

Cash

(low-vol)

Volatility

Volatility Target

Volatility Control

Monies

The vol-controlled index has a pre-determined volatility target level; the goal is to keep the overall

index volatility at or below the target. The way this happens is when volatility in the equity index(es)

begins to climb, money is moved out of the equity side and into the low volatility side. This has the

effect of lowering overall volatility – the greater the volatility, the more that is moved to cash or bonds

(the low volatility component). When volatility decreases, the reverse happens with money moving back

into equities. This balancing is typically done on a daily basis. The volatility control can be built-into a

new index that incorporates high and low/no components, or uses a volatility overlay that can be

essentially wrapped around an existing index.

The overall gross return is a combination of the earnings from the equities component and cash/bond

component. Some index returns are based on excess returns, meaning this combined return has a

benchmark rate deducted (typically the Fed Funds or 3-month LIBOR rate). Today, this benchmark rate

deduction is negligible, but it was only a few years ago when this would have resulted in several percent

deducted on an annualized basis. In addition, some indices have a service fee (currently ranging from

0.25% to 1% a year) that is also deducted daily on a prorated basis. The [net*] daily returns are added

together and a participation rate and/or spread applied.


Equities Component Return + Low/No Volatility Return = Daily Return [- Excess Return Benchmark – Service Fee] = Net Daily Return] Summed Daily Net Returns – [Spread or times Participation Rate] = FIA Interest Credited

[*bracketed deductions only apply to some indices]

Volatility Target

As I write this volatility target rates range from 4.5% to 10%. A higher target rate does not

necessarily result in a higher return. An index with a high target rate may have generally lower volatility

and lower returns and one with a low target may bump up against the target rate more often and deliver

higher returns. Or, a higher target may reflect a longer reset period – looking at two years instead of one

year. Thus, say, a 6% target may deliver a higher return than a 9% target under identical market

conditions. However, if everything about two different indices was identical – except the target rate –

then the higher target should provide a higher return in rising market

Leverage

Some indices permit the use of leverage or increased exposure to the equities side. An example would

be in an environment where the volatility was far below the target volatility, the index could recognize

150% of equities movement when volatility is below the target.

Strategies/Underlying Indices

There is nothing to stop a volatility-controlled index from using the same indices commonly used

with previous FIAs, but only the Standard & Poor's 500 is a familiar face in the vol-controlled space.

The new vol-controlled indices are using rule-based indices that base changes in their index composition

using momentum of the underlying equities, or looking at high dividend equities, or equities showing

lower average volatility, or that appear undervalued based on certain metrics. Some indices include

bonds, real estate and gold equities and/or exchange traded funds (ETFs). The one thing they share in

common is moving to the low volatility component when volatility increases and back again when

volatility falls.

When does the managed volatility concept work best & worst wth FIAs?

It works best when bond yields are so low that potential returns from traditional crediting methods

are less competitive. When bond yields are low and the pricing with traditional methods results in low

caps or participation, managed volatility allows for the potential for higher interest. Managed volatility

methods are a creative way to provide more value to the consumer in the current low interest rate

environment by effectively raising index participation.

VolControl Indices Are Like Snowflakes: The Levers Speaking at the 1998 National Association of Indexed Products Conference, an actuary from the

North Dakota insurance department complained that it was difficult to compare index annuities because

they were like snowflakes with no two being exactly alike. At that time this was an exaggeration, since

all but one carrier offered only the S&P 500 and a scratch pad could be used to figure out all of the

crediting method returns. However, if you look at more than two dozen vol-controlled indices currently

available in the FIA space I believe the snowflake metaphor is apt.


Let's say we have two fixed index annuities (FIAs) using volatility controlled indices. Both offer a

crediting method based on 100% participation in movements of identical baskets of stocks and both use

a cash equivalent account to manage volatility. Annuity A deducts a 2% yield spread from the calculated

annual gains; Annuity B deducts a 1.5% yield spread. Assuming the index has a gain for the year, which

annuity will credit more interest? The answer is it depends on several facts.

Servicing Costs – As mentioned, some FIA vol-controlled indices deduct a servicing fee that ranges

from 0.25% to 1.0% per annum that is deducted daily on a prorated basis; information about the

servicing fee is often found in the disclaimer language. If Annuity A does not have a servicing fee, but

Annuity B has a 1.0% fee, then the effective deduction from Annuity B gains is the 1.5% spread plus the

1% fee for a total of 2.5% - which is higher than Annuity A's 2% deduction.

Excess Return – Some index returns are calculated as excess returns, meaning the yield of a

predetermined benchmark – such as the Federal Funds rate or the 3-month Libor or a money market rate

– is deducted from gains. If everything else was equal, but Annuity B was calculated as an excess return,

then the net index return would be 0.25% less (if, say, the current Fed Funds rate was used).

Volatility Target – Volatility controlled indices work by switching from one bucket when volatility is

rising to a bucket with less or no volatility and then switching back when volatility falls. If Annuity A

has a volatility target of 5.5% - meaning the goal is to keep overall volatility under 5.5% - and Annuity

B has a target of 5%, Annuity B could well spend more time during the year in the cash account earning

zero or close to zero interest, therefore Annuity A could credit more interest.

Rebalancing Frequency – Most indices rebalance between the high and low volatility components

daily, and some monthly. There are advantages to frequent shifting as well as to infrequent shifting of

assets. All this really illustrates is frequency of rearranging the portfolio is another reason why identical

looking indices may have different returns,

Annuity A and Annuity B have identical portfolios and both use a crediting method with a 100%

participation rate that deducts a yield spread. And yet due to possible factors such as servicing costs, the

vol-target level and whether the gain calculation is based on the excess return, the annuity with lowest

apparent yield spread could result in less interest credited to the annuityowner.

Levers Of The Snowflake

Two indices on the surface may sound identical, but unless you were dig deeply into the lines of print

you would never know how different they are. One can find carriers that do use identical vol-controlled

indices, where simply looking at the spreads would tell you which could post a higher return, but these

are the exception.

Cash vs Bonds – Volatility control means moving from higher to lower volatility. For many indices

the low volatility component is cash, which essentially has no volatility and no (very low) returns. Some

use different types of bonds. Neither of these are fungible meaning cash operates differently from bonds.

In addition, low volatility, in and of itself, does not mean positive returns.

Using bonds as the low volatility component should result in a higher return than simply using cash,

as could using a mix of bonds and low volatility equities. However, if interest rates go up, the bond

element could post negative returns and impact any positive higher volatility component gains. If a low

volatility equity sector gets crunched there could be a situation where a negative return results. Of

course, the annuity is not going to lose money, but the overall return could be impacted.


Cash: Low-vol component Bond: Low-vol component

Barclays ARMOUR II Gross 7% USD

BNP Paribus High Dividend Plus

Credit Suisse CS Tactical Multi Asset Index

Deutsche Bank CROCI US 5% Volatility Control Index

Deutsche Bank CROCI Sectors II USD 5.5% Volatility Control Index

Deutsche Bank CROCI Sectors III USD 5.5% Volatility Control Index

Deutsche Bank Momentum Asset Allocator 5.5% Volatility Control Index

Dow Jones US Real Estate Risk Control 10%

Goldman Sachs Dynamo Strategy Index

Goldman Sachs Momentum Builder Multi-Asset Class

JPMorgan ETF Efficiente 5 Index

Lenwood Volatility Control Index

ML Strategic Balanced Index

Morgan Stanley Diversified Select

Morgan Stanley Dynamic Allocation

Shiller Barclays CAPE US Sector Risk Controlled 10% USD Total Return Index

S&P 500 Average Daily Risk Control 10% Index

S&P 500 Daily Risk Control 5% Index

S&P 500 Daily Risk Control 10% Index

S&P 500 Dividend Aristocrats Daily Risk Control 5%

S&P 500 Low Volatility Daily Risk Control 5% Index


Barclays U.S. Dynamic Balance II

S&P 500 Daily Risk Control 2 8% Index

Transparent Value Blended Index

Servicing Costs – Some FIA vol-controlled indices deduct a servicing fee that ranges from 0.25% to

1.0% per annum that is deducted prorated daily; information about the servicing fee is often found in the

disclaimer language.


Has Stated Service Fee Fee

BNP Paribus High Dividend Plus 1.00%

Barclays ARMOUR II Gross 7% USD 0.50%

Goldman Sachs Dynamo Strategy Index 0.50%

Goldman Sachs Momentum Builder Multi-Asset Class 0.50%

JPMorgan ETF Efficiente 5 Index 0.50%

JP Morgan Mozaic 0.50%

Lenwood Volatility Control Index 0.50%

ML Strategic Balanced Index 0.50%

Morgan Stanley Diversified Select 0.50%

Morgan Stanley Dynamic Allocation 0.50%

Deutsche Bank Momentum Asset Allocator 5.5% Volatility Control Index 0.25%

Excess Return – Some index returns are calculated as excess returns, meaning the yield of a

predetermined benchmark is deducted from gains.

Excess Return Based If Yes, benchmark

Barclays ARMOUR II Gross 7% USD Yes risk-free asset

BNP Paribus High Dividend Plus Yes, 3 month LIBOR

Credit Suisse CS Tactical Multi Asset Index Yes, Fed Funds rate

Deutsche Bank Momentum Asset Allocator 5.5% Volatility Control Index Yes, over money market

Goldman Sachs Dynamo Strategy Index Yes, Fed Funds rate

Morgan Stanley Dynamic Allocation Yes, Fed Funds rate

Morgan Stanley Diversified Select Yes, 3 month LIBOR

Maximum Leverage/Exposure – Leverage or increased exposure to the equities side may exceed

100% when volatility is below target level.

Maximum Leverage/Exposure

Credit Suisse CS Tactical Multi Asset Index 150%

Lenwood Volatility Control Index 150%

Morgan Stanley Diversified Select 150%

Shiller Barclays CAPE US Sector Risk Controlled 10% USD Tot Rtn Index 150%

S&P 500 Daily Risk Control 5% Index 150%

S&P 500 Daily Risk Control 10% Index 150%

S&P 500 Low Volatility Daily Risk Control 5% Index 150%

S&P 500 Low Volatility Daily Risk Control 8% Index 150%


Volatility Target Part II – In identical indices a 5.5% volatility target should provide a higher return

potential than a 5% target, ceteris paribus; however, trying to use target rates to compare different

indices doesn't work. As an example, the same option money spent to get you a 55% participation rate in

an industrial's index might get you 100% participation in a utilities index, but, the reason you got almost

twice the participation is because the utilities were expected to produce half the return of the industrials.

4.5% 5% 5.5% 6% 7% 8% 10%

Goldman Sachs Momentum Builder Multi-Asset Class

Barclays U.S. Dynamic Balance II Deutsche Bank CROCI US 5% VCI Goldman Sachs Dynamo Strategy Ind JPMorgan ETF Efficiente 5 Index Morgan Stanley Diversified Select Morgan Stanley Dynamic Allocation S&P 500 Dividend Aristocrats DRC 5% S&P 500 DRC 5% Index S&P 500 Low Volatility DRC 5% Index

Deutsche Bank CROCI Sectors II USD 5.5% Volatility Control Index Deutsche Bank CROCI Sectors III USD 5.5% Volatility Control Index Deutsche Bank Momentum Asset Allocator 5.5% Volatility Control Index

BNP Paribus High Dividend Plus Credit Suisse CS Tactical Multi Asset Index ML Strategic Balanced Index Transparent Value Blended Index (6.25%)

Barclays ARMOUR II Gross 7% USD Lenwood Volatility Control Index

S&P 500 Low Volatility Daily Risk Control 8% Index S&P 500 Daily Risk Control 2 8% Index

Dow Jones US Real Estate Risk Control 10% Shiller Barclays CAPE US Sector Risk Controlled 10% USD Total Return Index S&P 500 Average Daily Risk Control 10% Index S&P 500 Daily Risk Control 10% Index


Equities Strategy – The traditional indices tend to use a market capitalization for their asset niche.

There are volatility control indices that also do this, but other strategies are also used

Momentum Low Volatility Under Valued High Dividend

Barclays ARMOUR II Gross 7% USD Deutsche Bank Momentum Asset Allocator 5.5% Volatility Control Index Goldman Sachs Dynamo Strategy Index Goldman Sachs Momentum Builder Multi-Asset Class Lenwood Volatility Control Index ML Strategic Balanced Index Morgan Stanley Diversified Select Shiller Barclays CAPE US Sector Risk Controlled 10% USD Total Return Index

Barclays U.S. Dynamic Balance II Credit Suisse CS Tactical Multi Asset Index Dow Jones US Real Estate Risk Control 10% JPMorgan ETF Efficiente 5 Index Morgan Stanley Dynamic Allocation S&P 500 Daily Risk Control 5% Index S&P 500 Average Daily Risk Control 10% Index S&P 500 Daily Risk Control 10% Index S&P 500 Daily Risk Control 2 8% Index S&P 500 Low Volatility Daily Risk Control 5% Index


Deutsche Bank CROCI US 5% Volatility Control Index Deutsche Bank CROCI Sectors II USD Deutsche Bank CROCI Sectors II USD 5.5% Volatility Control Index Transparent Value Blended Index

BNP Paribus High Dividend Plus S&P 500 Dividend Aristocrats Daily Risk Control 5%

High Dividend – Looks for stocks with the highest supportable dividend yield and buys them, with

the belief that high dividend stocks will outperform


Low Volatility – Looks for stocks with the low volatility and buys them, with the belief that low

volatility stocks will outperform.

Momentum – Based on a belief that when certain stocks or sectors are going up that they will

continue to go up, the index jumps on board the moving securities.

Undervalued – Finds stocks that appear to be undervalued, based on digging into the company's

financial using a standardized set of criteria. The most undervalued stocks are then purchased with the

belief their value will be recognized.

Concerns

Future Hedging

Although it is highly unlikely that the well-established broad-based indexes will cease to be offered

in the foreseeable future, it is conceivable that one or more of the newly created volatility control indices

might someday end. After all, some of these indices were created for a specific carrier and may never

accumulate sufficient size to justify the creation of ongoing hedges a score of years from now. However,

all of the FIAs offer more than one index so the consumer could simply switch to a different index.

A greater risk is the ambiguity surrounding future hedging costs. Many of the companies offering the

index also provide the carrier the hedging for the index – some require that they be the exclusive

hedging source, at least initially. Although a broadly used index such as the S&P 500 has multiple

potential hedging sources, a little used index may only have one bidder. This lessens the negotiating

power of the carrier and could result in higher costs in future years than might be experienced when

using a broader index that offers multiple potential hedging partners. However, future hedging costs

might become lower for some of the new indices if they reach a critical mass that makes selling the

carriers derivatives worthwhile2.

Backcasting/Hypotheticals

Many of the volatility control indices, even the underlying indices beneath volatility control overlays,

have an actual track record measured in months rather than years and were designed based on how well

they might have performed over the last eight to ten years. In and of itself, the fact that these indices

have little actual history is less of a concern than believing that past returns – whether real or

hypothetical – predict future returns. We all parrot that past performance does not necessarily predict

future results, but then we often ignore the maxim and, in the annuity arena as well as others, say that

the future return should be x% to y%. However, the future often throws us a curve.

Comparisons

It is extremely difficult to assess the potential interest that may be earned when comparing two or

more vol-controlled indices. You can't compare the indices by looking at relative spreads, participation

rates, or volatility target rates. You can't compare them by looking at their hypothetical returns because

many of these indices were created to perform well over a very specific and unique period of market

history.

Since you can't do a quantitative comparison, you are left with a qualitative one. What this means is

examining the index and the index provider and determining whether you are comfortable with the

concept and the ability of the index to perform.


Market Conduct: Realistic returns

Since all current volatility controlled indices do not have a stated ceiling on the amount of interest

that might be earned, this may create the impression that potential interest is unlimited. However, the

reason for using volatility controlled indices is to provide a way of limiting interest to reduce hedging

costs. Their very design limits interest. Due to this design it can create unrealistic expectations if the

index is referred to as uncapped or unlimited, because the design effectively works as a governor on the

amount of the return generated. Although it is often technically true that one gets "all of index upside

less a spread" the consumer needs to understand that thus upside does have limitations.

Based on modeling – assuming hedging costs and current pricing advantage can and will be

preserved – these managed indices could deliver more interest than traditional indexing methods in the

current interest rate environment. However, by design a volatility controlled index will underperform a

non-volatility controlled index in a surging bull market. Thus, it is more realistic to frame managed

volatility as offering the potential for "a little more interest" rather than as source of uncapped index

performance.

Summary The reason we are seeing the proliferation of volatility controlled indices is due to the prolonged low

interest rate environment. There simply isn't enough yield out there to get inspiring caps or spreads or

participation rates using traditional FIA crediting methods. Volatility controlled indices are another way

to cope with low yields but offer, at least on paper, a way to get more interest with the same hedging

budget. If this all works out, volatility controlled indices will credit more interest than traditional

methods.

It is important to know that annuity carriers have been attempting to manage volatility since the

inception of the FIA. The second FIA on the market used a crediting method with a cap and the fourth

one used averaging; the monthly cap method was created as a solution to high hedging costs by

understating periods of gains while recognizing periods of losses. More recently, the TVI Index

appeared in the FIA market using a volatility overlay and could be considered the first true vol-

controlled FIA index, but the concept did not take off until it was tweaked by Barclays and Allianz. Vol-

controlled indices are a way to work with restricted hedging budgets in these low interest times.

How does one explain an FIA volatility controlled index to a consumer? The same way that any fixed

index annuity crediting method is explained as in "This fixed index annuity gives you the potential for

hopefully earning competitive interest over time, with a worse case that you will never lose what you've

already earned."

1. Advantage Insurance Carrier Bond Yield Composite Index, Advantage Compendium. 2015

2. Simpa Baiye. Hybrid Indices in Fixed Indexed Annuities: The New Wave. Product Matters. June 2015, p 1,.4-7

Copyright 2015. Advantage Compendium, Ltd., McKinney, TX (314) 255-6531. Jack Marrion. [email protected]. Reproduction is not permitted without written permission. We do not provide investment, tax or legal advice. Information is obtained from public sources and is believed accurate, but is not warranted. No annuity is sponsored, endorsed, sold or promoted by any index or index provider. No index nor their respective affiliates or third party licensors make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Index.


Index Composition

Barclays ARMOUR II Gross 7% USD Developed equity, emerging market equity, commodities, gold, bonds & cash.

Barclays U.S. Dynamic Balance II Shifts between S&P 500 & Barclays U.S. Aggregate RBI Series Index.

BNP Paribus High Dividend Plus U.S. dividend paying stocks; the 40 with the highest economic yield are included

Credit Suisse CS Tactical Multi Asset Index 10 ETFs: equities, fixed income (credit and US treasuries), commodities & real estate

Deutsche Bank CROCI Sectors II USD 5.5% VCI Selects from S&P 500, EuroStoxx Large Index & TOPIX 100

Deutsche Bank CROCI Sectors III USD 5.5% VCI Selects from S&P 500, EuroStoxx Large Index & TOPIX 100

Deutsche Bank CROCI US 5% Volatility Control Index 40 of the most undervalued stocks selected from top half (market capitalization) of the S&P 500 Index are grouped together in a propriety index.

Deutsche Bank Momentum Asset Allocator 5.5% VCI equities, gold, interest rates

Dow Jones US Real Estate Risk Control 10% Dow Jones US Real Estate Index and an interest-accruing cash component

Goldman Sachs Dynamo Strategy Index Developed Market Equities, fixed income, commodities & real estate

Goldman Sachs Momentum Builder Multi-Asset Cl US equities & bonds, International bonds, & commodities.

JPMorgan ETF Efficiente 5 Index mix of 12 ETFs: equities, fixed income, commodities and real estate and gold

Lenwood Volatility Control Index S&P 500 Total Return, Low Volatility Total Return & Equal Weight Total Return indices with 2, 5, and 10 yrs U.S. T-note Futures indices.

ML Strategic Balanced Index S&P 500 Index; Fixed Income Asset is Merrill Lynch 10-yr U.S. Treas Futures Total Return Index.

Morgan Stanley Diversified Select Global equity ETFs, real estate, foreign exchange

Morgan Stanley Dynamic Allocation Global Equities, treasuries, gold & real estate

S&P 500 Average Daily Risk Control 10% Index S&P 500 index & cash component accruing interest.

S&P 500 Daily Risk Control 2 8% Index S&P 500 & bond index.

S&P 500 Daily Risk Control 5% Index S&P 500 index & cash component accruing interest.

S&P 500 Daily Risk Control 10% Index S&P 500 index & cash component accruing interest.

S&P 500 Dividend Aristocrats Daily Risk Control 5% S&P 500 stocks that have increased their dividends for the last 25 years.

S&P 500 Low Volatility Daily Risk Control 5% Index S&P 500 Low Volatility Index & cash component accruing interest.

S&P 500 Low Volatility Daily Risk Control 8% Index S&P 500 Low Volatility Index & cash component accruing interest.


Monthly ranking of the 10 US sectors based on modified CAPE ratio and price momentum, equally allocating across top 4 ranked sectors.

Transparent Value Blended Index Transparent Value Large-Cap Defensive Index.


Index Volatility Target

Stated Service Fee

Excess Return Based

No/Low Volatility Component

Barclays ARMOUR II Gross 7% USD 7.00% 0.50% Yes Cash

Barclays U.S. Dynamic Balance II 5.00% No No Bond

BNP Paribus High Dividend Plus 6.00% 1.00% Yes Cash

Credit Suisse CS Tactical Multi Asset Index

6.00% No Yes Cash

Deutsche Bank CROCI Sectors II USD 5.5% VCI

5.50% No No Cash

Deutsche Bank CROCI Sectors III USD 5.5% VCI

5.50% No No Cash

Deutsche Bank CROCI US 5% Volatility Control Index

5.00% No No Cash

Deutsche Bank Momentum Asset Allocator 5.5% VCI

5.50% 0.25% Yes Cash


10.00% No No Cash

Goldman Sachs Dynamo Strategy Index 5.00% 0.50% Yes Cash

Goldman Sachs Momentum Builder Multi-Asset Cl

4.50% 0.50% No Cash

JPMorgan ETF Efficiente 5 Index 5.00% 0.50% No Cash

Lenwood Volatility Control Index 7.00% 0.50% No Cash

ML Strategic Balanced Index 5.00% 0.50% No Cash

Morgan Stanley Diversified Select 5.00% 0.50% Yes Cash

Morgan Stanley Dynamic Allocation 5.00% 0.50% Yes Cash

S&P 500 Average Daily Risk Control 10% Index

10.00% No No Cash

S&P 500 Daily Risk Control 2 8% Index 8.00% No No Bond

S&P 500 Daily Risk Control 5% Index 5.00% No No Cash

S&P 500 Daily Risk Control 10% Index 10.00% No No Cash

S&P 500 Dividend Aristocrats Daily Risk Control 5%

5.00% No No Cash


5.00% No No Cash


8.00% No No Cash


10.00% No No Cash

Transparent Value Blended Index 6.25% No No 2 Yr T-Notes


Index Index Strategy Maximum Leverage/Exposure

Index Live Date

Underlying Index Launch Date

Barclays ARMOUR II Gross 7% USD Momentum 100% 4/25/2013 4/25/2013

Barclays U.S. Dynamic Balance II Volatility 100% 4/15/2015 4/15/2015

BNP Paribus High Dividend Plus Dividend 100% 7/28/2014 7/28/2014

Credit Suisse CS Tactical Multi Asset In Volatility 150% 8/25/2014 8/25/2014

Deutsche Bank CROCI Sectors II USD 5.5% VCI

Under Valued 100% 3/13/2015 3/31/2005

Deutsche Bank CROCI Sectors III USD 5.5% VCI

Under Valued 100% 3/13/2015 3/31/2005

Deutsche Bank CROCI US 5% VCI Under Valued 100% 8/7/2015 1/31/2004

Deutsche Bank Momentum Asset Allocator 5.5% VCI

Momentum 100% 5/1/2015 6/30/2005


Volatility 100% 6/2/2013 6/2/2013

Goldman Sachs Dynamo Strategy Index Momentum 100% 6/14/2015 6/14/2015

Goldman Sachs Momentum Builder Multi-Asset Cl

Momentum 100% 7/25/2014 7/25/2014

JPMorgan ETF Efficiente 5 Index Volatility 100% 10/29/2010 10/29/2010

Lenwood Volatility Control Index Momentum 150% 5/28/2014 5/28/2014

ML Strategic Balanced Index Volatility 150% 8/12/2014 8/12/2014

Morgan Stanley Diversified Select Momentum 150% 3/31/2015 3/31/2015

Morgan Stanley Dynamic Allocation Momentum 100% 9/18/2013 9/18/2013

S&P 500 Average DRC 10% Index Volatility 100% 4/13/2013 4/1/1957

S&P 500 Daily Risk Control 2 8% Index Volatility 100% 6/3/2011 6/3/2011

S&P 500 Daily Risk Control 5% Index Volatility 150% 9/10/2009 4/1/1957

S&P 500 Daily Risk Control 10% Index Volatility 150% 5/13/2009 4/1/1957

S&P 500 Dividend Aristocrats DRC 5% Dividend 100% 8/25/2010 5/2/2005

S&P 500 Low Volatility DRC 5% Index Volatility 150% 8/31/2011 8/31/2011

S&P 500 Low Volatility DRC 8% Index Volatility 150% 8/31/2011 8/31/2011


Momentum 150% 2/6/2014 10/2/2012

Transparent Value Blended Index Under Valued 100% 3/20/2013 3/20/2013


Index Crediting Method Carrier(s) Offering

Barclays ARMOUR II Gross 7% USD 3 Yr w/Spread (1 and 2 Yr versions filed)

Forethought

Barclays U.S. Dynamic Balance II 1 Yr w/Spread Allianz

BNP Paribus High Dividend Plus 1 Yr w/Spread, 2 Yr w/Spread

Security Benefit

Credit Suisse CS Tactical Multi Asset Index 1 Yr w/Spread, 2 Yr w/Spread

Phoenix

Deutsche Bank CROCI Sectors II USD 5.5% VCI 1 Yr w/Spread, 2 Yr w/Spread

Guggenheim

Deutsche Bank CROCI Sectors III USD 5.5% VCI 1 Yr w/Spread Delaware

Deutsche Bank CROCI US 5% Volatility Control Index 1 Yr w/Spread Voya

Deutsche Bank Momentum Asset Allocator 5.5% VCI 1 Yr P-rate, 2 Yr P-rate Delaware

Dow Jones US Real Estate Risk Control 10% 5 Yr w/spread Fidelity & Guaranty

Goldman Sachs Dynamo Strategy Index 1 Yr P-rate, 2 Yr P-rate EquiTrust

Goldman Sachs Momentum Builder Multi-Asset Cl 3 Yr P-rate Integrity, Lafayette, Columbus

JPMorgan ETF Efficiente 5 Index 1 Yr w/Spread Symetra

Lenwood Volatility Control Index 2 Yr w/Spread Athene

ML Strategic Balanced Index 1 Yr P-rate, 2 Yr P-rate American General

Morgan Stanley Diversified Select 1 Yr P-rate, 2 Yr P-rate. 5 Te P-rate

Guggenheim

Morgan Stanley Dynamic Allocation 2 Yr w/Spread Security Benefit

S&P 500 Average Daily Risk Control 10% Index 2 Yr w/Spread Americo

S&P 500 Daily Risk Control 2 8% Index 2 Yr P-rate Athene

S&P 500 Daily Risk Control 5% Index 1 Yr w/Spread (LFG). 5 Yr w/spread (Symetra)

Symetra, Lincoln Financial

S&P 500 Daily Risk Control 10% Index 5 Yr w/spread Athene

S&P 500 Dividend Aristocrats Daily Risk Control 5% 1 Yr w/Spread American Equity

S&P 500 Low Volatility Daily Risk Control 5% Index 1 Yr w/Spread North American

S&P 500 Low Volatility Daily Risk Control 8% Index 2 Yr P-rate North American, Midland

Shiller Barclays CAPE US Sector Risk Controlled 10% USD TRI Index/Fix Blend Athene

Transparent Value Blended Index 1 Yr w/Spread Security Benefit


FIAs with volatility-controlled indices are fixed annuities. Section 989J of Dodd-Frank simplified the securities exemption by saying as long as the annuity satisfies state standard nonforfeiture laws – and did not use a separate account (i.e. was not a variable annuity) – it was a fixed annuity. The vol-controlled indices of FIAs meet the interest requirements of Dodd-Frank and the intent of the original Rule 151 in that they still provide a minimum guarantee, still protect premium and credited interest from market risk, and still credit interest annually. On the basis of how they credit interest these are still fixed annuities.

Managed volatility permits higher nominal participation. An index using managed volatility may

offer a 100% participation rate without a stated cap. However, nominal may not be the same thing as effective participation. Although the index with controlled volatility may offer a 100% rate on this index methodology, it may effectively only give a portion of the total underlying index gain.

Vol-controlled indices may, at times, produce significantly higher credited interest than existing

methods and may, at times, produce lower credited interest than existing methods. Vol-controlled indices for FIAs are a new response applied to deal with a prolonged low interest

rate environment. These indices gnerally have a short or no track records. Vol-controlled indices for FIAs are a creative way to provide more value to the consumer in the

current low interest rate environment by effectively raising index participation. The concept is valid.

Advantage Compendium Ltd. (www.volcontrol.com)

is led by Jack Marrion, providing research and consulting services to financial firms in a variety of

areas. He has conducted a broad scope of research ranging from the behavioral economic reasons

why consumers buy or don't buy financial products to future industry impact models. He also

serves as Director of Research for the National Association for Fixed Annuities and as a Research

Fellow for Webster University.

His insights on the annuity and retirement income world have appeared in hundreds of publications

including Best’s Review, Business Week, Kiplinger, The New York Times, and The Wall Street

Journal. In 2006 the National Association of Insurance Commissioners asked him to address their

annual meeting and teach regulators the realities of index annuities. In 2009 Dr. Marrion was

asked to speak at the NAIC Washington meeting on how seniors make decision. In 2015 Dr.

Marrion was asked to speak at the NAIC Midwest conference on volatility controlled indices offered

in fixed index annuities. Best’s Review said he was likely to affect the course of the industry.

Prior to forming Advantage Compendium Dr. Marrion was president and owner of an NASD

broker/dealer with offices in nine states, and formerly vice president of a life insurance company

and previously vice president of an NYSE investment banking firm. He has a BBA from the

University of Iowa, an MBA from the University of Missouri and his doctorate from Webster

University in the area of cognitive bias in decision-making formed a new paradigm in the

development of retirement income products. Neither Jack Marrion nor Advantage Compendium sell

or endorse any financial product.

Documents

Fixed Index Annuity Vol-Controlled Indices · Fixed Index Annuity Vol-Controlled Indices A A little over two years ago Allianz introduced the next generation volatility controlled