The State of the 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
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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 [email protected] 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.
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
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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.
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.
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.
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%)
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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.
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.
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Investments
35
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.
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