Final Expense and Preneed Life Companies Financial Analysis Edition One

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1 Final Expense and Preneed Companies Financial Analysis Edition One To kick off our analysis, we thought it would be helpful to lay out some basic parameters that define final expense and preneed companies. We identified a total of 69 companies who sell some form of final expense product. This includes companies specializing in selling final expense through traditional final expense distribution, companies selling small face life products direct, and companies offering simplified issue whole life products as part of their senior life focus. We also identified a total of 31 companies selling preneed 16 of these companies also sell final expense. For the uninitiated, preneed is sold specifically as the funding component of a pre-arranged funeral and is a distinctly different product from final expense utilizing different distribution. A list of the final expense and preneed companies we ve included in this research is at the end of this report. Note that we tried to separate subsidiaries from their parent companies when appropriate. How big are Final Expense and? It s no surprise that small face life products appeal to smaller companies. The top four largest final expense companies by assets are all subsidiaries of larger carriers (Monumental/AEGON, United of Omaha/Mutual of Omaha, Bankers /CNO Financial, and Liberty National/Torchmark). The next largest is Forethought, which at $4.9 billion in assets is not small but is still not among the largest US life insurers. On the other hand, Forethought did qualify as the largest preneed carrier out of all 31 companies when measured by assets (again, we separated subsidiaries from parent companies in some cases). The numbers drop off pretty quickly after the largest few, resulting in a median asset size for final expense of only $400 million and $200 million for preneed. This is good news for smaller companies looking for a product that allows them to compete favorably with peer companies. The table below shows the largest, smallest, and average company by assets as well as a breakdown by quartile. Final Expense and by 2010 Asset Size Largest $ Billion $4.9 Billion Smallest $20.8 Million $8 Million Average $1.636 Billion $638 Million Quartile 1 Up to $152M in assets Up to $95M in assets Quartile 2 $152M - $401M in assets $95M to $200M in assets Quartile 3 $401M - $830M in assets $200M to $740M in assets Quartile 4 Over $830M in assets Over $740M in assets How Well Capitalized are Final Expense and?

2 Although there are a number of different methods for determining capitalization, we used a simple formula of surplus divided by liabilities as a proxy. Given the surplus strain associated with final expense products, this is probably more meaningful for that line of business than for preneed, but since so many preneed companies sell final expense it is still an important consideration. Overall, final expense companies appear to be much better capitalized than preneed companies based upon this measurement. Note the difference between the largest ratio for final expense companies versus preneed. However, there didn t seem to be any correlation between the size of the company and the capitalization ratio small as well as large companies were included at both ends of the spectrum. Final Expense and 2010 Surplus to Liabilities Ratios Largest 135% 32% Smallest 3% 3% Average 19% 10% Quartile 1 Up to 7% Up to 6% Quartile 2 7% to 11% 6% to 9% Quartile 3 11% to 19% 9% to 11% Quartile 4 Over 19% Over 11% A broader capitalization measurement is risk based capital ratios. The table below shows the summaries of RBC ratios for final expense and preneed companies. Final Expense and 2010 RBC Ratios Largest 2634% 2007% Smallest 239% 270% Average 952% 796% Quartile 1 Up to 570% Up to 577% Quartile 2 570% to 858% 577% to 699% Quartile 3 858% to 1189% 699% to 982% Quartile 4 Over 1189% Over 982% How Profitable were Final Expense and in 2010? Since profitability is not a simple determination when it comes to statutory financials, we ll leave a detailed analysis of this question for a future date. However, just for benchmarking purposes, we ve summarized net income in the table below. One stat we found interesting is that 17 final expense companies reported negative net income in 2010 (25%) compared to just 4 preneed companies (13%). Final Expense and 2010 Net Income Largest $487 Million $69 Million Smallest ($110 Million) ($2.6 Million) Average $18 Million $5.3 Million

3 Quartile 1 Up to $227k Up to $417k Quartile 2 $227k to $1.7 Million $417k to $1.0 Million Quartile 3 $1.7 Million to $11.6 Million $1.0 Million to $3.7 Million Quartile 4 Over $11.6 Million Over $3.7 Million What are the AM Best Ratings for Final Expense and? Although there were a wide range of ratings, preneed appears to be less ratings sensitive given that no companies were rated higher than A-. Even more telling is how many companies don t seem to have a rating at all. We could only find AM Best ratings for 65% of preneed companies compared to more than 80% for final expense companies. The table below summarizes this data. Final Expense and Am Best Ratings Final Expense Companies Preneed Companies A+ 5 0 A 4 0 A B B+ 8 7 B 2 0 B- 3 1 C What Other Products do Final Expense and Sell? This is an intriguing question that we hope will provide plenty of interesting comparisons for future articles. For some companies, final expense and preneed represent a significant portion of their total premiums while for other companies, these products are a small addition to their primary lines of business. Other companies try to maintain a balanced mix between many different products. We think it will be important to consider different elements of each company s financials in the context of their overall product strategy. The following tables show the average range of total premiums by Line of Business for final expense and preneed companies. Average Percent of Total Premiums by Line of Business for A&H Other Final Expense Company Average 51% 21% 19% 1% 21% 18% Preneed Company Average 53% 20% 19% 1% 5% 5%

4 The data seems to indicate that preneed companies tend towards a more homogeneous product portfolio than final expense companies. Or to put it another way, preneed companies focus more on life and annuity products (individual and group) rather than A&H or other. For a more detailed look at how total premiums break out by line of business, the tables below tally the number of companies falling into each percentage range of premiums. The first table is for final expense companies and the second one for preneed companies. Number of with Specified Percent of Total Premiums by Line of Business A&H Other Under 25% % - 50% % - 75% Over 75% Number of with Specified Percent of Total Premiums by Line of Business A&H Other Under 25% % - 50% % - 75% Over 75% Next month we will examine the make-up of final expense and preneed company assts as well as investment yields and expenses. List of Companies Included in this Analysis Final Expense and Included in this Analysis 5 Star Globe & Accident American Home AAA Government Personnel Mutual American Memorial Alfa Investors Heritage Atlantic Coast American Home Landmark Catholic Holy Family Society American Pioneer Liberty Bankers Cincinnati Equitable American-Amicable Liberty National Citizens Fidelity Americo Lincoln Heritage Columbian Mutual Assurity Madison National Directors Assurance Baltimore Manhattan Employees (Mutual) Bankers Fidelity Medico Family Heritage Bankers & Casualty Monumental Forethought Catholic Holy Family Society Motorists Funeral Directors Catholic National Farm Great Western

5 Catholic Order of Foresters New Era Enterprises Homesteaders CICA Ins Co of America North Carolina Mutual Investors Heritage Citizens Fidelity Old American Kilpatrick Citizens, Inc. Oxford Liberty Bankers Colonial Penn Pennsylvania Lincoln Heritage Colorado Bankers Physicians Mutual Loyal Christian Benefit Columbian Mutual Royal Neighbors of America NGL Financial Combined Security National North Carolina Mutual Constitution Selected Funeral & Pekin Continental Senior Ins Co Pellerin Cotton States Sentinel Security Rabenhorst CSA Fraternal Settlers Security National Delta Slovene National Benefit Selected Funeral & EMC National Texas Service Southland National Employees (Mutual) Trinity Texas Service Equitable & Casualty United Heritage United Heritage Family Heritage United Home Unity Financial Fidelity Association United of Omaha United Funeral Benefit Forethought United Security Assn of PA Germania Gleaner Unity Mutual US Branch of Foresters Woodmen of the World/Assured