The State ofthe L/H Insurance Industry

SIR WebinarJune 6, 2011

Download 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

Profitability

Relatively SteadyBut Unspectacular

3

Billions

Life/Annuity Industry Profits, 2001-2010

$31.6

-$52.3

$21.5$28.1

$37.0$36.6$32.5

$25.9

$3.6

$11.0

($60)

($40)

($20)

$0

$20

$40

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

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.

4

Median ROEs for Insurers and OtherFinancial 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.

12.0%

10.0%

9.0%

8.0%

8.0%

8.0%

5.0%

3.5%

12.0%

0% 2% 4% 6% 8% 10% 12% 14%

Health Insurance/Managed Care

Diversified Financials

P/C Insurance (stock)

L/A Insurance (stock)

Securities

Commercial Banks

L/A Insurance (mutual)

P/C Insurance (mutual)

Fortune 500

Industry

5

Don’t Call Itthe “Life Insurance” Industry

Annuities DominateIndustry Premiums and Profits

Distribution of Premiums byLine of Business, 1996-2010

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 IndustryProfit 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 & AnnuityPremiums Generally Track DPl

Sources: www.bea.gov and SNL Financial; I.I.I. calculations

DPI ($ Trillion)

Individual Life Insurance & Annuity Premiums ($ Billion)

Individual Life Insurance & Annuity premiums dropped

31% in 2009 vs. 2008,although DPI rose by 1%

Group Insurance Premiums (line)Track Nonfarm Employment (bars)

Sources: NAIC Annual Statements, via SNL Financial; http://www.bls.gov/ces/

Ordinary Life InsuranceLapse Rates, 1996-2010

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?

2008-09 recession

16

Insurance Industry Employment Trends

17

Employment in Life/Annuity Insurers vs. Service Industries, Monthly, 1990–2011*

*As of April 2011; Not seasonally adjustedSources: US Bureau of Labor Statistics; Insurance Information Institutes.

Millions

80

85

90

95

100

105

110

115

120

Jan

1990

Jul 1

990

Jan

1991

Jul 1

991

Jan

1992

Jul 1

992

Jan

1993

Jul 1

993

Jan

1994

Jul 1

994

Jan

1995

Jul 1

995

Jan

1996

Jul 1

996

Jan

1997

Jul 1

997

Jan

1998

Jul 1

998

Jan

1999

Jul 1

999

Jan

2000

Jul 2

000

Jan

2001

Jul 2

001

Jan

2002

Jul 2

002

Jan

2003

Jul 2

003

Jan

2004

Jul 2

004

Jan

2005

Jul 2

005

Jan

2006

Jul 2

006

Jan

2007

July

2007

Jan

2008

July

2008

Jan

2009

July

2009

Jan

2010

July

2010

Jan

2011

300

350

400

450

500

550

600

Service Industries Life/Annuity CarriersThousands

19

Investments

Distribution of L/A Insurer InvestedAssets (General Account), 2010

Sources: ACLI Life Insurers Fact Book 2010, p. 12; I.I.I.

3%

6%

9%

12%

15%

19

80

81

82

83

84

19

85

86

87

88

89

19

90

91

92

93

94

19

95

96

97

98

99

20

00

01

02

03

04

20

05

06

07

08

09

20

10

11*

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

Net Rate on L/A General Account AssetsTends 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; http://federalreserve.gov/releases/h15/data/Annual/H15_TCMNOM_Y10.txt

2009 net earned rate on General

Account Invested Assets: 5.25%

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 2010, p. 11.

Billions in Loans GDP, Billions

March 2001-November

2001 recession

July 1990-March 1991 recession

July 1981-November

1982 recession

Financial Strength

23

The Industry HasWeathered the Storms Well

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

Number of Impaired L/H Insurers,1976–2010

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

13

2

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

10

Source: A.M. Best Special Report “1976-2010 Impairment Review”, published May 23, 2011; 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,

1976-2010: 18

Compare this stellar performance in 2008-09 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 55and Over, 2006:Q2-2011:Q1

13.2

13.2

13.4

13.4

13.6

13.8

13.9

14.1

14.1

14.3

14.3

14.3

14.2

14.2

14.3

14.4

14.6

14.6

14.7

14.9

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

13.3

13.4

13.4

13.5

0

5

10

15

20

25

30

2006:Q2

2006:Q3

2006:Q4

2007:Q1

2007:Q2

2007:Q3

2007:Q4

2008:Q1

2008:Q2

2008:Q3

2008:Q4

2009:Q1

2009:Q2

2009:Q3

2009:Q4

2010:Q1

2010:Q2

2010:Q3

2010:Q4

2011:Q1

women men

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

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”

-8%

-4%

0%

4%

8%

12%

16%

20%

May 0

7

Jul 0

7

Se

p 0

7

No

v 07

Jan 0

8

Mar 0

8

May 0

8

Jul 0

8

Se

p 0

8

No

v 08

Jan 0

9

Mar 0

9

May 0

9

Jul 0

9

Se

p 0

9

No

v 09

Jan 1

0

Mar 1

0

May 1

0

Jul 1

0

Se

p 1

0

No

v 10

Jan 1

1

Mar 1

1%

Cha

nge

vs P

rior

Yr

ages 0-44

ages 45-59

ages 60+

Percent Change* in Applications forIndividual 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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