Midwestern Underwriting ConferenceLife/LTC Linked Benefit Products

Kevin Oldani, SVP and Chief Underwriter

HLR America – Mortality Solutions

Midwestern Underwriting Conference

September 2014

Hannover Re Group

Disclaimer

2

This presentation does not address the investment objectives or financial situation of any particular person or legal entity. Investors should seek independent professional advice and perform their own analysis regarding the appropriateness of investing in any of our securities.

While Hannover Re has endeavoured to include in this presentation information it believes to be reliable, complete and up-to-date, the company does not make any representation or warranty, express or implied,as to the accuracy, completeness or updated status of such information.

Some of the statements in this presentation may be forward-looking statements or statements of future expectations based on currently available information. Such statements naturally are subject to risks and uncertainties. Factors such as the development of general economic conditions, future market conditions, unusual catastrophic loss events, changes in the capital markets and other circumstances may cause the actual events or results to be materially different from those anticipated by such statements.

This presentation serves information purposes only and does not constitute or form part of an offeror solicitation to acquire, subscribe to or dispose of, any of the securities of Hannover Re.

© Hannover Rück SE. All rights reserved. Hannover Re is the registered service mark of Hannover Rück SE.

Hannover Re Group

Agenda

Market Overview

• LTC Market Environment

• New Product Development Activity

• Product Options and Benefits

• How Do the Products Work and What do They Cover?

• Why are These Products Gaining Traction in the Market?

• Recent Sales Figures

Risk management

• Underwriting

• Underwriting training

• Claim Management Services

• Reinsurance

3

LTC Market Environment

Hannover Re Group

LTC Market Environment

Significant Market Exits from Direct Writers

• Interest Rates, Persistency and Morbidity

• Regulations

Sales Have Been Relatively Flat/Declining Since 2005

Significant Premium Rate Increases Passed on to Policyholders

• States Are Not Always Approving Actuarially Justified Amounts Due to Political Pressure

As of 2010, 55% of Covered Lives Held in Closed Blocks (Only 25% in 2009)

Attention Being Paid to Re-vitalize the Market

• Stand-Alone LTC vs. Hybrid LTC/Life Products

Current Market Overview

5

Hannover Re Group

LTC Market Environment

Roughly 5-6 Million Policies Inforce

Total Annualized Inforce Premium over $8 Billion

Accounts for 58% of Market Today – Down from 75% in 2000

Roughly One Dozen Companies Still Significantly Active

Annual Sales in 2010 were 65% Lower than in 2000

Between 2009 and 2010 Average Annual Growth was 10%; has slowed again since 2010 and declined in 2013

Individual Stand-Alone LTC Market

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Hannover Re Group

LTC Market Environment

Between 2.2 and 2.6 Million Covered Lives

Total Premium is Greater than $2 Billion

Growth Rate from 2005 to 2010 is roughly 5% Annually

Slightly More than 12,000 Employers and Other Groups Sponsor Coverage (Including Federal and Many State Governments)

Less than 8 Direct Writers Actively Selling in the Group Market

Group Stand-Alone LTC Market

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Hannover Re Group

LTC Market EnvironmentTotal Individual and Group Stand-Alone LTC Market

8

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

1,704

3,338

3,697

3,202

2,601

2,946

4,130

4,7934,497

5,179

5,612

6,053

6,404

6,995 6,8947,030 7,115 7,033

7,186 7,263 7,357

Total Number of Covered Lives by Year

Co

vere

d L

ives

(00

0's)

Source – NAIC LTC Experience Reports

Hannover Re Group

LTC Market EnvironmentIndividual Stand-Alone LTC Sales

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1990 1992 1994 1996 1998 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

100

200

300

400

500

600

700

800

380

500

420

609 600

698

754

509

362332

300 306283

221

253 249 254

172

Individual LTC Policies Sold

Po

licie

s (0

00’s

)

Source – Univita Health Experience Reports and Analysis

Hannover Re Group

LTC Market EnvironmentShrinking Number of Direct Writers in Stand-Alone LTC Market

2002 2004 2006 2008 2011Aegon USA Aegon USA Transamerica LTC

Allianz Life Allianz Life Allianz Life Allianz Life

BL&C BL&C BL&C BL&C BL&C

CNA Insurance

GE Financial Genworth Genworth Genworth Genworth

John Hancock John Hancock John Hancock John Hancock John Hancock

Lincoln Benefit Lincoln Benefit Life

Mass Mutual Mass Mutual Mass Mutual Mass Mutual

MetLife MetLife MetLife

Mutual of Omaha

New York Life New York Life New York Life

Northwestern LTC Northwestern LTC Northwestern LTC Northwestern LTC

Penn Treaty

Prudential LTC Prudential LTC Prudential LTC Prudential LTC

State Farm State Farm State Farm

Thrivent Financial

UnumProvident

Share 77% Share 81% Share 86% Share 86% Share 93%

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Hannover Re Group

LTC Market Environment

Rate Increase Requests Dominate Regulatory Arena

States Often not Approving Actuarially Justified Increases Due to Political Pressure

Different Treatment of Rate Increases by State• Becoming an Equity Issue for Policyholders

NAIC and Industry Working on New Rate Stability Provisions• Improve Rate Increase Process and Add More Transparency for Policyholders

States Reacting to Filings for Gender-Based Rates• No Clear Direction - Some Prohibiting and Some Approving

Life/LTC Hybrid Products Gaining Greater Acceptance

Regulatory Environment

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Hannover Re Group

New Product Development Activity

Gender-Based Rates

More Affordable Types of Coverage

• John Hancock’s Benefit Banko Affordable Alternative to Traditional Auto-Inflation Options

o Enables Coverage to Increase Gradually Over Time

o Product Shares Investment Risk with Policyholder (Benefits Only Increased if Investment Returns > 3%)

o Customizable Benefit Periods and Elimination Periods (Up to 10 Yr. Benefit and 365 Day Elimination Period)

Continue to Withdraw Product Features more Prone to Fraud and Abuse

• Cash Benefits

Continue to Issue more Limited Coverage's:

• Coverage Duration

• Benefit Amounts

Stand-Alone LTC Market

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Hannover Re Group

Provides integrated Death Benefit and Cash Value protection covering chronically ill individuals

• Typically a standard LTC 2/6 ADL Definition)

Structured to pay benefits beyond the acceleration of the Life Insurance policy Death Benefit through a linked Extension of Benefit (“EOB”) rider for qualifying LTC claims

• Reimbursement Dollar-for-Dollar Face Reduction Approach

• Indemnity Dollar-for-Dollar Face Reduction Approach

Mix of Life Insurance (acceleration component) and Individual LTC (EOB component)

• Governed by Section 7702B and the LTC Model Act

Marketed as an Alternative to Stand-Alone LTC

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Product Options and BenefitsLTC/Life Linked Benefit Products

Hannover Re Group

Product Rider Options

• Face Amount Acceleration Ridero 2 or 3 year acceleration period

• Extension of Benefits Ridero Generally 2 to 5 years

• Inflation Protection Ridero 3% and 5% Simple

o 3% and 5% Compound

o The 5% Compound Option must be offered under LTC regulations

• Return of Premium Rider/Feature

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Product Options and BenefitsLTC/Life Linked Benefit Products

Hannover Re Group

Why are These Products Gaining Traction in the Market?Client Need – Review of Long Term Care Costs

Key Statistics The median age of Nursing Home residents is 82.7 years old; 66% are Female Nearly half (46%) of Nursing Home residents die within 28 months of admission The average length of time since admission for Nursing Home residents is 27.5 months The median age for Assisted Living residents is 86.9 years old The median length of stay for Assisted Living Residents is 25.6 months 79% of Home Health Care Agencies provide Alzheimer’s training to their employees Nearly one-third (31%) of Home Health Care recipients die within 28 months of initial care

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Private Daily Rate

Semi-Private

Daily Rate

1 Bedroom Monthly

Rate

2 Bedroom Monthly

Rate

Studio Unit Monthly

Rate

HHA Hourly Rate

RN Hourly Rate

LPN Hourly Rate

$51$66

-

-

$22

$17,248

14%

$3,572

$42,864

4%

$4,474

$53,691

25%

$3,512

$49,669

-5%

$228

$83,114

0%

$95,706

0%

2013 National Averages

2013 Annual Costs

% Change (2012 to 2013)

Home Health Providers

-

2012 National Averages $262 $229 $3,694 $3,400 $3,435 $19 - -

-

Area

Nursing Homes Assisted Living Facilities

$262

Sources: Univita Cost of Care Survey 2013 LifePlans : Cognitive and Functional Disability Trends for Assisted Living Residents – March 2009 CDC : The National Nursing Home Survey: 2004 Overview – June 2009

Hannover Re Group

Client Need – Marketing Story

Products market away from the most common objection to stand-alone LTC products: it is a “use it or lose it” sale:

• Provides integrated Death Benefit and Cash Value protection features• Typically includes a Return of Premium Feature

Products are generally marketed to those who have decided to self-fund their LTC needs

• If the client does not own stand-alone LTC, they ARE self-funding

Products can help client leverage the assets they are allocating to LTC protection need

• Linked Benefit Rider** Average Premium: $81,134

Average Face Amount : $145,387

Potential Additional EOB Coverage : $290,774

Total Potential Coverage : $436,161 (~5.4x Leverage)

Provides benefits over a minimum 6-year period

Source : LIMRA Individual Life Combination Products – 2013 Annual Review** - Linked Benefit Averages based on Single Premium Products

Why are These Products Gaining Traction in the Market?

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Hannover Re Group

Client Need – LTCI Leverage

$81,134 Premium

$72,694 Accelerated

Face Amount

Year 1$145,387

Total Acceleration LTCI Benefit

or

Tax-Free Face Amount

$72,694 Accelerated

Face Amount

Year 2

$72,694 Extension of Benefit

Year 5

$72,694

Extension of Benefit

Year 6

$72,694

Extension of Benefit

Year 3

$72,694 Extension of Benefit

Year 4

$290,774

(2x Face Amt)

Total 4 Yr.

LTCI Extension

Benefit

Leverage Impact for LTC Combo Products

Monthly LTC Benefit: $6,058

Total Leverage: 5.4x

Why are These Products Gaining Traction in the Market?

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Hannover Re Group

Life / LTC Linked Benefit Products are not “Stand-alone LTC”

• Combination of mortality and morbidity risks result in a natural hedge providing a degree of embedded risk management versus stand-alone LTC

• The Extension Rider is the equivalent of a limited benefit LTC policy with a 2 or 3 year elimination period

− Maximum benefit period is typically 6-7 years

− Acceleration Rider must be exhausted before Extension Rider is used

− This product is not available in the stand-alone LTC market and is more efficient given the “effective” elimination period

Products have lower expected claims incidence

• Policyholder must decide to use their own money first for the first 2 to 3 years of claims via the Acceleration Rider

• Expected to result in lower LTC claims costs to insurance company

Product Risk Profile

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Why are These Products Gaining Traction in the Market?

Hannover Re Group

Recent Success2013 Sales Results

Sources: LIMRA Individual Life Combination Products – 2013 Annual Review

Total Premium : $2.6B• 8% growth over 2012• Represents 13% of Total Individual Life Premium• ~98,000 Policies Issued (14% growth)

Average Premium• Single Pay : Increased by 14% to $81,134

Average Face - $145,387• Recurring Premium : Increased by 34% to $8,849

Average Face - $342,555 Product Mix

• Acceleration Products Grew by 18%• Extension (Linked Benefit) Products Grew by 14%• 24% Extension Products / 76% Acceleration Products• Universal Life is Dominating (79% of policies sold)

General Movement Towards Flexible Payment Products

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Risk ManagementOverview

Hannover Re Group

Risk Management

Underwriting

• Difference between Life and LTC underwriting

• Life Risk is the probability of early death

• LTC risk of future activities of daily living (ADL) limitations and cognitive dependency

Underwriting requirements

• Application

• Phone History Interviews and Cognitive Screening

• What age do you start Cognitive Screening?

• RX

• MVR

• Typically no APS’s, Exams, Blood or Ekg’s

• LTC Underwriting

• Underwriting Manual

Underwriting

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Hannover Re Group

Risk Management

Underwriting Process

• Application completed

• Determine if qualifies for life table 4-8 or better

• Any impairments that are automatic decline for LTC

− COPD, Emphysema

− Parkinson’s disease

− Severe or Chronic back pain

− Chronic moderate to severe depression

− Type 1 Diabetes

• Complete teleunderwriting

• Instrumental activities of daily living (IADLs) are precursors to ADL impairments

• Cognitive Screening, Older age supplement, MCAS

• RX review

• Accept/reject LTC You have to balance the risk of accepting too few with the risk of accepting too many who are high risk. Up to a 20% decline rate.

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Underwriting

Hannover Re Group

Risk Management

Typically need for assistance with 2 or more ADLs (medically necessary, provided regularly; based on policy language)

• Bathing

• Dressing

• Transferring

• Toileting

• Incontinence management

• Eating

• Ambulation and mobility

Cognitive impairment

• Moderate or severe impairment

• Requires continuous supervision for safety

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Underwriting

Hannover Re Group

Risk Management

Medical diagnosis

• History

Extent of condition

Severity of condition

Stability of condition

• All determined based on limited information

Comorbid conditions

Impact on physical and cognitive function

• Low or average risk of disability and dependency

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Underwriting

Hannover Re Group

Risk Management

To Claimed Events

Pure Dementia

24%

Cancer

13%

Stroke

9.9%

Fractures/Injuries

6.8%

Arthritis and other Rheumatic Disorders

5.7%

Parkinson’s

4.9%

Cardiomyopathy, Congestive Heart Failure

4.2%

Respiratory Disease

4.2%

Disorders of the Spine

2.7%

Dementia with Falls/Fractures/Injuries

2.1%

Univita LTCI Underwriting and Claims Data Base 6/30/14

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Underwriting Focus

Hannover Re Group

Risk Management

Claims Management

• Definition review, do they qualify/life is clear cut

• LTC component

• Ongoing Health management

• Close follow up required

• Ongoing claims payments

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Claims

Hannover Re Group

Risk Management

Underwriting

• Have a written program

• Documentation

• LTC underwriting training program

− List of impairments, Accept, IC, Reject

• Simplified issue underwriting

• Cognitive status awareness (clues)

• Audits

Claims

• LTC component

• Ongoing qualification requirements

• Ongoing payments

Product development

• LTC component

• Product features

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Underwriting and Claims Training

Hannover Re Group

Outsourcing/Partnering

Product development

Product and application filings

Teleunderwriting process

Cognitive screening

Underwriting

Claims management

Reinsurance support

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Conclusions

Hannover Re Group

LTCI Linked Benefit Products offer a unique way for insurance companies to differentiate themselves in today’s market

Products fill a distinct client need as baby-boomers continue to age and lack long-term care coverage

Products provide a multi-faceted solution in comparison to the stand-alone LTC market which has been declining sharply

The major risks underlying the products can be mitigated by solid policy / product design, underwriting, claims management processes

Assumption Development is “Non-Trivial”; Spend Time Asking Questions

These products can help an insurance company significantly grow the top and bottom lines while effectively managing their overall risk profile

Underwriting and Claims training is key to long term success

 

LTC Combo Products Have Been SuccessfulConclusions

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Hannover Re Group

Contact information

Kevin OldaniSenior Vice President & Chief Underwriter

Tel. (720) 279-5019kevin.oldani@hlramerica.comwww.hlramerica.com

Thank You