US Financial Markets turmoil impact on life insurers

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US Financial Markets turmoil impact on life
insurers
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Agenda

• Housing market bubble
• Impact on credit markets to date
• Government intervention to date
• Life insurance market impact
• Executive summary
• Product line impact
• Reinsurance market impact
• MA pipeline
• Questions and Answers

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US Housing market bubble origins of the crisis
Sources Standard Poors, Federal Financing
Housing Board, Chicago Mercantile Exchange
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US Regional variation in HPA
Source Standard Poors
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New funding model part of the problem

• Source Chicago Fed Letter, Nov 2007

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ABS performance fallout
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Inter banking market liquidity freeze
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Regulators role 6 weeks of unprecedented
intervention
Source Wall St Journal
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Life Insurance sector balance sheet overview
Source AM Best
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Life insurance sector impact

• Life insurance sector is better positioned than
  Banking sector
• Funding profile is generally positive
• Leverage is much lower
• Asset risks are different
• So response to financial market crisis is
  different
• Life insurance balance sheet strength and
  earnings have still been severely affected
• Variable annuity product losses
• Investment losses from investment grade corporate
  debt
• Active management needed of liquidity position
• Recessionary outlook for economy

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US Life insurer impact

• Managing the balance sheet impact
• Cost of equity and debt has increased
  dramatically in the short term
• Focus then on de-risking, deferral of capital
  expenditure, review of dividend policy, managing
  product mix for new business to fit capital
  budget
• Increased flow of information to rating agencies
  and investors on balance sheet quality
• Dynamic situation given evolving standards on
  fair value accounting, market volatility,
  evolving capital standards of regulators and
  rating agencies and increasing role of the Fed in
  financial markets

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US Life insurer impact

• Managing the earnings impact
• Top line growth likely challenged as economic
  conditions worsen in short term
• Margin pressure arising from elevated cost of
  guarantees and increased cost of capital and
  investment losses (depending on strategy and
  accounting loss recognition)
• Variation in impact will be significant across
  the market depending on product/market niche and
  investment strategy pursued
• Opportunities ?
• Consolidation phase under way
• Flight to quality

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Product line impact - Variable Annuities
2008 1st Half New Business Individual Variable
Annuities ( 000s)

• Anchor product for many life carriers
• 64 of total individual life annuity sales
• Intense competition to retain funds and grow the
  assets under management
• Rider guarantee innovation (GMWB, GMAB)
• Breadth of investment fund choices
• Initial investment allocation
• MA charge levels
• Credit rating of institution
• Risk profile
• Equity market linked fee income
• Liquidity strain on new business
• Hedging performance critical to manage riders

Source LIMRA International
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Product line impact Variable Annuities

• Equity market fall
• Value of future fee income stream adversely
  impacted
• Ability to cover DPAC no longer as strong GAAP
  earnings and CARVM asset impact?
• Future sales outcome unclear as guarantees
  become more valuable to retirees
• Spike in Volatility
• Dynamic Hedging effectiveness tested
• Sustained spike not hedged gt margin pressure on
  guarantees provided

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Product line impact Fixed Deferred Annuities
2008 1st Half New Business Individual Fixed
Annuities ( 000s)

• Important product as part of balanced portfolio
• Sales are highly dependent on interest rate
  levels in absolute terms and relative to bank CD
  market
• Intense competition to retain funds and grow the
  assets under management
• Crediting rate promise for fixed annuities
• Index participation level for EIAs
• Credit rating of institution
• Risk profile
• Fixed annuities
• Spread between earned rate on portfolio and
  credited to policyholders
• EIAs
• Managing hedging costs to budget
• Compliance agenda

Source LIMRA International
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Product line impact Fixed Deferred Annuities

• Widening of US corporate debt spreads very
  significant for life insurers
• Immediate increase in unrealized losses on
  existing portfolio
• No immediate solvency impact given ALM matching
  and book value accounting
• Rating agency concern on potential conversion to
  realized losses
• Asset base to RBC leverage results in meaningful
  capital impact
• Opportunity for new business
• Widening of spreads makes crediting rate more
  attractive
• ..provided spread is reward for illiquidity and
  not elevated debt defaults to come

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Product line impact Term Assurance
Individual Term Assurance 2008 YTD (
000s)

• Accounts for about 50 of protection sales in US
  market - sustained price war in broker channel
  for last decade
• Intense competition standardised design gt thin
  margins
• Lean operating expense profile
• Top class risk underwriting/selection
• Active management of distribution
• Risk profile
• Mortality margins
• Funding cost and availability of debt capacity
  for Regulation XXX reserves
• Living within a thin expense budget

Source LIMRA International
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Product line impact Term Assurance
Redundant Reserve - needs to be debt funded

• Funding sources more limited for redundant
  statutory reserves
• Rule of thumb - 100m of new annual premium
  requires 500m of funding
• Securitization market is closed for now
• Recourse LOC solutions are available to top tier
  companies with strong credit profile
• Price of capacity has materially increased
• Direct market also looking to reinsurance market
  for capacity

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US Life Reinsurance market outlook
?
Source Munich American Re/SOA survey, adjusted
to net out reinsurance acquisitions
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Reshaping of competitive landscape

• Sales under way
• Sale of AIG US Life business and a minority stake
  of the Asian units
• Divestment of Primerica from CitiGroup
• Restructuring
• Move of XLs run-off financial guarantee business
  to a trust
• Strategic review of Genworths US mortgage
  insurance business, including potential spin-off

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Agenda

• Housing market bubble
• Impact on credit markets to date
• Government intervention to date
• Life insurance market impact
• Executive summary
• Product line impact
• Reinsurance market impact
• MA pipeline
• Questions and Answers