#302 | An Imminent Mortality Disaster?

At the end of 2021, Scott Davison, CEO of OneAmerica, was on a virtual Indiana Chamber of Commerce news conference with other local CEOs discussing the impact of COVID on their businesses. Davison’s main point was to advocate for vaccinations and, to bolster that point, he referenced some shocking mortality data from OneAmerica’s Group business – a 40% uptick in mortality versus pre-pandemic, the “highest death rates we have ever seen in this business” and far beyond a “six-sigma [mortality] event.” He went on to say that greater mortality will be reflected in prices that employers pay for their Group insurance premiums, particularly for areas of the country with low vaccination rates. The total cost to OneAmerica according to Davison has been around $100 million since the beginning of the pandemic – and, as he also noted, OneAmerica’s experience seems to be consistent with the experience of other life insurers.

For the first (and probably last) time in modern history, a life insurance company CEO went viral. Davison’s comments got picked up by local news, specialty publications and the Twitter mob as hard evidence about the underreported severity of Covid and the need for people to be vaccinated. In industry publications, his comments were interpreted as evidence of a huge (and largely undiscussed) mortality problem that would manifest in losses at insurers and product reprices. One large brokerage firm went so far as to send out a blast email declaring that producers and their clients should take advantage of the “fire sale” of current life insurance pricing because, based on Davison’s comments, prices are about to blow through the roof.

All of this, I’m sure, was not at all what Davison intended, but the fact is that there’s now a story circulating in our industry that there’s a looming mortality crisis from Covid – both directly and, as Davison pointed out, indirectly – that will manifest in huge pricing changes across the board. But before we jump on this clickbaitish conclusion, we need to dig into what he actually said and what we’re actually seeing in terms of mortality experience at life insurers.

Davison made it clear at the onset of his comments that he was specifically referencing mortality experience in the Group business at OneAmerica. Group is fundamentally different than Individual, which is OneAmerica’s bread and butter. Group policies are generally renewable term insurance written on working-age employees between 18 and 64. It is issued on a guaranteed basis, which means that there is very little (if any) underwriting. Because it is generally issued on younger folks and not held beyond the period of employment at the firm, death claim incidence tends to be low and stable. That’s what makes a 40% increase in mortality for Group at OneAmerica such a shocking, jaw-dropping number.

But it might be a mistake to say that figure has direct implications for Individual, which is what the readership of this publication cares about. Individual is essentially the opposite of Group – fully underwritten, held for long periods of time, generally sold to older affluent and mass affluent folks and usually on a permanent chassis with meaningful cash value accumulation. Does that mean that the results for Individual should be entirely different from what we’re seeing in Group?

Fortunately, we can get a glimpse into what’s going on with mortality through statutory filings, which have a specific line item for death claims. Quarterly statements don’t break out the claims by business lines, but you can look at the prior year’s full statement to figure out the rough percentage of deaths coming from Group and Individual, both of which are actual statutory categories for reporting. I looked at 13 insurers who had statutory filings from 2021 to 2018 readily available on their websites. Only one company, MetLife, had almost exclusively Group claims. Prudential had a fairly even split between Group and Individual, New York Life was about 30/70 and the rest were predominately (or exclusively) weighted towards Individual. For sake of making a readable chart, I baselined all of the company’s results at their 2018 mortality and the results are reported as a ratio of that figure. Take a look at the results:

On average, mortality through Q3 of 2021 (and extrapolated to full-year results) is 33% higher than in 2018, with a meaningful uptick in 2020 of 20%. Despite all of the differences between Group and Individual, the net increase is spitting distance from what Davison quoted for OneAmerica. There’s simply no way to say that Covid hasn’t had an impact on mortality across the industry. It certainly has. But making comparisons between insurers is less clear-cut than it might initially appear because of reinsurance. Life insurers who modified their reinsurance structure may show different results from one year to the next for reasons that have nothing to do with actual underlying mortality experience. If you were to look at individual insurers, the best barometers would be the firms with the biggest Individual blocks – New York Life and Northwestern Mutual, both of which reported results that are right at the average (1.28 and 1.34 respectively).

Is this a death knell for the industry? Fortunately, it’s not. Despite the fact that all of these insurers are life insurers, actual death benefits are a relatively small component of overall profitability. Take, for example, juggernaut Northwestern Mutual. Through Q3 of 2021, death benefits have accounted for $3.965B in claims – against $17.7 billion in overall policy benefits and increases in policy reserves. Or, to put it differently, Northwestern took in $16 billion in premiums against $3.965B in death benefits. Year to date, the difference between 2020 mortality and 2021 mortality is about $600 million. But even that dramatically overstates the impact. Each policy with a death claim has a cash surrender value that offsets the effect of the claim. Let’s say that $400M of that is actual non-reinsured death claims. Through Q3 of 2021, Northwestern has recorded an increase in their surplus of $3.2 billion. Northwestern, in other words, is doing just fine.

And they’re not alone. Read any company’s statutory filing and you’ll see that other policy benefits, business lines, asset valuation changes and any number of statutory accounting quirks will vastly overwhelm the specific effect of increased mortality over the last couple of years. I don’t think it’s particularly risky to say that no life insurer is going to go bankrupt over Covid-related mortality increases. Read earnings releases for life insurers and you’ll see that the general discussion around Covid is that it’s a temporary blip in mortality that kind of gets cleaned in the wash. Equitable relegated Covid to a tiny footnote in its Q3 2021 earnings presentation. Even MetLife, which saw a massive uptick in Group mortality, still managed to post $111 million in Group earnings through Q3.

The temporary nature of Covid is also why you shouldn’t expect for this mortality blip to flow through to permanent insurance pricing and, even if it did, you’d hardly notice it for most products. As I’ve written before, even Term pricing is shockingly unrelated to actual mortality experience because the vast majority of term “profits” for most competitively priced insurers come from people keeping the policy beyond the level term premium period. Accumulation oriented products like Indexed UL are usually funded at maximum levels so that the COI charge is almost irrelevant. Whole Life is already priced with guaranteed mortality and the mortality component of the dividend, while significant, is a smaller component than it used to be with the new 7702 rates and higher product prices. Where would you see the impact of a big population uptick in pricing? Exactly where Scott Davison at OneAmerica said you’d see it – transactional, renewable, highly commoditized Group Term.

There – and reinsurance. The reinsurers aren’t mincing words about the impact of Covid. Like Group Term, most reinsurers are in the highly commoditized YRT business, where their profit is entirely tied to mortality. A ripple in mortality causes a tsunami at reinsurers. Swiss Re, for example, posted a loss of $62 million through Q3 of 2021 versus a gain of $900 million excluding the effects of Covid, a swing of nearly a billion dollars. RGA estimated global impacts of COVD at $500 million over the same period. Hannover posted $404 million, SCOR $340M and Munich $190M. But, again, those reinsurers generally posted profits across the enterprise and even in the Life business line (SCOR) due to other elements of profitability. And all of them referred to Covid as a temporary, transient disruption that is, as one reinsurer put it, “manageable.” The fact that reinsurers aren’t sounding the alarm is evidence that although Covid is certainly causing losses, it’s not a cataclysmic event.

For those of us in the Individual side of the business, my general opinion after reading up on all of this – and in talking to numerous life insurers – is that Covid mortality isn’t going to change anything for product pricing, at least not in the short term. It is a temporary phenomenon. The mortality characteristics of Omicron have only further solidified that view. Don’t believe the hype.

But, on the flip side, don’t ignore it. Mortality events don’t cause permanent changes – mortality trends do. And the mortality trends for Americans aren’t great. American life expectancies have been falling for the last few years for a raft of reasons unrelated to Covid, including the tragedy of opioid addiction and overdoses. The problem for life insurers is compounded by the fact that many insurance policies are priced under the assumption of mortality improvements, which means that even life expectancies that stall out could pose a threat to current life insurance pricing. We may not be facing an imminent mortality disaster from Covid, but we are facing an emerging mortality threat – one that will prove to be bark or bite over the coming years.