© 2015 Oliver Wyman

Guillaume Briere-Giroux, FSA, MAAA, CFA

Indexed Product Deep Dive Financial Reporting

2015 SOA Annual Meeting & Exhibit

Austin – October 13, 2015

© 2015 Oliver Wyman 1 1 © 2015 Oliver Wyman

Agenda

I. Indexed annuity financial reporting

II. Indexed universal life US GAAP practices

III. Key takeaways

Risk and product design implications will be discussed throughout

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US Statutory valuation basics

Description Implications

AG 35 • Used for base FIA

• Factors in accumulated option value at the end of the

term

• Statutory reserves may or may not respond to

index movements during crediting terms

AG 33 • Framework in use for general account GLWB riders

• Benefits split into streams (elective vs. non-elective)

with their own valuation rate

• Calculate integrated present value of all streams for

all exercise paths, no lapses and the maximum

present value of all exercise paths

• Reserve is very conservative

• Stable accrual and release of liabilities (no mark-

to-market discount rate and in many cases little

index sensitivity)

AG 43 • Only for certain legacy blocks of GLWB riders

• Stochastic calculation

• Standard scenario

• Less conservative than AG 33

• More sensitivity to index movements than AG 33

VM-22 • Representative scenario method (“RSM”)

• Seriatim floor reserve

• Less conservative than AG 33

• Intended to be easier to implement than AG 43?

Indexed annuity financial reporting

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US GAAP valuation basics

Description Implications

FAS 133 for

base contract

(no GLWB)

• Calculate present value of excess cash flows, using

risk free rates (option budget method)

• Excess cash flows are typically based on surrender

and death benefits in excess of non-forfeiture value

/ premium floor

• Liability is bifurcated at issue, host contract accrues

to converge with non-forfeiture value

• Embedded derivative is sensitive to discount

rate; index credit hedges are not

FAS 133 for

base contract

(with GLWB)

• Adapt excess cash flows to account for withdrawals

in addition to surrender and death benefit cash

flows

• Increased persistency pushes cash flows away

• Smaller embedded derivative

• More complex calculation

SOP 03-1 for

GLWB rider

claims

• Calculate benefit ratio based on present value of

assessments and claims

• Accrue liability based on benefit ratio and interest

• Unlock benefit ratio for experience

• Stable accrual and release of liabilities (no

mark-to-market discount rate)

Indexed annuity financial reporting

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IUL financial reporting survey highlights

1 15 out of 21 participants (71%) used simplified approaches to calculate FAS 133 liabilities

2 90% of participants find model complexity and implementation issues to be crucial challenges in

producing financial reporting results

3 Implementation approaches for “full-blown” FAS 133 approaches varied greatly

Many participants expressed a desire for a clearer and simpler set of accounting

standards for IUL business

Indexed universal life US GAAP practices

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US GAAP base contract reserve methodology for indexed liabilities

3

1

1

11

1

5

FAS 97

Account value only

Simplified FAS 133

Account value + current option value

“Swap method”

Other

FAS 133

Option budget method

Stochastic approach

Reporting methodology for IUL base contract indexed account US GAAP liabilities

Note: One participant reported multiple approaches (more than one block of business)

Indexed universal life US GAAP practices

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Methodology choices for “full-blown” FAS 133

Indexed universal life US GAAP practices

See “Indexed Universal Life: US GAAP Financial Reporting Practices,” Issue 100, The Financial Reporter, SOA, March 2015 for further discussion

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Methodology choices for “full-blown” FAS 133 (continued)

Indexed universal life US GAAP practices

See “Indexed Universal Life: US GAAP Financial Reporting Practices,” Issue 100, The Financial Reporter, SOA, March 2015 for further discussion

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Key takeaways

1 US Statutory and US GAAP creates mismatches relative to economics

2 There is a wide range of US GAAP implementation methods; nuances matter

3 Certain designs are less prone to accounting mismatches

4 Balancing economics, statutory and US GAAP requires good analytics

Key takeaways