Thriving inan Economic Downturn:

What Lies Ahead?

Steven N. Weisbart, Ph.D., CLU, Senior Vice President and Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038

Tel: (212) 346-5540 Cell: (917) 494-5945 stevenw@iii.org www.iii.org

20th Annual Executive Conferencefor the Life Insurance Industry

New York, NYNovember 6, 2009

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 ReportSales, Lapse, Policy Loan Trends

• A Financial Security Budget Target?• Q & A

Wait a Minute: Isn’t the

Downturn Over?

3.1%

2.1%

5.4%

1.4%

0.1%

3.0%

1.2%

3.2% 3.

6%

2.1%

1.5%

-5.4

%

-6.4

%

-0.7

%

3.5%

2.4% 2.6%

2.7%

2.8%

2.9%

-0.7

%

-2.7

%-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

05:3

Q

05:4

Q

06:1

Q

06:2

Q

06:3

Q

06:4

Q

07:1

Q

07:2

Q

07:3

Q

07:4

Q

08:1

Q

08:2

Q

08:3

Q

08:Q

4

09:1

Q

09:2

Q

09:3

Q

09:4

Q

10:1

Q

10:2

Q

10:3

Q

10:4

Q

Real Quarterly GDP Changes (annualized),

2005:Q3-2010:Q4F

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).

Spike due almost entirely to the weak dollar (growing exports and slowing imports)

Red bars are actual; Yellowbars are forecasts/estimates

The Q1:2009 decline was the steepest since the

Q1:1982 drop of 6.4%

95

98

101

104

107

110

113

Mar 01

Jun 0

1

Sep 0

1

Dec 0

1

Mar 02

Jun 0

2

Sep 0

2

Dec 0

2

Mar 03

Jun 0

3

Sep 0

3

Dec 0

3

Mar 04

Jun 0

4

Sep 0

4

Dec 0

4

Mar 05

Jun 0

5

Sep 0

5

Dec 0

5

Mar 06

Jun 0

6

Sep 0

6

Dec 0

6

Mar 07

Jun 0

7

Sep 0

7

Dec 0

7

Mar 08

Jun 0

8

Sep 0

8

Dec 0

8

Mar 09

Jun 0

9

Sep 0

9

Total Industrial Production, monthly Mar 2001-Sept 2009 (Index 2002=100)*

Source: http://www.federalreserve.gov/releases/g17/ipdisk/ip_sa.txt. *seasonally adjusted5

Recession began December 2007

Industrial production turned up in July

Index

Hurricane Katrina

March 2001-November 2001

recession

U.S. Nonfarm Private Employment, Monthly, Nov. 2007 – Sept. 2009

138.

0

138.

1

138.

0

137.

9

137.

8

137.

8

137.

7

137.

6

137.

6

137.

4

137.

0

136.

7

136.

2

135.

1

134.

3

133.

7

133.

0

132.

5

132.

2

131.

7

131.

4

131.

2

130.

9

130.0130.5131.0131.5132.0132.5133.0133.5134.0134.5135.0135.5136.0136.5137.0137.5138.0138.5

Nov07

Dec07

Jan08

Feb08

Mar08

Apr08

May08

June08

Jul08

Aug08

Sep08

Oct08

Nov08

Dec08

Jan09

Feb09

Mar09

Apr09

May09

Jun09

Jul09

Aug09

Sep09

Seasonally adjusted. Source: US Bureau of Labor Statistics

Millions Job loss is slowing. Only 263,000 jobs lost in September

Employment peak; recession starts

But Problems RemainHousing is

Still a Sourceof Downward Pressure

2.8 3.

5 4.0

3.7

3.6 3.8

3.6 3.

9

3.9

3.8 4.1

3.6

7.1

6.5

5.7

4.9

4.49 4.71

4.55 4.66

4.72 4.89 5.

24

5.10

0

1

2

3

4

5

6

7

8

05 06 07 08

Jan-

09

Feb

09

Mar

09

Apr

09

May

09

Jun

09

Jul 0

9

Aug

09

Inventory of unsold homes number of homes sold

Source: http://www.realtor.org/research/research/ehsdata

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

# of house sales is slightly higher

Many People’s Main Asset (Their Home) Has Lost 6 Years of Appreciation

100

110

120

130

140

150

160

170

180

190

200

210

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Current recession began in Dec ‘07

July 2009 index value was 144.23: home prices

were 30% below their July 2006 peak

Home prices in July 2009 were about equal to

August 2003

*Case-Shiller Home Price Index (20-city composite); January 2000=100. Not seasonally adjustedSource: http://www2.standardandpoors.com/spf/pdf/index/CSHomePrice_History_072820.xls

Index*

“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

-8%

-4%

0%

4%

8%

12%

16%

2004:Q

1

2004:Q

2

2004:Q

3

2004:Q

4

2005:Q

1

2005:Q

2

2005:Q

3

2005:Q

4

2006:Q

1

2006:Q

2

2006:Q

3

2006:Q

4

2007:Q

1

2007:Q

2

2007:Q

3

2007:Q

4

2008:Q

1

2008:Q

2

2008:Q

3

2008:Q

4

2009:Q

1

2009:Q

2

Home Mortgage Consumer Credit Business Corporate

Households and BusinessesAre Still “Deleveraging”

Percent Change in Debt Growth (Quarterly since 2004 at Annualized Rate)

Source: Federal Reserve Board, at http://www.federalreserve.gov/releases/z1/Current/z1r-2.pdf

Personal (mortgage) deleveraging

Corporate deleveraging

Consumer desperation?

A Full-Employment Economy is Still

Many Years Away

2

4

6

8

10

12

14

16

18

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Traditional Unemployment Rate U-3Unemployment + Underemployment Rate U-6

January 2000 through September 2009, seasonally adjusted

U-6 went from 9.2% in April 2008 to

17.0% in Sept. 2009

Source: US Bureau of Labor Statistics; Insurance Information Institute.

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.

Unemployment and UnderemploymentRates: Rocketing Up in 2008-9

Percent

U.S. Unemployment Rate ForecastsQuarterly, 2009:Q4 to 2010:Q4

10.1%

10.3% 10.3% 10.3%10.2%

10.0%10.1% 10.1%

9.8%

9.6%

9.9%9.8%

9.6%

9.2%

8.9%

8.5%

9.0%

9.5%

10.0%

10.5%

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.

Unemployment is now expected to peak in late 2009:Q4 or

2010:Q1.

When Might All of the Lost JobsBe Regained? 2016?

Source: Wall Street Journal, October 9, 2009, p. A3

Interest Rates Will Likely Stay Low for

the ForeseeableFuture

2009-2010 Inflation Forecast: Low Rates Ahead

4.9%5.1%

3.0%3.2%

2.6%

1.5%1.9%

3.3%3.4%

1.3%

2.5%2.3%

3.0%

3.8%

2.8%

3.8%

1.9%

-0.5%

2.8%2.9%2.4%

-1%

0%

1%

2%

3%

4%

5%

6%

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F10F

Sources: US Bureau of Labor Statistics (actual, blue bars); Blue Chip Economic Indicators, 10/2009 issue, (forecasts, yellow bars)

Average inflation rate, 1992-2007: 2.67% Following July 1990-

March 1991 recession

Following March 2001-November 2001 recession

Theory: Re-ignited Inflation Won’t ThreatenUntil 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

-2%

0%

2%

4%

6%

8%

10%

90

91

92

93

94

95

96

97

98

99 00

01

02

03

04

05

06

07

08

09F

10F

CPI-U % Change U.S. Treasury 10-Year Note Yield

Sources: US Bureau of Labor Statistics (history); Blue Chip Economic Indicators, 10,/2009 issue (forecasts)

ForecastJuly 1990-March 1991

recession

March 2001-November 2001

recession

2%

4%

6%

8%

10%

12%

14%

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

*

L/H Net Rate, Gen'l Acct 10-Year Treasury Note

Net Rate on L/H General Account Assets Tends to Follow 10-Year US T-Note

*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 Longer-Term Forecast

for Interest Rates?

-$1,800

-$1,600

-$1,400

-$1,200

-$1,000

-$800

-$600

-$400

-$200

$0

$200

$4001969

1975

1980

1985

1990

1995

2000

2005

2010

2015

2019

Fed

eral

Def

icit

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

Def

icit

as

% o

f G

DP

Federal Deficit ($ Bill)

deficit as % of GDP

Will Federal Deficit Spending Ultimately Re-ignite Severe Inflation?

Deficit hit $1.6 trillion inFY 2009 (11% of GDP),

by far a post-WW II high

Source: White House OMB Mid-year Budget Report at http://www.whitehouse.gov/omb/assets/fy2010_msr/10msr.pdf

0%

2%

4%

6%

8%

10%

12%

14%

16%1970

1975

1980

1985

1990

CP

I

0%

1%

2%

3%

4%

5%

6%CPI Annual % changedeficit (-surplus) as % of GDP

In the 70s and 80s, When the Deficit Rose, Only High Interest Rates Dampened Inflation

2%

4%

6%

8%

10%

12%

14%

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

2010

F11

F12

F13

F14

F20

15F

16F

17F

18F

19F

L/H Net Rate, Gen'l Acct 10-Year Treasury Note

Will Inflation and Interest RatesRepeat the 1980-85 Pattern?

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 WellThey’re Living

Close to the Edge

“How Long Could You Go Without Your Job Before Experiencing Significant Financial Hardship?”

11.9%7.9%

26.3%21.9%

36.3% 36.8%

18.8%14.5%

10.0%

15.6%

0%

5%

10%

15%

20%

25%

30%

35%

40%

families with children families with no children

Per

cent

age

up to 1 week

up to 1 month

up to 4 months

up to 1 year

over 1 year

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 InsuranceLapse Rates, 1996-2008

5.9% 6.0%

5.6%

6.1% 6.1%

6.5%

6.1%6.4%

6.0%6.2%

5.9%

7.1%

6.4%6.7%

6.1% 6.2%6.5%

5.9%

6.6%

5.7%5.4%

4.9% 4.9%5.1%

6.2%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

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

Was the 2002 spike in lapse rates related to the March 2001-

November 2001 recession?

2008-09 recession; curve will likely

continue up in 2009

$40

$60

$80

$100

$120

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

*

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

Policy Loans Nominal GDP

Policy Loans Increase During/Followinga Recession, but Also in Boom Times

Sources: http://www.bea.gov/national/xls/gdplev.xls , ACLI Life Insurers Fact Book 2008, p. 11.

Billions in Loans GDP, Billions

March 2001-November 2001

recession

July 1990-March 1991

recessionJuly 1981-November

1982 recession

The Older Generations MightBoost Economic Growth and

Life/Annuity Purchasesby Continuing to Work

More Workers Are DelayingTheir Planned Retirement

16%

66%

21%

84%

18%

79%

28%

89%

75%

32%

0%10%20%30%40%50%60%70%80%90%

100%

% who changed retirement age inpast 12 months

% who changed to delay retirement

2003

2004

2005

2008

2009

Source: EBRI Issue Brief No. 316, (April 2009), p. 14

Percent

Age When Workers Planto Retire

50%

31%

11%

0%

41%

31%

18%

5%

37%

26%22%

6%

26%23%

31%

10%

0%

10%

20%

30%

40%

50%

60%

before age 65 at age 65 age 66 or older never retire

1994

1999

2004

2009

Source: EBRI Issue Brief No. 316, (April 2009), p. 14

Percent of Workers

Past and Projected Labor Force Participation Rates, by Age Group

69.6

%

58.2

%

28.8

%

19.2

%

9.5%

4.4%

70.1

%

63.5

%

34.6

%

25.1

%

14.7

%

7.6%

0%

25%

50%

75%

men 55-64 women 55-64 men 65-74 women 65-74 men 75+ women 75+

2006 2016

Source: Mitra Toossi, “Labor force projections to 2016: more workers in their golden years,” Monthly Labor Review, November 2007, Table 3.

Participation Rate

Labor Force Participation, Ages 55and Over, 2006:Q2-2009:Q3

11.4 11.6 11

.8

11.9 12

.0 12.2

12.3 12

.5

12.5 12.6 12

.8

12.8 12

.9

13.0

13.8

13.8

13.6

13.4

13.4

13.2

13.2

14.1

14.2

14.3

14.3

14.3

14.2

14.2

11

12

13

14

15

men women

Source: US Bureau of Labor Statistics, http://www.bls.gov/web/cpseed6.pdf seasonally adjusted quarterly averages

Labor force participation by workers—especially women—age 55 and over has grown in spite of the current recession.

Labor Force (millions)

People Over 60 areIncreasingly Buying

Individual Life InsuranceThey’re the only age group like this

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

% C

hang

e vs

Pri

or Y

r

ages 0-44

ages 45-59

ages 60+

Percent Change* in Applications for Individual U.S. Life Insurance Policies,

May 2007- Sep 2009

*vs. same month, prior yearSource: MIB Life Index, monthly releases

The 0-44 age group still represents the majority of the premium

volume, but this has been declining over time.

Ages 60 and over is the only group consistently increasing

life insurance applications.

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 IncomeShould People Spend

to AssureTheir Financial Security?

7.4%

7.5%

7.6%

7.7%

7.8%

7.9%

8.0%

8.1%

8.2%

2001 2002 2003 2004 2005 2006 2007 2008

As a Percent of Personal (Gross) Income,Personal Insurance Premiums Are Down

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

Personal Insurance Premiums include all Life, A&H, Annuities, and Personal

Property/Casualty Insurance.

L-H IndustryProfitability

L/H Industry Net Income, 1995-2008

$13.6$19.2 $21.7

$18.0$20.9 $22.2

$9.8$4.1

$26.6$32.2

$35.9 $36.2$31.9

-$50.6-$55-$50

-$45-$40-$35

-$30-$25-$20

-$15-$10-$5

$0$5

$10$15$20

$25$30$35

$40$45

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Bill

ions

Source: NAIC Annual Statements, p.4, line 35, from National Underwriter HighlineData.

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%.

Effect of Realized Capital Gains/ Losses on Net Income, 1995-2008

$13.6

$19.2

$21.7

$18.0

$20.9

$22.2

$9.8

$4.1 $

26.6

$32.2

$36.0

$36.2

$31.9

-$51.7

-$55-$50-$45-$40-$35-$30-$25-$20-$15-$10-$5$0$5

$10$15$20$25$30$35$40

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

L/H NetIncome

L/HRealizedCapitalGains(Losses)

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

$105,8

04

$126,5

41

$142,5

90

$165,2

43

$146,1

49 $193,0

67

$127,7

11

$116,2

72

$132,9

38

$149,7

95

$122,7

11

$141,9

20

$154,5

59

$121,4

32

$50,000

$100,000

$150,000

$200,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: Best’s Aggregates and Averages, Life/Health, 2009 Edition

$ Millions

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 continueThese people have been increasingly buying life

insurance

Insurance Information Institute On-Line

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