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Beyond Ratings: An Alternative Approach to Analyzing Life
Insurance Financial StrengthA Session Specifically Designed for The ITM TwentyFirst University
Wednesday, May 4, 2016 at 2pm EST
credit for CFP, CTFA and FIRMA Certified Member
David Paul
Principal, ALIRT Insurance Research
W: alirtresearch.com
Presented By:
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.
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2016 Course Schedule - Free CFP® & CTFA CE CreditsHow to Make Sure Your TOLI Policies Are Competitive
Michael Brohawn, CFP®, CLU®, Managing Partner, ITM TwentyFirstWednesday, 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 RegulationsAlexander P. Ryan, Of Counsel, Groom Law FirmThursday, 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.
About ITM TwentyFirst UniversityITM 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.
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itm-twentyfirst.comMinneapolis, MN Office T: 612.371.3008New York, NY Office T: 212.378.6730Cedar Falls, IA Office T: 866.384.2766
Richard W. Jacobs - PDS Services, [email protected] / pdscompanies.com
Hard to Value Asset Management & Recordkeeping
Jon B. Mendelsohn - Ashar [email protected] / ashargroup.com
Life Settlement,Longevity, and Secondary Market Valuation (SMV®) Specialists
Jason T. Mendelsohn - Ashar [email protected] / ashargroup.com
Life Settlement, Longevity, and Secondary Market Valuation (SMV®) Specialists
Randy Pople, CFP®, AEP - Pople Financial [email protected] / poplefinancial.com
Trust Practices and Consulting
Barry Flagg, CFP®, CLU, ChFC, GFS - Veralytic, [email protected] / veralytic.com
Best Practices Standards for Life Insurance Stewards
Don Trone, GFS - [email protected] / 3ethos.com
Leadership, Stewardship and Governance (Fiduciary Responsibility)
Brad Davidson - Spardata/Unique Asset [email protected] / spardata.com
Hard to Value Asset Valuation and Consulting
Jason Hassman - ITM|[email protected] / itm-twentyfirst.com
TOLI Policy Management
Michael Brohawn CFP®, CLU - ITM|[email protected] / itm-twentyfirst.com
TOLI Policy Management
Meet The ITM TwentyFirst University Faculty Team
Visit itm-twentyfirst.com/Education to register!
1
Beyond Ratings: An Alternative Approach toAnalyzing Life Insurer Financial Trends
Presented By: David Paul, ALIRT Insurance Research
Upcoming Webinars
How to Make Sure Your TOLI Policies Are CompetitiveMichael Brohawn, CFP®, CLU®, Managing Partner, ITM TwentyFirstWednesday, May 18, 2016 at 2pm ESTRegister Here
10 Questions Every Trustee or Advisor Should Ask Before a Client Purchases or Continuesa Life Insurance PolicyBarry D. Flagg, CFP, CLU, ChFC, GFS, Veralytic, Inc.Thursday, June 2, 2016 at 2pm ESTRegister Here
Our Presenter
Beyond Ratings: An AlternativeApproach to Analyzing LifeInsurance Financial Strength
David Paul, Principal, ALIRTInsurance ResearchWednesday, May 4, 2016 at 2pm EST1 Hour CE credit for CFP, CTFA and FIRMA Certified Member
2
Current Industry Financial/Operating Conditions
The Good News:
Favorable Environment to Generate Statutory Earnings and Capital
• Equity markets up moderately in 2014 after increasing sharply in 2013, and threeof prior four years
• Solid capital gains through 9/30/2014, compared to the considerable losses seen in2008/2009
• Limited sales growth producing lower acquisition costs
• Product retrenchment, changing policy terms & conditions
• Increased use of affiliated reinsurance
I NS UR AN CE RE S E A RC H
Beyond Ratings:An Alternative Approach to Analyzing
Life Insurer Financial Trends
ITM/TwentyFirst Webinar
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 25years
• Produces quarterly financial analyses on approximately 600 Life, 1,600 P&C, and 350managed care insurers
• Analysis generated by running statutory and GAAP financials through a proprietarymodel that screens for relative financial strength
• Clients: distributors of insurance products, end users of insurance products, assetmanagers, boards of directors, insurers
• Purpose: to “get below” the public ratings in order to more accurately determine therelative financial strength and weakness of insurers
What Producers Should KnowAbout 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 theparent which is often a large, publicly-traded organization that is wellbranded.
• Few life insurers go out of business, but being part of a large, well-brandedholding company does not mean that the underlying insurer cannot be sold.In the case of a sale, your insurance contract remains backed by the legalentity on the declarations page.
• Ratings and Comdex will tell you about the parent organization; a drill downinto the financials of the actual company underwriting the policy will tell youabout the balance sheet backing your future claims.
• Make sure to determine what the legal entity is and concentrate yourattention primarily on its financials.
3
What Producers Should KnowAbout Their Carriers’ Financials
Insolvent Solvent
From A Binary Approach
To A Spectrum Approach
Insolvent SolventRun-off Sale ofBusiness
Sale of aBlock ofBusiness
CapitalInfusion
ManagementChanges
Changein PolicyCharges/Crediting
Rate
ProductChanges
Where Should Your Focus Be?
Where Should Your Focus Be?
4
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
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%
* S&P and Moody's began rating life insurers in 1983 and 1985, respectively. A.M. Best has been rating insurers since the late 1800's
** For A.M. Best Scale: Top Category = A++, A+; Middle Category = A; Low Category = A-. In 1992, A.M. Best expanded its rating categories to include A++. Companies given A++
rating then are cons idered highest rated in 1990.
A.M. Best**Moody's S&P Fitch
Traditional Approaches: Comdex Quandary
Comdex Scores as of 3/3/2015
40
50
60
70
80
90
100
20
25
30
35
40
45
50
55
60
65
70
New
York
Life I
ns. C
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North
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. Co.
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o Life
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entia
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ic Lif
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. Co.
Prote
ctive
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ican G
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Genw
orth
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ty &
Guar
anty
Life
Secu
rity B
enefi
t Life
Comparison of ALIRT Scores and Comdex Scores - 12/30/2015 Financials*
9/15 ALIRT Score (Left Axis) Historical Median ALIRT Score (Left Axis) Comdex Score (Right Axis)
5
The Problem: Change in Life Insurance Company Ownership
AmerUs 97American United/OneAmerica MHC 00Americas/UNIFI 97Canada Life 99General American MHC 97Indianapolis Life 01John Hancock 00Manufacturers Life 99Metropolitan Life 00Minnesota Life MHC 98MONY Life 98National Life of VT MHC 98Ohio National MHC 98Pacific Life MHC 97Phoenix Life 01Principal Life 98Prudential 00Security Benefit MHC 98Standard Ins. Co. 99Sun Life 00Western & Southern MHC 00Woodmen Accident & Life/Assurity MHC 99
Demutualizations in Period '97-'01
American General Metlife Insurance Company USA
American Skandia Mutual Trust Life (MTL)
AmerUs/AVIVA Life & Annuity/Athene Phoenix Life
Canada Life Presidential Life
Columbus Life Protective Life
Commonwealth Annuity & Life (Allmerica) Provident Mutual
Crown Life Reliance Standard
Equitable Life Assurance Reliastar Life
Equitrust Life Riversource (IDS)
Fidelity & Guaranty Security Benefit
Forethought Life Shenandoah Life
General American SunAmerica
Genworth Life & Annuity Sun Life of Canada (US) /Delaware Life
Indianapolis Life Safeco Life/Symetra Life
Integrity Life Standard Insurance Company
John Hancock / Manufacturers Life USA Transamerica
Lafayette Life Travelers - Citi - Metlife
Lincoln Benefit Life Union Central Life
Liberty Life (Athene Life & Annuity) Voya Ins. & Annuity Co. (ING/Aetna)
Lincoln National/Jefferson-Pilot Life Zurich/Kemper
Ownership Changes Last 17 Years
The Problem: Private Equity Acquisitions of Life Groups
Apollo Global Management /Athene Group Ltd. (5 acquisitions 2011-2013)
The Blackstone Group L.P. (3 acquisitions 2006 – 2015)
The Canada Pension Plan Investment Board (1 acquisition 2014)
The Devlin Group/Forethought Financial (2 acquisitions 2004-2012)
Global Atlantic Financial Group/Goldman Sachs (4 acquisitions 2005-2014)
Guggenheim Partners (5 acquisitions 2009-2013)
Harbinger Group, Inc. (1 acquisition 2011)
Naussau Reinsurance Group/Golden Gate Capital (2 acquisitions 2015)
Reservoir Capital Group, LLC /Prosperity Life Ins. Grp. (2 acquisitions 2012-2014)
Stone Point Capital/Wilton Re (9 acquisitions 2004-2014)
Tricadia Capital Management, LLC /Tiptree Financial Partners (3 acquisitions 2010-2014)
Problem:What Happens to a Subsidiary’s Rating When it is No Longer Deemed “Core”?
A.M. Best A 3rd Highest A.M. BestFitch A- 7th Highest FitchMoody's A3 7th Highest Moody'sS&P A 6th Highest S&P
Ratings Before Announcement Effect of Announcement on RatingsDown one notchUnchangedDown two notchesDown two notches
A.M. Best A+ 2nd Highest A.M. BestFitch A- 7th Highest FitchMoody's A1 5th Highest Moody'sS&P A+ 5th Highest S&P
Ratings Before Announcement Effect of Announcement on RatingsUnder ReviewUnder ReviewDown three notchesDown three notches
A.M. Best A+ 2nd Highest A.M. BestFitch AA- 4th Highest FitchMoody's Aa3 4th Highest Moody'sS&P AA- 4th Highest S&P
Effect of Announcement on RatingsDown one notchDown three notchesDown three notchesDown four notches
Ratings Before AnnouncementIn December 2011 Sun Life Financial announcedthat it would cease the sale of VAs and individuallife products in the U.S. and place the operationsof its U.S. subsidiary Sun Life AssuranceCompany of Canada (US) into run off.
Allstate Corporation the sale of Lincoln BenefitLife Company to Resolution Life Holdings, Inc.in July 2013.
In March 2012 Hartford Financial Servicesannounced its intent to runoff/sell its VAoperations, individual life and retirement plansbusiness. Much of the VA exposure was on thebooks of Hartford Life & Annuity InsuranceCompany.
6
Alternative Approach:In-Depth Analysis of Issuing Insurer and Macro Environment
Don’t Have
• ALIRT Analyses
– 20+ Years of Historical Industry Data(Statutory)
– 15 Years of Proprietary Financials onIndividual Companies (Stat & GAAP)
• On-Going Flow of Analysts Reports,Company Calls, Rating Agency Releases,Brokerage White Papers & Trade JournalArticles
• ALIRT’s Quarterly Industry Reviews
• Anecdotal feedback from clients;meetings with insurer management.
• Common Sense & Gut Feel
Alternative Approach - ALIRT Analysis Explained
ALIRT INSURANCE RESEARCH LIFE FINANCIAL STRENGTH RATIOS
ABC Life Insurance CompanyTIER 1 - INVESTMENT PERFORMANCE
INVESTMENT LEVERAGE, CREDIT, AND DEFAULT RISK INVESTMENT INTEREST RATE RISK MARKET RISK INVESTMENT RESULTS
INVESTMENT LEVERAGE CREDIT AND DEFAULT RISKWEIGHT. CAPITAL
RISK- AS A % OF TOTAL SURPLUS MATURITY GAINS OR NET TOTALBASED 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. INVESTEDYEAR RATIO RATIO BONDS ESTATE INVEST. SURPLUS SURPLUS (YEARS) SURPLUS SURPLUS MARGIN SURPLUS BONDS ASSETS ASSETS
2003 325% 8.4% 81% 137% 16% 80% 208% 8.7 2% 12% 39.7% -1.4% 6.45% 6.12% 5.99%2004 301% 7.5% 82% 148% 22% 101% 216% 9.7 4% 3% 29.5% -3.4% 5.89% 5.54% 5.26%2005 332% 7.2% 70% 156% 19% 134% 208% 9.7 6% 3% 20.9% -4.3% 5.86% 5.60% 5.27%2006 341% 6.7% 67% 169% 21% 108% 257% 9.3 12% 43% 22.3% -4.0% 5.93% 6.08% 5.80%2007 271% 5.6% 98% 233% 25% 126% 296% 9.8 35% 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% 10.0 38% 30% 54.2% -7.6% 6.08% 5.46% 3.76%
TIER 2 - OPERATIONAL PERFORMANCECAPITAL GROWTH AND BUSINESS LEVERAGE PROFITABILITY AND EARNINGS REVENUE VITALITY AND LIQUIDITY
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 LIQUIDITYYEAR ($ MNS.) GROWTH SURPLUS SURPLUS LEVERAGE LEVERAGE LEVERAGE ROE ROA EARNINGS ICATION ASSETS CASH FLOW GROWTH RATIO
2003 3,760 30% 11.2 4.8 52 4% 197% 18.2% 1.55% 103% 2.5 1.17% 37% 43% 154%2004 3,916 26% 12.6 4.8 49 -1% 8% 10.5% 0.83% -38% 2.5 1.33% 40% 22% 145%2005 3,930 33% 13.3 5.2 45 1% 11% 11.1% 0.82% 8% 2.5 1.34% 25% -11% 147%2006 3,810 27% 14.3 5.5 47 1% 41% 9.5% 0.66% -16% 2.5 0.84% 6% -27% 150%2007 3,188 -6% 17.2 5.9 56 1% 46% 7.8% 0.48% -26% 2.0 0.40% -14% -11% 127%
6/2008 2,840 -34% 19.7 5.8 N/A 4% N/A -4.5% -0.24% N/M N/A 0.47% -16% 68% N/A
INDUSTRY 1,445 18% 8.8 5.5 47 34% 82% 8.3% 0.91% -14% 4.0 1.32% 20% 4% 132%
TIER 3 - GROUP PERFORMANCE - HOLDING COMPANY ANALYSIS TIER 4 - SIZE & RATINGSCOMPANY AS % OF GROUP REVENUES & LIQUIDITY FIN'L LEVERAGE, COVERAGE & PROFITABILITY
SIZE ($ MNS.) RATINGSSTATUTORY INS. CO. ANNUAL %
AS A % OF ANNUAL % LIQUID CHANGE INTOTAL 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 COMPOSITEYEAR ASSETS SURPLUS ($ MNS.) REVENUE REVENUE BOOK VAL. ASSETS RATIO EARNINGS COVERAGE ROE ASSETS ASSETS WRITTEN RATING
2003 47.7% 17.3% 32,149 8.7% 17.7% 145.7% 74.5% 24.7% 132% 13.0 18.8% 44,991 18,111 11,206 AA+2004 48.1% 16.8% 33,936 5.6% 16.1% 161.0% 74.1% 24.4% 28% 14.9 21.6% 51,960 18,718 13,694 AA+2005 49.1% 18.2% 35,383 4.3% 15.8% 172.8% 72.3% 24.2% -54% 6.3 9.9% 54,905 20,440 12,145 AA+2006 50.2% 15.4% 35,796 1.2% 14.1% 184.4% 71.6% 21.3% 244% 20.1 34.2% 56,644 20,917 8,805 AA2007 49.2% 12.0% 36,769 2.7% 14.8% 134.0% 69.2% 25.8% -7% 20.0 30.5% 56,872 18,893 7,808 AA
6/2008 49.9% 12.9% 31,010 -15.7% 14.8% 125.3% 67.6% 28.7% -90% 1.9 3.3% 57,454 16,379 13,138 AA
INDUSTRY 21.6% 10.5% 6,119 -6.9% 18.9% 115.4% 62.8% 36.7% -15% 4.6 11.3% 11,483 2,663 3,113 AA
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 - ALIRT Analysis Explained
7
Alternative Approach - ALIRT Analysis Explained
0
100
200
300
400
500
600
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1200
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 100
Fre
quen
cy
Standard Deviation = 8.94Mean Score = 53.4
Life ALIRT Score Distribution (9/2001 - 2015)
Distribution Frequency
+ / - 1 Standard Deviation
+ / - 2 Standard Deviations
Alternative Approach: Sample ALIRT Score Distribution
67 66 65 65 62 60 60 59 58 58 56 52 48 48 46 45 44 43 42 39 3805
10152025303540455055606570758085
New
York
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Prot
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Pruc
o Lif
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Amer
ican
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er L
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AXA
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able
Life
Ins.
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Princ
ipal L
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ALIR
T Lif
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Relia
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ifeof
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ALIR
T Sc
ore
12/31/15 ALIRT Scores - Select Life Insurers vs. ALIRT Life Industry Composite
Alternative Approach to Due Diligence
RISK MANAGEMENT TOOL = DEFENSE
Insurer insolvency is a process, not an event. Therefore, the best way to anticipatefinancial solvency issues/financial weakness is by counteracting process withprocess. 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 anddemonstrable oversight and risk/reward comparison of insurance company partnerfinancial strength.
8
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 areaction 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-goingfinancial strength profile of selected carriers?
ALIRT Research vs. Public Rating Agencies
Rating Agencies ALIRT Research
Non-Customized Customized
Annual Rating Reviews Quarterly ALIRT Reviews
Subjective Ratings Objective Scoring System
One Opinion Builds all Public Rating Opinions into Work
Non-Comparative Comparative
Top-Down Bottom-Up
Conflict of Interest Arms Length
De Facto Regulators Arms Length
No Value-Add Service Service Component Central
Rating Agencies ALIRT Research
Non-Customized Customized
Annual Rating Reviews Quarterly ALIRT Reviews
Subjective Ratings Objective Scoring System
One Opinion Builds all Public Rating Opinions into Work
Non-Comparative Comparative
Top-Down Bottom-Up
Conflict of Interest Arms Length
De Facto Regulators Arms Length
No Value-Add Service Service Component Central
9.5%
10.0%
10.5%
11.0%
11.5%
12.0%
12.5%
13.0%
100
150
200
250
300
350
400
450
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Pu
re Cap
ital Ratio
Tot
al S
urp
lus
($ B
ns.
)
ALIRT Life Industry Composite
Total Surplus (Left Axis) Pure Capital Ratio (Right Axis)
Macro Context: U.S. Life Insurer FinancialsCapitalization
• 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 easierto “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
9
850
975
1,100
1,225
1,350
1,475
1,600
1,725
1,850
1,975
2,100
-10
0
10
20
30
40
50
60
70
80
90
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
S&P
500 at end of Period
Pre
tax
Ear
ning
s fo
r Y
ear
($ B
ns.)
ALIRT Life Composite Statutory Earnings and the S&P 500
P-Tax Stat. Earnings (Left Axis) S&P 500 (Right Axis)
Macro Context: U.S. Life Insurer FinancialsStatutory Earnings and Equity Market Returns: 2002-2015
• Statutory earnings are significantly correlated with aggregate equity market results
• 2015 returns on equity were reasonable considering flat equity market (helped by strong grouplife and group and individual life earnings)
• Low interest rates (which fell in 2015) require higher variable annuity reserves, adverselyimpacting individual annuity earnings
-3.0%
0.0%
3.0%
6.0%
9.0%
12.0%
15.0%
18.0%
21.0%
03 04 05 06 07 08 09 10 11 12 13 14 15
ALIRT Life Composite Return on Equity
Pretax After-Tax
-0.30%
0.00%
0.30%
0.60%
0.90%
1.20%
1.50%
1.80%
2.10%
03 04 05 06 07 08 09 10 11 12 13 14 15
ALIRT Life Composite Return on Assets
Pretax After-Tax
Macro Context: U.S. Life Insurer FinancialsStatutory Returns on Equity & Assets
• Ultra-high returns of 2009 and to some extent 2010 represent in part a recovery from the operatinglosses 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 2014-2015 a harbinger of things to come?
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009* 2010 2011 2012 2013 2014 2015
Annual % Change in Premiums Written: ALIRT Life Composite
Net Premiums Written Direct Premiums Written
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 2013.
• 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 reduceddistributor and policyholder demand for the industry’s products
• Investor scrutiny likely to continue, and perhaps limits traditional industry consolidation
* 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.
10
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
ALIRT Life Composite Investment Returns
Net Investment Yield Net Total Return
Macro Context: U.S. Life Insurer Financials IndustryInvestment Returns
• Net investment yield has generally been trending down since 1996
• Net yield at historic lows presently, and the continued low interest rate environment makesany 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 bothinvested assets and hedging instruments
• Affects profitability of old policies, and availability/attractiveness of new ones
Industry Results – Total ALIRT Score
40
45
50
55
60
65
70
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
AL
IRT
Sco
re
Historical Total ALIRT Scores: ALIRT Life Industry Composite
Life Industry 15 Year Avg. Industry Score = 54
Thank YouDavid Paul, ALIRT Insurance Research
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