ROANOKE TIMES
Copyright (c) 1997, Roanoke Times
DATE: Sunday, January 5, 1997 TAG: 9701070001
SECTION: BUSINESS PAGE: 4 EDITION: METRO
TYPE: ECONOMIC FORECAST
SOURCE: MAG POFF STAFF WRITER
Two competitors in the financial services industry - insurance companies and banks - share a dependence on the economy. With expectations of a slowdown, both are girding for the battle ahead.
Robert Clark, president of Shenandoah Life Insurance Co. in Roanoke, sees two trends in the insurance industry likely to affect 1997's business results.
One is more consolidation, such as the acquisition by General Electric Co. last year of two insurers based in the state: Life of Virginia and First Colony Corp.
"I see fewer insurance companies," Clark said, with the large national companies and regionals that have specialty niches as the survivors. The environment will become more competitive among insurers and between insurance companies and banks, he said.
Another is more public scrutiny on the ways companies and their agents conduct business, following a year marked by several well-publicized lawsuits. He said insurance agents must provide more information during a sale and confirm that the product meets the buyer's needs.
All of this, he said, "bodes well for Shenandoah Life," which is geared for the competition in its region and emphasizes a good fit between products and consumers.
But Clark sees opportunity this year as well.
The baby-boom generation is entering the 46-to-64 age group that constitutes the primary customers for annuities. As that group swells by 36 percent in the coming years, Clark looks for annuity sales to grow 9 percent to 12 percent a year. Banks and others will go after that market, he said, but Shenandoah Life "will compete."
Those in the 18-to-44-year age group are candidates for life insurance, but that group is shrinking. Even so, Clark said, 42 percent of such potential customers know they are underinsured and 40 percent plan to buy. The 17 million underserved people, he said, "are one of the big challenges to the industry. There's a good opportunity there to grow."
The annuity and life markets, he said, will require careful targeting.
Employee groups expect benefits in the workplace, Clark said, and this business should grow even though workers are beginning to finance a larger share of the costs. Shenandoah Life will be pushing dental plans because 25 percent of small businesses lack that coverage.
The over-65 group is the fastest-growing segment, and some 40 percent of its members will spend time in a nursing home. Yet only 10 percent of them have long-term care insurance, he said, representing another opportunity for growth in the insurance industry.
* * *
The outlook for the banking industry, said David Orr, chief economist for First Union Corp., comes down to the strength of loan demand and the direction of the yield curve. The latter is the spread between short- and long-term interest rates, which defines the cost banks pay savers and others for money and what they can charge to borrowers. The difference comprises a major part of a bank's profits.
Widening of that spread "spells nirvana for profit growth," Orr said. An inverted curve, or when short-term rates are higher than long-term, "spells real trouble."
This year, he said, neither extreme appears likely. Thus the outlook is for a moderate year with profits up about 8 percent, compared with the exceptionally strong 16 percent increase in 1996.
Orr believes that the Federal Reserve's fed funds rate should be near 5 percent this year, while the five-year Treasury note hovers near 6 percent. The federal funds rate, among the most sensitive indicators of interest rates, is what banks pay each other for overnight loans to meet the requirement that they balance reserves at the end of each business day.
Loan demand accelerated sharply in 1995 and was about 7 percent last year, fueled primarily by consumer credit. Orr forecasts 5 percent for this year with a better balance between consumer and business credit.
Despite headlines about the rise in credit card delinquency from 2.5 percent in 1994 to almost 4 percent in 1996, Orr said that banks still make good profits at that level.
But he said issuers are tightening their credit terms to prevent the ratios from climbing even higher. That will likely result in about 5 percent growth in consumer installment credit in 1997, or less than half the 1996 increase.
The likelihood of an outright decline in consumer credit this year is very small unless unemployment nudges above 6 percent, Orr said. He predicted that it will remain below that figure this year.
The outlook for business loans this year is "quite good" as businesses continue to invest heavily in new equipment to improve technology and productivity. Commercial real estate, meanwhile, is improving significantly as vacancies fall and rentals increase.
Orr said banks have had extremely low loan loss ratios in business loans, so they "are still easing their credit terms in response to the extremely competitive climate."
LENGTH: Medium: 91 linesby CNB