for the Life Insurance Industry New York, NY November 6, 2009

Transcription

1 Thriving in an Economic Downturn: What Lies Ahead? 20 th Annual lexecutive Conference for the Life Insurance Industry New York, NY November 6, 2009 Steven N. Weisbart, Ph.D., CLU, Senior Vice President and Chief Economist Insurance Information Institute 110 William Street New York, NY Tel: (212) Cell: (917)

2 Presentation Outline Isn t the Downturn Over? The Housing Market: Still a Source of Downward Pressure A Full-employment Economy? It s Many Years Away Interest and Inflation Rate Expectations The New Financial Anxiety Individual Life Insurance: Status Report Sales, Lapse, Policy Loan Trends A Financial Security Budget Target? Q & A

3 Wait a Minute: Isn t the Downturn Over?

4 8% Real Quarterly GDP Changes (annualized), 2005:Q3-2010:Q4F Q Red bars are actual; Yellow bars are forecasts/estimates Spike due almost entirely to the weak dollar (growing exports and slowing imports) 6% 5.4 4% 4% 2% 0% 3.1% 2.1% 1.4 4% 0.1% 3.0% 1.2% 3.2% 3.6% 2.1% 1.5 5% 3.5% 2.4% 2.6% 2.7% 2.8% 2.9% -2%.7% -0..7% % -6% -8% The Q1:2009 decline was the steepest t since the Q1:1982 drop of 6.4% -2.7% -5.4% -6.4% 05 5:3Q 05 5:4Q 06 6:1Q 06 6:2Q 06 6:3Q 06 6:4Q 07 7:1Q 07 7:2Q 07 7:3Q Sources: US Department of Commerce, Bureau of Economic Analysis (actual) at Blue Chip Economic Indicators 10/09 issue (forecasts). 07 7:4Q 08 8:1Q 08 8:2Q 08 8:3Q 08 8:Q4 09 9:1Q 09 9:2Q 09 9:3Q 09 9:4Q 10 0:1Q 10 0:2Q 10 0:3Q 10 0:4Q

5 Total Industrial Production, monthly Mar 2001-Sept 2009 (Index 2002=100)* Index March November 2001 recession Recession began December 2007 Hurricane 107 Katrina Industrial production turned up in July 95 Jun 09 Mar 01 Jun 01 Sep 01 Dec 01 Mar 02 Jun 02 Sep 02 Dec 02 Mar 03 Jun 03 Sep 03 Dec 03 Mar 04 Jun 04 Sep 04 Dec 04 Mar 05 Jun 05 Sep 05 Dec 05 Mar 06 Jun 06 Sep 06 Dec 06 Mar 07 Jun 07 Sep 07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Sep 09 Source: *seasonally adjusted 5

6 U.S. Nonfarm Private Employment, Monthly, Nov Sept Millions Nov Dec Jan Feb Mar Apr May 08 Employment peak; recession starts June Jul Aug Sep Seasonally adjusted. Source: US Bureau of Labor Statistics Oct Nov Dec Jan Feb Mar 09 Job loss is slowing. Only 263,000 jobs lost in September Apr May Jun Jul Aug Sep 09

7 But Problems Remain Housing is Still a Source of fdownward dpressure

8 High Ratio of Unsold-Homes Inventory to Sales Will Likely Keep Prices Falling Millions of Homes, Annual Rate Inventory of unsold homes # of house sales fell; inventory was roughly constant number of homes sold # of house sales is slightly higher Jan n-09 Feb 09 Mar 09 Apr 09 May 09 Jun 09 Jul 09 Aug 09 Source:

9 Index* 210 Many People s Main Asset (Their Home) Has Lost 6 Years of Appreciation 200 Home prices in July were about equal to August Jan n-00 Jan n-01 Jan n-02 Jan n-03 Jan n-04 Current recession began in Dec 07 July 2009 index value was : home prices were 30% below their July 2006 peak *Case-Shiller Home Price Index (20-city composite); January 2000=100. Not seasonally adjusted Source: Jan n-05 Jan n-06 Jan n-07 Jan n-08 Jan n-09

10 Shadow Inventory of Unsold Homes: It s Worse Than You Think Zillow.com s latest Homeowner Confidence Survey (published August 18, 2009) asked homeowners how likely they would put their homes on the market if they saw signs of a turnaround in the next 12 months: Very likely, 8% (7.5 million homes) Likely, 9% (7.5 million homes) But Adam York, economist for Wells Fargo Securities, contends that t the amount of homes that t have not yet been listed for sale could be around 4-5 million. Source:

11 Millions More Foreclosures are Likely [A]ny modification program seeking to avoid preventable foreclosures has limits, HAMP included. Even before the current crisis, when home prices were climbing, there were still many hundreds of thousands of foreclosures. Therefore, even if HAMP is a total success, we should still expect millions of foreclosures, as President Obama noted when he launched the program in February. Source: Treasury Assistant Secretary for Financial Institutions Michael S. Barr, Written Testimony on Stabilizing the Housing Market before the House Financial Services Committee, Subcommittee on Housing and Community Opportunity (emphasis added)

12 At Midyear 2009, Over 40% of Subprime Loans Were Delinquent or in Foreclosure (2005:Q1-2009:Q2) 2009:Q2)

13 The Percent of Delinquent Prime Loans and Prime Loans in Foreclosure Is Still Rising Sharply (2005:Q1-2009:Q2) 2009 Q2)

14 Fewer People/ Organizations are Borrowing

15 Households and Businesses Are Still Deleveraging g Percent Change in Debt Growth (Quarterly since 2004 at Annualized Rate) 16% Home Mortgage Consumer Credit Business Corporate 12% Corporate deleveraging 8% 4% 0% -4% Consumer desperation? Personal (mortgage) dl deleveraging -8% :Q :Q :Q :Q :Q :Q :Q :Q :Q :Q :Q :Q :Q :Q :Q :Q :Q :Q :Q :Q :Q :Q2 Source: Federal Reserve Board, at

16 A Full-Employment Economy is Still Many Years Away

17 Unemployment and Underemployment Rates: Rocketing Up in January 2000 through September 2009, seasonally adjusted Percent Traditional Unemployment Rate U-3 18 Unemployment + Underemployment Rate U Jan % Sept unemployment rate (U-3) was the highest monthly rate since Peak rate in the last 30 years: 10.8% in Nov-Dec Jan-0 01 Jan-0 02 Jan-0 03 Jan-0 04 Jan-0 05 U-6 went from 9.2% in April 2008 to 17.0% in Sept Jan-0 06 Source: US Bureau of Labor Statistics; Insurance Information Institute. Jan-0 07 Jan-0 08 Jan-0 09

18 U.S. Unemployment Rate Forecasts Quarterly, 2009:Q4 to 2010:Q4 10.5% 10.0% 10.1% 10.0% 99% 9.9% 10.3% 10.3% 10.3% 10.1% 10.1% 9.8% 9.8% 10.2% 9.5% 9.6% 9.6% 9.0% 8.5% Unemployment tis now expected dto peak in late 2009:Q4 or 2010:Q1. 9.2% 8.9% 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4 10 most pessimistic consensus/midpoint 10 most optimistic Sources: Blue Chip Economic Indicators (10/09); Insurance Info. Inst.

19 When Might All of the Lost Jobs Be Regained? 2016? Source: Wall Street Journal, October 9, 2009, p. A3

20 Interest Rates Will Likely Stay Low for the Foreseeable Future

21 Inflation Forecast: Low Rates Ahead 6% Following Average inflation rate, : 2.67% 4.9% 5.1% July % March 1991 Following March recession 2001-November 4% 3% 2% 1% 3.0% 3.2% 2.9% 2.8% 2.4% 2.6% 19% 1.9% 1.5% 3.3% 3.4% 2001 recession 1.3% 3.8% 3.8% 3.0% 2.8% 2.5% 2.3% 19% 1.9% 0% -1% -0.5% F10F Sources: US Bureau of Labor Statistics (actual, blue bars); Blue Chip Economic Indicators, 10/2009 issue, (forecasts, yellow bars)

22 Theory: Re-ignited Inflation Won t Threaten Until the Economy Returns to a Full-Employment Level Likely Likely a Few Years Away The markets are starting to worry that the flood of money for the recovery will re-ignite inflation (the spread between 10-Year TIPS and 10-Year T-Notes is widening). Source: Cooper, Hints of Recovery And Fears of Inflation, BusinessWeek, May 11, 2009, p. 8

23 Bond Yields Tend to Reflect Expected Inflation, but the Relationship is a Loose One 10% 8% 6% CPI-U % Change July March 1991 recession U.S. Treasury 10-Year Note Yield March November 2001 recession Forecast 4% 2% 0% F 10F -2% Sources: US Bureau of Labor Statistics (history); Blue Chip Economic Indicators, 10,/2009 issue (forecasts)

24 Net Rate on L/H General Account Assets Tends to Follow 10-Year US T-Note L/H Net Rate, Gen'l Acct 10-Year Treasury Note 14% 12% 10% 8% 6% 4% 2% *estimates/forecasts from October 2009 issue of Blue Chip Economic Indicators Sources: ACLI Life Insurers Fact Book 2008, p. 34; * 10* 0 201

25 What s the Longer- Term Forecast for Interest Rates?

26 Will Federal Deficit Spending Ultimately Re-ignite Severe Inflation? $400 Federal Deficit ($ Bill) 4% $200 dfiit deficit as % of fgdp 2% $0 -$200 0% Fed deral Deficit -$400 -$600 -$800 -$1,000-2% -4% -6% Defici t as % of GDP -$1,200 -$1,400 -$1,600 Deficit hit $1.6 trillion in FY 2009 (11% of GDP), by far a post-ww II high -8% -10% -$1,800-12% Source: White House OMB Mid-year Budget Report at

27 In the 70s and 80s, When the Deficit Rose, Only High Interest Rates Dampened Inflation 16% CPI Annual % change 6% deficit (-surplus) as % of GDP 14% 5% 12% 10% 4% CPI 8% 3% 6% 4% 2% 0% 2% 1% 0%

28 Will Inflation and Interest Rates Repeat the Pattern? L/H Net Rate, Gen'l Acct 10-Year Treasury Note 14% 12% 10% 8% 6% 4% 2% F F 11F 12F 13F 14F F 16F 11 17F 18F 19F Forecasts: Office of Management and Budget, Mid-Session Review, Fiscal Year ; I.I.I. speculation for

29 How Well Are Most People Handling Recent Circumstances?

30 Not Well They re Living Close to the Edge

31 How Long Could You Go Without Your Job Before Experiencing Significant Financial Hardship? 40% up to 1 week 35% up to 1 month Pe ercentage 30% 25% 20% 15% 10% 5% 11.9% 26.3% 36.3% 36.8% 21.9% 15.6% 14.5% 7.9% 18.8% up to 4 months up to 1 year over 1 year 10.0% 0% families with children families with no children Source: Jacob Hacker, The Great Risk Shift, rev. ed., Oxford University Press, New York, p. 102, citing a Gallup survey published in April Hacker notes that these results are after controlling for demographic variables such as age, income, race, education, and gender.

32 Trend: Growing Chance That a Family s Income Will Drop By 50% or More The income instability risk has been rising for three decades Even at tits most recent best (at the height of the prosperity of the 1990s), the risk level exceeded all pre-1980 levels Source: Jacob Hacker, The Great Risk Shift, (New York: Oxford University Press), 2006, pp. 2,

33 Ordinary Life Insurance Lapse Rates, Was the 2002 spike 9.0% in lapse rates related to the March November % recession? recession; curve will likely continue up in % 6.0% 5.0% 4.0% 7.1% 6.7% 6.5% 6.6% 6.4% 6.5% 6.4% 61% 61% 62% 61% 61% 62% 5.9% 6.0% 6.1% 6.1% 6.2% 6.1% 6.1% 6.2% 6.2% 6.0% 5.9% 5.9% 5.7% 5.6% 5.4% 4.9% 4.9% 5.1% by number of policies by amount of insurance Sources: NAIC Annual Statements, p. 26 line 15 (lapses) and average of lines 1 and 21, from National Underwriter HighlineData; I.I.I. calculations

34 Billions in Loans Policy Loans Increase During/Following a Recession, but Also in Boom Times Policy Loans Nominal GDP GDP, Billions $120 $16,000 $100 July November 1982 recession July March 1991 recession $14,000 $12,000 $80 $60 March November 2001 recession $10,000 $8,000 $6,000 $4,000 $40 $2, * Sources: ACLI Life Insurers Fact Book 2008, p. 11.

35 The Older Generations Might Boost Economic Growth and Life/Annuity Purchases by Continuing to Work

36 More Workers Are Delaying Their Planned Retirement Percent 100% 90% 80% 75% 89% 84% 79% 70% 66% % % % 32% % 30% 16% 21% % 20% 10% 0% % who changed retirement tage in % who changed dto delay retirement t past 12 months Source: EBRI Issue Brief No. 316, (April 2009), p. 14

37 Age When Workers Plan to Retire Percent of Workers 60% 50% 40% 30% 20% 10% 0% 50% 41% 37% 26% 31%31% 26% 23% 11% 22% 18% 31% 10% 5% 6% 0% before age 65 at age 65 age 66 or older never retire Source: EBRI Issue Brief No. 316, (April 2009), p. 14

38 Past and Projected Labor Force Participation Rates, by Age Group Participation Rate 75% 50% 69.6% 70.1% 58.2% 63.5% % 0% 28.8% 34.6% men women men women men 75+ women 75+ Source: Mitra Toossi, Labor force projections to 2016: more workers in their golden years, Monthly Labor Review, November 2007, Table % % 9.5% 14.7% 4.4% 7.6%

39 Labor Force Participation, Ages 55 and Over, 2006:Q2-2009:Q Q3 Labor Force (millions) 15 Labor force participation by workers especially women age 55 and over has grown in spite of the current recession men women :Q :Q :Q :Q :Q :Q :Q :Q :Q :Q :Q :Q :Q :Q3 Source: US Bureau of Labor Statistics, seasonally adjusted quarterly averages

40 People Over 60 are Increasingly Buying Individual Life Insurance They re the only age group like this

41 % Change vs Prior Y 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% Percent Change* in Applications for Individual U.S. Life Insurance Policies, May Sep 2009 The 0-44 age group still represents the majority of the premium volume, but this has been declining over time. May 07 Jul 07 Sep 07 Nov 07 Jan 08 Mar 08 *vs. same month, prior year Source: MIB Life Index, monthly releases May 08 Jul 08 Sep 08 Nov 08 Jan 09 Mar 09 May 09 Jul 09 Sep 09 Ages 60 and over is the only group consistently increasing life insurance applications. ages 0-44 ages ages 60+

42 Not Just Retirees: Many People Don t Know Where They re Going or How to Get There Source: National Underwriter (L/H), June xx, 2008, p. xx

43 Cover Art for July/August 2008 Issue of AARP Bulletin Source: AARP Bulletin, Vol. 49, No. 6 (July/August 2008)

44 Conclusion: People Need Help Constructing ti Their Own Financial Safety Net

45 Step 1: Give Them a Spending Target What Percent of Income Should People Spend to Assure Their Financial Security?

46 As a Percent of Personal (Gross) Income, Personal Insurance Premiums Are Down 8.2% 8.1% Personal Insurance Premiums include all Life, A&H, 8.0% Annuities, and Personal Property/Casualty Insurance. 7.9% 7.8% 7.7% 7.6% 7.5% 7.4% Sources: Best s Aggregates and Averages, Life/Health, 2009 Edition, p. 173 and Property/Casualty 2009 edition, p. 573., I.I.I. calculations

47 L-H Industry Profitability

48 L/H Industry Net Income, Billions $45 $40 $35 $30 $25 $20 $15 $10 $5 $0 -$5 -$10 -$15 -$20 -$25 -$30 -$35 -$40 -$45 -$50 -$55 $19.2 $21.7 $20.9 $22.2 $18.0 $13.6 $9.8 $4.1 $32.2 $35.9 $36.2 $31.9 $ net income rose only 0.8% despite 10.5% net premium growth, because surrenders grew 20.4%, disability benefits grew 21.6%, and total expenses grew 13.1%. -$ Source: NAIC Annual Statements, p.4, line 35, from National Underwriter HighlineData.

49 Effect of Realized Capital Gains/ Losses on Net Income, $40 $35 $30 $25 $20 $15 $10 $5 $0 -$5 -$10 -$15 -$20 -$25 -$30 -$35 -$40 -$45 -$50 -$55 $13.6 $ $ $18.0 $ $ $9.8 $4.1 $ $32.2 $36.0 $36.2 $31.9 -$ L/H Net Income L/H Realized Capital Gains (Losses) Source: NAIC Annual Statement data, Summary of Operations and Exhibit of Capital Gains (Losses) from Highline National Underwriter

50 Life Insurer Operating Expenses, (excl. Commissions) $ Millions $200,000 $150,000 $100,000 $105,804 $126,5 541 $14 42,590 $165,243 $14 46,149 $193,0 067 $127,7 711 $116,27 72 $132 2,938 49,795 $1 $122,7 711 $14 41,920 $1 154,559 $121,4 432 $50, Source: Best s Aggregates and Averages, Life/Health, 2009 Edition

51 Summary & Conclusion The capital markets are still weighed down by the housing market and lenders reluctance to lend Given the present and likely future unemployment picture, the economy is unlikely to show signs of recovery in the near term Sales of individual life insurance policies have been trending down for 6 years Trend toward increasing labor force participation by those over 55 seems likely to continue These people have been increasingly buying life insurance

52 Insurance Information Institute On-Line If you would like a copy of this presentation, please give me your business card with address