Life Insurance Industry in the United States

1. Life Insurance Industry in the United States Presented by William Leung Annie Lau Aaron Cawker Jeffery Pat Alex Kwan

2. Agenda • Introduction of Life Insurance Industry • Sun Life Canada Group • Prudential Insurance • Manulife Financial • Recommendation

3. Structure of the Industry

4. Background • Over 2000 life insurance companies in the US • Admitted Assets totaled $3.26trillion at the end of 2001 • Top 10 insurers accounted for 45% of the assets • Top 3 accounted for 20%

5. Change in the industry • A business of shared risk • Historically only provide one service: financial remuneration when the policyholder dies • Today an array of financial services • Face direct competition from banks and other financial intermediates (Substitutes)

6. Ownership Structures • Stock insurance companies • Publicly traded • Mutual insurance companies • Owned by policyholders • Mutual holding companies • Combination of the two structures • Trend toward demutualization

7. Revenue and Cost Structure

8. Companies Revenue • Declined by 15% in 2001 • Two sources • Premiums • Investment Income

9. Income in 2001

10. Companies expenses • Declined by 14.7% in 2001 • Three sources • Benefits paid out (Declined by 18.9%) • Death benefits • Annuity benefits • Disability benefits • Accident and heath benefits • Surrender benefits • Reserve additions • Operating expenses (Declined by 18.1%)

11. Expense in 2001

12. Types of Products

13. 2001 Types of Products

14. Types of Products • Term Insurance • Life insurance that remains in effect for a set period or a set term • No build-up cash value or forfeiture value

15. Types of Products • Whole Life • Combines a death benefit with a forced savings plan • Premium levels remain constant • Carries a surrender value • Death benefit is exempt from income taxes

16. Types of Products • Group Life • Life insurance coverage provided under a group or association program

17. Types of Products Other policies • Credit Life Insurance • Term life insurance designed to cover the repayment of a loan, installment purchase, or other financial obligation • Industrial Life Insurance • A relatively low-value form of life insurance whereby the premium is collected by the salesperson at the home of the insured on a weekly or monthly basis

18. Types of Products • Annuities • Provides a series of payments to the annuity holder • Immediate annuity or deferred annuity • Money deposited before the commencement of payments earns income on a tax-deferred basis • In 2001, individual & group annuities accounted for 53% of insurers’ total premiums

19. Technology

20. Technology • Local Area Computer Networks • Faster processing of applications and claims • More rapid matching of policies and premiums • Instant Actuarial Analysis • More rapid & accurate pricing of customized products • Internet Sales • Customers may access product information, or file a claim on the Internet

21. Regulatory Environment

22. Regulatory Environment • Each state grants operating licenses to insurers • State Regulators • Approval of products & agents • National Association of Insurance Commissioners (NAIC)

23. Regulatory Environment • Each year, insurance companies are required to file a set of financial statements with the regulators • Financial Services Modernization Act (1999) • Uniform product filing form • National agent licensing plan

25. Company Background • Leading financial services organization headquartered in Toronto, with operations in key markets around the world

26. International Operations

27. Stock Chart Current stock price: $31.89

28. Products and Services • Offers financial products and services that fall into two main business areas • Wealth Management • Asset management, mutual funds, pension plans, and annuities operations • Protection • Life and health insurance, reinsurance operations

29. Revenue by Industry

30. Total Revenue

31. Expenses and Other

32. Operating Expenses

33. Investments

34. Bonds by Investment Grade

35. Risk Management Team • Board of Directors appoint the Risk Review Committee • Dedicated to oversight the risk management within the company • No member of this committee is an employee of the company

36. Claims Risk • Risk of incurring higher than anticipated claim losses on any one policy • Underwriting procedures to determine insurability of applicants • Manage exposure to large claims

37. Concentration Risk • Risk of major losses resulting from an overexposure to an industry segment • Buys reinsurance from reliable 3rd parties • Regularly evaluates the financial condition of the reinsurers

38. Operation Risk • Worldwide and specific policies for each market in which it operates • Ongoing training through internal and external program to reduce number of errors • Review and upgrade information systems and technology where necessary

39. Liquidity Risk • Liquefiable assets equal to at least 100% of all liabilities payable on demand • Maintain minimum levels of cash and money market investment as a % of total investment assets

40. Credit Risk • Credit and underwriting policies • Company policy limits credit exposure to 4% of consolidated equity invested in any single issuer and to 8% of consolidated equity invested in any associated group of issuers • Transacts derivatives contracts with counterparties rated AA or better

41. Market Risk • Diversify stock holdings by industry type and corporate entity • Diversify real estate holdings by location and property type • Earning-at-Risk measurement model • Equity index futures, swaps and other options

42. Sensitivities of Earnings

43. Interest Rate Risk • Matching policy for each portfolio of assets and liabilities • Management of the “duration gap” of assets and liabilities • Duration gap analysis measures sensitivity of assets, liabilities and off-balance sheet instruments in interest rate changes • Interest rate swaps and options

44. Foreign Currency Risk • Assets and liabilities that held in each jurisdiction are denominated in local currencies • Provide effective operational hedge against currency fluctuations • Currency swaps and forward contracts 2002 Annual Report

46. Prudential Financial • On December 18, 2001, Prudential Insurance converted from a mutual life insurance company owned by its policyholders to a stock life insurance company and became an indirect, wholly owned subsidiary of Prudential Financial.

47. Prudential Financial

48. Products • Life insurance • Property and casualty insurance • Mutual funds, annuities, and pension • Asset management, securities brokerage, banking and trust services • Real estate brokerage franchises, and relocation services.

49. Revenues and Expenses • Revenues • insurance premiums; mortality, expense, and asset management fees; commissions • Expenses • insurance benefits provided, general business expenses, dividends to policyholders, commissions and interest credited on general account liabilities.

50. Profitability • Ability to price and manage risk on insurance products • Ability to attract and retain customer assets • Ability to manage expenses.