Transcript AECLII-110609 - Insurance Information Institute

Thriving in
an Economic Downturn:
What Lies Ahead?
20th Annual Executive 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 10038
Tel: (212) 346-5540  Cell: (917) 494-5945  [email protected]  www.iii.org
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
Wait a Minute:
Isn’t the
Downturn
Over?
Real Quarterly GDP Changes (annualized),
2005:Q3-2010:Q4F Red bars are actual; Yellow
bars are forecasts/estimates
Spike due almost entirely to the weak dollar
(growing exports and slowing imports)
2.4%
2.6%
2.7%
2.8%
2.9%
09:4Q
10:1Q
10:2Q
10:3Q
10:4Q
08:Q4
08:3Q
08:2Q
08:1Q
07:4Q
07:3Q
07:2Q
07:1Q
06:4Q
06:3Q
06:2Q
06:1Q
05:4Q
05:3Q
-8%
09:3Q
-6%
-5.4%
The Q1:2009 decline was
the steepest since the
Q1:1982 drop of 6.4%
09:2Q
-4%
09:1Q -6.4%
-2.7%
-2%
-0.7%
-0.7%
1.5%
2.1%
3.5%
3.6%
1.2%
3.0%
0%
0.1%
1.4%
2%
2.1%
4%
3.1%
6%
3.2%
5.4%
8%
Sources: US Department of Commerce, Bureau of Economic Analysis (actual) at
http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
Blue Chip Economic Indicators 10/09 issue (forecasts).
Total Industrial Production, monthly
Mar 2001-Sept 2009 (Index 2002=100)*
Index
113
Recession began
December 2007
March 2001November 2001
recession
110
Hurricane
Katrina
107
104
101
Source: http://www.federalreserve.gov/releases/g17/ipdisk/ip_sa.txt.
*seasonally adjusted
5
Sep 09
Jun 09
Mar 09
Dec 08
Sep 08
Jun 08
Mar 08
Dec 07
Sep 07
Jun 07
Mar 07
Dec 06
Sep 06
Jun 06
Mar 06
Dec 05
Sep 05
Mar 05
Dec 04
Sep 04
Jun 04
Mar 04
Dec 03
Sep 03
Jun 03
Mar 03
Dec 02
Sep 02
Jun 02
Mar 02
Dec 01
Sep 01
Jun 01
Mar 01
95
Jun 05
Industrial production
turned up in July
98
U.S. Nonfarm Private Employment,
Monthly, Nov. 2007 – Sept. 2009
Job loss is slowing.
Only 263,000 jobs
lost in September
130.9
131.2
131.4
131.7
132.2
132.5
133.0
133.7
134.3
135.1
136.2
136.7
137.0
137.4
137.6
137.6
137.8
137.8
137.9
138.0
138.1
138.0
138.5
138.0
137.5
137.0
136.5
136.0
135.5
135.0
134.5
134.0
133.5
133.0
132.5
132.0
131.5
131.0
130.5
130.0
137.7
Employment peak;
recession starts
Millions
Nov Dec Jan Feb Mar Apr May June Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep
07
07
08 08 08 08 08
08
08 08 08 08 08
08 09
09 09 09
09 09
09
09 09
Seasonally adjusted.
Source: US Bureau of Labor Statistics
But Problems Remain
Housing is
Still a Source
of Downward Pressure
High Ratio of Unsold-Homes Inventory
to Sales Will Likely Keep Prices Falling
Millions of Homes,
Annual Rate
# of house sales fell;
inventory was roughly constant
5.10
3.6
5.24
4.1
3.9
4.72
May 09
4.89
3.9
4.66
Apr 09
3.8
3.6
4.55
4.71
3.8
3.6
4.49
3.7
3.5
Mar 09
2
2.8
4
4.0
4.9
5
3
# of house sales is
slightly higher
5.7
6
number of homes sold
6.5
7
7.1
8
Inventory of unsold homes
1
Source: http://www.realtor.org/research/research/ehsdata
Aug 09
Jul 09
Jun 09
Feb 09
Jan-09
08
07
06
05
0
Many People’s Main Asset (Their Home)
Has Lost 6 Years of Appreciation
Index*
210
200
190
180
170
160
150
140
130
120
110
100
Home prices in July 2009
were about equal to
August 2003
Current recession
began in Dec ‘07
*Case-Shiller Home Price Index (20-city composite); January 2000=100. Not seasonally adjusted
Source: http://www2.standardandpoors.com/spf/pdf/index/CSHomePrice_History_072820.xls
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
July 2009 index value was
144.23: home prices were
30% below their July
2006 peak
“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 the amount of homes that
have not yet been listed for sale could be around 4-5
million.
Source: http://zillow.mediaroom.com/index.php?s=173
“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)
At Midyear 2009, Over 40% of Subprime
Loans Were Delinquent or in Foreclosure
(2005:Q1-2009:Q2)
The Percent of Delinquent Prime Loans and Prime
Loans in Foreclosure Is Still Rising Sharply
(2005:Q1-2009:Q2)
Fewer People/
Organizations are
Borrowing
Households and Businesses
Are Still “Deleveraging”
Percent Change in Debt Growth (Quarterly since 2004 at Annualized Rate)
Home Mortgage
16%
Consumer Credit
Business Corporate
Corporate
deleveraging
12%
8%
4%
0%
Consumer
desperation?
-4%
Personal (mortgage)
deleveraging
Source: Federal Reserve Board, at http://www.federalreserve.gov/releases/z1/Current/z1r-2.pdf
2009:Q2
2009:Q1
2008:Q4
2008:Q3
2008:Q2
2008:Q1
2007:Q4
2007:Q3
2007:Q2
2007:Q1
2006:Q4
2006:Q3
2006:Q2
2006:Q1
2005:Q4
2005:Q3
2005:Q2
2005:Q1
2004:Q4
2004:Q3
2004:Q2
2004:Q1
-8%
A Full-Employment
Economy is Still
Many Years Away
Unemployment and Underemployment
Rates: Rocketing Up in 2008-9
January 2000 through September 2009, seasonally adjusted
Percent
Traditional Unemployment Rate U-3
Unemployment + Underemployment Rate U-6
18
16
14
12
9.8% Sept. 2009 unemployment rate (U-3)
was the highest monthly rate since 1983.
Peak rate in the last 30 years: 10.8% in
Nov-Dec 1982.
U-6 went from 9.2%
in April 2008 to
17.0% in Sept. 2009
10
8
6
4
Source: US Bureau of Labor Statistics; Insurance Information Institute.
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
2
U.S. Unemployment Rate Forecasts
Quarterly, 2009:Q4 to 2010:Q4
10.5%
10.0%
10.1%
10.3%
10.3%
10.1%
10.1%
10.3%
10.2%
10.0%
9.9%
9.8%
9.8%
9.6%
9.5%
9.6%
9.2%
9.0%
8.9%
Unemployment is now expected to
peak in late 2009:Q4 or 2010:Q1.
8.5%
09:Q4
10 most pessimistic
10:Q1
10:Q2
consensus/midpoint
Sources: Blue Chip Economic Indicators (10/09); Insurance Info. Inst.
10:Q3
10:Q4
10 most optimistic
When Might All of the Lost Jobs
Be Regained? 2016?
Source: Wall Street Journal, October 9, 2009, p. A3
Interest Rates Will
Likely Stay Low for
the Foreseeable
Future
2009-2010 Inflation Forecast:
Low Rates Ahead
6%
5%
5.1%
4.9%
Following
July 1990March 1991
recession
Average inflation rate, 1992-2007: 2.67%
Following March
2001-November
2001 recession3.8%
4%
3%
2%
3.2%
3.0%
2.9%2.8%
2.4%
2.6%
3.3%3.4%
1.9%
1.5%
3.0%
2.5%
2.3%
3.8%
2.8%
1.9%
1.3%
1%
0%
-0.5%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F 10F
-1%
Sources: US Bureau of Labor Statistics (actual, blue bars); Blue Chip Economic Indicators, 10/2009
issue, (forecasts, yellow bars)
Theory: Re-ignited Inflation Won’t Threaten
Until the Economy Returns to a Full-Employment
Level—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
Bond Yields Tend to Reflect Expected
Inflation, but the Relationship is a Loose One
CPI-U % Change
U.S. Treasury 10-Year Note Yield
10%
March 2001November 2001
recession
July 1990March 1991
recession
8%
Forecast
6%
4%
2%
-2%
Sources: US Bureau of Labor Statistics (history); Blue Chip Economic Indicators, 10,/2009 issue (forecasts)
10F
09F
08
07
06
05
04
03
02
01
00
99
98
97
96
95
94
93
92
91
90
0%
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%
1980
81
82
83
84
1985
86
87
88
89
1990
91
92
93
94
1995
96
97
98
99
2000
01
02
03
04
2005
06
07
08
09*
2010*
2%
*estimates/forecasts from October 2009 issue of Blue Chip Economic Indicators
Sources: ACLI Life Insurers Fact Book 2008, p. 34;
http://federalreserve.gov/releases/h15/data/Annual/H15_TCMNOM_Y10.txt
What’s the LongerTerm Forecast
for Interest Rates?
Will Federal Deficit Spending
Ultimately Re-ignite Severe Inflation?
$400
4%
Federal Deficit ($ Bill)
deficit as % of GDP
$200
2%
-$200
0%
-$400
-2%
-$600
-4%
-$800
-6%
-$1,000
Deficit hit $1.6 trillion in
FY 2009 (11% of GDP),
by far a post-WW II high
-$1,200
-$1,400
-8%
-10%
-$1,600
Source: White House OMB Mid-year Budget Report at
http://www.whitehouse.gov/omb/assets/fy2010_msr/10msr.pdf
2019
2015
2010
2005
2000
1995
1990
1985
1980
1975
-12%
1969
-$1,800
Deficit as % of GDP
Federal Deficit
$0
In the 70s and 80s, When the Deficit Rose,
Only High Interest Rates Dampened Inflation
CPI Annual % change
deficit (-surplus) as % of GDP
16%
6%
14%
5%
12%
4%
8%
3%
6%
2%
4%
1%
2%
1990
1985
1980
0%
1975
0%
1970
CPI
10%
Will Inflation and Interest Rates
Repeat the 1980-85 Pattern?
L/H Net Rate, Gen'l Acct
10-Year Treasury Note
14%
12%
10%
8%
6%
4%
1980
81
82
83
84
1985
86
87
88
89
1990
91
92
93
94
1995
96
97
98
99
2000
01
02
03
04
2005
06
07
08
09F
2010F
11F
12F
13F
14F
2015F
16F
17F
18F
19F
2%
Forecasts: Office of Management and Budget, Mid-Session Review, Fiscal Year 2010.
http://federalreserve.gov/releases/h15/data/Annual/H15_TCMNOM_Y10.txt ; I.I.I. speculation for 2016-19
How Well Are Most
People Handling
Recent
Circumstances?
Not Well
They’re Living
Close to the Edge
“How Long Could You Go Without Your Job Before
Experiencing Significant Financial Hardship?”
40%
up to 1 week
35%
up to 1 month
up to 4 months
30%
Percentage
up to 1 year
25%
over 1 year
20%
36.8%
36.3%
15%
26.3%
21.9%
10%
5%
11.9%
15.6% 14.5%
18.8%
10.0%
7.9%
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 2003. Hacker notes that these results are after controlling for demographic
variables such as age, income, race, education, and gender.
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 its 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, 14-15.
Ordinary Life Insurance
Lapse Rates, 1996-2008
Was the 2002 spike
in lapse rates related
to the March 2001November 2001
recession?
9.0%
8.0%
2008-09 recession;
curve will likely
continue up in 2009
7.1%
7.0%
6.7%
6.5%
6.4%
6.0%
5.9%
6.0%
6.1%
6.2%
6.1%
6.5%
6.6%
6.4%
6.1%
6.1%
5.9%
5.6%
6.2%
6.0%
6.2%
5.9%
5.7%
5.4%
5.0%
4.9%
4.9%
5.1%
by number of policies
by amount of insurance
4.0%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Sources: NAIC Annual Statements, p. 26 line 15 (lapses) and average of lines 1 and 21, from National
Underwriter HighlineData; I.I.I. calculations
Policy Loans Increase During/Following
a Recession, but Also in Boom Times
Policy Loans
Billions in Loans
GDP, Billions
July 1990March
1991
recession
$120
$100
Nominal GDP
July 1981November
1982
recession
$16,000
$14,000
$12,000
$10,000
$80
$8,000
Sources: http://www.bea.gov/national/xls/gdplev.xls , ACLI Life Insurers Fact Book 2008, p. 11.
$6,000
$4,000
2009*
2008
2007
2006
2005
2004
2003
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
$40
2002
March 2001November 2001
recession
$60
$2,000
The Older Generations Might
Boost Economic Growth and
Life/Annuity Purchases
by Continuing to Work
More Workers Are Delaying
Their Planned Retirement
Percent
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
84%
75%
89%
79%
66%
32%
28%
16%
21% 18%
% who changed retirement age in
past 12 months
Source: EBRI Issue Brief No. 316, (April 2009), p. 14
% who changed to delay retirement
2003
2004
2005
2008
2009
Age When Workers Plan
to Retire
Percent of Workers
60%
50%
50%
40%
41%
37%
31%31%
30%
26%
26%
23%
20%
1994
1999
2004
2009
31%
22%
18%
11%
10%
5%6%
10%
0%
0%
before age 65
at age 65
Source: EBRI Issue Brief No. 316, (April 2009), p. 14
age 66 or older
never retire
Past and Projected Labor Force
Participation Rates, by Age Group
Participation Rate
men 55-64
women 55-64
men 65-74
women 65-74
2016
men 75+
4.4%
14.7%
0%
9.5%
25.1%
19.2%
25%
34.6%
28.8%
2006
7.6%
63.5%
50%
58.2%
70.1%
69.6%
75%
women 75+
Source: Mitra Toossi, “Labor force projections to 2016: more workers in their golden years,”
Monthly Labor Review, November 2007, Table 3.
Labor Force Participation, Ages 55
and Over, 2006:Q2-2009:Q3
2
Q
6:
0
20
3
Q
6:
0
20
4
Q
7:
0
20
1
Q
7:
0
20
2
Q
7:
0
20
3
Q
7:
0
20
4
Q
8:
0
20
1
Q
8:
0
20
2
Q
8:
0
20
3
Q
8:
0
20
Source: US Bureau of Labor Statistics, http://www.bls.gov/web/cpseed6.pdf
seasonally adjusted quarterly averages
4
Q
9:
0
20
1
Q
9:
0
20
13.0
14.2
14.2
12.8
12.9
14.3
12.8
14.3
12.6
14.2
12.5
14.1
12.3
13.8
13.8
12.2
12.0
11.8
11.6
11.4
Q
6:
0
20
11.9
12
11
13.6
13.4
women
13.2
13.2
13
men
13.4
14
12.5
15
14.3
Labor force participation by workers—
especially women—age 55 and over has
grown in spite of the current recession.
Labor Force
(millions)
2
Q
9:
0
20
3
People Over 60 are
Increasingly Buying
Individual Life Insurance
They’re the only age group like this
Percent Change* in Applications for Individual
U.S. Life Insurance Policies,
May 2007- Sep 2009
16%
14%
12%
Ages 60 and
over is the
only group
consistently
increasing
life insurance
applications.
The 0-44 age group still represents
the majority of the premium
volume, but this has been declining
over time.
% Change vs Prior Yr
10%
8%
6%
ages 0-44
ages 45-59
ages 60+
4%
2%
0%
p
Se
9
09
l0
09
09
08
08
8
09
ay
ar
n
Ju
M
M
Ja
ov
N
p
Se
l0
*vs. same month, prior year
Source: MIB Life Index, monthly releases
08
-8%
08
08
-6%
ay
ar
n
07
07
7
07
-4%
Ju
M
M
Ja
ov
N
p
Se
l0
ay
Ju
M
-2%
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
Cover Art for July/August 2008
Issue of AARP Bulletin
Source: AARP Bulletin, Vol. 49, No. 6 (July/August 2008)
Conclusion:
People Need Help
Constructing Their Own
Financial Safety Net
Step 1:
Give Them a Spending Target
What Percent of Income
Should People Spend
to Assure
Their Financial Security?
As a Percent of Personal (Gross) Income,
Personal Insurance Premiums Are Down
8.2%
Personal Insurance Premiums
include all Life, A&H,
Annuities, and Personal
Property/Casualty Insurance.
8.1%
8.0%
7.9%
7.8%
7.7%
7.6%
7.5%
7.4%
2001
2002
2003
2004
2005
2006
2007
2008
Sources: http://www.bea.gov/national/xls/gdplev.xls , Best’s Aggregates and Averages, Life/Health,
2009 Edition, p. 173 and Property/Casualty 2009 edition, p. 573., I.I.I. calculations
L-H Industry
Profitability
Billions
L/H Industry Net Income, 1995-2008
$45
$40
$35
$30
$25
$20
$15
$10
$5
$0
-$5
-$10
-$15
-$20
-$25
-$30
-$35
-$40
-$45
-$50
-$55
$32.2
$35.9 $36.2
$31.9
$26.6
$19.2
$13.6
$21.7
$18.0
$20.9 $22.2
$9.8
$4.1
2006 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%.
-$50.6
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: NAIC Annual Statements, p.4, line 35, from National Underwriter HighlineData.
L/H Net
Income
-$51.7
$31.9
$36.2
$36.0
$32.2
$26.6
$4.1
$9.8
$22.2
$20.9
$18.0
$21.7
$19.2
$40
$35
$30
$25
$20
$15
$10
$5
$0
-$5
-$10
-$15
-$20
-$25
-$30
-$35
-$40
-$45
-$50
-$55
$13.6
Effect of Realized Capital Gains/
Losses on Net Income, 1995-2008
L/H
Realized
Capital
Gains
(Losses)
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: NAIC Annual Statement data, Summary of Operations and Exhibit of Capital Gains (Losses)
from Highline National Underwriter
Life Insurer Operating Expenses,
(excl. Commissions) 1995-2008
$ Millions
$200,000
$121,432
$154,559
$141,920
$122,711
$149,795
$132,938
$116,272
$127,711
$193,067
$146,149
$165,243
$142,590
$105,804
$100,000
$126,541
$150,000
$50,000
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Best’s Aggregates and Averages, Life/Health, 2009 Edition
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
Insurance Information
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