JP Morgan institutional conference call presentation on the state of my industry throughout 2009. Believe it or not, this information presents several opportunities for your clients and associates.
1. A.M. Best Company
Current Perspectives on the Life
Insurance Industry
J.P. Morgan Conference Call
January 16, 2009
2. What Happened And Where Are
We Now?
Deterioration in macroeconomic fundamentals-
while the bad news has slowed, is there an end
in sight?
Extreme volatility in equity markets
Rising credit defaults/asset impairments
Significant spread widening/unrealized losses
Limited financial flexibility
Negative outlook on the life industry
3. A.M. Best Outlook – Life & Annuity
“The severe dislocation in the capital
markets, fueled most recently by the
bankruptcy filing [of Lehman] and liquidity
concerns at high-profile financial
institutions…has prompted A.M. Best Co.
to revise its rating outlook for the U.S. life
insurance industry to negative from
stable.”
4. U.S. Life Industry Capital
Trends
350
325
300
$bill
275
250
225
200
2004 2005 2006 2007 1Q 08 2Q 08 3Q 08
Cap ital & Sur p lus + AVR
5. Capitalization Trends
Industry had built up excess capital in prior years
Increased operating and financial leverage
Deployed through share buybacks, dividends
and some acquisitions
Excess capital eroded
Expectation of need to strengthen capital
Access to capital and liquidity is weak
7. Investment Losses
Companies treating stat and GAAP
impairments differently (for the most part)
Unrealized losses-are they economic or
interest rate driven?
How long under water and by how much?
More impairments likely in 4Q
8. Variable Annuities
Living benefits driving sales
Lower sales & fee income
Higher reserve & capital charges
Rising costs of hedging; has it worked?
DAC unlocking
Companies revising product structures
9. Recent Industry Trends
Shift from protection to accumulation
products
Variable annuity products more complex
Industry consolidation at a relatively slow
pace
But, concentration at the top increasing
ERM has been tested
10. Where Are We Going?
More regulation likely
M&A/divestitures will accelerate
Choppy markets continue to pressure VA
writers
More impairments
Liquidity to remain tight
11. Is There Any Good News?
Retirement income opportunities still exist
International business continues to hold
promise
Stronger players will continue to thrive
All things must pass
12. Key Factors in Maintaining Ratings
Focus on preserving capital & maintaining
liquidity
Consistent operating profitability trends
Investment risk manageable
Proven ERM effectiveness during troubled
times
Risk appetite commensurate with capital
Diversification on both sides of the balance
sheet
