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Life Insurers Not Free of COVID-19 Yet, as Virus Impacts Younger Populations

The delta variant pushed up the number of pandemic-related deaths for working-age people in the U.S. A mix of investment gains and business diversification across segments could help ameliorate potential costs.
  • Terrence Dopp
  • January 2022

Key Points

  • Rising: While initial hopes were for a gradual decline in COVID-19 mortality as vaccinations picked up and the pandemic ebbed after more than a year, some life insurers cited general population deaths as high as three times initial projections.
  • Segment: As the COVID-19 mortality rate began to rise for younger people in their working years, the increase was seen primarily in the group life segment of their books.
  • Time: Industry advocates such as the American Council of Life Insurers said the true impact on the industry will take time, although the increase is seen as more of a short-term earnings drag than a long-term threat.

Life insurers told investors in their 2021 third-quarter earnings reports that virus-related deaths had increased above expectations, showing that COVID-19 is continuing to have a significant impact on the industry. With unknowns surrounding emerging variants, insurance experts say the outlook for 2022 remains unclear.

The head of Prudential's U.S. Businesses said during his company's earnings announcement that deaths in the third quarter were three times what the company initially expected. Life insurer Unum Group reported a similar finding, saying deaths had doubled during the third quarter of 2021.

“We were expecting 30,000 deaths and we saw 95,000,” said Andrew Sullivan, executive vice president and head of Prudential's U.S. businesses. About half of the total was concentrated in the southern U.S., he added.

A year and a half into the COVID-19 pandemic, life insurers via a flurry of third-quarter earnings calls and statements notified investors that virus-related deaths had increased and that the ages of those who were dying had crept downward into the working-age population. Sullivan reported in his company's earnings call that deaths among working-age Americans in the 35-to-54 range tripled.

Related: Life Insurers Ponder How to Underwrite COVID-19 Survivors

“The average age of our group block is in the neighborhood of 46 years old,” Sullivan said. “Second, as you probably know and expect, we have a large national account book of business and have a very strong share in health care, in retail and in manufacturing. These are areas where front-line workers are out and about by the definition and nature of their job and therefore more exposed.”

That last fact can partially soften the impact of the rise, as some companies saw the increase come in the group life segment. Those policies are generally offered as workplace benefits and often have smaller face values based on annual salaries, compared to the individual market.

Also important to note is that across the industry results were positive from an earnings standpoint and gains in other business segments offset the impacts experienced in the group life portion of insurers' books.

Yet some companies reported rising claim costs.

Prudential Financial Inc., in its earnings results for the third quarter of 2021, said its group benefits business reported a loss of $135 million compared to adjusted operating income of $22 million in the same period a year earlier. The third quarter of 2020, for reference, was also during the pandemic and notably pre-vaccine. Sullivan called the results unfortunate and said his company is “proud” to be able to pay off related claims.

Prudential saw its third-quarter net attributable income rise slightly to $1.53 billion, even with the increase in claims, compared with $1.49 billion for the same period a year earlier. Assets under management reached $1.73 trillion in the three-month period. Chairman and Chief Executive Officer Charles Lowrey attributed the growth to good investment performance and consumer demand.

Richard P. McKenney Unum

“The recovery from COVID has been delayed longer than we anticipated by the delta variant but we do expect to see a recovery ahead.”

Richard P. McKenney
Unum

Variants, Younger People

Aegon N.V., a multinational insurer that counts the U.S. as a core market, also saw adverse claims experience. The company cited both COVID-19 and a higher average claim size as drivers of a trend that outweighed even increased fees due to higher equity markets and business growth. The operating result from the Americas decreased €112 million (US$125.87 million) to €60 million for the period, the company reported.

Across the company, Aegon reported operating results decreased to €443 million, a 16% drop from the third quarter of 2020.

These developments occurred as variants became the watchword in the U.S. and globally.

Variants are a mutated form of the virus that differ slightly from previous strains and can become more transmissible or more virulent. The third-quarter results track the rise of the delta variant, which the Centers for Disease Control and Prevention said can be twice as contagious as the original virus and broadened its infection reach to both younger people and those vaccinated through less-common “breakthrough” cases.

According to the Health System Tracker compiled by the Peterson Center on Healthcare and Kaiser Family Foundation, COVID-19 had dropped to the seventh-leading cause of death in the U.S. by July 2021. But as the summer drew to a close, the virus became a more common cause of death among Americans 35-54 and by September it was the leading cause of death in that age group and second-most common among all Americans after heart disease.

In fact, the daily death average in the U.S. reached 1,899 in September, behind the 2,078 attributed to heart disease and just above the 1,636 from cancer, the group found.

Paul Graham American Council of Life Insurers

“The implications are still emerging for the life insurance industry. Nobody knows exactly how COVID will impact the long-term mortality of the country yet.”

Paul Graham
American Council of Life Insurers

A Continuation

Mortality increases in the third quarter of 2021 are a continuation of trends that first emerged at the end of 2020 and first quarter 2021, where COVID began to be a more dominant cause of insured mortality, said R. Dale Hall, managing director of the Society of Actuaries Research Institute. Hall said most results also continued a pattern that had seen excess mortality in the group life segment raised by about 30%.

“The pandemic is causing about two-thirds of the excess mortality,” he said. “For individual life, the fourth quarter of [2020] had excess mortality of 22%, doubled from the third quarter of [2020].”

Recent information from the CDC showed continued mortality due to Alzheimer's, diabetes, liver disease, hypertension and Parkinson's, all with large deteriorations, according to Hall. “That continues on from the finding of a 2020 study on population mortality for people of working ages and those types of conditions are becoming more prominent and continuing into 2021,” he said.

Not all news has been dour for insurers.

In December AM Best revised its market segment outlook for the life and annuity industry to stable, up from the negative outlook assigned early in the pandemic as uncertainty loomed. In the upward revision, analysts cited record levels of capitalization and earnings that have improved. While noting that death claims have impacted earnings, the outlook report points to strong product sales in the second and third quarters of 2021.

“Although the life/annuity segment faces some hurdles heading into 2022, we think that the industry will be able to address these challenges because of the improvement in capitalization, profitability, and ERM practices resulting from the COVID-19 crisis,” according to the Best's Market Segment Report, Market Segment Outlook: U.S. Life/Annuity. Louis Silvers, a senior financial analyst with AM Best, said companies to date have been wary for the most part of making rock-solid attributions for the increase. Potential theories, he explained, include the deaths being clustered in states with lower vaccination rates, the fact that the impact of earlier waves of the virus were concentrated among older populations and higher vaccination rates among senior citizens.

“The investment performances for these companies have really glossed over any impact from slightly increased mortality and companies have not generally been unlocking their mortality assumptions, which mean that they don't see increased mortality as something that's permanent in the future,” Silvers said.

This trend closely mirrors the experience of life insurer Unum Group, which is optimistic about the future despite seeing a drop in income from its U.S. group life segment.

In early November, Unum reported companywide net income of $328.6 million for the third quarter of 2021, above the $231.1 million it saw during the same period a year earlier. But digging down a step, in the group life and accidental death and dismemberment line of business, it reported an adjusted operating loss of $67.1 million for the third quarter of 2021 compared to adjusted operating income of $13.9 million in the year-prior quarter.

Richard P. McKenney, Unum's president and chief executive officer, told analysts during an earnings presentation that in addition to about twice the U.S. deaths anticipated during the period, the company experienced higher costs for short-term disability coverage. In one notable development, he said the younger populations tend to actually have larger benefits than Unum's other customers.

“The recovery from COVID has been delayed longer than we anticipated by the delta variant but we do expect to see a recovery ahead,” McKenney said.

Related: U.S. Life/Health - Industry 2020 Investment Returns - 2021 Edition

Beware Scale

Silvers said that higher levels of the deaths within working-age people can mute the financial impacts of each claim because group insurance policies acquired through the workplace generally have lower face amounts than individual life policies. In turn, individual life policies tend to have a higher average age insured, but there's still a question of scale.

“It's smaller face amount so certainly the impact is going to be more diffuse. But on the other hand, if there is a trend that they are seeing it is more likely the claim counts going up, the frequency going up,” he said. “On the one hand, each individual death does not have as much of an impact, but on the other hand, if you're seeing a trend that means that there's probably more to it in terms of a bunch of small policies having these claims.”

Paul Graham, senior vice president, policy development at industry advocacy group American Council of Life Insurers, said it will take time to know the full impact the COVID-19 pandemic has on mortality and the life insurance industry, including the most recent quarter. Before the onset of the pandemic the U.S. opioid crisis was affecting mortality and offsetting other positive factors such as healthier lifestyles and medical advancements, he said.

“The implications are still emerging for the life insurance industry,” he said. “Nobody knows exactly how COVID will impact the long-term mortality of the country yet.”


Terrence Dopp is a senior associate editor. He can be reached at terry.dopp@ambest.com.



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