2009 General Meeting ● Assemblée générale 2009 Ottawa, Ontario ● Ottawa (Ontario)

1. L’Institut canadien des actuaires Canadian Institute of Actuaries 2009 General Meeting ●Assemblée générale 2009 Ottawa, Ontario ● Ottawa (Ontario) Session/séance : PD-19 Impact of Recessions on LTD Experience Speaker(s)/conférencier(s) :Jeff Schuh, Peter Douglas, Ken Fraser

2. 2009 General Meeting Assemblée générale 2009 Agenda • Evolution of the U.S. recession • Historical connections between recessions and Group LTD experience in the U.S. • Canadian LTD metrics vs. Economic indexes • Canadian LTD Profitability vs. Economic indexes

3. PD-19 Impact of Recessions on LTD Experience Jeff Schuh, VP & Senior Actuary ING Reinsurance 2009 General Meeting Assemblée générale 2009

4. 2009 General Meeting Assemblée générale 2009 U.S. Economic Timeline • Summer 2007 - “Beginning of the end” • Trouble brewing in the U.S. housing market (prices dropping, inventories climbing, foreclosures up) • MBS quality drops • 2 large Bear Stearns hedge funds go bankrupt ($1.6B) due to MBS exposure – despite AAA rating • First crack in the edifice • Cost of borrowing up, spreads increase

5. 2009 General Meeting Assemblée générale 2009 U.S. Economic Timeline • March 10-16, 2008: “A very bad week” • Monday • Rumors circulate that Bear Stearns is running out of cash • Stock begins to nosedive (slowed only by Spitzer scandal!) • Thursday • Bear Stearns suffers run on bank as clients pull money • Needed emergency cash or file bankruptcy overnight, call to JP Morgan • JP Morgan and NY Feds send over analysts to look at the books • Friday • JP and Feds discover enormity of problem: sub-prime exposure, credit default swaps, interconnectedness with other banks • Feds propose a loan $30B to JP Morgan to fund Bear Stearns purchase • Saturday • JP offers Bear Stearns $8-12/share ($170 in 2007, $30 previous Friday) • Sunday • JP revises bid and offers $4/share • Treasury Secretary Henry Paulson worries about “moral hazard”, insists that JP lower offer to $2/share to penalize Bear Stearns • Economy limps along until the fall…

6. 2009 General Meeting Assemblée générale 2009 U.S. Economic Timeline • Sept 9-16th, 2008: “The Week America’s Economy Almost Died” • Tuesday– Lehman Brothers stock drops 45% in one day • Wednesday – LB announces earnings early, to no avail • Thursday–LB computerized trading system freezes when JPMorgan demands $5B collateral on short notice • Friday • Paulson insists there will be no bailout, citing “moral hazard” issues • Geithner declares “somebody needs to buy them” • BOA and Barclays interested – but BOA purchases ML instead, Barclays drops out • Sunday– LB files bankruptcy • Tuesday • LB goes under • Stock market nose dives • Banks unwilling to lend money, credit markets freeze up • AIG nationalized after stock drops 61% • Wednesday– Goldman Sachs and Morgan Stanley now teetering

7. 2009 General Meeting Assemblée générale 2009 U.S. Economic Timeline September 20 $700B bailout proposed September 21 GS and MS turn themselves into bank holding companies (all five major investment banks are gone) September 25 Washington Mutual becomes largest bank failure ever October 3 Congress passes bailout bill allowing government authority to purchase toxic assets or capital injections

8. 2009 General Meeting Assemblée générale 2009 September & November, 2008 • Lehman Bankruptcy • Bank of America acquires Merrill Lynch • Federal Reserve rescues AIG • Bailout Plan passed • Goldman and Morgan Stanley become banks • Washington Mutual seized • Wells Fargo acquires Wachovia • Fannie Mae/Freddie Mac bailed out • Car Makers (Detroit) seek bailout • President Obama elected • Speed of economic collapse was startling…

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13. 2009 General Meeting Assemblée générale 2009 Recessions Are Not Equal Opportunity Events (snapshot from early 2009)

14. 2009 General Meeting Assemblée générale 2009 What does this have to do with Group LTD? • Potential for higher incidence rates • Potential for lower termination rates (longer durations) • Effect will vary by diagnosis, industry, occupation, demographics • Statements above are logical and plausible, but largely anecdotal. What proof do we have that this linkage exists?

15. 2009 General Meeting Assemblée générale 2009 U.S. Evidence of LTD/Economy Linkage • Metrics • M&A Impact on Group LTD Incidence (2000) • Unum 2004 Incidence Study • 2008 SOA Termination Rate Study • ING Survey on Economic Impact (2009) • New Academic Papers • Profits • 1990 LTD Industry Profits • 2008 Industry LTD Claims Review • Recent Results from Select Insurers (Unum, Standard, Met)

16. 2009 General Meeting Assemblée générale 2009 Impact of M&A on Group LTD • Study by one U.S. insurer found LTD incidence rates and loss ratios increased immediately after M&A activity* • Incidence rates 10-15% higher after M&A date • Annual incurred claims per employee were 21% higher • Were these from employees who were very likely to be laid off? Does this differ from current environment where employment is uncertain and workers may be afraid to go on disability? • Will there be a disability “echo” during economic recovery as postponed claims are filed and new claims arise from overworked staff? • *Source: ING Reinsurance Disability Forum, 2000, Vol. 7, No. 2

17. 2009 General Meeting Assemblée générale 2009 Unum Incidence Study • Presented at SOA 2004 Anaheim Health Spring Meeting • Unum LTD incidence rates from 1989-2003 mapped against U.S. recessions of 1990 and 2001 • Discovered correlations between incidence rates and macro-economic indexes • Startling conclusion: incidence rates continued to rise after the 1990 recession, and officially peaked 16 quartersafter the recession officially ended

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20. 2009 General Meeting Assemblée générale 2009 Conclusions of Unum Study Implications are troubling given current economic indicators…

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22. 2009 General Meeting Assemblée générale 2009 U.S. Consumer Confidence Index

23. 2009 General Meeting Assemblée générale 2009 Qualifications with Unum Study • Actual values and claim rates not available • Correlations vs. causation • No linear relationships • Mix of business: results not corroborated by other insurers, current Unum results not adversely affected by recession (significant move down-market and concentration in “recession resistant” industries) • 2001 recession incomplete, inconclusive during study period • Not all recessions have similar effects • More to Group LTD profitability than incidence rates • However, the study served important role by generating discussion and increasing awareness of LTD/Economy linkage

24. 2009 General Meeting Assemblée générale 2009 ING Reinsurance Industry Survey • “Impact of the U.S. Economy on the Disability Market” – 9/2009 • Incidence Rates: • Majority of participants felt economy had minimal impact on incidence or that incidence had declined • “Some industries with increasing incidence rates are offset by tendency of employees in other sectors to hang on to their employment or RTW more quickly in order to avoid losing job” • “We have experienced more instances in which claims submitted were not eligible because their hours were reduced below plan” • Recovery Rates: • 78% felt recession had not affected recovery rates, however… • 56% felt recession has dampened employers’ willingness to support RTW • “There is less willingness to hold jobs open or make accommodation to allow some to return to work”

25. 2009 General Meeting Assemblée générale 2009 New SOA LTD Study:Short Duration (<5 yrs) Termination Rates Speaker noted only modest drop in termination rates during 2001, offset by increase in mortality Source: “SOA Experience Table Update” – Edd Bailey, Eric Poirier (2009 JHA Dynamics of Disability)

26. 2009 General Meeting Assemblée générale 2009 New Academic Studies from the University of Southern Maine(Center for Business & Economic Research) • “Long-Term Disability Claims Rates and the Consumption-to-Wealth Ratio” published in the Journal of Risk and Insurance [March 1, 2009] • Purpose: investigate relationship between Group LTD claim rates and the economic indicators.Explore the ability of the consumption-to-wealth ratio to predict LTD submitted claims rates.” • Option Theory utilized as LTD insurance treated as put option • Conclusion: “When the consumption-to-wealth ratio is low, claims rates are high.We find that the connection is fairly strong and robust” • Predicting SSDI submitted incidence using time series (ARIMA) models • Preview given at SOA Annual Meeting (Oct. 28-28, 2009) • Relatively high predictive power

27. 2009 General Meeting Assemblée générale 2009 New Academic Studies from the University of Southern Maine(Center for Business & Economic Research) • The catch… • Consumption-to-Wealth Study: • Examined only two industry sectors: manufacturing and wholesale/retail. • Based on Unum-only data • This is an academic paper - Dynamic Ordinary Least Squares Cointegrating Regressions: • ARIMA Model: • Time series models are a black box, do not provide insight into reasons for predictive ability.

28. 2009 General Meeting Assemblée générale 2009 U.S. LTD Industry Profits vs. 1990 Recession • - LTD experience does not track directly with recession. Lagged effect? • Poor experience generally attributed to white collar lay-offs, liberal plan designs (physicians/attorneys), rise of managed care, etc. • Source: Jan. 2009 GUAA presentation (Rich Clement – Smith Group)

29. 2009 General Meeting Assemblée générale 2009 Council for Disability Awareness: 2008 LTD Claims Review • 15 participating companies, representing 75% of U.S. disability market. • Government Plan • Applications for SSDI benefits “surged” during 2008 • SSDI approval rates continue to decline • Private Plans • LTD insurers report that over past several years, incidence and durations have been declining • Almost without exception, participants report that the 2008-2009 downturn has not affected disability claims as of the reporting date • “The participating member companies generally expect to see some influence on claims from the current economic downturn, although none predict a severe impact.”

30. 2009 General Meeting Assemblée générale 2009 StanCorp shows no adverse link between economy and overall Group Benefit Ratio Source: 9/10/2009 KBW Insurance Conference

31. 2009 General Meeting Assemblée générale 2009 Drill-down into LTD-only benefit ratio yields similar results Source: 9/10/2009 KBW Insurance Conference

32. 2009 General Meeting Assemblée générale 2009 StanCorp’s Quarterly Group Benefit Ratios - through 3Q09 Source: StanCorp’s quarterly earnings calls

33. 2009 General Meeting Assemblée générale 2009 • Bad News: Unum shows uptick in LTD incidence rate during 3Q09. STD deteriorated as well. • Good News: Average size of claim decreased, claim volatility coming from “non-economically sensitive sectors”. • Source: 9/9/2009 Annual Investor Meeting

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35. 2009 General Meeting Assemblée générale 2009 Source: 9/9/2009 Annual Investor Meeting

36. 2009 General Meeting Assemblée générale 2009 Source: 9/9/2009 Annual Investor Meeting

37. 2009 General Meeting Assemblée générale 2009 MetLife Underwriting Results • The group disability morbidity ratio (96.4%) was above the target range for the first time this year. • “Disability claim incidence picked up in the third quarter after several quarters of stable experience, although there was a similar up-tick in the year-ago period.” • “Recoveries, which have been lower than anticipated all year, remained below expectations.” Source: MetLife Q3 2009 Earnings Call - October 30, 2009

38. 2009 General Meeting Assemblée générale 2009 Links 2004 Unum SOA Presentation http://www.soa.org/files/pdf/033_bk-anaheim04.pdf 2008 SOA Table: http://www.soa.org/research/group-disability/2008-ltd-study.aspx CDA 2008 LTD Claims Review: http://www.disabilitycanhappen.org/surveys/CDA_LTD_Claims_Survey_2008.asp University of Southern Maine – Center for Business & Econ Research http://www.usm.maine.edu/~cber/ LTD & Consumption to Wealth Ratio http://www3.interscience.wiley.com/cgi-bin/fulltext/122192705/HTMLSTARTW?CRETRY=1&SRETRY=0

39. PD-19 Impact of Recessions on LTD Experience Peter Douglas, Instructor Math & Stats University of Regina 2009 General Meeting Assemblée générale 2009

40. PD-19 LTD During A Recession Statistical Analysis Historical Background Data Sources Impact on Incidence Impact on Termination US, Canadian and UK data 2009 General Meeting Assemblée générale 2009

41. Data Studies 2009 General Meeting Assemblée générale 2009 All of this data free on the web! But ideally we need longer Canadian LTD history.

42. Historical Unemployment 2009 General Meeting Assemblée générale 2009

43. Canadian Economic Indicators 2009 General Meeting Assemblée générale 2009

44. CIA LTD Studies Short history with key gaps Termination Rates 1988-97 Study released 2009 New study 2004-8 underway Incidence Rates No study to date Planned 2009 study on hold 2009 General Meeting Assemblée générale 2009

45. CIA Terminations 2009 General Meeting Assemblée générale 2009 A:E ratios generally improved over time Regardless of changes in unemployment!

46. CIA TerminationsDetailed Results Correlation of A:E Ratio Improvement over time more important than job market More terminations in poor job market? More soft claims (year 1 results) Biggest impact in years 4-10? 2009 General Meeting Assemblée générale 2009

47. CPP Disability Approvals 2009 General Meeting Assemblée générale 2009

48. CPP Disability Approvals 2009 General Meeting Assemblée générale 2009

49. CPP Approval Rates 2009 General Meeting Assemblée générale 2009 • Subjective • Politics • Policy changes • Current political pressure? • Clear spikes when unemployment is high • Expect an increase in CPP approval rates for 2009-10

50. WCB Statistics 2009 General Meeting Assemblée générale 2009 • Results by province 1996-2007 • Some gaps • Key stats added in 2000 • Not always consistent between WCBs • Key Statistical Measures • Number of Loss Time Claims • Payroll • % LTCs receiving benefits after 2 years