The State of the L/H Insurance Industry SIR Webinar June 6, 2011 Download at: Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief Economist Insurance Information Institute  110 William Street  New York, NY Office:  Cell:  

2 Profitability Relatively Steady But Unspectacular

12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 3 Billions Life/Annuity Industry Profits, Sources: NAIC, via SNL Financial; Insurance Information Institute. The Life/Annuity industry has produced steady (if unspectacular) profits, except for years in which the industry’s investment results produced significant realized capital losses.

12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 4 Median ROEs for Insurers and Other Financial Services in the “Fortune 500,” 2010 Profits as a % of Owners’ Equity: Median of Fortune 500 Companies in Selected Industries Source: Fortune, May 23, 2011; Insurance Information Institute. Industry

5 Don’t Call It the “Life Insurance” Industry Annuities Dominate Industry Premiums and Profits

Distribution of Premiums by Line of Business, Source: NAIC, via SNL Financial; I.I.I. Life Insurance is now 17.5% of total premiums, down from 28% a dozen years ago. Annuities have been the main premium source for decades. Insurance

U.S. Life/Annuity Insurance Industry Profit Sources, by Percent, 2010 Sources: NAIC Annual Statements, p. 6, from SNL Financial; I.I.I. calculations 44.3% 18.4% 24.3%

8 Revenues and Revenue Drivers

L-A Direct Premiums by Market, ($ Billions) 2010 Source: NAIC Annual Statement data, from SNL Financial; I.I.I. calculations

Individual Life Insurance & Annuity Premiums Generally Track DPl Sources: and SNL Financial; I.I.I. calculationswww.bea.gov DPI ($ Trillion) Individual Life Insurance & Annuity Premiums ($ Billion) Individual Life Insurance & Annuity premiums dropped 31% in 2009 vs. 2008, although DPI rose by 1%

Spending on Financial Services as a % of Personal Consumption Expenditures, 1995:Q1-2010:Q4 Sources: U.S. Bureau of Economic Analysis: ; Insurance Information Institute. 11

12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 12 Percentage of Homes with Mortgages That Are in Negative (and Near-Negative) Equity* *No data on LA, ME, MS, SD, VT, WV, and WY Sources: CoreLogic Negative Equity Report Q (March 8, 2011) and earlier quarterly reports; Insurance Information Institute. No improvement in the last 6 quarters In 2010:Q4, nearly 11.1 million mortgages were “under water,” and another 2.4 million were within 5% of going under. What’s worse—prices in many areas are still falling. Negative equity: worst states* NV: 65.4% AZ: 50.9% FL: 47.3% Negative equity: best states* OK: 6.2% ND: 6.9% NY: 7.2%

Group Insurance Premiums (line) Track Nonfarm Employment (bars) Sources: NAIC Annual Statements, via SNL Financial;

12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 14 US Unemployment Rate Forecasts Unemployment will remain high even under the most optimistic of scenarios, but forecasts are being revised downwards Sources: Blue Chip Economic Indicators (5/11); Insurance Information Institute Stubbornly high unemployment will restrain the growth of employer- sponsored (Group) life insurance, annuities, and health insurance Quarterly, 2011:Q2 to 2012:Q4

Ordinary Life Insurance Lapse Rates, Sources: NAIC Annual Statements, p. 25 line 15 (lapses) and average of lines 1 and 21, from SNL Financial; I.I.I. calculations Was the 2002 spike in lapse rates related to the 2001 recession? recession

16 Insurance Industry Employment Trends

12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 17 Employment in Life/Annuity Insurers vs. Service Industries, Monthly, 1990–2011 * *As of April 2011; Not seasonally adjusted Sources: US Bureau of Labor Statistics; Insurance Information Institutes. Millions Thousands

12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 18 U.S. Employment in Insurance Agencies & Brokerages: 1990–2011* Thousands *As of March 2011; Not seasonally adjusted. Includes all types of insurance. Note: Recessions indicated by gray shaded columns. Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes. As of March 2011, employment at insurance agencies and brokerages was down by 42,100 or 6.2% to 637,500 since the recession began in Dec (compared to overall US employment decline of 6.4%)

19 Investments

Distribution of L/A Insurer Invested Assets (General Account), 2010 Sources: ACLI Life Insurers Fact Book 2010, p. 12; I.I.I.

Net Rate on L/A General Account Assets Tends to Follow 10-Year US T-Note *forecast from May 2011 issue of Blue Chip Economic Indicators Sources: ACLI Life Insurers Fact Book 2010, p. 40; net earned rate on General Account Invested Assets: 5.25%

Policy Loans Increase During/Following a Recession, but Also in Boom Times Sources: ACLI Life Insurers Fact Book 2010, p Billions in LoansGDP, Billions March November 2001 recession July March 1991 recession July November 1982 recession

Financial Strength 23 The Industry Has Weathered the Storms Well

Distribution of A.M. Best Ratings for L-H Insurers, Source: The Insurance Forum, September issue, various years The Percent of A/A- L-H Insurers Has Grown. Today 2/3 of L-H Insurers Have A. M. Best Ratings of A- or Better

Number of Impaired L/H Insurers, 1976–2010 Source: A.M. Best Special Report “ Impairment Review”, published May 23, 2011; Insurance Information Institute. The Number of Impairments Spiked in , with Smaller Spikes in 1983 and But in the Financial Crisis, When Hundreds of Banks Failed, Virtually No Life Insurers Failed. Average number of impairments, : 18 Compare this stellar performance in with that of banks.

26 Markets: People Over 60? The Older Generations Might Boost Economic Growth and Life/Annuity Purchases by Continuing to Work

Number Employed, Ages 55 and Over, 2006:Q2-2011:Q1 Source: US Bureau of Labor Statistics, seasonally adjusted quarterly averageshttp:// Employment by workers age 55 and over—especially women— grew in spite of the recent recession. This trend is likely to continue. Millions The “Great Recession”

Number Employed, Ages 55 and Over, 2006:Q2-2011:Q1 Source: US Bureau of Labor Statistics, seasonally adjusted quarterly averageshttp:// Employment by workers age 55 and over—especially women— grew in spite of the recent recession. This trend is likely to continue. Millions The “Great Recession”

Percent Change* in Applications for Individual U.S. Life Insurance Policies *vs. same month, prior year Source: MIB Life Index, monthly releases The 0-44 age group still represents the majority of the premium volume, but this has been declining over time. Age 60-and-over is the only group consistently increasing life insurance applications.

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