The State ofthe L/H Insurance Industry

Alabama I-DayTuscaloosa, AL

September 30, 2010Download at: www.iii.org/presentations

Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038Office: 212.346.5540 Cell: 917.494.5945 stevenw@iii.org www.iii.org

2

Profits: Don’t Call Itthe “Life Insurance” Industry

Annuities Providethe Majority of Industry Profits

U.S. Life Insurance IndustryProfit Sources, by Percent, 2009

Source: NAIC Annual Statements, p. 6, from National Underwriter HighlineData; I.I.I. calculations

55%

17%20%

Dollars of Profitby Line of Business, 2009

Sources: NAIC Annual Statements, p. 6, from National Underwriter HighlineData; I.I.I. calculations

$27B

$9B$10B

Millions

Dollars of Profitby 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 Profitby 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

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.

21%

21%

19%

14%

14%

12%

10.5%

9%

9%

9%

7%

7%

5%

4%

3.5%

0%

0% 5% 10% 15% 20% 25%

Food Consumer Products

Pharmaceuticals

Computers, Office Equip.

Health Insurance & Mgd. Care

Specialty Retailers

Energy

All Industries

Diversified Financials

Telecommunications

Utilities

P/C Insurance (Stock)

L/H Insurance (Stock)

Entertainment

Commercial Banks

P/C Insurance (Mutual)

L/H Insurance (Mutual)

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,1995-2009

Source: NAIC Annual Statements, p.4, line 35, from National Underwriter HighlineData.

2006 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 LossesHave 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: http://www.bea.gov/national/xls/gdplev.xls , 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

*AnnualizedSources: http://www.bea.gov/national/xls/gdplev.xls , NAIC Annual Statement data, via SNL Financial; I.I.I. calculations

Premiums, Billions

GDP, Billions

2001 Recession

2008-09 Recession

L/H Industry Premiums GenerallyTrack Disposable Personal Income

*seasonally adjusted at annualized rates

Sources: www.bea.gov and SNL Financial

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: http://www.bea.gov/national/xls/gdplev.xls , Best’s Aggregates and Averages, Life/Health, 2010 Edition, p. 170, I.I.I. calculations

Life Premiums

Annuity Premiums

Range 2001-2008

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; http://www.bls.gov/ces/

Life Insurance Premiums, 2001-2009

Source: NAIC Annual Statements, via National Underwriter Highline Data

$ BillionsFrom 2001-2008,

Individual Life Premiums Grew by

20%, but lost all of that in 2009 alone

From 2001-2009, Group Life Premiums were

essentially flat

Annuity Premiums, 2001-2009

Source: NAIC Annual Statements, via National Underwriter Highline Data

$ BillionsFrom 2001-2008,

Individual Annuity Premiums Grew by

45%, but dropped 40% in 2009 alone

From 2001-2009, Group Annuity Premiums were

essentially flat

Deferred + ImmediateIndividual Annuity Sales, 1999-2008

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 2004. 2006 was a record year, up 17%. 2007 was up 15% over 2006. 2008 sales dropped by 15%.

In inflation-adjusted terms, total sales since 2003 are essentially flat.

Individual Immediate Annuity Sales,2003-2008

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 1st-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) 1995-2009

Source: Best’s Aggregates and Averages, Life/Health, 2010 Edition, p. 172

$ Millions

Ordinary Life InsuranceLapse Rates, 1996-2009

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?

2008-09 recession; will the curve rise again in 2010-11?

26

Baselines:U.S. Employment Trends

27

U.S. Nonfarm Employment,Monthly, 1990–2010*

*As of August 2010; Not seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

Millions

105

110

115

120

125

130

135

140

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10

28

U.S. Employment in Service Industries,Monthly, 1990–2010*

*As of August 2010; Not seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

Millions

80

85

90

95

100

105

110

115

120

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10

29

Insurance Industry Employment Trends

Soft Market, Difficult Economy, Outsourcing, Productivity

Enhancements and Consolidation Have Contributed

to Industry’s Job Losses

30

U.S. Employment in the DirectLife Insurance Industry: 1990–2010*

*As of July 2010; Not seasonally adjusted; Does not including agents & brokersNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

Thousands

300

325

350

375

400

425

450

475

500

525

550

575

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10

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. 2007 (compared to overall US employment decline of 7.2%)

31

U.S. Employment in the Direct Health-Medical Insurance Industry: 1990–2010*

*As of July 2010; Not seasonally adjusted; Does not including agents & brokersNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

Thousands

175

200

225

250

275

300

325

350

375

400

425

450

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10

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.

2007 (compared to overall US employment decline of 7.2%)

32

U.S. Employment in Insurance Agencies & Brokerages: 1990–2010*

Thousands

500

550

600

650

700

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10*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. 2007 (compared to overall US

employment decline of 7.2%)

33

U.S. Employment in Third-Party Administration of Insurance Funds: 1990–2010*

Thousands

85

95

105

115

125

135

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10*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

35

U.S. Treasury Yields Are Low: Near 2008 Financial Crisis Levels

4.82% 4.96% 5.04% 4.96% 4.82% 4.82% 4.88% 5.00% 4.93% 5.00%5.19%

0.76%1.00%

1.55%1.87%

2.25%

2.69%

0.16% 0.14% 0.19% 0.25%0.47%

0.72%

1.33%

1.92%

2.47%

3.23%3.52%

0.11% 0.11% 0.27% 0.37%

3.05%

0%

1%

2%

3%

4%

5%

6%

1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y

Pre-Crisis (July 2007)

Year-end 2008

Month-end Aug 2010

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 http://ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield_historical_main.shtml ; ISO; I.I.I.

3%

6%

9%

12%

15%

1980 81 82 83 84

1985 86 87 88 89

1990 91 92 93 94

1995 96 97 98 99

2000 01 02 03 04

2005 06 07 08 09

2010

*

L/H Net Rate, Gen'l Acct 10-Year Treasury Note

Net Rate on L/H General Account AssetsTends to Follow 10-Year US T-Note

*forecast from Sept. 2010 issue of Blue Chip Economic Indicators Sources: ACLI Life Insurers Fact Book 2009, p. 40; http://federalreserve.gov/releases/h15/data/Annual/H15_TCMNOM_Y10.txt

Policy Loans Increase During/Followinga Recession, but Also in Boom Times

Sources: http://www.bea.gov/national/xls/gdplev.xls , ACLI Life Insurers Fact Book 2009, p. 11.

Billions in Loans GDP, Billions

March 2001-November

2001 recession

July 1990-March 1991 recession

July 1981-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 DelayingTheir Planned Retirement

Source: EBRI Issue Brief No. 340, (March 2010), p. 14

Percent who postponed their planned retirement age

Labor Force Participation, Ages 55and Over, 2006:Q2-2010:Q2

13.2

13.2 13

.4

13.4 13

.6 13.8

13.9 14

.1

14.2

14.3

14.3

14.3

14.2

14.2

14.3 14

.4 14.6

11.4

11.6 11

.8

11.9 12.0 12

.2

12.3 12

.5

12.5 12.6 12

.8

12.8 12

.9

12.9

13.0 13

.1 13.4

11

12

13

14

15men women

Source: US Bureau of Labor Statistics, http://www.bls.gov/web/cpseed6.pdf seasonally adjusted quarterly averages

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 forIndividual U.S. Life Insurance Policies

*vs. same month, prior yearSource: 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 HasWeathered the Storms Well

Number of Impaired L/H Insurers,1976–2009

61

11

71

0 12 13

12

32

16

16

16

23 2

75

54

68

13

82

41

21

11

91

81

22

61

08 1

05 5

10

38 9

12

0

10

20

30

40

50

60

70

80

90

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

Source: A.M. Best Special Report “1969-2009 Impairment Review”; Insurance Information Institute.

The Number of Impairments Spiked in 1989-92, with Smaller Spikes in 1983 and 1999. But in the Financial Crisis, When Hundreds of Banks Failed,

Virtually No Life Insurers Failed.

Average number

of impairments,

1976-2009: 18.6

Compare this stellar performance in 2008-09 with that of banks.

L/H Insurer Impairment Frequency1976-2009

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

19

76

19

77

19

78

19

79

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

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 year1976-2009

average FIF was 0.88

Pretty good performance during

a financial crisis and major recession

Reasons for U.S. L-H InsurerImpairments, 1976-2009

Source: A.M. Best, 1976-2009 Impairment Review, Special Report

Leading Causes of Impairment

---Business Management (Rapid Growth, Significant Change in Business, Affiliate Problems)

---Deficient Loss Reserves/ Inadequate Pricing

47

Summary of A.M. Best’s P/C Insurer Ratings Actions in 2009

.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

orplaced under review

Affirm – 1,375

Downgraded – 53

Upgraded – 59

Under Review – 69

Other – 216

Distribution of A.M. Best Ratingsfor L-H Insurers, 2000-2010

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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