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The State of the L/H Insurance Industry

This presentation discusses the state of the life and health insurance industry in Alabama, highlighting the dominance of annuities in driving industry profits. It also analyzes the industry's profitability, net income, and its association with GDP. The presentation further examines the impact of the financial crisis on the industry and the relationship between premiums and disposable personal income. Additionally, it explores the distribution of life and annuity premiums by market and the trends in individual and group life insurance and annuity premiums. The presentation concludes with an overview of deferred and immediate annuity sales and the reliance on first-year and single premiums.

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The State of the L/H Insurance Industry

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  1. The State ofthe L/H Insurance Industry Alabama I-Day Tuscaloosa, AL September 30, 2010 Download at: www.iii.org/presentations Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief Economist Insurance Information Institute  110 William Street  New York, NY 10038 Office: 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 2

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

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

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

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

  7. Median ROE for Insurers vs. Financial Firms and Other Key Industries 2009 (Profits as a % of Stockholders’ Equity) 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 Mutuals’ average ROE was 0%. Source: Fortune, May 3, 2010; Insurance Information Institute. 8 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  8. L/H Industry Net Income,1995-2009 $Billions 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%. Source: NAIC Annual Statements, p.4, line 35, from National Underwriter HighlineData.

  9. 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

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

  11. Revenues and Revenue Drivers 12

  12. U.S. GDP vs. L/H Premiums:Fairly Strong Association Premiums, Billions GDP, Billions 2001 Recession 2008-09 Recession *AnnualizedSources: http://www.bea.gov/national/xls/gdplev.xls , NAIC Annual Statement data, via SNL Financial; I.I.I. calculations

  13. L/H Industry Premiums GenerallyTrack Disposable Personal Income DPI in $ Trillions L-H Premiums in $ Billions L-H premiums dropped 19% in 2009 vs. 2008, though DPI rose by 1% *seasonally adjusted at annualized ratesSources: www.bea.gov andSNL Financial

  14. As a Percent of Personal Disposable Income,Life & Annuity Premiums Plunged in 2009 Life Premiums Annuity Premiums Range 2001-2008 Life Premiums: from 1.85% to 1.60% Annuity Premiums: from 3.31% to 3.24% Sources: http://www.bea.gov/national/xls/gdplev.xls , Best’s Aggregates and Averages, Life/Health, 2010 Edition, p. 170, I.I.I. calculations

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

  16. Group Insurance Premiums (line)Follow Nonfarm Employment (bars) Sources: NAIC Annual Statements, via National Underwriter Highline; http://www.bls.gov/ces/

  17. Life Insurance Premiums, 2001-2009 $ Billions From 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 Source: NAIC Annual Statements, via National Underwriter Highline Data

  18. Annuity Premiums, 2001-2009 $ Billions From 2001-2008, Individual Annuity Premiums Grew by 45%, but dropped 40% in 2009 alone From 2001-2009, Group Annuity Premiums were essentially flat Source: NAIC Annual Statements, via National Underwriter Highline Data

  19. Deferred + ImmediateIndividual Annuity Sales, 1999-2008 Fixed annuity sales spike when the stock market tumbles $ Billions In inflation-adjusted terms, total sales since 2003 are essentially flat. 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%. Source: LIMRA International, The 2008 Individual Annuity Market—Sales and Assets Report

  20. Individual Immediate Annuity Sales,2003-2008 Includes about $0.2 billion of indexed annuities $ Billions Almost no one buys variable immediate annuities or indexed immediate annuities Source: LIMRA International, The 2008 Individual Annuity Market—Sales and Assets Report

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

  22. Expenses 23

  23. Life Insurer Operating Expenses,(excl. Commissions) 1995-2009 $ Millions Source: Best’s Aggregates and Averages, Life/Health, 2010 Edition, p. 172

  24. Ordinary Life InsuranceLapse Rates, 1996-2009 2008-09 recession; will the curve rise again in 2010-11? Was the 2002 spike in lapse rates related to the 2001 recession? Sources: NAIC Annual Statements, p. 25 line 15 (lapses) and average of lines 1 and 21, from National Underwriter HighlineData; I.I.I. calculations

  25. Baselines:U.S. Employment Trends 26

  26. U.S. Nonfarm Employment,Monthly, 1990–2010* Millions *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. 27 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  27. U.S. Employment in Service Industries,Monthly, 1990–2010* Millions *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. 28 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

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

  29. U.S. Employment in the DirectLife Insurance Industry: 1990–2010* 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%) Thousands *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. 30 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  30. U.S. Employment in the Direct Health-Medical Insurance Industry: 1990–2010* 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. 2007 (compared to overall US employment decline of 7.2%) *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. 31 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  31. U.S. Employment in Insurance Agencies & Brokerages: 1990–2010* Thousands 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%) *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. 32 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  32. 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. 33 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  33. Investments 34

  34. 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 http://ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield_historical_main.shtml ; ISO; I.I.I. 35 12/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

  35. 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

  36. Policy Loans Increase During/Followinga Recession, but Also in Boom Times Billions in Loans GDP, Billions July 1981-November 1982 recession July 1990-March 1991 recession March 2001-November 2001 recession Sources: http://www.bea.gov/national/xls/gdplev.xls , ACLI Life Insurers Fact Book 2009, p. 11.

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

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

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

  40. Labor Force Participation, Ages 55and Over, 2006:Q2-2010:Q2 Number in the Labor Force (millions) Labor force participation by workers—especially women—age 55 and over has grown in spite of the recent recession. Source: US Bureau of Labor Statistics, http://www.bls.gov/web/cpseed6.pdf seasonally adjusted quarterly averages

  41. Percent Change* in Applications forIndividual U.S. Life Insurance Policies 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. *vs. same month, prior yearSource: MIB Life Index, monthly releases

  42. Financial Strength The Industry HasWeathered the Storms Well 43

  43. Number of Impaired L/H Insurers,1976–2009 Average number of impairments, 1976-2009: 18.6 Compare this stellar performance in 2008-09 with that of banks. 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. Source: A.M. Best Special Report “1969-2009 Impairment Review”; Insurance Information Institute.

  44. L/H Insurer Impairment Frequency1976-2009 Financial Impairment Frequency FIF is the number of insurers that became impaired during the year divided by the number that started the year 1976-2009 average FIF was 0.88 Pretty good performance during a financial crisis and major recession Source: A. M. Best

  45. Reasons for U.S. L-H InsurerImpairments, 1976-2009 Leading Causes of Impairment ---Business Management (Rapid Growth, Significant Change in Business, Affiliate Problems) ---Deficient Loss Reserves/ Inadequate Pricing Source: A.M. Best, 1976-2009 Impairment Review, Special Report

  46. Summary of A.M. Best’s P/C Insurer Ratings Actions in 2009 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 Other – 216 Affirm – 1,375 Under Review – 69 Upgraded – 59 Downgraded – 53 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 .Source: A.M. Best. eSlide – P6466 – The Financial Crisis and the Future of the P/C

  47. Distribution of A.M. Best Ratingsfor L-H Insurers, 2000-2010 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 Source: The Insurance Forum, September issue, various years

  48. Insurance Information Institute Online: www.iii.org Thank you for your timeand your attention! Download at: www.iii.org/presentations

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