The State of the L/H Insurance Industry Alabama I-Day Tuscaloosa, AL September 30, 2010 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 Profits: Don’t Call It the “Life Insurance” Industry Annuities Provide the Majority of Industry Profits

U.S. Life Insurance Industry Profit Sources, by Percent, 2009 Source: NAIC Annual Statements, p. 6, from National Underwriter HighlineData; I.I.I. calculations 55% 17% 20%

U.S. Life Insurance Industry Profit Sources, 2007 Source: NAIC Annual Statements, p. 6, from National Underwriter HighlineData; I.I.I. calculations. 37% 26% 30%

Dollars of Profit by Line of Business, 2009 Sources: NAIC Annual Statements, p. 6, from National Underwriter HighlineData; I.I.I. calculations $27B $9B $10B Millions

Dollars of Profit by Line of Business, 2008 Source: NAIC Annual Statements, p. 6, from National Underwriter HighlineData; I.I.I. calculations $Millions From a Profit Perspective, Annuities is a Volatile Line of Business. After a $22+B Loss in 2008, it Gained $27B in 2009

Dollar of Profit by Line of Business, 2007 Source: NAIC Annual Statements, p. 6, from National Underwriter HighlineData; I.I.I. calculations $Millions $12.4B $8.8B $10.1B

12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 8 Median ROE for Insurers vs. Financial Firms and Other Key Industries 2009 (Profits as a % of Stockholders’ Equity) Source: Fortune, May 3, 2010; Insurance Information Institute. L/H Mutuals’ average ROE was 0%. Stock L/H insurers earned a 7% ROE in 2009, below the 10.5% earned by the Fortune 500 as a whole and well below health insurers’ 14%.

L/H Industry Net Income, Source: NAIC Annual Statements, p.4, line 35, from National Underwriter HighlineData net income rose only 0.8% despite 10.5% net premium growth, because surrenders grew 20.4%, disability benefits grew 21.6%, and total expenses grew 13.1%. $Billions

Recently, Realized Capital Losses Have Depressed Net Income Source: NAIC Annual Statement data, Summary of Operations and Exhibit of Capital Gains (Losses) from Highline National Underwriter

U.S. GDP vs. L/H Industry Net Income: Fairly Strong Association Sources: NAIC Annual Statement data, via SNL Financial. Net Income $ Billions GDP $Billions Realized capital losses: $50.5 billion in 2008 and $28.7 billion in 2009.

12 Revenues and Revenue Drivers

U.S. GDP vs. L/H Premiums: Fairly Strong Association *Annualized Sources: NAIC Annual Statement data, via SNL Financial; I.I.I. calculationshttp:// Premiums, Billions GDP, Billions 2001 Recession Recession

L/H Industry Premiums Generally Track Disposable Personal Income *seasonally adjusted at annualized rates Sources: and SNL Financialwww.bea.gov DPI in $ Trillions L-H Premiums in $ Billions L-H premiums dropped 19% in 2009 vs. 2008, though DPI rose by 1%

As a Percent of Personal Disposable Income, Life & Annuity Premiums Plunged in 2009 Sources: Best’s Aggregates and Averages, Life/Health, 2010 Edition, p. 170, I.I.I. calculationshttp:// Life Premiums Annuity Premiums Range Life Premiums: from 1.85% to 1.60% Annuity Premiums: from 3.31% to 3.24%

L-H Direct Premiums by Market, ($ Billions) 2009 Source: NAIC Annual Statement data, from SNL Financial; I.I.I. calculations Products sold to individuals accounted for nearly three-fifths of all 2009 life-health insurance premiums.

Group Insurance Premiums (line) Follow Nonfarm Employment (bars) Sources: NAIC Annual Statements, via National Underwriter Highline;

Life Insurance Premiums, Source: NAIC Annual Statements, via National Underwriter Highline Data $ Billions From , Individual Life Premiums Grew by 20%, but lost all of that in 2009 alone From , Group Life Premiums were essentially flat

Annuity Premiums, Source: NAIC Annual Statements, via National Underwriter Highline Data $ Billions From , Individual Annuity Premiums Grew by 45%, but dropped 40% in 2009 alone From , Group Annuity Premiums were essentially flat

Deferred + Immediate Individual Annuity Sales, Source: LIMRA International, The 2008 Individual Annuity Market—Sales and Assets Report Fixed annuity sales spike when the stock market tumbles $ Billions Variable sales dropped after the stock market plunge in 2000 but recovered by was a record year, up 17% was up 15% over sales dropped by 15%. In inflation-adjusted terms, total sales since 2003 are essentially flat.

Individual Immediate Annuity Sales, Source: LIMRA International, The 2008 Individual Annuity Market—Sales and Assets Report Almost no one buys variable immediate annuities or indexed immediate annuities $ Billions Includes about $0.2 billion of indexed annuities

22 Reliance on 1 st -year and Single Premiums, by Line of Business, 2009 Sources: NAIC Annual Statements, from National Underwriter HighlineData; I.I.I. calculations. Individual Life Insurance Individual Annuities The Individual Annuity Line Depends Much More on Single Premiums than Does the Individual Life Insurance Line

23 Expenses

Life Insurer Operating Expenses, (excl. Commissions) Source: Best’s Aggregates and Averages, Life/Health, 2010 Edition, p. 172 $ Millions

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

26 Baselines: U.S. Employment Trends

12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 27 U.S. Nonfarm Employment, Monthly, 1990–2010* *As of August 2010; Not seasonally adjusted Note: Recessions indicated by gray shaded columns. Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes. Millions

12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 28 U.S. Employment in Service Industries, Monthly, 1990–2010* *As of August 2010; Not seasonally adjusted Note: Recessions indicated by gray shaded columns. Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes. Millions

29 Insurance Industry Employment Trends Soft Market, Difficult Economy, Outsourcing, Productivity Enhancements and Consolidation Have Contributed to Industry’s Job Losses

12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 30 U.S. Employment in the Direct Life Insurance Industry: 1990–2010* *As of July 2010; Not seasonally adjusted; Does not including agents & brokers Note: Recessions indicated by gray shaded columns. Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes. Thousands As of July 2010, Life insurance industry employment was down by 10,400 or 2.9% to 343,900 since the recession began in Dec (compared to overall US employment decline of 7.2%)

12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 31 U.S. Employment in the Direct Health- Medical Insurance Industry: 1990–2010* *As of July 2010; Not seasonally adjusted; Does not including agents & brokers Note: Recessions indicated by gray shaded columns. Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes. Thousands As of July 2010, Health-Medical insurance industry employment was down by 11,300 or 2.6% to 430,600 since the recession began in Dec (compared to overall US employment decline of 7.2%)

12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 32 U.S. Employment in Insurance Agencies & Brokerages: 1990–2010* Thousands *As of July 2010; 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 July 2010, employment at insurance agencies and brokerages was down by 47,900 or 7.0% to 631,700 since the recession began in Dec (compared to overall US employment decline of 7.2%)

12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 33 U.S. Employment in Third-Party Administration of Insurance Funds: 1990–2010* Thousands *As of July 2010; 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.

34 Investments

12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 35 U.S. Treasury Yields Are Low: Near 2008 Financial Crisis Levels Yields on 10-yr Treasury notes are above the 2.25% reached during the financial crisis in late 2008, but are still depressed (2.47%) relative to pre-crisis yields. 2010:Q1 annualized industry yield was 3.7% The Average Maturity on Bonds in P/C Insurers’ Portfolios Has Remained Steady at About 7.5 Years Through the Last Decade Sources: Board of Governors of the United States Federal Reserve Bank at ; ISO; I.I.I.

Net Rate on L/H General Account Assets Tends to Follow 10-Year US T-Note *forecast from Sept issue of Blue Chip Economic Indicators Sources: ACLI Life Insurers Fact Book 2009, p. 40;

Policy Loans Increase During/Following a Recession, but Also in Boom Times Sources: ACLI Life Insurers Fact Book 2009, p Billions in LoansGDP, Billions March November 2001 recession July March 1991 recession July November 1982 recession

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

Cover Art for July/August 2008 Issue of AARP Bulletin Source: AARP Bulletin, Vol. 49, No. 6 (July/August 2008)

More Workers Are Delaying Their Planned Retirement Source: EBRI Issue Brief No. 340, (March 2010), p. 14 Percent who postponed their planned retirement age

Labor Force Participation, Ages 55 and Over, 2006:Q2-2010:Q2 Source: US Bureau of Labor Statistics, seasonally adjusted quarterly averageshttp:// Labor force participation by workers—especially women— age 55 and over has grown in spite of the recent recession. Number in the Labor Force (millions)

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. Ages 60 and over is the only group consistently increasing life insurance applications.

Financial Strength 43 The Industry Has Weathered the Storms Well

Number of Impaired L/H Insurers, 1976–2009 Source: A.M. Best Special Report “ Impairment Review”; 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, : 18.6 Compare this stellar performance in with that of banks.

L/H Insurer Impairment Frequency Source: A. M. Best Financial Impairment Frequency FIF is the number of insurers that became impaired during the year divided by the number that started the year average FIF was 0.88 Pretty good performance during a financial crisis and major recession

Reasons for U.S. L-H Insurer Impairments, Source: A.M. Best, Impairment Review, Special Report Leading Causes of Impairment ---Business Management (Rapid Growth, Significant Change in Business, Affiliate Problems) ---Deficient Loss Reserves/ Inadequate Pricing

12/01/09 - 9pmeSlide – P6466 – The Financial Crisis and the Future of the P/C 47 Summary of A.M. Best’s P/C Insurer Ratings Actions in Source: A.M. Best. P/C Insurance is by Design a Resilient Business. The Dual Threat of Financial Disasters and Catastrophic Losses Are Anticipated in the Industry’s Risk Management Strategy Despite financial market turmoil and a soft market in 2009, 80.9% of ratings actions by A.M. Best were affirmed or upgraded; just 6.9% were downgraded or placed under review Affirm – 1,375 Downgraded – 53 Upgraded – 59 Under Review – 69 Other – 216

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

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