MEMBERS Horizon - The Value of Risk Control

MEMBERS Horizon The Value of Risk Control Ryan Stowe, FSA, MAAA Director Pricing & Product Management For registered representative use only. Not for use with the general public. All guarantees are based on the claims-paying ability of the issuer. CUNA Mutual Group 2016 MHA-1583869.1-0816-0918 Agenda The Value of Risk Control A Qualitative Approach Actual vs. Rational Investor Behavior Historical Look at Expected Portfolio Return and Risk The Value of Risk Control A Quantitative Approach Case Studies Sequence of Returns Risk & Drawdown Risk How Important is Market-Timing? The Impact of Expenses on Overall Return For registered representative use only. Not for use with the general public. All guarantees are based on the claims-paying ability of the issuer. CUNA Mutual Group 2016 2 Investor Behavior

In order to gain from the market, clients have to be in the market For registered representative use only. Not for use with the general public. All guarantees are based on the claims-paying ability of the issuer. CUNA Mutual Group 2016 MEMBERS Horizon - Background MEMBERS product strategy is built around solving problems with simple and transparent solutions MEMBERS Horizon was built to address the fundamental problem of keeping investors in the market Risk Control Accounts provide a new and innovative method to help manage even control investment risk in a portfolio By leveraging an annuity chassis, we can provide the safety of guaranteed floors on investment performance tied to an index a risk management tool other traditional investment solutions cannot provide For registered representative use only. Not for use with the general public. All guarantees are based on the claims-paying ability of the issuer. CUNA Mutual Group 2016 4 Risk and Return Characteristics Have Changed

For registered representative use only. Not for use with the general public. All guarantees are based on the claims-paying ability of the issuer. CUNA Mutual Group 2016 5 Solution: MEMBERS Horizon Variable Subaccounts Money Money Market Market Risk Control Accounts Allocation Allocation S&P 500 Bond Bond US Stock US Stock (0%Secure Floor) (0% Floor) International

International Stock Stock Specialty Specialty Growth (-10% Floor) (-10% Floor) Secure Growth EAFE Secure (0%Secure Floor) (0% Floor) Growth Growth (-10% Floor) (-10% Floor) New approach to risk management using risk control accounts Risk control can be used in a variety of market cycles

For registered representative use only. Not for use with the general public. All guarantees are based on the claims-paying ability of the issuer. CUNA Mutual Group 2016 Case Study #1: Sequence of Returns & Drawdown Risk Year 60% Equity 40% Bond 50% Risk Control 30% Equity 20% Bond 2004 108,265 108,629 2005 112,507 112,386 2006 125,119 126,337

2007 132,730 132,393 2008 106,048 112,449 2009 125,403 131,145 2010 140,018 147,158 2011 146,184 150,425 2012

162,686 168,950 2013 192,983 197,417 CAGR 6.8% 7.0% For registered representative use only. Not for use with the general public. All guarantees are based on the claims-paying ability of the issuer. CUNA Mutual Group 2016 Recovery time depends on the magnitude of the drawdown Sequence of returns can affect client behavior Emotional investment decisions can affect overall returns Equity Fund uses the S&P 500 Total Return Index Bond Fund uses the Barclays U.S. Aggregate Bond Index Risk Control uses the S&P 500 Price Index; floor = -10% and cap = 15.00% All values shown before the application of any fees

7 Case Study #2: How Important is Market Timing? Looking at 10-year holding periods from 1950 2005, if you invested in at: The peak of the index during the year: 4.8% CAGR The trough of the index during the year: *As you look at more recent market performance the difference becomes smaller: 1970 2005: 100 bps 1995 2005: 65 bps 6.0% CAGR Average over all index trading days: 5.6% CAGR For registered representative use only. Not for use with the general public. All guarantees are based on the claims-paying ability of the issuer.

CUNA Mutual Group 2016 8 *Being in the market is more important than timing when to get into the market. Assumes an index floor of -10% and index cap of 15%. CAGR = compound annual growth rate Case Study #2 (Continued) Looking at the average over all 10-year holding periods: Portfolio 1/1995 12/2005 CAGR 1/2000 12/2005 CAGR 60% Equity 40% Fixed Income 5.95% 5.66% 50% Risk Control 30% Equity 20% Fixed Income

5.44% 5.45% Correlations between equity and fixed income change based on market conditions; controlling investor behavior during volatile market cycles makes these returns difficult to achieve Risk control can provide stability in volatile market cycles at reasonable cost of average return Assumes an index floor of -10% and index cap of 15%. CAGR = compound annual growth rate For registered representative use only. Not for use with the general public. All guarantees are based on the claims-paying ability of the issuer. CUNA Mutual Group 2016 9 Case Study #3: Impact of Expenses on Overall Return Recall from Case Study #1 that a $100K investment in 2004 grew to the following amount by 2013: Year 60% Equity 40% Bond 50% Risk Control 30% Equity 20% Bond 2013

$192,983 $197,417 CAGR 6.8% 7.0% Assuming 2% and 3% All-In fees the same portfolio would have the following investment performance: Year 60% Equity 40% Bond 50% Risk Control 30% Equity 20% Bond 2% All-In Fees CAGR 3% All-In Fees CAGR $158,034 4.7%

$142,992 3.6% $162,539 5.0% $147,373 4.0% For registered representative use only. Not for use with the general public. All guarantees are based on the claims-paying ability of the issuer. CUNA Mutual Group 2016 CAGR = compound annual growth rate 10 But wait For registered representative use only. Not for use with the general public. All guarantees are based on the claims-paying ability of the issuer. CUNA Mutual Group 2016 11 The Real & Perceived Cost of Investment Products Why are annuities perceived to be so expensive?

Annuities provide guarantees that other investment products cannot offer (investment performance, annuitization, guarantees of principal, living & death benefits, tax deferral for NQ, etc.) Investment products can have significant fee structures too; you have to look at the all-in fees to accurately compare products. Example - sticker price of a car on the lot vs. the cost to drive it off the lot Transparency and level of fees will undergo significant change in a post-DOL world For registered representative use only. Not for use with the general public. All guarantees are based on the claims-paying ability of the issuer. CUNA Mutual Group 2016 12 Product/Solution Comparison: Apples-to-Apples Product/Platform Expense Comparison Solution #1 Solution #2 Platform Fee *Usually defined as a % of AUM. *Be sure to include any break-points as necessary. Contract Fee *Usually defined as a fixed dollar amount.

*Convert to a % of AUM for accurate comparison. Sub-Account Fees *Include all sub-account fees weighted by asset allocation. Additional Fees *12b-1 fees if not included above, inactivity fees, custodial fees, rider charges, etc. M ay need converted to % of AUM. Advisory Fee *Only applicable for products that do not pay a commission to the advisor. Total "All In" Fees Do Not Distribute. Not for use with the general public. For registered representative use only. Not for use with the general public. All guarantees are based on the claims-paying ability of the issuer. CUNA Mutual Group 2016 13 Horizon vs. Managed Money Assumptions $100K premium MEMBERS Horizon Aggressive (Active + Passive express portfolio)

Managed Money For registered representative use only. Not for use with the general public. All guarantees are based on the claims-paying ability of the issuer. CUNA Mutual Group 2016 14 Lockwood Asset Allocation Portfolios. Lowest possible client fee assumed (range from 1-3%) Assumes no 12b-1 fees; actual fund selections may include these fees Minimal advisory fee assumed arbitrarily 0.50% Questions? For registered representative use only. Not for use with the general public. All guarantees are based on the claims-paying ability of the issuer. CUNA Mutual Group 2015 15

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