Butch Britton


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Butch Britton

  1. 1. CN1114-5988-0113 It’s All About Life Donald (Butch) Britton, CEO, ING U.S. Insurance Presenting Sponsor: Produced By: Presenting Sponsor: Produced By:
  2. 2. DISCLOSURE Life insurance products are issued by ReliaStar Life Insurance Company (Minneapolis, MN), ReliaStar Life Insurance Company of New York (Woodbury, NY) and Security Life of Denver Insurance Company (Denver, CO). Within the state of New York, only ReliaStar Life Insurance Company of New York is admitted, and its products issued. All are members of the ING family of companies. All guarantees are based on the financial strength and claims paying ability of the issuing insurance company, who is solely responsible for all obligations under its policies. Other than the ING companies identified, no other entities, whether distributing or listed on the material, are affiliated with the ING family of companies. Presenting Sponsor: Produced By:2
  3. 3. Key Topics  State of the Industry  Economic Impact of Insurance  Key Industry Trends  Industry Headwinds  What’s Happening in Products  Future of Distribution  Save the Goose that Lays the Golden Egg Presenting Sponsor: Produced By:3
  4. 4. Life Insurance Industry Key in U.S. Economy  Just how big and important is it  Where would we be without Life industry  Weathering a storm  How is fiscal policy affecting us  Is history repeating itself Strong, important industry with big challenges Presenting Sponsor: Produced By:4
  5. 5. Life insurance beneficiaries received approximately $60 billion in 2011. Source: The Heart of the Matter, LIMRA 2012 Presenting Sponsor: Produced By:5
  6. 6. Life insurers infused $59 billion into the U.S. economy in 2009 through death benefits paid to beneficiaries. Source: The Heart of the Matter, LIMRA 2012 Presenting Sponsor: Produced By:6
  7. 7. At the end of 2009, life insurers held $325 billion in commercial and residential properties. Source: The Heart of the Matter, LIMRA 2012 Presenting Sponsor: Produced By:7
  8. 8. Life insurers have $4.5 trillion invested in the U.S. economy, making them one of the largest sources of capital in the nation. Source: The Heart of the Matter, LIMRA 2012 Presenting Sponsor: Produced By:8
  9. 9. The life insurance industry has $1.3 trillion in investable assets. Source: The Heart of the Matter, LIMRA 2012 Presenting Sponsor: Produced By:9
  10. 10. The life insurance industry pays $14.7 billion in premium taxes annually. Source: The Heart of the Matter, LIMRA 2012 Presenting Sponsor: Produced By:10
  11. 11. The life insurance industry is the NUMBER ONE U.S. investor in corporate bonds. Source: The Heart of the Matter, LIMRA 2012 Presenting Sponsor: Produced By:11
  12. 12. Social Security pays out about $1.9 billion every day. The life insurance industry pays out $1.5 billion every day. Source: The Heart of the Matter, LIMRA 2012 Presenting Sponsor: Produced By:12
  13. 13. The life insurance industry employs 5.7 million people. Source: The Heart of the Matter, LIMRA 2012 Presenting Sponsor: Produced By:13
  14. 14. Life Insurance Industry: Emerging from a Dark Decade  What happened – the five fatal factors  Where are we now Don’t want a replay Presenting Sponsor: Produced By:14
  15. 15. The Credit Crisis Fatal Factor #1: Subprime Image from: http://www.dallasloanofficer.com/files/tag-sub-prime002c-alt-a002c-credit-crunch.html Presenting Sponsor: Produced By:15
  16. 16. Timeline: Crisis Unfolding Key Events 2002-2006  Interest rates held at all time lows, housing prices soar  Banks fundamentally shift mortgage activities to an “originate and distribute” model (Source: OECD) 02/07  Freddie Mac announces will no longer buy subprime mortgages 07/07  Countrywide Financial warns of “difficult conditions” 11/07  Interbank lending rates start trend upward 12/07  Federal Reserve creates Term Auction Facility (TAF) to inject $24B of liquidity into the financial system 01/08  Bank of America buys Countrywide Financial for $4B in all stock deal 03/08  Fed provides financing deal for JPM to “purchase” Bear Stearns Source: Timeline.org, Organization for Economic Cooperation & Development (OECD) Presenting Sponsor: Produced By:16 16
  17. 17. Timeline: Crisis in Full Swing Key Events 09/08  Bank of America announces purchase of troubled broker Merrill Lynch for $50B  Freddie and Fannie placed under government control  Lehman Brothers files CH 11 Bankruptcy  JPM purchases troubled bank Washington Mutual  Government drastically expands various programs aimed at injecting capital into the financial system  Wells Fargo announces intention to purchase troubled bank Wachovia  US Government lends AIG $85B 10/08  FDIC Insurance limits raised to $250k 11/08  Three large Insurance companies seek TARP money (Lincoln, Genworth and Hartford). [Genworth did not qualify / receive TARP money] 12/08  Automakers receive government aid Source: Timeline.org Presenting Sponsor: Produced By:17 17
  18. 18. A Remarkable Statistic  1/1/1970 to 04/30/2009  DJIA – 10,000 trading days – nearly 40 years  39 days with a 4%+ rise  34 days with a 4%+ fall  0.7% of the time  Sept. 2008 to April 2009  17 days with 4%+ rise  20 days with 4%+ fall HALF of the big swings over 40 years have occurred from Sept. 2008 to April 2009 Fatal Factor #2: Market Volatility (Source: Morgan Stanley research) Presenting Sponsor: Produced By:18 18
  19. 19. The Federal Funds Rate • Fed Funds – interest rate banks borrow from each other remains close to 0%. Rate is determined by the Federal Reserve. • Rates expected to be kept low for extended period. (Percent) Shaded areas indicate U.S. recessions. 2010 research.stlouisfed.org Fatal Factor #3: Rate increase Presenting Sponsor: Produced By:19 19
  20. 20. Accounting Issues  The crisis highlighted issues around securities valuations in stressed market liquidity  Mark to Market (FAS 115)  Accounting policy implies markets are operating in a way that will price securities correctly (efficient market theory)  Example: Alt-A Mortgages  Valuation A: Valued at 90 cents on the dollar based on coupon payments  Valuation B: Trading at 60 cents on the dollar in the open market  Which valuation would be more meaningful to a long term investor planning on holding the Alt-A Mortgages to maturity  The question of how accounting policy can be adapted to different types of financial institutions and ensure transparency remains an important policy issue Fatal Factor #4: Mark to Market Presenting Sponsor: Produced By:20 20
  21. 21. Ratings Agencies  Recent book “The Big Short” by Michael Lewis has portrayed rating agencies in a negative light  Banks learned how to game the ratings agencies’ models  Ratings models wrongly assumed house prices would always rise  Mortgage securities with a high risk of default were bundled with other high risk securities and wrongly given AAA ratings based on “geographical diversification”  Ratings agencies gave many mortgage-backed securities AAA ratings that failed and are now being accused of “shooting the wounded” with credit downgrades of companies that invested in these securities  Lower rating impact on cost of capital Fatal Factor #5: Rating Agencies Presenting Sponsor: Produced By:21 21
  22. 22. How Have Rating Agencies Responded? U.S. Life / Annuity Rating A.M. Best Downgrades Downgrades Source: A.M. Best Research, 2009 Special Report, A.M. Best Monthly Ratings Reports (Jan. – Dec. ‘09) Presenting Sponsor: Produced By:22
  23. 23. Headwinds for the Future  Ratings and consumer confidence  Low interest rates problem  Regulation and disclosure  Loss of tax advantages  High capital use products Not out of the woods yet Presenting Sponsor: Produced By:23
  24. 24. Ratings Hurting Consumer Confidence  Look back 20 years at performance vs. ratings  Does not tell the story  Comdex in a vacuum not worth it  Average rating of big US bank Are we using ratings against ourselves? Presenting Sponsor: Produced By:24
  25. 25. Financial Strength Ratings Comdex vs. Credit Ratings Company A Company B A.M. Best A+ Negative A+ Negative Standard & Poor’s AA- Stable A+ Negative Fitch A+ Negative Not Rated Moody’s A2 Stable Not Rated Admitted Assets: $237Bn Admitted Assets: $1.3Bn Company Information Net Earnings from Ops: $497M Net Earnings from Ops: $173k COMDEX 89 93 A.M. Best Company assigns ratings from A++ to F based on a companys financial strength and ability to meet obligations to contract holders. A+ is the 2nd highest of 15 ratings. Fitch assigns ratings from AAA to C based on a companys financial strength. A+ is the fifth highest of 19 ratings. Moodys Investor Service (Moodys) assigns ratings from Aaa to C based on a companys financial security. A2 is the sixth highest of 21 ratings. Standard & Poors assigns ratings from AAA to CC based on a companys financial security. AA- is the 4th highest and A+ is the 5th highest of 20 ratings. The ratings relate to an insurance companys ability to meet its claims and guarantees. The Comdex is a composite index based on the ratings received by a company from the ratings services. It is the average percentile ranking for all of the ratings received by a company. As such, it is not another rating, but rather an objective scale that can be used to easily compare the ratings of different companies. The ratings are as of 09/16/2010 and are subject to change. Source of ratings and financial data: VitalSigns Carrier Analysis Report Financial data as of 2008 Year End Presenting Sponsor: Produced By:25 25
  26. 26. What About the Major Banks? Moody’s S&P Senior Unsecured Debt Baa2 A- Bank 1 Subordinated Debt Baa3 BBB+ Outlook NEG NEG Senior Unsecured Debt A2 A Bank 2 Subordinated Dept A3 A- Outlook NEG NEG Senior Unsecured Debt Baa2 A- Bank 3 Subordinated Debt Baa3 BBB+ Outlook NEG NEG Senior Unsecured Debt A2 A+ Bank 4 Subordinated Debt A3 A Outlook NEG NEG Senior Unsecured Debt A3 A- Bank 5 Subordinated Debt Baa1 BBB+ Outlook NEG NEG Senior Unsecured Debt Baa1 A- Bank 6 Subordinated Debt Baa2 BBB+ Outlook NEG NEG Moodys Investor Service (Moodys) assigns ratings from Aaa to C based on a companys financial security. Standard & Poors assigns ratings from AAA to CC based on a companys financial security. The ratings are as of 09/2012 and are subject to change. Presenting Sponsor: Produced By:26 26
  27. 27. S&P Historical Ratings ING US Life Insurance Company Ratings and Competitor Benchmark Financial Strength Ratings Standard & Poors 2012 Standard & Poors 1990 Financial Rating Action/ Rating Financial Rating Action/ Rating Outlook Strength Credit Opinion Outlook Strength Credit Opinion Stable A+ 02/28/2011 New Rating AA+ 03/06/1990 Stable A+ 02/28/2011 Watch, Neg AA+ 03/30/2005 Negative AA- 1/27/2012 DG, Neg A 12/11/1990 Stable B+ 08/03/2012 UG, Stable A+ 11/06/1997 Executive Life DG BBB 03/28/1990 Stable A 01/23/1990 Stable A- 3/21/2012 Stable AAA 07/02/1985 Stable A- 03/07/2012 Stable AA 04/17/1991 Stable A- 03/07/2012 New Rating A+ 09/26/1990 Stable A- 03/07/2012 Stable AAA 02/12/1987 Stable AA- 12/13/2010 New Rating AAA 07/03/1991 Stable AAA 02/21/1986 Stable AA- 6/15/2009 New Rating AA- 10/03/1991 Stable AA- 5/1/2012 New Rating AA+ 07/15/1994 Mutual Benefit R 08/24/1992 Stable AA+ 05/10/1990 Stable AA- 8/19/2011 New Rating AAA 06/25/1997 Stable A+ 7/8/2011 Stable AAA 12/14/1988 Stable A+ 6/20/2012 New Rating AA+ 10/03/1991 Negative A+ 10/9/2012 New Rating AA+ 09/24/1991 Stable AA- 2/26/2009 Stable AAA 01/03/1985 Stable BBB+ 2/24/2012 New Rating AAA 01/16/1990 DG BBBpi 12/22/1999 UG Aaq 06/25/1996 The ratings relate to an insurance companys ability to meet its claims and guarantees. The ratings are as of 11/2012 and are subject to change. Presenting Sponsor: Produced By:27 27
  28. 28. 2008 – 2011 Timeline 14% Consumer Confidence in Insurance Companies Consumer Favorable View of the Economy 74% New Annualized Premiums ($ Billions) 11% 72% 72% 77% 72% 71% 69% 69% 9% 9% 70% 10% 8% 8% 8% 69% 7% 62% 4% 5% 4% 3% 2%  A global financial crisis is  March 9, 2009: the S&P 500 closes  The Moment of Truth: Report of the  The Federal Reserve announces triggered by the bursting U.S. at 676.53, a 57% drop from the Oct. National Commission on Fiscal it will keep interest rates at housing bubble. 9, 2007 high of 1,565.15. Responsibility and Reform (the historic lows through mid-2013.  The recession officially ends in June Bowles-Simpson report) is released. • Lehman Brothers files for  Individual life insurance sales gain according to the National Bureau of The report states that, “everything bankruptcy Economic Research. must be on the table,” and 4%, totaling $9.9 billion. • AIG receives an $8.5 billion  The unemployment rate plateaus at recommends an end to many tax federal bailout 10% in October. expenditures, including the current tax • Bear Stearns collapses and  Individual life insurance sales decline treatment of individual life Insurance. is sold to JP Morgan Chase 16% to $9.2 billion, the worst annual  Individual life insurance sales rise 4% • Individual life insurance sales percentage decrease since 1942. to $9.5 billion. (based on annualized new  The Dodd-Frank Wall Street Reform  The U.S. federal debt ceiling is raised and Consumer Protection Act is and within days Standard & Poor’s premiums) fall 7% to $10.9 signed into law. The legislation downgrades the credit rating of U.S. billion. requires about 400 rulemakings and debt. The U.S. federal debt stands at nearly 100 studies. about $1.5 trillion by year-end. Source: 2012 LL Global Presenting Sponsor: Produced By:28
  29. 29. The Federal Funds Rate and 10 Year Treasury Rate • Fed Funds – interest rate banks borrow from each other remains close to 0%. Rate is determined by the Federal Reserve. • Fed expected to keep rates low for extended period. (Percent) Shaded areas indicate U.S. recessions. 2010 research.stlouisfed.org Who is thinking about Insurance Industry with 4% cash value? Presenting Sponsor: Produced By:29 29
  30. 30. Potential Headwinds – Low Interest Rates Key Findings  45% of respondents see a prolonged low interest rate environment as the greatest threat to their business.  87% believe there is a 50% greater likelihood of a major disruption to the economy in the next 12 to 18 months.  97% consider interest rate risk a significant exposure for their company.  When considering interest rate exposure, respondents cited the level of statutory capital and statutory earnings as the primary metrics for concern.  57% of respondents have established risk tolerance limits for interest rate risk. Some of these companies have had serious challenges trying to keep within their established limits.  43% of respondents say the language in their policy forms allows them to change COI rates based on investment earnings.  Most CFOs are considering implementing multiple new strategies as a result of the low interest rate environment, including dramatic changes such as ceasing or exiting a product line. Source: Towers Watson’s Life Insurance CFO Survey #30 (web-based survey conducted March & April 2012) Presenting Sponsor: Produced By:30
  31. 31. What’s Happening to Products  Low interest rate environment  Potential impact on crediting rates  Pulling of long term guaranteed term product  Are GDBUL next to go?  Is Indexed our future? Low interest rates drive up prices in big way Presenting Sponsor: Produced By:31 31
  32. 32. Potential Headwinds, Regulators and Disclosure  Actuarial Guidance 38 and long term guarantees  Commission disclosure  Other challenges  Loss of tax advantages Presenting Sponsor: Produced By:32
  33. 33. Moving on to Current Trends  Are we fulfilling our social mission  Is the market mature  Is there still an opportunity in affluent market  Can we solve the middle market puzzle Are we a pass or fail? Presenting Sponsor: Produced By:33
  34. 34. Key Findings – Sales Trends U.S. Individual Life Sales Trends 16 14 13.5 12.0 12.5 12 9.7 11.6 10 8 2011 6.0 +4% 6 4 -29% 2 Premiums $bbl Constant (1985) $ 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2005 2007 2008 2009 2010 2011 Industry sales flat for two decades. Down 29% on constant dollars. First Quarter 2006 up 15% driven by UL and NRPF. Source: LIMRA’s U.S. Individual Life Insurance Sales Survey and LIMRA estimates Presenting Sponsor: Produced By:34
  35. 35. Key Findings – Sales Trends Policies Sold 18 1617.1 14 12 12.3 10 10.0 9.5 Policies 8 2011 6 +2% -41% 4 2 Policies $mm 0 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Bad direction for policies sold. Selling bigger policies. Source: LIMRA’s Individual Life Sales Survey and LIMRA estimates (U.S. Individual Life Insurance Sales Trends, 1975 – 2011) Presenting Sponsor: Produced By:35
  36. 36. Opportunity – Needs Up Trends in Need for Life Insurance and Future Purchase Intentions 50% 44% 42% 39% 32% 27% 25% 23% 19 19 20 20 19 19 20 20 92 98 04 10 92 98 04 10 Needs more life insurance Likely to buy in next 12 months* *Includes “Very” and “Fairly” likely to buy in the next 12 months Source: LIMRA’s Individual Life Sales Survey and LIMRA estimates Presenting Sponsor: Produced By:36
  37. 37. Key Findings – Sales Trends Policies Sold vs. Households with Children 18 Policies Households w/children 80 74.3 mn HH 16 70 14 62.7 mn HH 60 12 50 10 10 mn 40 8 Policies 6 +19% 30 20 4 2 10 0 0 1980s 1990s 2000s Industry failing in a growing market. Opportunity is huge. Source: LIMRA’s Individual Life Sales Survey and LIMRA Estimates (2010) Presenting Sponsor: Produced By:37 37
  38. 38. “We’re Failing” 1 Trends in U.S. Life Insurance Ownership 90% 83% 83% 81% 78% 78% 80% 76% 70% 72% 70% 65% 62% 60% 56% 55% 50% 52% 54% 53% 49% 50% 46% 52% 50% 47% 40% 42% 44% 41% 34% 30% 1960 1976 1984 1992 1998 2004 2010 Total Group Individual Face-to-Face 1Source: 2008 CEO Life Insurance Task Force for the Future 2Source: LIMRA’s Individual Life Sales Survey and LIMRA Estimates (2010) Presenting Sponsor: Produced By:38 38
  39. 39. Opportunity - Answers Why Households Needing More Insurance Haven’t Bought Can’t afford life insurance 74% Difficult to decide how much I need 52% Have not gotten around to it 50% Worry about making the wrong decision 43% Prefer to put money in other financial products 40% No one has approached me 29% Unpleasant to think about dying 20% Source: LIMRA 2004 Ownership Study Presenting Sponsor: Produced By:39 39
  40. 40. Opportunity – Fewer Agents Number of Agents and Recruits 275000 100,000 225000 80,000 175000 60,000 125000 40,000 75000 20,000 25000 1975 1983 1989 1993 1998 2002 2004 2006 2008 2010 0 Total Agents Recruits (Right Axis) Source: LIMRA’s Census of U.S. Sales Personnel Presenting Sponsor: Produced By:40 40
  41. 41. Future of Distribution  LIMRA numbers show the problem  New generation of talent in the industry  Growth in intermediaries  Is career on the comeback?  Alternative distribution for middle class has its opportunity and problems  The quote shop  Technology as a distribution tool, like ING for Life  Mentoring new people Presenting Sponsor: Produced By:41 41
  42. 42. Sales Capacity Remains an Issue Across most channels, the majority of experienced1 advisors are over 50 and have significant industry experience Advisors age 50 and older Advisors with 25+ years industry experience Percent by channel Percent by channel 1 Advisors in survey have at least 3+ years of experience in industry Source: LIMRA-McKinsey Financial Advisor Survey 2012 Presenting Sponsor: Produced By:42
  43. 43. Shrinking Pool of Agents Median Age of Producers by Distribution System 1978 1996 1999 2004 All 38 47 50 Affiliated 48 Career 47 50 MLEA 46 48 Independent 56 Broker 48 50 PPGA 50 53 Securities Rep 39 Bank Rep 31 IFP 43 Distribution force is aging. Going independent and up market. *Source: LIMRA’s Survey of Producer Opinion Source: Financial Advisor Survey Presenting Sponsor: Produced By:43
  44. 44. Sales Capacity Remains an Issue About 20% to 40% of advisors are within 10 years of retiring or selling their practices, but more than half have no succession plans Years to retirement/sale of practice by channel Percent channel total 39 32 28 1 to 3 years 21 23 22 18 4 to 6 years 7 to 10 years Percent with succession plans 41% 65% *Insufficient data **Based on a small sample SOURCE: LIMRA-Mckinsey Financial Advisor Survey 2012 Presenting Sponsor: Produced By:44
  45. 45. Company Success Focus on Multiple Channels Individual Life Market by Channel Annualized New Premium Growth may come from channel diversification. Source: 2010 LIMRA Life Facts Presenting Sponsor: Produced By:45
  46. 46. Technology Future in Distribution  Bought vs. sold  Internet sales  Internet and technology as a tool  Social media Who will crack the safe? Presenting Sponsor: Produced By:46
  47. 47. Presenting Sponsor: Produced By:47
  48. 48. Presenting Sponsor: Produced By:48
  49. 49. This says it all “No! – I can’t be bothered to see a salesman – we’ve got a battle to fight!” Can’t let all the events blind us Presenting Sponsor: Produced By:49
  50. 50. The Insurance Purchase Process The Role of the Internet in the United States  In the United States, 245 million people (78 percent of the population) are online.1  Transact online: 61% bank online and 71% purchase products there.  Both figures increase as household incomes and educational attainment rise.2  61% of U.S. consumers who recently sought information on individual products made the Internet one of their information sources, up 38% from 2006.3 1 Internet Usage and Population Statistics for North America, Internet World Statistics, December 31, 2011. 2 Zickuhr, Kathryn, and Aaron Smith, Digital Differences, Pew Internet & American Life Project, April 13, 2012. 3 Need Identification and Information Seeking; The Role of the Internet in the United States, LIMRA, 2012. Presenting Sponsor: Produced By:50 50
  51. 51. The Insurance Purchase Process The Role of the Internet in the United States (cont’d.)  Online consumers continue to purchase offline, most often in person through insurance professionals or at work.  Only about 1 in 10 recent buyers purchased insurance or annuities online, fewer than in 2009.  Only 59% of online life buyers were able to complete the purchase process without contacting someone.  Consumer who buy online most often look for convenience (61%).  Offline buyers most often want to meet with someone in person, meet with a personal agent, or be able to ask questions.  Self-directed consumers want to buy online. Men, Gen Yers, and middle-income consumers were more likely to purchase online. Source: 2012, LL Global, Inc. Presenting Sponsor: Produced By:51 51
  52. 52. Recent Purchase Behavior How Did They Buy Individual Insurance and Annuities? Percent of consumers who purchase from any source, by product purchased Roughly 9 in 10 recent individual insurance or annuity purchasers completed the process offline, most often in person or at work. Online purchasing has not increased. Source: The Insurance Purchase Process: The Role of the Internet in the United States, 2012, LL Global, Inc. Presenting Sponsor: Produced By:52 52
  53. 53. Technology and Innovation to Reach the Middle Market Phone # for Determine if consumers to Agency or call Lead Generator? Presenting Sponsor: Produced By:53
  54. 54. Life Insurance Still a Big Advisor Base Sale  Shop online, buy online  The professional agent  Buyers want education Where are professionals focused? Presenting Sponsor: Produced By:54
  55. 55. Life Insurance Ownership in High Net Worth Market has an Impact on the Middle Market  Is declining ownership of life insurance in middle market driven by agent pursuing wealthier households?  Is the high net worth market saturated?  Who will serve the middle market?  Will alternative channels fill the void?  Disappearing life companies  1985 – 2,261  2003 – 1, 123  We fail as an industry if we don’t serve both Multiple distribution channels and broad product offerings are key to solutions for industry. Source: Count from AM Best Presenting Sponsor: Produced By:55
  56. 56. The Affluent Household Number of Affluent Households Total Households (millions) 16 13.7 14 13.2 13.3 13.1 14 12 10.9 10.5 9.6 9.6 10 9.1 8.3 7.5 8 7.1 6.7 6.3 6 6.2 6.2 5.3 5.4 6 4.9 4.9 3.7 3.7 3.8 3.3 3.3 4 2.7 2.5 2.9 2 0.59 0.53 0.48 0.48 0.54 0.74 0.93 0.25 0.23 0.41 0 $500k+* $1mn+* $1mn+ Investable Assets $5mn+* All time high at 14 million NIPR – Not including Primary Residence Source: Spectrem Group Presenting Sponsor: Produced By:56
  57. 57. The Belief that High Net Worth Market is Saturated is a Myth Individual Life Insurance and Ownership and Future Purchase Intentions Future Purchase Ownership Intentions Cash Value 44% 4% Term 41% 5% Second-To-Die 7% 2%  More than half of high net worth households do not own permanent or term  Less than 10% own second to die  While future purchase intentions seem low, each percentage point translates into some 89,000 high net worth  Debate around estate taxes causes hesitancy to purchase  12% admit they do not have enough  Probably an underestimate given 26% of high net worth have less than $100,000 of life insurance. There is a big market, but current sales practices could hurt the traditional sale. Source: 2006 Phoenix Wealth Survey and July National Underwriting article by Walter Zultowski Presenting Sponsor: Produced By:57
  58. 58. The Life Insurance Company Dilemma in the Middle Market  Need to be competitive, price sells  Mortality results drive price and profit  Underwriting and risk selection strict  Compensation supporting distribution vs. price  Economics of the sale vs. market opportunity  You can tie underwriting and loss to price They want to buy. We need to be competitive. Can you afford to sell it? Presenting Sponsor: Produced By:58
  59. 59. The Competitive Landscape in the Middle Market  Spread sheet selling  Price  Underwriting guidelines  Risk of an outlier  For $500,000 of Term Life Insurance at most ages the difference in #1 and #5 may be $10  Easy does not sell like price  Easy is important to company/distributor economics Price is king, easy is necessary, process is expensive. Presenting Sponsor: Produced By:59
  60. 60. Underwriting and Mortality  Very strict underwriting to get mortality results  Just think in super-preferred class on average in the industry. You are looking at around:  Under 2 deaths per 10,000 insured at 35 year 1  Under 3 deaths per 10,000 insured at 45 year 1  Under 5 deaths per 10,000 insured at 55 year 1 Population mortality is substandard. This is the challenge to Simple and Instant Issue Product. Source: Rounded ING pricing mortality Presenting Sponsor: Produced By:60
  61. 61. The Economics of the Sales ING TermSmart 10 Year Level Term – Super Preferred 80% Base Commission $68 Policy Fee Male Face Commission Commission Age Amount Premium on the Fee not on Fee 35 100,000 102 81.60 27.20 300,000 143 114.40 60.00 500,000 193 154.40 100.00 55 100,000 279 223.20 168.80 300,000 560 448.00 393.60 500,000 873 698.40 644.00 Delivery is economics of the sale. Presenting Sponsor: Produced By:61
  62. 62. Cost of Distribution  Nobel assertion is “distribution cost too high”  Average agent under $50,000 income  Agent’s Role  Direct Role  Prospect  Prospect  Sell  Sell  Case manage  Case manage  Place policy  Place policy  Service  Service Alternative channels have not found way to reduce distribution cost. Direct mass prospecting is middle market key. Presenting Sponsor: Produced By:62
  63. 63. Future of the Middle Market  Alternative channels will play a bigger role  Mass marketing to call centers selling term  Ordinary agent economic dilemma  Company scale to deliver  Five years from now new models will find a way to capture share in the segment  Banks may be a bigger player  Distribution economics a challenge in middle market New industry models needed or a back to basics is needed to fill the need in this large market segment. Presenting Sponsor: Produced By:63
  64. 64. Protecting the Goose that Lays the Golden Egg Presenting Sponsor: Produced By:64
  65. 65. The Goose’s Golden Egg  Protecting your home, your car – why not your family?  Income tax-free death benefits – Proceeds from an insurance policy are generally income tax free and if properly structured, may also be free from estate tax.  Potential for income tax-deferred growth – No income taxes are generally due on cash values that accumulate in the life insurance policy.  Potential source of retirement income - Income tax free distributions are achieved by withdrawing to the cost basis (premiums paid) then using policy loans. Loans and withdrawals may generate an income tax liability, reduce available cash value and reduce the death benefit or cause the policy to lapse. This assumes the policy qualifies as life insurance and is not a modified endowment contract.  Lifetime return on death benefit Presenting Sponsor: Produced By:65
  66. 66. Enter the Life Settlement Deal Volume Total Policy Year Face Value 2003 6 Billion 2005 (1) 13 Billion 2010 (2) 15 Billion 2030 (1) 160 Billion Market is growing but still small when compared to more than 9 trillion of life insurance in force. (1) Source: Sanford Bernstein Co. (2) Source: Scope Group, Berlin Presenting Sponsor: Produced By:66
  67. 67. Life Settlements Do Life Settlements have a role?  Model regulations coming along – State regulation is increasing  States passing provision to protect consumer’s right to know Industry Impact  Old age prices – not significant yet  Price into new products  Raise rates on older ages  Impact of abuses  First right of purchase policy language Establish a new role in underwriting. The risk is longevity. They live too long. Presenting Sponsor: Produced By:67
  68. 68. The Perfect Storm Adverse Conditions  Life Settlement  Premium Finance  Non Recourse Premium Finance  Investor Owned Life Insurance (IOLI)  Wet Paper Transactions/Free Insurance  Future impact on the industry  Nothing in this world is free  The table shave program  Death of the underwriting exception  Two tables turn a 5% asset into 12% asset Does anybody buy real life insurance anymore? Need back to basics. Presenting Sponsor: Produced By:68
  69. 69. Term-to-Perm, To Settlement Destroying the term conversion Presenting Sponsor: Produced By:69
  70. 70. We Are a Very Important Industry  My greatest learning experiences were from my mistakes. Learn from the past 10 years.  Our industry is a big part of the U.S. recovery  The opportunities have never been greater  The challenges have also never been greater  Low interest rates, shrinking new agents, disappearing products  Ethics in the business  Back to basics in selling  Distribution online or offline still king  The future is up to us We all should care Presenting Sponsor: Produced By:70