Term Insurance Market Update

Kevin J. Borchert, CFA, FSA, MAAAVP, Life Reinsurance Pricing

Agenda

• Environment and Market News• Retail Market

– Sales Results– Reinsurance placement– Rate trends

• Reinsurance Market– Market – LOC

• 2001 CSO– State Adoption– Impact Illustration – Reinsurance example

Our Environment

• Volatile equity markets

• Low interest rates

• Economic uncertainty / unemployment

• Threat of terrorist activity

• Retail market consolidation

• Reinsurance market shrinking

Market News – M&A / Player Exits

• AXA buys Mutual of NY ($1.5B) – 9/03 • Manulife buys John Hancock ($11B) – 9/03• Allianz exits life reinsurance market – 9/03• A&L Re stops writing new business – 2/03• ERC exits life reinsurance market – 11/03• Scottish Re acquisition of ERC inforce ($.2B) –

10/03• Great West buys Canada Life ($7.1B) – 2/03

Market News – M&A / Player Exits• Sun Life and Clarica merge – 12/02 • Safeco Life to sell Life and Investment business – 9/03• RGA buys Allianz life reinsurance unit ($.3B) – 9/03• Banc One acquires Zurich Life ($.5B)– 5/03

October 2003: Insurance industry sheds 2,000 jobs Expect continued consolidation

Retail Market Sales Results

0

200

400

600

800

1000

1200

1400

1600

1800

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001US Individual Life Sales – AM Best Aggregates & Averages

Slight gains year-over-year until 2001

2002: AM Best new sales up slightly; LIMRA up 14% thru Q3, 2002

Retail Market

• What is your expected annual growth rate in term sales over the next 5 years? – Average consensus is 8-10% from market

• Significant increase in 20 YT plans sales mix over the last 4 years (17% -> 35%)

• Short duration and ART plan share has fallen off (45%-> 26%)

• Return of premium plans gaining share

Retail Market Pricing

• Top retail players pricing trends from 2001 -> 2003:

Premium Change Min / Max

• 10 YT -4% 0% / -22%

• 15 YT -5% +3 / -18%

• 20 YT -5% +3 / -23%

• 30 YT -7% 0% / -30+%

Reinsurance Market

• Competitive Landscape Changing– financials– Ratings– Market Exits

• Reinsurer exits and retro consolidation• LOC: Cost/ Capacity• Inforce Market• Increase in PC&D/ Private Label Solutions

Reinsurance Market Sales Results

US Life Reinsurance Recurring New Business

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600

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1000

1200

1400

1600

1800

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

2002 volume almost seven times 1992 volume22% CAGR

New Business Utilizing Reinsurance

US Life Reinsurance Recurring New Business as percent of Directly Written Business

Percent reinsured continues to growGrowth rate slowed after 1998

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Reinsurance Players

Company Recur. Port. Retro. Total

Market Share Recur. Port. Retro. Total

Market Share

1 Swiss Re* 265,491 9,225 0 274,716 21.0% 246,466 493,335 0 739,801 48.4%

2 Employers/ERC* 58,483 141,568 0 200,051 15.3% 50,448 29,359 0 79,807 5.2%

3 ING Re 129,340 14,858 7 144,205 11.0% 93,584 0 4 93,588 6.1%

4 RGA 116,491 21,852 0 138,343 10.6% 112,746 20,682 0 133,428 8.7%

5 Transamerica Re 110,219 0 0 110,219 8.4% 85,662 0 0 85,662 5.6%

6 Munich American Re 80,076 10,398 176 90,650 6.9% 103,679 6,122 680 110,481 7.2%

7 BMA 74,255 0 0 74,255 5.7% 39,003 985 0 39,988 2.6%

8 Allianz 54,749 0 7 54,756 4.2% 43,711 0 2 43,713 2.9%

9 Scottish Re (US) 34,339 2,962 0 37,301 2.9% 26,045 319 0 26,364 1.7%

10 SCOR Life Re 21,888 292 0 22,180 1.7% 2,923 292 0 3,215 NA

TOP 10 TOTALS 945,331 201,155 190 1,146,676 87.8% 804,267 551,094 686 1,356,047 88.7%

MARKET TOTALS 1,078,262 204,495 23,989 1,306,746 100.0% 947,169 569,358 25,141 1,528,468 100.0%

20012002

*2002 ERC portfolio and recurring includes significant volume assumed from AUL

*2001 Ordinary portfolio amount includes $470,093 assumed from Lincoln Re

Source: Munich Survey

Reinsurance Players

• Mid 1990’s:– Nearly 30 companies active in US life reinsurance market. – Top 6 players have 60% of market share– Approximately 20 reinsurers had at least a 2% share

accounting for 90% of market

• By 2002: Reinsurance market tripled from 1995– Less than 20 active reinsurers.– Top 6 account for 75-80% of market share– Top 10 companies account for 90% of market

Why are firms exiting Life Reinsurance?

• Financial distress• Lack of appropriate scale• Capital relief• Business considered non-core

=> Becoming difficult to diversify reinsurance pool

Reinsurance Concerns

• Letter of credit costs rising (30%) short term• LOC capacity requirements• Retro market consolidating• Retail market delaying product re-pricing• 8+ reinsurance players from 5 years ago

have either merged, exited, disappeared• Decreased credit quality / ratings for

remaining reinsurance players

Reinsurer Ratings (As of 11/03)

Reinsurer: S&P Rating:

General Cologne Re AAASwiss Re AATransamerica Re AAING Re (US) AAHanover AA-RGA Re AA-Munich Re A+SCOR BBB-Scottish Re BBB-

• Several no longer rated such as Gerling, Max Re, &Optimum Re

Reinsurance Letter Of Credit Capacity Estimates

LOC Demand Estimates

2002 2003 2004 2005 2006 2007 2008 2009 2010

High

Low

Midrangee

100

80

60

40

20

Reinsurance Opportunities

• Inforce block pricing more rational• Increased activity in product consulting and private

label solutions• Market share open for many pools due to financial

difficulties and market participant exits• Limited capacity and reinsurance outlets• Upward pressure on rates due to LOC costs, LOC

capacity, interest rates, RBC, etc.

Regulatory Issues

• 2001 CSO– State Adoption (source: ACLI)

• Adopted: NM (1/04), OK (1/04), TX (5/1/03), UT (7/1/03)

• Proposed 1/1/04: AL, DE, ID, IN, IA, MD, MA, MD, NE, OH, PA, TN

• Proposed 1/1/05: ND

– Retail players planning 2001 plan introduction

– Impact Example

2001 CSO Example

• Portfolio of 10/20/30 year level term with 60%/25%/15% sales mix

• Reserve strain is reduced but not eliminated

0

2000

4000

6000

8000

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29

Economic Reserves

2001 CSO Reserves

1980 CSO Reserves

2001 CSO Impact

• Reserve redundancy still significant

• Industry financing capacity still an issue

• Reserve pattern “hump”Redundancy

65%

70%

75%

80%

85%

90%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

1980 CSO

2001 CSO

Hump

Deficiency Run-off

2001 CSO Pricing Impact

• Overall portfolio allowance change minimal (<1%) using constant target ROI’s

• Longer duration products result in more significant change– Reserve credit impact– Time value of cost savings

• Preferred classes absorb larger declines in allowances– Improvement in nonsmoker mortality– Shorter periods of deficiency reserves under 2001 CSO