2013 Life Insurance Conference APRIL 16, 2013

Transcription

1 2013 Life Insurance Conference APRIL 16, 2013

2 Eric Johnson Background Harvard University, B.A. cum laude, American History Manufacturers Hanover Trust Company NatWest Capital Markets CNO Financial i Group EVP and Chief Investment t Officer 2 non-profit boards 2 teen mentoring gprograms CNO Financial Group 2013 Life Insurance Conference April 16,

3 Unemploym ment U.S. Economic Outlook Unemployment U.S. data remains generally ypositive, but not 1 1 positive enough to resolve uncertainty Unemployment Expect consumer spending to slow due to 1 Long Term Unemployment 8% lagged response to January s tax increases, and the sequestration cuts 8% Positive wealth effects from stocks Persistent inflation undershoot threatens to become globalized Equity markets have gone very far very fast creating an environment primed for correction Lon ng Term QE3 outlook extremely data dependent Labor Force Participation Rate 69% 67% Net Job Gains/Losses % -0.2 Rat te 63% 61% 59% Average: 63.71% Millio ons % Source: Bloomberg, Bureau of Labor and Statistics, Fed CNO Financial Group 2013 Life Insurance Conference April 16,

4 U.S. Economic Outlook CPI Headline and Core CPI 15% 13% 11% 9% 7% 5% 3% 1% -1% -3% Fed Target: Headline CPI Core CPI Retail Sales ($ $Bn) Retail Sales Ex. Food and Consumer Confidence $390 $340 $290 $240 $190 Retail Sales C Consumer ConfidenceC $ Consum mer Confidence e Core PCE 2.7% Real GDP Growth 1% YOY Y (%) % 1. Grow wth (%) -1% - 0.7% -3% Source: Bloomberg, Bureau of Labor and Statistics, Fed CNO Financial Group 2013 Life Insurance Conference April 16,

5 Yield to Ma aturity Interest Rate Outlook U.S. Treasury Yields Rates are range bound 3% 1% 30 Yr. 10 Yr. 5Yr. BOJ JCB purchases have potential to exert sizeable demand effect Contained underlying U.S. inflation is the most consistent data trend Drag from fiscal deal and sequester likely to manifest in 2Q and 3Q Neutral on curve given recent flattening Fed policy has transferred risk from households and companies to investors Spread (bps) 7s 30s Curve 5y5y 10y10y Curve Sprea ad (bps) Source: Barclays, Bloomberg, Fed CNO Financial Group 2013 Life Insurance Conference April 16,

6 5% Inside the Yield Curve Potential for inflation/rising rates Return requirements Liquidity preference 3% Belly Rolldown return Carry trade Best value 3.13% 1% Low repo rates QE3 Central swap clearing demand for collateral yr. 2 yr. 3 yr. 5 yr. 7 yr. 10 yr. 20 yr. 30 yr. Source: Barclays CNO Financial Group 2013 Life Insurance Conference April 16,

7 2013 YTD Broad Asset Class Total Returns Rates - 0.5% Commodities % % % % % -8% % Credit 1 9% Risk 1 9% 9.7% 6.5% % % 0. 3% 2.5% % % 0.7% 3% -3% - -3% As of 4/9/2013 Source: Barclays, Bloomberg CNO Financial Group 2013 Life Insurance Conference April 16,

8 Yield to Ma aturity Investment Grade Corporates Yields by Rating Limited differentiation for risk 1 8% AA Corp A Corp BBB Corp Default losses virtually irreducible High degree of price exposure to rising rates Low all in rates not favorable to spreads Event risk ik is substantial bt til idiosyncratic risk ik Greatest beneficiary of low for longer Generally credit spreads will remain steep as low growth and accommodative monetary policy limit credit risk LBO Count Volatility and LBO s 600 LBO's VIX VIX ld Yiel Baa Bond Yield Less S&P 500 Earnings Yield 7% 5% 3% 1% -1% -3% -5% Source: Barclays, Bloomberg, Moody s CNO Financial Group 2013 Life Insurance Conference April 16,

9 Yield to Ma aturity High Yield Corporates Yields by Rating Limited capacity for further spread tightening g 35% Lower quality grades disproportionately 3 BB Corp exposed to uncertainties in economic B Corp fundamentals 25% CCC Corp Macro correlation likely to decline meaning 2 sector/name selection will drive investment 15% performance Retail participation ultimately a risk factor 1 5% Carry plus short duration plus low volatility equals demand Spread (bps) Spreads, Default Losses, & Net Yields High Yield New Issuance $120 Current Spread 800 Avg. Default Loss 600 Implied Net Yield BB B CCC 1 8% - Source: Barclays, Bloomberg, Moody s CNO Financial Group 2013 Life Insurance Conference April 16, Defau ult Loss/Net Yiel ld ($Bn n) $100 $80 $60 $40 $20 $0

10 Yield to Ma aturity Commercial Mortgage Backed Securities AAA Last Cash Flow vs AA CMBS Continued negative net supply AAA AA Cap rates attractive vs. fixed income with some inflation protection Recent increases in IO loan underwriting Recovering CRE values leveraging down collateral loss expectations Increasing clarity on legacy collateral quality May see increased collateral liquidation 60 Structural call protection plus stable to positive fundamentals DSC CR DSCR and LTV Avg. DSCR Avg. LTV LTV Rat te Collateral Delinquency Rates 2 Multifamily 1 Retail Office Industrial 1 Hotel 8% Source: Amherst, CoreLogic, POINT CNO Financial Group 2013 Life Insurance Conference April 16,

11 Yield Non-Agency RMBS Loss Adjusted Yields Negative net supply 2 Focus on bonds leveraged to housing 18% 1 recovery Prime High proportion of short sales is reducing 1 Alt-A liquidation discount Derivatives and leverage necessary to meet 1 investor return targets 1 Positive HPA now priced into market Future of private securitization? 8% Extension risk pushing investors toward short duration credit l HPA Annual HPA, Delinquent and REO Loans 2 Mortgage Loans Annual HPA $1,200 $800 $400 $0 Delinque ent/reo Loans ($Bn) Rat te Current to Delinquent Transition Rate 5% Alt-A Option ARMs Prime Subprime 3% 1% Source: Amherst, CoreLogic, Deutsche Bank, JP Morgan CNO Financial Group 2013 Life Insurance Conference April 16,

12 Yield to Ma aturity Agencies Yield and Spread to Treasury Despite very favorable technicals, lackluster 8% performance due to policy and prepayment risk FNCL Increase in mortgage banking capacity should Basis leverage up prepays Structural uncertainty regulation, capacity, QE3 credit standards, GSE s Specified high LTV, low loan balance, low FICO, seasoned collateral will continue to attract premium - Captive to changes in investor consensus on QE3 timeline suance ($Bn) REIT Equity Is Issuance and Holdings $18 Agency REIT Equity Issuance $15 GSE MBS Holdings $12 $9 $6 $3 $0 $1,900 $1,600 $1,300 $1,000 $700 $400 GSE Holdings ($Bn) Volati ility MOVE Index Source: Bloomberg, Fed CNO Financial Group 2013 Life Insurance Conference April 16,

13 Default Rate Collateralized Loan Obligations Loan Default Rates and Senior O/C Ratio Broadening CLO investor base and growing g product demand Default Rates 1 Tested structural integrity and ratings Senior O/C Ratio stability 1 Higher FDIC risk assessments may inhibit 122 bank demandd 8% Senior O/C Ratio Reinvestment risk is the major challenge to returns Arbitrage pressured by tightening BB loan spreads relative to CLO liabilities Volume ($Bn) CLO New Issue Volume $25 $20 $15 $10 $5 $0 Volume ($Bn) Second Lien & Cov-Lite Volume $50 $40 $30 $20 $10 $0 Second Lien Cov-Lite Second Lien Spread Cov-Lite Spread 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Spre ead (bps) Source: Moody s, S&P LCD, Intex, Wachovia Capital Markets, LLC, RBS CNO Financial Group 2013 Life Insurance Conference April 16,

14 Commercial Mortgage Loans Origination n ($Bn) Rate Life Industry Loan Origination and Yields $60 $ Life Industry Origination Average Yield $40 $20 $0 CML 60+ Delinquencies 1 8% CMBS Fannie Freddie Life Industry 9% 8% 7% 5% Yield to Maturity Dramatic improvement in CBD credits cash flows, LTV s Negative long term trends in suburban office, tertiary markets, retail sectors Flat to positive net absorptions, although rent growth remains soft Limited development activity High unemployment is a serious impediment Higher interest t rates may impact debt yield, DSCR, cap rates, hence valuations Continued bifurcation in market, with strong properties receiving lenient terms and weaker properties lacking access to capital Too hot and too cold Source: SNL, ACLI, NAIC, MBNA, Trepp LLC CNO Financial Group 2013 Life Insurance Conference April 16,

15 Yield to Ma aturity EM Corporates Corporate and Diversified EM Economic growth generally disappointing 18% leading to somewhat higher downside risks JPM CEMBI 15% JPM EMBI Expect EM investment strategy to shift away BBB Corp 3% from carry due to declining correlations 1 CEMBI - BBB Corp Commodity export reliance not a credit positive 9% 3% 1% CEMB BI-BBB Corp Persistent structural reform challenges as economies increasingly need to reconnect toward domestic demand and away from labor or commodity arbitrage Despite challenges, fundamentals support tighter spreads vs. corporates Ratio Upgrade Downgrade Ratios Cumulative Default Rates EM Corp US Corp 6 1 US Corp 5 EM Corp 5 8% Rate Source: Barclays, JP Morgan, Moody s, S&P CNO Financial Group 2013 Life Insurance Conference April 16,

16 % of Invested Assets Municipals Average Life Industry Muni Allocation Tax revenues growing g slowly but have yet to achieve pre-recession levels Total muni defaults/bankruptcies have remained very low relative to other asset classes 3% California and Illinois (25% of the taxable muni index) currently have different credit trajectories America Fast Forward Bonds, essentially BABs, would become permanent under the proposed 1% 2014 Federal budget Combination of rating, duration and spread difficult to replicate Munis vs. BBB Corp 7% Municipal Budgets $275 State Tax Collections $140 Yield to Ma aturity 5% 3% BBB Corp Muni ($Bn) $225 $175 $125 $75 Non Farm Payroll $135 $130 $125 $120 $115 ($Mm) $25 $110 Source: Bloomberg, Financial Filings, S&P CNO Financial Group 2013 Life Insurance Conference April 16,

17 What Will Turn the Markets? Policy Mistake Global Deflation Sovereign Debt/Banking Contagion Middle East Political Tensions Major Trading Error Risk Asset Bubbles GSE Exit Mistake CNO Financial Group 2013 Life Insurance Conference April 16,

18 Source: Barclays Credit Spreads, 1/1/2005-Present Low AA Corps High A Corps BBB Corps BB Corps 146 1, B Corps 221 1, EM Corp IG EM Corp HY 169 1, Municipals CLO CMBS AM 60 1, CMBS A Esoteric ABS 15 1, Subprime LCF 140 1, Prime Jumbo BIG Alt-A BIG 125 1, CNO Financial Group 2013 Life Insurance Conference April 16, Current

19 1 Investible Capital Markets Matrix 9% CCC Corp 8% 7% B Corp ity EM HY Yield to Maturi 5% 3% CLO BBB CMBS C EM Sov. Prime BIG Munis BBB Corp CLO A EM IG CMBS D CMBS AJ BB Corp Alt-A BIG Subprime BIG CLO AAA AA Corp A Corp CMBS AM Alt-A IG 1% CMBS A4 Prime IG Subprime IG As of 4/9/2013 Source: Barclays, Bloomberg 0 AAA 1 AA2 A3 BBB 4 BB5 B6 CCC 7 CC8 Average Credit Rating CNO Financial Group 2013 Life Insurance Conference April 16,

20 Life Industry Impacts Portfolio Yield Average Life Industry Portfolio Yields* and ROE 7.5% Yield 7. ROE 6.5% % 1 1 8% ROE Reduced consumer confidence - leads to lower sales Group life benefits negatively impacted by employment trends $Bn ns 5. Fixed Annuity Sales $14 $12 $10 $8 $6 $4 $2 Pressure on annuity sales, especially fixed annuities Low (re)investment rates impact on CFT and LRT margins Potential for additional reserve requirements on top of lower earnings streams *Dowling Research, sample average comprised of public companies Source: Bloomberg, Dowling Research, JP Morgan CNO Financial Group 2013 Life Insurance Conference April 16,

21 The Interest Rate Conundrum Market Value Spread Compression Risk If rates return, compression risk lessens but disintermediation may increase If rates remain low, compression risk materializes Assets Fully immunized risk practical impossibility Today Liabilities Disintermediation Risk Falling Low Rates i Normal Environment Rising High Rates CNO Financial Group 2013 Life Insurance Conference April 16,

22 ALM Issues Today Reinvestment assumptions Growing the asset mix Changing investment liquidity Distributable earnings susceptible to non-continuous jumps Setting the right objective functions Stakeholder communication CNO Financial Group 2013 Life Insurance Conference April 16,

23 Product Management Issues Today Levers Constraints Pricing Competition Product Features Regulation Agent Comp Reputation Expense Assumptions Franchise Crediting Rates Expense Leverage Sales Mix CNO Financial Group 2013 Life Insurance Conference April 16,

24 Investment Actions Allocation to Alternatives Allocation to Mortgage gg Loans 10. % of Invested Assets 3% 1% % of Invested Assets % Allocation to Treasuries and Agencies Allocation to NAIC % % of Investe ed Assets 8% % of Inves sted Assets 3 25% 2 15% Source: Blomberg, Financial Filings, NAIC, SNL CNO Financial Group 2013 Life Insurance Conference April 16,

25 140 Investment Actions - Value of Duration 20 Yr. Avg Yr. Avg. 5 Yr. Avg. Current 80 Bps vs. 1 5 vs. 3 7 vs vs vs. 10 Source: Barclays, Bloomberg The benefits from extending or shortening asset durations will depend on actual asset, liability and capital structure. CNO Financial Group 2013 Life Insurance Conference April 16,

26 Emphasize U.S. domestic sectors Transition from macro (correlated) to micro market Call on rate led sectors housing, banks, insurance Municipals Self liquidating leverage to add return Rent for Liquidity Efficient Frontier Alternatives CNO Financial Group 2013 Life Insurance Conference April 16,

27 U.S. Growth Equities Banks Real Estate/REITS Carry Trade Credit Compression Taxable Municipals Floaters CRE Multifamily Insurance European Growth Commodities Utilities (Regulated) High Yield Retail Healthcare Technology CRE Suburban Office U.S. Duration/Rate Bet Energy RMBS Esoteric ABS CNO Financial Group 2013 Life Insurance Conference April 16,

28 Product Management Investments Asset-Liability Management CNO Financial Group 2013 Life Insurance Conference April 16,

29 Thank You CNO Financial Group 2013 Life Insurance Conference April 16,