1. Are your LTD results saying what you think they are? Joel Cornberg CIA General Meeting 19 October 2006

2. Slide 2 Agenda Relevance of the topic 2006 group life & LTD survey A concrete example Incurral year analysis Embedded value Where to go from here Questions Joel Cornberg CIA General Meeting 19 October 2006

3. Slide 3 Relevance of the topic Joel Cornberg CIA General Meeting 19 October 2006

4. Slide 4 Relevance of the topic Stems from conversations with many carriers Variety of opinions on how to monitor LTD Ongoing tough competition False confidence could be expensive Joel Cornberg CIA General Meeting 19 October 2006

5. Slide 5 2006 group life & LTD survey Joel Cornberg CIA General Meeting 19 October 2006

6. Slide 6 2006 group life & LTD survey Swiss Re’s biannual survey of group carriers To be released in the coming weeks Broad industry participation Covers many functional areas CIA presentation includes responses from 20 carriers Joel Cornberg CIA General Meeting 19 October 2006

7. Slide 7 2006 group life & LTD survey What tools do you use to monitor the financial performance of your LTD portfolio? Select all that apply: Tool % using Calendar year results80% Incurral year results60% Reserve adequacy testing50% Embedded value20% Other 5% Joel Cornberg CIA General Meeting 19 October 2006

8. Slide 8 2006 group life & LTD survey What profit measures do you use in pricing? Select all that apply: Measure % using Per cent of premium85% Return on equity55% Internal rate of return10% Other 0% Joel Cornberg CIA General Meeting 19 October 2006

9. Slide 9 2006 group life & LTD survey Many companies are relying on one type of analysis More variety could be useful Joel Cornberg CIA General Meeting 19 October 2006

10. Slide 10 A concrete example Joel Cornberg CIA General Meeting 19 October 2006

11. Slide 11 A concrete example ABC Life has a stable block of business Annual premium is $1 million Reserves are $5 million Required capital is $1 million Incidence & termination similar to industry studies Investment income is 5% Income tax is 33% Target post-tax profit is 5% of premium Joel Cornberg CIA General Meeting 19 October 2006

12. Slide 12 A concrete example Income statement for ABC Life ($ 000) Premium 1 000 Expenses (150) Claims(1 075) Reserve change 0 (reserves are stable) Interest 300 Pre-tax profit 75 Income tax (25) Post-tax profit 50 (5% of premium) Joel Cornberg CIA General Meeting 19 October 2006

13. Slide 13 A concrete example Most carriers look at Profit as % of premium Calendar year results Everything is fine, end of story? Let’s take a closer look! Joel Cornberg CIA General Meeting 19 October 2006

14. Slide 14 Incurral year analysis Joel Cornberg CIA General Meeting 19 October 2006

15. Slide 15 Incurral year analysis Income statement Premium 1 000 Expenses (150) Claims(1 075) Reserve change 0 Interest 300 Pre-tax profit 75 Income tax (25) Post-tax profit 50 Joel Cornberg CIA General Meeting 19 October 2006

16. Slide 16 Incurral year analysis Income statement 2006 incurrals Prior year runoff Expected ActualExpected Actual Premium 1 000 1 000 0 0 Expenses (100) (100) (50) (50) Claims (60) (65)(1 015)(1 010) Reserve change (910) (980) 910 980 Interest 25 25 275 275 Pre-tax profit (45) (120) 120 195 Income tax 15 40 (40) (65) Post-tax profit (30) (80) 80 130 Joel Cornberg CIA General Meeting 19 October 2006

17. Slide 17 Incurral year analysis Calendar year results can be split by incurral year Incurral Profit year during 2006 1990 $a 1991 $b … … 2006 $y Total $z reconciles to 2006 financials Easier to identify areas for investigation, e.g. poor terminations Clearer picture of reserve strain and margin releases Joel Cornberg CIA General Meeting 19 October 2006

18. Slide 18 Incurral year analysis Triangular results since inception can be built Incurral Profit by calendar year Cumulative year19901991 …2006 profit 1990 $ $ … $ $ 1991 $ … $ $ … … … … 2006 $ $ Total $ $ … $ $ Group actuaries could benefit from P&C concepts – Why do we apply them only for medical? Joel Cornberg CIA General Meeting 19 October 2006

19. Slide 19 Incurral year analysis Challenges with incurral year methods Need for care in allocating – Investment income – IBNR Excessive reliance on formulas – Day-to-day business knowledge is still key Joel Cornberg CIA General Meeting 19 October 2006

20. Slide 20 Embedded value Joel Cornberg CIA General Meeting 19 October 2006

21. Slide 21 Embedded value Origins European companies, 1980’s Used by investment analysts Publicly disclosed by many large L&H insurers Joel Cornberg CIA General Meeting 19 October 2006

22. Slide 22 Embedded value Definition Present value of future profits on inforce business Plus required capital Minus cost of tying up capital Joel Cornberg CIA General Meeting 19 October 2006

23. Slide 23 Embedded value Related concepts IRR-style approach Requires identification of a hurdle rate EV > 0 implies value creation Economic profit is a hot issue Source of earnings analysis Inforce versus new business Joel Cornberg CIA General Meeting 19 October 2006

24. Slide 24 Embedded value Challenges with embedded value analysis Complicated Requires some corporate finance expertise – hurdle rate – investment assumptions Definition of new business for Group Again, no substitute for knowing your business Joel Cornberg CIA General Meeting 19 October 2006

25. Slide 25 Where to go from here Joel Cornberg CIA General Meeting 19 October 2006

26. Slide 26 Where to go from here Current simplistic analysis may not be sufficient Consider other approaches Incurral year and EV offer useful insights Multiple tools are needed We can’t stand still Joel Cornberg CIA General Meeting 19 October 2006

27. Slide 27 Questions Joel Cornberg CIA General Meeting 19 October 2006