Term Insurance Market Update Kevin J. Borchert, CFA, FSA, MAAA VP, Life Reinsurance Pricing

Agenda Environment and Market News Retail Market Reinsurance Market Sales Results Reinsurance placement Rate trends Reinsurance Market Market LOC 2001 CSO State Adoption Impact Illustration – Reinsurance example

Our Environment Volatile equity markets Low interest rates Economic uncertainty / unemployment Threat of terrorist activity Retail market consolidation Reinsurance market shrinking

Market News – M&A / Player Exits AXA buys Mutual of NY ($1.5B) – 9/03 Manulife buys John Hancock ($11B) – 9/03 Allianz exits life reinsurance market – 9/03 A&L Re stops writing new business – 2/03 ERC exits life reinsurance market – 11/03 Scottish Re acquisition of ERC inforce ($.2B) – 10/03 Great West buys Canada Life ($7.1B) – 2/03

Market News – M&A / Player Exits Sun Life and Clarica merge – 12/02 Safeco Life to sell Life and Investment business – 9/03 RGA buys Allianz life reinsurance unit ($.3B) – 9/03 Banc One acquires Zurich Life ($.5B)– 5/03 October 2003: Insurance industry sheds 2,000 jobs Expect continued consolidation

Retail Market Sales Results US Individual Life Sales – AM Best Aggregates & Averages Slight gains year-over-year until 2001 2002: AM Best new sales up slightly; LIMRA up 14% thru Q3, 2002

Retail Market What is your expected annual growth rate in term sales over the next 5 years? Average consensus is 8-10% from market Significant increase in 20 YT plans sales mix over the last 4 years (17% -> 35%) Short duration and ART plan share has fallen off (45%-> 26%) Return of premium plans gaining share

Retail Market Pricing Top retail players pricing trends from 2001 -> 2003: Premium Change Min / Max 10 YT -4% 0% / -22% 15 YT -5% +3 / -18% 20 YT -5% +3 / -23% 30 YT -7% 0% / -30+%

Reinsurance Market Competitive Landscape Changing financials Ratings Market Exits Reinsurer exits and retro consolidation LOC: Cost/ Capacity Inforce Market Increase in PC&D/ Private Label Solutions

Reinsurance Market Sales Results US Life Reinsurance Recurring New Business 2002 volume almost seven times 1992 volume 22% CAGR

New Business Utilizing Reinsurance US Life Reinsurance Recurring New Business as percent of Directly Written Business Percent reinsured continues to grow Growth rate slowed after 1998

Reinsurance Players Source: Munich Survey *2002 ERC portfolio and recurring includes significant volume assumed from AUL *2001 Ordinary portfolio amount includes $470,093 assumed from Lincoln Re Source: Munich Survey

Reinsurance Players Mid 1990’s: Nearly 30 companies active in US life reinsurance market. Top 6 players have 60% of market share Approximately 20 reinsurers had at least a 2% share accounting for 90% of market By 2002: Reinsurance market tripled from 1995 Less than 20 active reinsurers. Top 6 account for 75-80% of market share Top 10 companies account for 90% of market

Why are firms exiting Life Reinsurance? Financial distress Lack of appropriate scale Capital relief Business considered non-core => Becoming difficult to diversify reinsurance pool

Reinsurance Concerns Letter of credit costs rising (30%) short term LOC capacity requirements Retro market consolidating Retail market delaying product re-pricing 8+ reinsurance players from 5 years ago have either merged, exited, disappeared Decreased credit quality / ratings for remaining reinsurance players

Reinsurer Ratings (As of 11/03) Reinsurer: S&P Rating: General Cologne Re AAA Swiss Re AA Transamerica Re AA ING Re (US) AA Hanover AA- RGA Re AA- Munich Re A+ SCOR BBB- Scottish Re BBB- Several no longer rated such as Gerling, Max Re, &Optimum Re

Reinsurance Letter Of Credit Capacity Estimates 100 80 60 40 20

Reinsurance Opportunities Inforce block pricing more rational Increased activity in product consulting and private label solutions Market share open for many pools due to financial difficulties and market participant exits Limited capacity and reinsurance outlets Upward pressure on rates due to LOC costs, LOC capacity, interest rates, RBC, etc.

Regulatory Issues Retail players planning 2001 plan introduction 2001 CSO State Adoption (source: ACLI) Adopted: NM (1/04), OK (1/04), TX (5/1/03), UT (7/1/03) Proposed 1/1/04: AL, DE, ID, IN, IA, MD, MA, MD, NE, OH, PA, TN Proposed 1/1/05: ND Retail players planning 2001 plan introduction Impact Example

2001 CSO Example Portfolio of 10/20/30 year level term with 60%/25%/15% sales mix Reserve strain is reduced but not eliminated 2000 4000 6000 8000 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 Economic Reserves 2001 CSO Reserves 1980 CSO Reserves

2001 CSO Impact Reserve redundancy still significant Industry financing capacity still an issue Reserve pattern “hump”

2001 CSO Pricing Impact Overall portfolio allowance change minimal (<1%) using constant target ROI’s Longer duration products result in more significant change Reserve credit impact Time value of cost savings Preferred classes absorb larger declines in allowances Improvement in nonsmoker mortality Shorter periods of deficiency reserves under 2001 CSO