Protection
We offer U.S. customers life insurance, long-term care insurance and, primarily
for companies with fewer than 1,000 employees, group life and health insurance.
In Europe, we offer payment protection insurance, which helps consumers meet
their payment obligations in the event of illness, involuntary unemployment,
disability or death. In 2005, we were the leading provider of individual long-term
care insurance and a leading provider of term life insurance in the U.S., according
to LIMRA International (in each case based upon annualized first-year premiums).
Our leadership in long-term care insurance is based upon over 30 years of product
underwriting and claims experience. This experience has enabled us to build
and benefit from what we believe is the largest actuarial database in the long-term
care insurance industry. We are a leading provider of term life insurance through
brokerage general agencies in the U.S. which we consider to be the largest distribution
channel for term life insurance.
Life insurance
Our life insurance business markets and sells term and universal life, insurance
products that provide a personal financial safety net for individuals and their
families. These products provide protection against financial hardship after
the death of an insured by providing cash payments to the beneficiaries of the
policyholder. Some types of life insurance also offer a savings element that
can be used to help accumulate funds to meet future financial needs.
Our principal life insurance product is term life, which provides life insurance
coverage with guaranteed level premiums for a specified period of time. Term
life insurance has little or no buildup of cash value that is payable upon lapse
of the coverage. We have been a leading provider of term life insurance for
more than two decades, and we believe that we are a leading provider of term
life insurance through brokerage general agencies in the U.S. In addition to
term life insurance, we offer universal life insurance products, which are designed
to provide protection for the entire life of the insured and may include a buildup
of cash value that can be used to meet particular financial needs during the
policyholder’s lifetime. Our life insurance business also includes a run-off
block of whole life insurance.
We price our insurance policies based primarily upon our own historical experience
in the risk categories that we target. Our pricing strategy is to target individuals
in preferred risk categories and offer them attractive products at competitive
prices. Preferred risks include healthier individuals who generally have family
histories that do not present increased mortality risk. We also have significant
expertise in evaluating people with health problems and offer appropriately
priced coverage for people who meet our underwriting criteria.
We offer our life insurance products primarily through an extensive network
of independent brokerage general agencies located throughout the U.S. We also
offer our life insurance products through affluent market producer groups, financial
intermediaries, and insurance marketing organizations. We believe there are
opportunities to expand our sales through each of these distribution channels.
Products
Term life insurance
Our term life insurance policies provide a death benefit if the insured dies
while the coverage is in-force. Term life policies lapse with little or no required
payment by us at the end of the coverage period if the insured is still alive.
We also offer policyholders the right to convert most of our term insurance
policies to specified life insurance policies issued by us. We seek to reduce
the mortality risk associated with conversion by restricting its availability
to certain ages and by limiting the period during which the conversion option
can be exercised.
Our primary term life insurance products have guaranteed level premiums for
initial terms of 5, 10, 15, 20 or 30 years. In addition, our 5-year products
offer, at the end of the initial term, a second 5-year term of level premiums,
which may or may not be guaranteed. After the guaranteed period expires, premiums
increase annually and the policyholder has the option to continue under the
current policy by paying the increased premiums without demonstrating insurability
or by qualifying for a new policy by submitting again to the underwriting process.
Coverage continues until the insured reaches the policy expiration age or the
policyholder ceases to make premium payments or otherwise terminates the policy,
including potentially converting to a permanent plan of insurance. The termination
of coverage is called a lapse. For newer policies, we seek to reduce lapses
at the end of the guaranteed period by gradually adjusting premiums to the attained
age of the insured over the five years following the guaranteed period. After
this phase-in period, premiums continue to increase as the insured ages.
VantagePointSM is a term product with a return of premium feature. Available
for initial terms of 15, 20 or 30 years, it has a cash value rider that provides
for a return of 100% of total net paid premiums at the end of the initial term,
if a death benefit has not been paid. Cash values begin after the fourth year
and are available for policy loans.
Universal life insurance
Our universal life insurance policies provide policyholders with lifetime death
benefit coverage, the ability to accumulate assets on a flexible, tax-deferred
basis, and the option to access the cash value of the policy through a policy
loan, partial withdrawal or full surrender. Our universal life products allow
policyholders to adjust the timing and amount of premium payments. We credit
premiums paid, less certain expenses, to the policyholder’s account and from
that account deduct regular expense charges and certain risk charges, known
as cost of insurance, which generally increase from year to year as the insured
ages. Our universal life insurance policies accumulate cash value that we pay
to the policyholder when the policy lapses or is surrendered. Most of our universal
life policies also include provisions for surrender charges for early termination
and partial withdrawals. As of December 31, 2005, 54% of our in-force block
of universal life insurance was subject to surrender charges. We also sell joint,
second-to-die policies that are typically used for estate planning purposes.
These policies insure two lives rather than one, with the policy proceeds paid
after the death of both insured individuals.
Asset management
We offer asset management services to affluent individual investors. Most of
our clients for these services have accumulated significant capital, and our
principal asset management strategy is to help protect their assets while taking
advantage of opportunities for capital appreciation. Our asset management clients
are referred to us through financial advisers. We work with these financial
advisers to develop portfolios consisting of individual securities, mutual funds
and variable annuities designed to meet each client’s particular investment
objectives. Our products consist of separately managed accounts, managed mutual
funds accounts, and managed variable annuity services. For each of these products,
we receive a management fee based upon the amount of assets under management.
Separately managed accounts are individually managed client portfolios that
we structure based on the client’s needs and investment objectives, with securities
recommended by multiple institutional investment advisors according to defined
investment strategies. Our clients directly own the securities in their individual
portfolios, and we continuously monitor and evaluate each investment advisor
and the investment performance in each portfolio. We also offer advisory services
to help clients invest in a variety of mutual funds and other securities. By
working in cooperation with our clients’ financial advisers, we seek to achieve
each client’s investment objectives by selecting the appropriate mutual funds.
Our retail broker/dealers have approximately 2,400 affiliated financial professionals,
who sell annuity and insurance products, including our proprietary products,
as well as third-party mutual funds and other investment products. In connection
with these sales, we receive commission and fee income from purchasers, and
we pay a portion of the commissions and fees to financial professionals.
Mortgage Insurance
Through our Mortgage Insurance segment, we offer mortgage insurance in the
U.S., Canada, Australia, Europe, New Zealand, Mexico and Japan. We also are
exploring opportunities in Europe, Latin America and Asia.
Private mortgage insurance expands homeownership opportunities by enabling
borrowers to buy homes with “low-down-payment mortgages,” which are usually
defined as loans with a down payment of less than 20% of the home’s value. Low-down-payment
mortgages are sometimes also referred to as high loan-to-value mortgages. Mortgage
insurance products increase the funds available for residential mortgages by
protecting mortgage lenders and investors against loss in the event of a borrower’s
default. These products generally also aid financial institutions in managing
their capital efficiently by reducing the capital required for low-down-payment
mortgages. If a borrower defaults on mortgage payments, private mortgage insurance
reduces and, in some instances, eliminates the loss to the insured institution.
Private mortgage insurance also facilitates the sale of mortgage loans in the
secondary mortgage market.
U.S. mortgage insurance The U.S. private mortgage insurance industry is defined
in large part by the requirements and practices of Fannie Mae, Freddie Mac and
other large mortgage investors. Fannie Mae and Freddie Mac purchase residential
mortgages from mortgage lenders and investors, as part of their governmental
mandate to provide liquidity in the secondary mortgage market. For the first
nine months of 2005, Fannie Mae and Freddie Mac purchased approximately 28.1%
of all the mortgage loans originated in the U.S., as compared to 36.1% for 2004,
according to statistics published by Inside the GSEs. We believe the significant
reduction in the percentage of mortgages purchased by Fannie Mae and Freddie
Mac has reduced the market size for flow private mortgage insurance.
The majority of our U.S. mortgage insurance policies provide default loss protection
on a portion (typically 10%-40%) of the balance of an individual mortgage loan.
Most of our primary mortgage insurance policies are “flow” insurance policies,
which cover individual loans at the time the loan is originated.
Products and services
Primary mortgage insurance
Flow insurance. Flow insurance is primary mortgage insurance placed on an individual
loan when the loan is originated. Our primary mortgage insurance covers default
risk on first mortgage loans generally secured by one- to four-unit residential
properties, and can be used to protect mortgage lenders and investors from default
on any type of residential mortgage loan instrument that we have approved. Our
insurance covers a specified coverage percentage of a “claim amount” consisting
of unpaid loan principal, delinquent interest and certain expenses associated
with the default and subsequent foreclosure. As the insurer, we generally are
required to pay the coverage percentage of a claim amount specified in the primary
policy, but we also have the option to pay the lender an amount equal to the
unpaid loan principal, delinquent interest and certain expenses incurred with
the default and foreclosure, and acquire title to the property. In addition,
the claim amount may be reduced or eliminated if the loss on the defaulted loan
is reduced as a result of the lender’s disposition of the property. The lender
selects the coverage percentage at the time the loan is originated, often to
comply with investor requirements to reduce the loss exposure on loans purchased
by the investor.