The New World ofFixed Indexed

Annuities

For Agent Use Only.

INTRODUCTIONThe year 1995 seems like a world ago — the O.J. Simpson trial captivated the

nation, eBay launched online and the DVD debuted. Who would have imagined

then that just over two decades later we’d witness Simpson receive parole for a

different crime, see Amazon crush online and big-box retailers, and watch movies

on our phones?

This Senior Market Sales® (SMS) white paper examines the evolution and growth

of FIAs through the historical lens of the important economic, regulatory and

product milestones that have shaped the FIA industry — and shaped many

financial advisors’ opinions of FIAs. It does not assert that FIAs are the solution

for all retirees. Rather, it shows how FIAs have evolved to earn a respectable

position in the toolbox of today’s financial advisor, evidenced by soaring sales

and new product innovations that are leading even once-skeptical advisors to

acknowledge that FIAs can be the right safe-money alternative for some clients.

A decade or two can make a big difference.

In the financial world, 1995 also marked the debut of the fixed-indexed annuity

(FIA). So, when you consider the innovations or world events that have occurred

since then, it makes sense that the FIAs you knew in 1995 are not the same as

today’s FIAs. Consumer demand and industry innovation, especially following

the Great Recession, have driven the evolution and success of FIAs, and these

forces continue to align — perhaps even more perfectly — for greater growth in

the coming months and years.

FIAs are unique risk management vehicles that combine the

growth potential of index-linked interest, the protection from

market downturns and the guarantees of lifetime income. These

valuable benefits help protect people from the key retirement

risks of inflation, longevity and market volatility.

A decade or two can make a world of difference.

The reasons for these stellar sales: more insurance agents and financial advisors

see their value and want to offer them, and consumers have also responded

favorably in a market where competing safe money options are at record-low

interest rates. (A recent LIMRA study found that 83% of FIA buyers were satisfied

with their purchase.)

THE BIG PICTUREFIAs date back only to 1995, when Keyport Life created the first equity-linked

indexed annuity, KeyIndex. But in their relatively short lifespan, they’ve experienced

tremendous popularity and remarkable sales momentum — despite being at

the center of debate on how they should be regulated. (They started and remain

today as insurance products rather than securities. See the timeline at the end of

the white paper for the full history.)

In fact, FIAs have seen record growth for the past nine consecutive years. FIA sales

surpassed $60 billion in 2016 and now make up 27% of the total annuity market. 11

FIA Sales (in billions)

$60.0

1996 2000 20102005 2016

$50.0

$40.0

$30.0

$20.0

$10.0

$-

$1.5 $5.5

$27.3

$32.1

$60.9

FIAs have not only survived but also thrived partly because insurance companies

have continued to adapt by making them more attractive to consumers. The latest

advancements include uncapped crediting strategies, longer reset periods, smart-

beta indices, volatility controls and indexing partnerships with brand-name financial

firms such as J.P. Morgan, Merrill Lynch and Barclays. Consumers are particularly

interested in guaranteed lifelong income riders. According to LIMRA, nearly 70% of

indexed annuity owners elect to add the Guaranteed Lifetime Withdrawal Benefits

rider when it is available.12

Institutions have become more accepting of FIAs than in the past, contributing to

the growth of FIA sales overall. Banks and broker-dealers have jumped on the FIA

product and expanded the market through their relationships. The percentage of

FIA sales from banks and broker-dealers compared to other channels has increased,

eclipsing 30% in 2016.2

The market has diversified in other ways, too, and FIAs are no longer considered a

niche market. Whereas two carriers owned 40% of the market in FIA sales in 2005,

today the growth of FIA sales is spread across a healthier, broader group of carriers.8

“Innovation is the only way to win.”

- Steve Jobs

MARKET SHARE BY ANNUITY TYPEFIA sales have eaten into the market shares of other annuities.

$257

$184

$156

$128$141

$158

$147$145

$140 $133$105

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

$73

$109 $111

$82 $81$72

$84$96

$104

$117

$265

$239$222

$238

$220$230 $236 $237

$222

U.S. Individual Annuity Sales — Annual

Variable Fixed

Do

llars

in B

illio

ns

Source: LIMRA Secure Retirement Institute, U.S. Individual Annuities survey

THE LATEST DISRUPTION IS FIA’S GREATEST OPPORTUNITY YETIn April 2016, the Department of Labor (DOL) released the much-anticipated

fiduciary rule mandating that all financial advisors who oversee retirement

accounts adopt a fiduciary standard of duty putting the interest of their clients

above their own.

The FIA market is well positioned for further growth in a post-DOL-fiduciary world.

What may be seen by many as a disruption could create opportunities for savvy

financial advisors who are looking to help their clients manage risk in addition to

managing their assets.

Safe money options will continue to be an important part of a financial plan,

and the fear of another financial crisis has increased the appeal of FIAs among

consumers and financial professionals. The powerful combination of index-related

accumulation with downside protection is appealing to consumers in times of both

growth and recession.

We are also seeing many carriers starting to offer fee-based FIAs, providing

advisors an alternate asset class to traditional stock and bond portfolios to bring

their clients greater diversification, volatility governors and guaranteed retirement

income solutions.

Rule No. 1:

Rule No. 2:

Never Lose Money

Never Forget Rule No. 1

“”

—Warren Buffett

CONCLUSIONDespite all the disruption, the insurance industry continues to innovate,

and FIAs are perhaps its most innovative product yet — with more yet to arrive.

To realize the opportunity in FIAs, you need only to think of 1995 and all that has

transpired since then. You didn’t have access to news at your fingertips on Twitter,

shopping on Amazon or TV shows on demand. Just as other industries innovate,

the insurance industry has innovated. Just as other industries produce life-changing

inventions, so has the insurance industry.

FIAs deserve a fresh look, because today, what can seem a world ago was really

only a matter of days in the past. With the speed of life-changing innovations

accelerating, your clients depend on your willingness to recognize the best, the

newest and the next products in your industry that could help them succeed —

and your business deserves that, too.

WHERE DO YOU GO FROM HERE?In an ever-changing regulatory, economic and product environment, you

need a partner with the experience, tools and fortitude to be with you every

step of the way.

Founded in 1982, Senior Market Sales has not only weathered the greatest

industry changes, but also emerged as an industry leader. In fact, spotting the

opportunity within industry disruption is how we’ve succeeded.

Today, our menu of products and services goes well beyond FIA solutions

and includes Medicare planning, long-term care, life insurance, and advisor-

focused software products, including Social Security Timing®, Tax Clarity™ and

SmartRisk™. We monitor changes from a regulatory and economic standpoint

and work with some of the leading insurance carriers in the market to make sure

we are up-to-date on all of the current product changes and enhancements.

We do all of this so that you have the support you need to focus on what you

do best.

SMS’ mission is to help you leverage time, make more money, and put your

business in a position of distinction. We have tools and programs to make

you successful.

1.877.645.4939www.SeniorMarketSales.com

Contact one of our marketing consultants today to find out

how we can help you!

ENDNOTES

1. LIMRA International.

2. Indexed Compendium, April 2016.

3. Employee Benefit Research Institute and BenefitsPRO.

4. “Hybrid Indices in Fixed Indexed Annuities: The New Wave,” by Simpa Baiye, Product Matters, Society of Actuaries, Issue 92, June 2015.

5. “Key Moments in the Evolution of Fixed Indexed Annuities,” LifeHealthPro, March 15, 2016.

6. Fear of Financial Planning Survey, Nationwide Financial, conducted by Harris Interactive, 2013.

7. “Indexed Annuities Battle with SEC Comes to an End,” by Sheryl J. Moore, Annuity Specs, July 21, 2010.

8. “Fixed Indexed Annuities: Recap... And What’s Next?,” by Guillaume Briere- Giroux, Oliver Wyman, May 2014.

9. https://insurancenewsnet.com/innarticle/here-come-the-fee-based-indexed- annuities.

10. http://www.prnewswire.com/news-releases/nationwide-announces-its-first- fee-based-fixed-indexed-annuity-300486312.html.

11. “Fixed annuity sales hit record $117.4 billion in 2016,” thinkadvisor.com, February 21, 2017.

12. “Guaranteed features propel indexed-annuity sales,” by Darla Mercado, InvestmentNews, June 6, 2014.

A BRIEF HISTORY OF FIAs

Keyport Life created the first

equity-linked indexed annuity,

KeyIndex.

In an effort to offer higher interest

rates, insurance carriers increased

both the length of the surrender

charge period and the amount of

surrender charge penalties. By the end

of 1998, nearly one-half of FIAs sold

had a surrender period of 10 years or

longer. 5

Within a couple of years, the

Securities and Exchange

Commission (SEC) started

to increase scrutiny on the

classification of FIAs as insurance

products and not securities. 7

The popularity of 401(k) plans,

and the decline of traditional

pension plans, started to emerge.

A decade-long period of record

economic expansion came to a

sudden halt with the dot-com

stock market crash.

During what became the

longest bear market since the

Great Depression, the NASDAQ

Composite lost 78% of its value,

and overall $8 trillion of wealth

was wiped out. This event also

ushered in a period of increased

volatility in the equity markets. 4

FIA sales had taken off by

2005 but were concentrated

with two carriers owning 40%

of the market.8

In August 2005, the National

Association of Securities Dealers

(NASD), now known as the

Financial Industry Regulatory

Authority (FINRA), issued Notice

to Members 05-50, declaring

that member firms treat indexed

annuities as if they are securities.

The question of whether the

NASD had jurisdiction over FIAs

remained. 7

A wave of product innovations

starting in 2011 sparked the

growth of FIAs and generated

broader acceptance by

consumers and financial

professionals.

In April 2016, the Department

of Labor (DOL) released the

much-anticipated fiduciary rule

mandating all financial advisors

who oversee retirement accounts

adopt a fiduciary standard of duty

putting the interest of their clients

above their own.

The housing bubble and subprime

mortgage crisis resulted in the

Great Recession lasting from

December 2007 to June 2009.

During this period of financial

hardship, the S&P 500 declined

57%. The government initiated a

process of quantitative easing to

increase the money supply and

stimulate the economy.

2009In December 2009, after legal

action and legislation introduced

to “undo” Rule 151A, the

SEC agreed to a two-year

stay of 151A. 7

A period of moderate economic

expansion occurred from 2002

to 2007, and FIA sales grew from

$11.7 billion to $25.1 billion

during this time. 5

In 1998, the SEC decided that FIAs

were not securities and wouldn’t be

regulated as such.

The courts ruled in the 2001

case Beverly S. Malone v. Addison

Insurance Marketing, Inc., that FIAs

are not securities. 5

The National Association of Insurance

Commissioners (NAIC) passed

legislation to protect senior citizens

ages 65 or older from abusive

annuity sales practices. The act,

called the Senior Protection in

Annuity Transaction Model Act, was

later expanded to cover all annuity

consumers, not just those older than

age 65. 5

Beginning in 2006,

a number of product

enhancements

emerged that

increased the

competitiveness of

FIAs. These include

Guaranteed Minimum

Death Benefit riders,

Guaranteed Lifetime

Withdrawal Benefits

and nursing home

multipliers. 8

In June 2008, the SEC changed course

and pursued the reclassification of

FIAs as securities with proposed Rule

151A requiring agents who sell FIAs

to become securities licensed.7 In

December 2008, after a six-month

comment period and significant

protest from the insurance industry,

the SEC adopted rule 151A with an

effective date of Jan. 12, 2011. 7

In July 2010 after 13 years of

regulatory action, the Dodd-Frank

Wall Street Reform and Consumer

Protection Act became law, and

FIAs were indefinitely classified

as fixed insurance products and

not securities. 7

By 2015, 401(k) assets have

grown to over $4.7 trillion. 3

Additionally, retirement

plan rollovers, which have

traditionally been a rich

source of FIA premium, are

expected to grow to $550 by

the end of the decade. 1

During the most recent period

of economic recovery, the

domestic equity markets have

rebounded and reached all-

time highs in 2017.

Fee-based annuity products

— mostly in the form of

variable annuities — have

been on the market for several

years, but analysts predict that

the DOL’s fiduciary rule will

lead to insurers developing

more fee-based FIAs. 5,9

1995

2000

2000-2002

2005

2011 2016

2007-2009

2002-2007

1998 2001 2003 2006 2008 2010 20152017

Red = regulatory events

Green = product innovations and milestones

Blue = economic eventsKEY: