Beyond Ratings: An Alternative Approach to Analyzing Life Insurance Financial Strength

Transcription

1 keeping trusts on track Beyond Ratings: An Alternative Approach to Analyzing Life Insurance Financial Strength A Session Specifically Designed for The ITM TwentyFirst University Wednesday, May 4, 2016 at 2pm EST credit for CFP, CTFA and FIRMA Certified Member Presented By: David Paul Principal, ALIRT Insurance Research W: alirtresearch.com This course has been approved for 1 Hour CE credit for CFP, CTFA and FIRMA Certified Member The Institute of Certified Bankers (ICB), a subsidiary of the American Bankers Association, is dedicated to promoting the highest standards of performance and ethics within the financial services industry. This statement should not be viewed as an endorsement of this program or its provider. itm-twentyfirst.com

2 keeping trusts on track About ITM TwentyFirst University ITM TwentyFirst University was created to provide those individuals working with personal trusts and TOLI trusts a source of vital information to utilize in their practice. The course topics will include real life case studies that can be applied to day to day situations. Subject matter is designed to help Advisors provide better guidance and assistance to clients. Our faculty consists of sought after presenters who are experts in their related fields. The courses are offered for free and will carry Continuing Education (CE) credits. See specific courses for CE listings Course Schedule - Free CFP & CTFA CE Credits How to Make Sure Your TOLI Policies Are Competitive Michael Brohawn, CFP, CLU, Managing Partner, ITM TwentyFirst Wednesday, May 18, 2016 at 2pm EST 1-HR CE For CFP & CTFA (Financial Planning) Many TOLI Trustees struggle to understand the concept of life insurance policy competitiveness, one of their responsibilities. This session will show the steps that need to be put in place to create a program to document the competiveness of policies and how to deal with noncompetitive policies, including proper documentation to mitigate Trustee liability. We will also provide actual case examples to bring the process to life. 10 Questions Every Trustee or Advisor Should Ask Before a Client Purchases or Continues a Life Insurance Policy Barry D. Flagg, CFP, CLU, ChFC, GFS, Veralytic, Inc. Thursday, June 2, 2016 at 2pm EST 1-HR CE For CFP & CTFA (Financial Planning) This presentation will provide Trustees and Advisor s with practical questions to ask before the purchase or continuation of any life insurance product in order to reconcile the difference between prevailing life insurance industry practices designed to sell a policy versus proven Prudent Investor principles designed to manage life insurance as an asset pursuant to the client s best interests. It is provided by an industry expert and one of the architects of the Best Practices for Life Insurance Stewards. Special Session: The New DOL Fiduciary Regulations Alexander P. Ryan, Of Counsel, Groom Law Firm Thursday, June 23, 2016 at 2pm EDT 1 Hour CE credit for CFP, CTFA and FIRMA Certified Member Earlier this year in a highly attended and well received session, Alexander P. Ryan, of the Groom Law Group provided us with a review of the proposed DOL Fiduciary Regulations. Now, Mr. Ryan, an expert in fiduciary matters who deals with ERISA plan sponsors, administrators, trustees and various financial service providers, is back to give his review of the actual regulation language, giving you the opportunity to gain firsthand knowledge from an authority on this hot button topic. itm-twentyfirst.com

3 keeping trusts on track Meet The ITM TwentyFirst University Faculty Team Jason Hassman - ITM TwentyFirst jhassman@itm21st.com / itm-twentyfirst.com TOLI Policy Management Michael Brohawn CFP, CLU - ITM TwentyFirst mbrohawn@itm21st.com / itm-twentyfirst.com TOLI Policy Management Jon B. Mendelsohn - Ashar Group jon@ashargroup.com / ashargroup.com Life Settlement,Longevity, and Secondary Market Valuation (SMV ) Specialists Jason T. Mendelsohn - Ashar Group jason@ashargroup.com / ashargroup.com Life Settlement, Longevity, and Secondary Market Valuation (SMV ) Specialists Randy Pople, CFP, AEP - Pople Financial Consulting rpople@poplefinancial.com / poplefinancial.com Trust Practices and Consulting Barry Flagg, CFP, CLU, ChFC, GFS - Veralytic, Inc. bflagg@veralytic.com / veralytic.com Best Practices Standards for Life Insurance Stewards Don Trone, GFS - 3ethos don@3ethos.com / 3ethos.com Leadership, Stewardship and Governance (Fiduciary Responsibility) Brad Davidson - Spardata/Unique Asset Partners bdavidson@spardata.com / spardata.com Hard to Value Asset Valuation and Consulting Richard W. Jacobs - PDS Services, Inc. rjacobs@pdscompanies.com / pdscompanies.com Hard to Value Asset Management & Recordkeeping Visit itm-twentyfirst.com/education to register! LU-04/18/2016 Minneapolis, MN Office T: New York, NY Office T: Cedar Falls, IA Office T: itm-twentyfirst.com ITM TwentyFirst All rights reserved.

4 Beyond Ratings: An Alternative Approach to Analyzing Life Insurer Financial Trends Presented By: David Paul, ALIRT Insurance Research Upcoming Webinars How to Make Sure Your TOLI Policies Are Competitive Michael Brohawn, CFP, CLU, Managing Partner, ITM TwentyFirst Wednesday, May 18, 2016 at 2pm EST Register Here 10 Questions Every Trustee or Advisor Should Ask Before a Client Purchases or Continues a Life Insurance Policy Barry D. Flagg, CFP, CLU, ChFC, GFS, Veralytic, Inc. Thursday, June 2, 2016 at 2pm EST Register Here Our Presenter Beyond Ratings: An Alternative Approach to Analyzing Life Insurance Financial Strength David Paul, Principal, ALIRT Insurance Research Wednesday, May 4, 2016 at 2pm EST 1 Hour CE credit for CFP, CTFA and FIRMA Certified Member 1

5 Current Industry Financial/Operating Conditions I NS UR AN CE RE S E A RC H The Good News: Favorable Environment to Generate Statutory Earnings and Capital Equity markets up moderately Beyond in 2014 Ratings: after increasing sharply in 2013, and three of prior four years An Alternative Approach to Analyzing Solid capital gains through 9/30/2014, compared to the considerable losses seen in Life Insurer Financial Trends 2008/2009 Limited sales growth producing lower acquisition costs ITM/TwentyFirst Webinar Product retrenchment, changing policy terms & conditions Increased use of affiliated reinsurance Presented by: David Paul, ALIRT Insurance Research ALIRT INSURANCE RESEARCH, LLC Provides private credit analytics on the life, property & casualty, and health industries Located in Windsor, CT Years in Business: 17 Principals have worked together providing credit oversight on insurers for the past 25 years Produces quarterly financial analyses on approximately 600 Life, 1,600 P&C, and 350 managed care insurers Analysis generated by running statutory and GAAP financials through a proprietary model that screens for relative financial strength Clients: distributors of insurance products, end users of insurance products, asset managers, boards of directors, insurers Purpose: to get below the public ratings in order to more accurately determine the relative financial strength and weakness of insurers What Producers Should Know About Their Carriers Financials An insurance policy is a legal contract between the insured and a specific, legal entity; that is the insurer named on the declarations page. Ratings (Comdex Scores) largely reflect the implicit financial support of the parent which is often a large, publicly-traded organization that is well branded. Few life insurers go out of business, but being part of a large, well-branded holding company does not mean that the underlying insurer cannot be sold. In the case of a sale, your insurance contract remains backed by the legal entity on the declarations page. Ratings and Comdex will tell you about the parent organization; a drill down into the financials of the actual company underwriting the policy will tell you about the balance sheet backing your future claims. Make sure to determine what the legal entity is and concentrate your attention primarily on its financials. 2

6 What Producers Should Know About Their Carriers Financials From A Binary Approach Insolvent Solvent To A Spectrum Approach Insolvent Run-off Sale of Sale of a Capital Management Change Product Solvent Business Block of Infusion Changes in Policy Changes Business Charges/ Crediting Rate Where Should Your Focus Be? Where Should Your Focus Be? 3

7 Traditional Approaches to Carrier Due Diligence VitalSigns: Comdex Score of at least 80 A.M. Best Rating of A (or higher) S&P / Moody s Rating of AA (or higher) Some Dependence on Company-Provided Financials Traditional Approaches: Ratings Drift Moody's S&P Fitch A.M. Best** Carrier Initial* 8/2008 4/2015 Initial* 8/2008 4/2015 Initial* 8/2008 4/2015 8/1990 8/2008 4/2015 Allianz Life N. America Aa3 A2 A2 AAA AA AA N/A N/R N/R A+ A A+ American General Life Aa3 Aa1 A2 AAA AA+ A+ N/A AA- A+ A++ A A American National Ins. Co. N/R N/R N/R AA+ AA A N/A N/R N/R A++ A+ A Athene Annuity & Life Co. A3 A1 N/R A+ AA- A- N/A AA- N/R A+ A+ A- Axa Equitable Life Aa2 Aa3 Aa3 A+ AA A+ N/A AA AA- A- A+ A+ Banner Life Ins. Co. N/R N/R N/R AA AA AA- N/A N/R AA- A+ A+ A+ Delaware Life Ins. Co. Aa1 Aa2 Baa2 AAA AA+ BBB N/A AA N/R A++ A++ A- Genworth Life & Annuity Aa3 Aa3 Ba1 AA AA- BB N/A AA- BB+ A+ A+ B++ Hartford Life Ins. Co. Aa2 Aa3 Baa2 AAA AA- BBB+ N/A AA N/R A++ A+ A- John Hancock Life (USA) Aa1 Aa1 A1 AAA AAA AA- N/A AA+ AA- A++ A++ A+ Lincoln Benefit Life Aa3 Aa3 N/R AA+ AA BBB+ N/A AA- N/R A+ A+ A- Lincoln National Life Aa3 Aa3 A1 AA- AA AA- N/A AA A+ A+ A+ A+ Metropolitan Life Aaa Aa2 Aa3 AA+ AA AA- N/A AA AA- A++ A+ A+ North American Co. L&H N/R N/R N/R A+ AA- A+ N/A AA- N/R A A+ A+ Principal Life Ins. Co. Aaa Aa2 A1 AA+ AA- A+ N/A AA AA- A++ A+ A+ Protective Life A1 Aa3 A2 AA AA AA- N/A AA- A A+ A+ A+ Prudential Ins. Co. of Amer. Aaa Aa3 A1 AAA AA AA- N/A AA A+ A++ A+ A+ Reliastar Life Ins. Co. (Voya) A1 Aa3 A2 AA AA- A N/A AA A A+ A+ A Transamerica Life Aa3 Aa3 A1 AAA AA AA- N/A AA+ AA- A A+ A+ United of Omaha Aa2 A1 A1 AAA AA- AA- N/A N/R N/R A+ A+ A+ % in Top 3 Rating Categories 47% 29% 0% 80% 65% 5% N/A 63% 0% 85% 90% 60% % in 4-5 Rating Categories 47% 65% 53% 20% 35% 60% N/A 37% 82% 10% 10% 15% % in 6 or < Rating Categories 6% 6% 47% 0% 0% 35% N/A 0% 27% 5% 0% 25% rating then are considered highest rated in Traditional Approaches: Comdex Quandary Comparison of ALIRT Scores and Comdex Scores - 12/30/2015 Financials* New York Life Ins. Co. Northwestern Mutual Ins. Co. Great West Life & Annuity Western-Southern Life Assur. State Life Ins. Co. Banner Life Ins. Co. Metropolitan Life Ins. Co. AXA Equitable Life Ins. United of Omaha Life Transamerica Life Ins. Co. John Hancock Life (USA) Pruco Life Ins. Co., AZ Principal Life Ins. Co. Prudential Ins. Co. of Amer. Lincoln National Life Nationwide Life Ins. Co. Nationwide Life & Ann. Pacific Life Ins. Co. Protective Life Ins. Co. American Gen'l Life, TX American National Ins. Co. National Life Ins. Co. Symetra Life Ins. Co. ReliaStar Life, MN Athene Annuity & Life Co. Forethought Life Ins. Co. Hartford Life & Annuity Hartford Life Ins. Co. Delaware Life Ins. Co. Lincoln Benefit Life Genworth Life & Annuity Fidelity & Guaranty Life Security Benefit Life 9/15 ALIRT Score (Left Axis) Historical Median ALIRT Score (Left Axis) Comdex Score (Right Axis) Comdex Scores as of 3/3/2015 4

8 The Problem: Change in Life Insurance Company Ownership Ownership Changes Last 17 Years Demutualizations in Period '97-'01 American General American Skandia AmerUs/AVIVA Life & Annuity/Athene Canada Life Columbus Life Commonwealth Annuity & Life (Allmerica) Crown Life Equitable Life Assurance Equitrust Life Fidelity & Guaranty Forethought Life General American Genworth Life & Annuity Indianapolis Life Integrity Life John Hancock / Manufacturers Life USA Lafayette Life Lincoln Benefit Life Liberty Life (Athene Life & Annuity) Lincoln National/Jefferson-Pilot Life Metlife Insurance Company USA Mutual Trust Life (MTL) Phoenix Life Presidential Life Protective Life Provident Mutual Reliance Standard Reliastar Life Riversource (IDS) Security Benefit Shenandoah Life SunAmerica Sun Life of Canada (US) /Delaware Life Safeco Life/Symetra Life Standard Insurance Company Transamerica Travelers - Citi - Metlife Union Central Life Voya Ins. & Annuity Co. (ING/Aetna) Zurich/Kemper AmerUs 97 American United/OneAmerica MHC 00 Americas/UNIFI 97 Canada Life 99 General American MHC 97 Indianapolis Life 01 John Hancock 00 Manufacturers Life 99 Metropolitan Life 00 Minnesota Life MHC 98 MONY Life 98 National Life of VT MHC 98 Ohio National MHC 98 Pacific Life MHC 97 Phoenix Life 01 Principal Life 98 Prudential 00 Security Benefit MHC 98 Standard Ins. Co. 99 Sun Life 00 Western & Southern MHC 00 Woodmen Accident & Life/Assurity MHC 99 The Problem: Private Equity Acquisitions of Life Groups Apollo Global Management /Athene Group Ltd. (5 acquisitions ) The Blackstone Group L.P. (3 acquisitions ) The Canada Pension Plan Investment Board (1 acquisition 2014) The Devlin Group/Forethought Financial (2 acquisitions ) Global Atlantic Financial Group/Goldman Sachs (4 acquisitions ) Guggenheim Partners (5 acquisitions ) Harbinger Group, Inc. (1 acquisition 2011) Naussau Reinsurance Group/Golden GateCapital (2 acquisitions 2015) Reservoir Capital Group, LLC /Prosperity Life Ins. Grp. (2 acquisitions ) Stone Point Capital/Wilton Re (9 acquisitions ) Tricadia Capital Management, LLC /Tiptree Financial Partners (3 acquisitions ) Problem: What Happens to a Subsidiary s Rating When it is No Longer Deemed Core? In December 2011 Sun Life Financial announced that it would cease the sale of VAs and individual life products in the U.S. and place the operations of its U.S. subsidiary Sun Life Assurance Company of Canada (US) into run off. Ratings Before A.M. Best Announcement A+ 2nd Highest Effect of Announcement on Ratings A.M. Best Down one notch Fitch AA- 4th Highest Fitch Down three notches Moody's Aa3 4th Highest Moody's Down three notches S&P AA- 4th Highest S&P Down four notches In March 2012 Hartford Financial Services announced its intent to runoff/sell its VA operations, individual life and retirement plans business. Much of the VA exposure was on the books of Hartford Life & Annuity Insurance Company. Ratings Before A.M. Best Announcement A 3rd Highest Effect of Announcement on Ratings A.M. Best Down one notch Fitch A- 7th Highest Fitch Unchanged Moody's A3 7th Highest Moody's Down two notches S&P A 6th Highest S&P Down two notches Allstate Corporation the sale of Lincoln Benefit Life Company to Resolution Life Holdings, Inc. in July Ratings Before A.M. Best Announcement A+ 2nd Highest Effect of Announcement on Ratings A.M. Best Under Review Fitch A- 7th Highest Fitch Under Review Moody's A1 5th Highest Moody's Down three notches S&P A+ 5th Highest S&P Down three notches 5

9 INVESTMENT LEVERAGE CREDIT AND DEFAULT RISK WEIGHT. CAPITAL RISK- AS A % OF TOTAL SURPLUS MATURITY GAINS OR NET TOTAL BASED PURE NON-INV. MORT., OTHER TRAD. UNAFFIL. INVEST. LOSSES GROSS NET YIELD RETURN ON CAPITAL CAPITAL GRADE AND REAL AFFIL. CMO'S/ MBS & ABS/ BONDS SCH. BA/ STOCKS/ INCOME AS A % OF YIELD ON ON INVEST. INVESTED YEAR RATIO RATIO BONDS ESTATE INVEST. SURPLUS SURPLUS (YEARS) SURPLUS SURPLUS MARGIN SURPLUS BONDS ASSETS ASSETS GEN'L SEP. ANNUAL SEP. ACCT. TOTAL 5 YR. ACCT. ACCT. LIFE HEALTH AFTER- AFTER- GROWTH BUSINESS FEE INCOME/ ADJ. NET ANNUAL TOTAL SURPLUS SURPLUS LIAB./ LIAB./ INSUR. INSUR. REINS. TAX TAX NET OPER. DIVERSIF- TOTAL S.A. TO GROSS PREMIUM LIQUIDITY YEAR ($ MNS.) GROWTH SURPLUS SURPLUS LEVERAGE LEVERAGE LEVERAGE ROE ROA EARNINGS ICATION ASSETS CASH FLOW GROWTH RATIO COMPANY AS % OF GROUP REVENUES & LIQUIDITY FIN'L LEVERAGE, COVERAGE & PROFITABILITY STATUTORY INS. CO. ANNUAL % AS A % OF ANNUAL % LIQUID CHANGE IN TOTAL ORGANIZATION TOTAL CHANGE IN OPERATING STOCK ASSETS AS A DEBT/ PRETAX PRETAX GEN'L ACCT. SEPARATE WEIGHTED REVENUE TOTAL CASH FLOW/ MKT VAL./ % OF TOTAL EQUITY OPERATING INTEREST OPERATING INVESTED ACCOUNT NET PREM'S COMPOSITE YEAR ASSETS SURPLUS ($ MNS.) REVENUE REVENUE BOOK VAL. ASSETS RATIO EARNINGS COVERAGE ROE ASSETS ASSETS WRITTEN RATING Industry Surplus, Asset Size, Business Diversification, and Tier 3 Measures are Medians for the 100 U.S. life insurers (and 30 Life Holding Company Groups) In the ALIRT LIFE Composite. Quarterly income statement items are annualized. Alternative Approach: In-Depth Analysis of Issuing Insurer and Macro Environment ALIRT Analyses 20+ Years of Historical Industry Data (Statutory) 15 Years of Proprietary Financials on Individual Companies (Stat & GAAP) On-Going Flow of Analysts Reports, Company Calls, Rating Agency Releases, Brokerage White Papers & Trade Journal Articles ALIRT s Quarterly Industry Reviews Don t Have Anecdotal feedback from clients; meetings with insurer management. Common Sense & Gut Feel Alternative Approach - ALIRT Analysis Explained Alternative Approach - ALIRT Analysis Explained ALIRT INSURANCE RESEARCH LIFE FINANCIAL STRENGTH RATIOS ABC Life Insurance Company TIER 1 - INVESTMENT PERFORMANCE INVESTMENT LEVERAGE, CREDIT, AND DEFAULT RISK INVESTMENT INTEREST RATE RISK MARKET RISK INVESTMENT RESULTS % 8.4% 81% 137% 16% 80% 208% 8.7 2% 12% 39.7% -1.4% 6.45% 6.12% 5.99% % 7.5% 82% 148% 22% 101% 216% 9.7 4% 3% 29.5% -3.4% 5.89% 5.54% 5.26% % 7.2% 70% 156% 19% 134% 208% 9.7 6% 3% 20.9% -4.3% 5.86% 5.60% 5.27% % 6.7% 67% 169% 21% 108% 257% % 43% 22.3% -4.0% 5.93% 6.08% 5.80% % 5.6% 98% 233% 25% 126% 296% % 72% 18.8% -4.7% 6.11% 5.92% 5.64% 6/2008 N/A 4.9% 93% 256% 41% N/A N/A N/A 47% 72% N/A -13.2% N/A 4.76% 3.40% INDUSTRY 413% 10.6% 43% 115% 46% 77% 127% % 30% 54.2% -7.6% 6.08% 5.46% 3.76% TIER 2 - OPERATIONAL PERFORMANCE CAPITAL GROWTH AND BUSINESS LEVERAGE PROFITABILITY AND EARNINGS REVENUE VITALITY AND LIQUIDITY ,760 30% % 197% 18.2% 1.55% 103% % 37% 43% 154% ,916 26% % 8% 10.5% 0.83% -38% % 40% 22% 145% ,930 33% % 11% 11.1% 0.82% 8% % 25% -11% 147% ,810 27% % 41% 9.5% 0.66% -16% % 6% -27% 150% ,188-6% % 46% 7.8% 0.48% -26% % -14% -11% 127% 6/2008 2,840-34% N/A 4% N/A -4.5% -0.24% N/M N/A 0.47% -16% 68% N/A INDUSTRY 1,445 18% % 82% 8.3% 0.91% -14% % 20% 4% 132% TIER 3 - GROUP PERFORMANCE - HOLDING COMPANY ANALYSIS TIER 4 - SIZE & RATINGS SIZE ($ MNS.) RATINGS % 17.3% 32, % 17.7% 145.7% 74.5% 24.7% 132% % 44,991 18,111 11,206 AA % 16.8% 33, % 16.1% 161.0% 74.1% 24.4% 28% % 51,960 18,718 13,694 AA % 18.2% 35, % 15.8% 172.8% 72.3% 24.2% -54% % 54,905 20,440 12,145 AA % 15.4% 35, % 14.1% 184.4% 71.6% 21.3% 244% % 56,644 20,917 8,805 AA % 12.0% 36, % 14.8% 134.0% 69.2% 25.8% -7% % 56,872 18,893 7,808 AA 6/ % 12.9% 31, % 14.8% 125.3% 67.6% 28.7% -90% % 57,454 16,379 13,138 AA INDUSTRY 21.6% 10.5% 6, % 18.9% 115.4% 62.8% 36.7% -15% % 11,483 2,663 3,113 AA 6

10 Alternative Approach - ALIRT Analysis Explained Life ALIRT Score Distribution (9/ ) + / - 1 Standard Deviation + / - 2 Standard Deviations Frequency Standard Deviation = 8.94 Mean Score = 53.4 Distribution Frequency Alternative Approach: Sample ALIRT Score Distribution ALIRT Score /31/15 ALIRT Scores - Select Life Insurers vs. ALIRT Life Industry Composite New York Life Protective Life Guardian Life Pruco Life Ins. Co. Northwestern Mutual Life American General Life Nationwide Life Ins. Co. Banner Life AXA Equitable Life Ins. Co. Mass Mutual Life Principal Life ALIRT Life Industry Composite Lincoln National Life United of Omaha Transamerica Life Reliastar Life Accordia L&A MetLife Ins. Co. USA Security Life of Denver Phoenix Life John Hancock Life USA Alternative Approach to Due Diligence RISK MANAGEMENT TOOL = DEFENSE Insurer insolvency is a process, not an event. Therefore, the best way to anticipate financial solvency issues/financial weakness is by counteracting process with process. Banks have external regulatory exams and internal audits to address. SALES/MARKETING TOOL = OFFENSE Retain existing and grow new business relationships by providing on-going and demonstrable oversight and risk/reward comparison of insurance company partner financial strength. 7

11 Gauging Probabilities Risk/Reward Analyses Is the client willing to pay up for top-rated companies? What are the best options - price/ratings - at a given point in time? Should my clients surrender out of downgraded companies? Is a downgrade a true reflection of weakened financials at the issuing entity or merely a reaction to a group event? Can I Best Gauge Probabilities with Ratings Alone? Implicit Support of Parent vs. Actual Financials of Contractual Entity What happens in case of ownership change of insurer? What happens in case of merger with/into other insurers? Quantifying the Range of Risk How do I demonstrate to client /trusted advisors their best options at point of sale? How do I demonstrate to client/trusted advisors and bank risk managers the on-going financial strength profile of selected carriers? ALIRT Research vs. Public Rating Agencies Rating Agencies Non-Customized Annual Rating Reviews Subjective Ratings One Opinion Non-Comparative Top-Down Conflict of Interest De Facto Regulators No Value-Add Service ALIRT Research Customized Quarterly ALIRT Reviews Objective Scoring System Builds all Public Rating Opinions into Work Comparative Bottom-Up Arms Length Arms Length Service Component Central Macro Context: U.S. Life Insurer Financials Capitalization Reported industry capitalization significantly exceeds all of the ground lost in 08 & early 09 However, important accounting changes have taken place over the last few years, making it easier to count certain assets as surplus Thus, the goal posts have been moved, and improvement in capital is not as great as it appears Risk based capitalization benefitted by an even greater extent via regulatory changes 450 ALIRT Life Industry Composite 13.0% Total Surplus ($ Bns.) % 12.0% 11.5% 11.0% 10.5% 10.0% Pure Capital Ratio % Total Surplus (Left Axis) Pure Capital Ratio (Right Axis) 8

12 Macro Context: U.S. Life Insurer Financials Statutory Earnings and Equity Market Returns: Statutory earnings are significantly correlated with aggregate equity market results 2015 returns on equity were reasonable considering flat equity market (helped by strong group life and group and individual life earnings) Low interest rates (which fell in 2015) require higher variable annuity reserves, adversely impacting individual annuity earnings Pretax Earnings for Year ($ Bns.) ALIRT Life Composite Statutory Earnings and the S&P ,100 1,975 1,850 1,725 1,600 1,475 1,350 1,225 1, S&P 500 at end of Period P-Tax Stat. Earnings (Left Axis) S&P 500 (Right Axis) Macro Context: U.S. Life Insurer Financials Statutory Returns on Equity & Assets Ultra-high returns of 2009 and to some extent 2010 represent in part a recovery from the operating losses of 2008, a snapback from dramatic increases to variable annuity reserves in 2008 Returns markedly weaker in 2011 (among lowest of any year except 2008), as markets were flat Sharply higher returns in 2012 and 2013, benefitting from higher markets & lack of business growth Future market rises may have less earnings impact. Were a harbinger of things to come? ALIRT Life Composite Return on Equity 21.0% 18.0% 15.0% 12.0% 9.0% 6.0% 3.0% 0.0% ALIRT Life Composite Return on Assets 2.10% 1.80% 1.50% 1.20% 0.90% 0.60% 0.30% 0.00% -3.0% % Pretax After-Tax Pretax After-Tax Macro Context: U.S. Life Insurer Financials Industry Premium Trends The drop in total premiums written in 2009 was unprecedented over the last 25 years until Fourth quarter 2014 saw a sharp rise in premium results (reinsurance affecting net premiums) Premium growth in 2015 was low (net premiums) to moderate (direct premiums) Higher operating costs, lower investment yields, market volatility, increased focus on risk management, investor scrutiny, and capital conservation efforts limited insurer appetite for new business, while The weak economy, concerns about insurer solvency, reaction to new (= less generous) products reduced distributor and policyholder demand for the industry s products Investor scrutiny likely to continue, and perhaps limits traditional industry consolidation 20% 15% 10% 5% 0% -5% -10% -15% -20% Annual % Change in Premiums Written: ALIRT Life Composite * Net Premiums Written Direct Premiums Written * Excludes Hartford Life & Annuity and Aviva Life & Annuity which had enormous affiliated reinsurance transactions. NPW growth would have been 23.2% if these two companies were included. 9

13 Macro Context: U.S. Life Insurer Financials Industry Investment Returns Net investment yield has generally been trending down since 1996 Net yield at historic lows presently, and the continued low interest rate environment makes any improvement in the yield rate difficult over the near and perhaps medium term. Net total investment return driven by both yield and net capital gains/losses, for both invested assets and hedging instruments Affects profitability of old policies, and availability/attractiveness of new ones 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% ALIRT Life Composite Investment Returns Net Investment Yield Net Total Return Industry Results Total ALIRT Score 70 Historical Total ALIRT Scores: ALIRT Life Industry Composite ALIRT Score Life Industry 15 Year Avg. Industry Score = 54 Thank You David Paul, ALIRT Insurance Research Minneapolis Office 333 South Seventh St. Suite 300 Minneapolis, MN Tel: New York Office 1271 Ave of the Americas Suite 4300 New York, NY Tel: Cedar Falls, IA Office 119 E 4th Street Cedar Falls, IA Tel: Itm-twentyfirst.com 10