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Analyst Ponders Mortality Figures

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How can an observer tell the difference between ordinary fluctuations in mortality at a life reinsurer and the start of a long-term trend? [@@]

Andrew Kligerman, an analyst at UBS Securities L.L.C., New York, considers that question in a note on second-quarter results at Scottish Re Group Ltd., Hamilton, Bermuda, which is reporting $1.6 million in net income for the latest quarter on $504 million in revenue, compared with $29 million in net income on $227 million in revenue for the second quarter of 2004.

Scottish Re’s operating income was down only slightly, and the company is attributing much of the drop in net income to factors such as fluctuations in the value of derivatives.

Kligerman is expressing concern about the 56 claims in the second quarter that were for amounts over $500,000.

“Although the adverse experience resulted from only 16 policies of a total of 13.9 million in force at June 30, we still think that this may be evidence of an adverse trend,” Kligerman writes.

Singular events can cause mortality to soar in a particular quarter, Kligerman writes.

But part of the problem may be that life reinsurers have been making overly aggressive assumptions about how much longevity will improve, Kligerman writes.

Kligerman suggests that the fact that 75% of Scottish Re’s in-force business is co-insurance business also may have affected the second-quarter results.

With a co-insurance treaty, premiums paid by the primary insurer remain constant over time, although benefits naturally increase as the policyholders age.

“Mortality experience on co-insurance normally deteriorates as the business ages, particularly after the 3-year mark,” Kligerman writes. “As time passes, a larger proportion of Scottish Re’s business will have originally been assumed 3 years ago.”


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