Archives: Articles

The chief investment strategist of Prudential International Investments Advisors, John Praveen, expects stock markets to post further gains, thanks to the U.S. Federal Reserve’s “open-ended” QE3 purchases and the ECB’s “unlimited” bond-buying plan, according to his Global Investment Outlook, September-October 2012.

Highlights of Praveen’s latest report include:

• The ECB’s plan to buy “unlimited” quantity of debt provides the dysfunctional Eurozone bond markets with an “effective backstop” thereby reducing tail risks from Eurozone.
• QE 3 is open-ended with Fed buying bonds and keeping interest rates low until there is a meaningful and sustained decline in the unemployment rate. While there is a debate about the effectiveness of QE measures in stimulating the economy, there is little doubt that they have provided a boost to equity markets. Stocks posted healthy gains following QE 1 and QE 2.
• Other central banks are also likely to undertake further easing measures. Further, Eurozone policy makers continue to take small, but steady, steps to resolve the debt crisis. However, stocks continue to face risks/challenges from fresh Middle East geo-political tensions, slower global growth and the drag on earnings, fears of the U.S. fiscal cliff and lingering Eurozone uncertainty. These headwinds are likely to limit equity gains and encourage profit-taking, but are unlikely to reverse the stock market uptrend.
• Global bond yields are likely to remain range-bound, caught between improving risk appetite versus weak growth outlook and central bank bond purchase programs. Bond’s safe haven appeal has diminished with improving risk appetite as the ECB’s plan and other policy measures have reduced tail risks from Eurozone.
• However, the global growth outlook remains weak with the U.S. limping at a below-trend pace, while Japan and Eurozone are struggling. Weak growth outlook and asset purchase programs by the ECB, Fed and BoE are likely to support bonds.    

Purchasers of variable annuities with guaranteed living benefits have shown lower mortality rates than non‐buyers, according to Ruark Consulting LLC’s 2012 Variable Annuity Mortality Study. The difference may indicate “product selection decisions made by these purchasers,” Ruark suggested.

 “This is important information for insurance companies because they need to establish appropriate price and reserve levels for these benefits,” said Peter Gourley, vice president of Ruark Consulting, based in Simsbury, Conn.

The study also found that “mortality levels by age and sex are not well matched to any of the standard mortality tables used by the industry.” To correct for this, Ruark has created a proprietary mortality table and provided it to insurance company risk managers to use as a point of reference in their modeling. 

Seventeen major insurance companies contributed over 30 million policy years of exposure and 340,000 deaths to the study, covering the time period January 2007 through December 2011, Ruark said in a release.

Ruark Consulting has performed surrender, partial withdrawal, and mortality studies for the variable annuity industry since 2007, and produced the industry’s first Fixed Indexed Annuity Surrender Study in 2011.

Variable annuity surrender, partial withdrawal and annuitization studies are currently in process and will be released later this year. The annuitization study will analyze utilization under Guaranteed Minimum Income Benefits (GMIB’s) and will be the firstindustry study of its kind, providing insurance company participants with unique insights into the early usage of GMIB’s.

Highlights of the Variable Annuity Mortality Study include:

• Mortality levels among purchasers of guaranteed living benefits (GMIB’s, GLWB’s and GMWB’s) are lower than those who did not buy a guaranteed living benefit, suggesting that buyers of these benefits have an accentuated concern for longevity risk.
• Mortality levels have declined since the prior study was completed in 2007. However, this is largely accounted for by the increase in volume of policies containing guaranteed living benefits, which were pointed out to have lower mortality. After adjusting for this difference, there is little statistical support for mortality levels declining from 2007 through 2011.
• None of the standard industry tables, such as 94MGDB or A2000, are a good proxy for the level and slope of variable annuity mortality. Actual mortality levels vary by both sex and age, relative to the standard industry tables. To facilitate accurate modeling, the Ruark Mortality Table has been created to reflect the true level and slope of the variable annuity mortality experience.
• Mortality levels generally increase as policy size increases. Since socio‐economic differences are typically expected to have the opposite effect, this study result may indicate a selection affect occurring among buyers of variable annuities.

U.S. insurance industry regulators have established principle‐based standards for statutory reserves and capital on variable annuity business. C3 Phase II for capital came first in 2005, followed by Actuarial Guideline 43 (also known as VA CARVM) in 2009. Principle‐based calculations require companies to perform financial projections that utilize assumptions believed to be appropriate.

Establishing these appropriate reserve and capital levels requires the selection of assumptions for future expected mortality, persistency and partial withdrawal activity. Historical results are important input to the selection of future anticipated experience. The valuation of guaranteed living benefits offered on variable annuities is particularly sensitive to the selection of these assumptions.

Study results are only available to the participating insurance companies who contribute data to the study. Participating companies receive extensive analysis of their own experience, as well as the aggregate experience of all companies who participate.

The ability to compare their results to that of the aggregate study provides a valuable benchmarking function to the insurance company participants, providing standards against which they can manage their business and their risk profile.

Ruark Consulting has performed surrender, partial withdrawal, and mortality studies for the variable annuity industry since 2007, and produced the industry’s first Fixed Indexed Annuity Surrender Study in 2011.           

Variable annuity surrender, partial withdrawal and annuitization studies are currently in process and will be released later this year. The annuitization study will analyze utilization under Guaranteed Minimum Income Benefits (GMIB’s) and will be the first industry study of its kind, providing insurance company participants with unique insights into the early usage of GMIBs.

© 2012 RIJ Publishing LLC. All rights reserved.

Six years after The Hartford settled with prosecutors in Connecticut and New York over taking kickbacks from insurance brokers on defined benefit pension plan termination deals, the Department of Labor is still trying to get one of the brokers in the case to pay back at least $522,000.

A complaint filed August 27, 2012 by Secretary of Labor Hilda Solis against Kurt E. Dietrich & Associates, Plymouth Meeting, Pa., alleges that Dietrich inflated the competing bids of five other group annuity providers to conceal the fact that Hartford’s bid of $26.1 million included a 2% brokerage fee, or $522,047, which was paid to Dietrich in early 2004.

The fee was over 10 times larger than the $50,000 that Memorial Hospital-West Volusia had contracted to pay Dietrich for helping it solicit bids from insurance companies and select the low bidder for a group annuity to replace its defined benefit pension.

The Hartford settled the dispute separately with then-Attorney General Ralph Blumenthal of Connecticut and then-Attorney General Eliot Spitzer of New York in May 2006 without admitting or denying their claim that it had conspired to pay incentives to brokers for steering terminal funding agreements for defined benefit plans its way while participating in what should have been a fair bidding process for the business. The incentives were then built into the cost that the DB plan sponsor paid for the group annuity.

“Hartford paid back the plans affected through its settlement with the states of New York and Connecticut and, as part of that agreement, Hartford represented that it would not seek contributions from any other party,” said DoL spokesperson Joanna Hawkins in a recent email to RIJ.  

By concealing the fee and passing the cost through to the hospital, all in violation of his advisory contract with the hospital, the DoL alleged, Dietrich had engaged in a prohibited transaction and violated his ERISA fiduciary duties to the hospital. The action was filed in U.S. District Court, Eastern District, Pennsylvania, on August 27, 2012.  

“By deceiving the Pension Plan and its fiduciaries, and by receiving and retaining impermissible compensation from the insurer, Dietrich & Associates and Kurt E. Dietrich were unjustly enriched by violations of ERISA,” the complaint said.

“Moreover, they prevented the Pension Plan and its sponsor from knowing the true cost of Dietrich & Associates’ services; concealed their financial arrangement with Hartford and the resulting conflict of interest with respect to the Hartford bid; and deprived the Pension Plan and its sponsor of the opportunity to negotiate the amount of any insurer-paid commission or other payment as an element of the total cost of the annuity.

“Instead of honoring their contractual commitments and adhering to their fiduciary obligations under ERISA, Dietrich & Associates and Kurt E. Dietrich pocketed more than a half-million dollars in unjust profits, representing ten times more than their agreed-upon fee.”

According to the complaint, Dietrich testified that in his own view he wasn’t bound by his advisory contract with the hospital. 

Whether or not Dietrich violated his fiduciary responsibility to the plan sponsor, the DoL charged, he engaged in transactions prohibited under ERISA. The DoL also asked the court for an injunction that would prevent Dietrich & Associates from advising an ERISA-covered employee benefit plan in the future. 

© 2102 RIJ Publishing LLC. All rights reserved.

Past research has shown that periods of high unemployment, for unknown reasons, can coincide with periods of generally lower mortality rates. But a new paper from economists at Wellesley College suggests that laying people off in their 50s can shave a few years off of their lifespans.

The paper, “Recessions, Older Workers, and Longevity: How Long Are Recessions Good For Your Health?”, was written by Courtney C. Coile, Phillip B. Levine and Robin McKnight, all of Wellesley College. The paper said in part:

“If workers experience an economic downturn in their late 50s, they may face several years of reduced employment and earnings before “retiring” when they reach Social Security eligibility at age 62.  They also may experience lost health insurance, and therefore higher financial barriers to health care, through age 65, when Medicare becomes available.  

“All of these experiences could contribute to weaker long-term health outcomes.  To examine these hypotheses, we use Vital Statistics mortality data between 1969 and 2008 to generate age-specific cohort survival probabilities at older ages.  We then link these survival probabilities to labor market conditions at earlier ages.  We also use data from the 1980-2010 March Current Population Surveys and the 1991-2010 Behavioral Risk Factor Surveillance System surveys to explore potential mechanisms for this health effect.  

“Our results indicate that experiencing a recession in one’s late 50s leads to a reduction in longevity.  We also find that this exposure leads to several years of reduced employment, health insurance coverage, and health care utilization which may contribute to the lower long-term likelihood of survival.

“In terms of survival probabilities, we find that a one percentage point increase in the unemployment rate at, say, age 58 reduces the likelihood of surviving through age 79 by 0.045 percentage points. This means that if the entire impact on survival is generated from those initial workers who suffered long-term unemployment resulting from a recession, an additional one in ten of those workers would not survive to age 79 as a result of the labor market downturn.

“An alternative way to interpret these numbers is to estimate the impact on life expectancy assuming that all of the survival effect was transmitted through employment reductions. These calculations suggest that a worker who lost their job at age 58 as a result of a recession could be expected to live three fewer years (19 years instead of 22) as a result.

“We find that unemployment shocks at ages 57 to 61 have the biggest long-term effect on survival, while shocks at earlier (ages 55 to 56) or later (ages 62 to 65) ages have no significant long-term effect. A plausible mechanism for this longer-term finding is the long period of lower rates of employment, health insurance coverage, and access to health care that we find comes with exposure to an economic downturn in one’s late 50s or early 60s.”

© 2012 RIJ Publishing LLC. All rights reserved.

Dallas-based Southwest Airlines Pilots’ Association (SWAPA), which represents 6,300 Southwest Airlines pilots, will offer the Hueler Income Solutions annuity platform to all of its current and retired members, Hueler Companies announced.

The Income Solutions platform is a web-based annuity purchase system where people transitioning from 401(k) plans to retirement or in retirement can receive competitive bids from several income annuity providers without the intervention of a commissioned sales person.

The platform services, launched by Minneapolis-based Hueler Investment Services in 2004, are now available to many retirement plans, including all Vanguard 401(k) plans, as well as through non-exclusive partnerships with other financial service firms, employers, and non-profit member organizations, Hueler said in a release.

SWAPA members will be able to use Income Solutions to buy annuities with IRA rollover assets or with non-qualified savings. The platform will include fixed deferred, single premium immediate, and longevity annuity contracts.

“Our collective goal is to empower individual members as they seek to build a personal pension or create a paycheck for life from their retirement savings,” said Kelli Hueler, CEO Hueler Companies.

According to a release, “SWAPA members will now be able to convert their hard earned savings into lifetime income on the most competitive terms possible while retaining control over timing, features, dollars invested, and providers selected.”

“We are excited to offer our pilots an institutionally priced annuity distribution option, so that they can establish a lifetime income stream to help meet their core costs in retirement,” said John Nordin, SWAPA 401(k) Committee chairman.

Hueler Companies, Inc., based in Minneapolis, was founded in 1987 as a consulting/data research firm. It offers resources for the analysis, selection, and implementation of stable value and annuity products.

© 2012 RIJ Publishing LLC. All rights reserved.

Reprinted from the New York Times

WASHINGTON — The Federal Reserve opened a new chapter on Thursday in its efforts to stimulate the economy, announcing simply that it plans to buy mortgage bonds, and potentially other assets, until unemployment declines substantially.

The Fed said that it would expand its holdings of mortgage-backed securities and potentially take other steps to encourage borrowing and financial risk-taking. But perhaps more significant was the basic change in its approach: For the first time, the Fed pledged to act until the economy improved, rather than creating another program with a fixed endpoint.

In announcing the new policy, the Fed sought to make clear that its decision reflected not only an increased concern about the health of the economy, but an increased determination to respond – in effect, an acknowledgment that its approach until now had been flawed.

The Fed also acknowledged its limits. “Monetary policy, particularly in the current circumstances, cannot cure all economic ills,” the Fed chairman, Ben S. Bernanke, said at a news conference.

The Fed’s policy-making committee said in a statement that its efforts would continue for “a considerable time after the economic recovery strengthens.” Specifically, it said it would act until the outlook for the labor market improved “substantially,” although it did not offer a numerical target.

In a separate statement, the Fed said its senior officials now expected the economy to expand from 1.7 to 2 percent this year, down from their June projection of growth of 1.9 to 2.4 percent. The officials continued to predict that the unemployment rate would not fall below 8 percent.

“The weak job market should concern every American,” Mr. Bernanke said at the news conference. “The modest pace of growth continues to be inadequate to generate much improvement in the current rate of unemployment.”

Fed officials predicted that growth would be somewhat faster in coming years, and that unemployment would decline somewhat more quickly, presumably reflecting the impact of the measures the Fed announced Thursday.

“The idea is to quicken the recovery, to help the economy begin to grow quickly enough to generate new jobs and reduce the unemployment rate,” Mr. Bernanke said.

On Wall Street, traders welcomed the moves. The benchmark Standard & Poor’s 500-share index was up 1.6 percent by the close of trading. The Dow Jones industrial average also ended with a gain of 1.6 percent, or about 200 points.

The Fed’s plan went further than many investors had expected by providing an open-ended commitment. But stocks have been rising in recent weeks, partly in anticipation of the Fed taking more measures to support the economy.

“There weren’t many more accommodative options the Fed could have gone with,” said Dan Greenhaus, the chief global strategist at BTIG, an institutional broker.

In its measures, the Fed said it would add $23 billion of mortgage bonds to its portfolio by the end of September, a pace of $40 billion in purchases each month. It will then announce a new target at the end of this month, and every subsequent month, until the outlook for the labor market improves “substantially,” as long as inflation remains in check. The statement did not further explain either standard.

The Fed’s statement made clear, however, that it would continue to stimulate the economy even as the recovery strengthened, suggesting that it was now willing to tolerate somewhat higher inflation in the future to encourage growth in the present.

“A highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens,” the Fed’s policy-making committee said in its statement, issued at the end of its regular two-day meeting in Washington.

Asked what improvement in unemployment would satisfy the Fed, Mr. Bernanke said: “We are looking for ongoing, sustained improvement in the labor market. It is not a specific number we have in mind, but what we have seen the last six months, that isn’t it.”

The committee’s statement said that the Fed now expected to hold short-term interest rates near zero at least through the middle of 2015, and that it would take other measures as necessary – including purchasing other kinds of assets. The projections of senior Fed officials showed, however, that almost all of them expect to start raising short-term rates before the end of 2015.

Eleven members of the committee voted for the action; Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, dissented, as he as throughout the year.

The scale of the new effort is significantly smaller than the Fed’s previous rounds of asset purchases. The Fed’s most recent expansion of its portfolio added about $75 billion in securities each month. Its first round was even larger. It said Thursday that it would target a rate of about $40 billion a month during the current campaign, although unlike those earlier efforts, the volume is now subject to adjustment.

The Fed also said it would continue through the end of the year a program it announced in June to exchange short-term securities for longer-term securities, taking the total volume of purchases to roughly $85 billion a month.

The new purchases will be the first time in more than two years that the Fed has expanded its holdings of mortgage bonds. That decision reflects the Fed’s view that the housing market still needs help, and that lower rates on mortgage loans could provide significant benefits for the broader economy.

The committee said in its statement that the new actions “should put downward pressure on longer-term interest rates, support mortgage markets and help to make broader financial conditions more accommodative.”

The Fed had given unusually clear indications in recent weeks that it was ready to act. An account of its last meeting, published in mid-August, suggested action was imminent unless the economy showed “substantial and sustainable” improvement.

A few weeks later, Mr. Bernanke spoke of his “grave concern” about the high rate of unemployment and said that in his judgment, the likely benefits of additional action outweighed the potential costs. A number of longtime observers of the central bank said they could not recall a Fed chairman using stronger language.

Since then, the economy has shown little evidence of substantial improvement. The government estimated last week that employers added only 96,000 jobs in August, and other economic indicators have been similarly lackluster.

The political climate has complicated the Fed’s efforts. Republicans including Mitt Romney, the party’s presidential nominee, have argued against new action. Mr. Romney has promised to replace Mr. Bernanke, and Republicans are seeking to impose new limits on the Fed’s management of monetary policy.

Fed officials insist that they do not consider politics in making their decisions, and history shows that the central bank often has acted during presidential campaigns – it has announced policy changes in September or October during 10 of the last 15 presidential election years, according to research by Credit Suisse.

Moreover, the political situation also has provided a motivation for the Fed to act. The nation’s fiscal policy – including the tax increases and spending cuts scheduled to take effect next year – increasingly looms as the largest threat to growth, many experts say. Fed officials have said that it could tip the economy back into recession, and Mr. Bernanke has repeatedly urged Congress to dismantle this “fiscal cliff.” Some Fed officials have argued that the central bank should seek to strengthen the economy as much as possible in the meantime to cushion the potential shock.

The Fed has struggled to define its role over the last three years. Its big and unprecedented actions helped to arrest the 2008 financial crisis, economists maintain. But as the economy has settled between crisis and prosperity, Fed officials have become divided over their ability and responsibility to do more.

Mr. Bernanke has presided over a gradual intensification of the central bank’s stimulus campaign, but the central bank has repeatedly underestimated the depth of the nation’s economic problems, and the unemployment rate has remained stubbornly high. The Fed has said its current policies will not reduce unemployment to normal levels for years to come.

There is broad disagreement among economists about the effects of the Fed’s expansion of its balance sheet. The Fed’s own research shows it may have raised economic output by 3 percent and created more than two million jobs. Most independent analyses have reached more modest conclusions, and some experts argue that there is little evidence of any meaningful economic impact.

Experts also disagree about the likely impact of additional purchases. Mr. Bernanke said last month in Jackson Hole, Wyo., that he was confident such a program would stimulate the economy. Significantly, he also said that he had concluded the likely benefits of such a program would outweigh the potential costs.

Many outside economists share Mr. Bernanke’s conclusion that the Fed retains considerable power to bolster the economy. However, some economists argue that the Fed has exhausted its power or that the costs now outweigh the benefits.

NY Life to sell Mexican surety bond operation 

New York Life has agreed to sell Fianzas Monterrey, its wholly-owned surety bonnd busiess in Mexico, to ACE Group for $285 million in cash. New York Life acquired Fianzas Monterrey in 2000 when it purchased Seguros Monterrey from Aetna Inc. and Grupo Financiero Bancomer S.A. 

Ted Mathas, chairman and CEO of New York Life, said in a release that Fianzas Monterry was “outside of our primary focus on the life insurance and investments businesses.

“In terms of life insurance, our focus is now exclusively on the U.S. where we have the leading market share, and on Seguros Monterrey New York Life, our wholly-owned Mexican subsidiary and the second-largest life insurer in Mexico. Additionally, ACE is a well established global insurer,” Mathas said.

Phoenix Cos. boasts $1.5 billion in fixed index annuity assets

The Phoenix Companies, Inc., says that it now has $1.5 billion in fixed indexed annuity assets under management, only two and a half years after entering the FIA space.

The former variable annuity player shifted its focus to the middle market in 2009 and began building a fixed indexed annuity product line. Broker-dealers generally sell VAs with lifetime income guarantees only from A-rated companies, and Phoenix has a strength rating from A.M. Best of B+ with a positive outlook.

“Our focus is on developing competitive and profitable products, establishing partnerships with strategically positioned Insurance Market Organizations (IMOs) and investing in technology infrastructure to meet the needs of these partners as well as our end clients,” said Phoenix president and CEO James D. Wehr in a release.

FIAs first became popular during the low-interest rate environment following the dot.com crash, when investors shied from equities but wanted higher returns than bonds offered. FIAs traditionally offer guaranteed principal (after fees) and upside exposure through equity options.

A similar market environment after the 2008-2009 crisis revived consumer interest in FIAs, and they have been posting record sales. FIA sales have been helped by the fact they now offer guaranteed lifetime withdrawal benefits. FIAs have also tried to seize the sales opportunity created by the pullback of many VA-GLWB issuers from the market.  

Phoenix has been aggressive in creating flexible annuities, including contracts that offer immediate or deferred income or that allow contract owners to choose among lifetime income, chronic care or enhanced death benefit options.  

“Consumers approaching retirement face many challenges including access to adequate income, protection against the high costs of chronic care and transfer of wealth to heirs. The current trend in annuities is to address multiple needs like these in a more affordable way than standalone products,” said Phil Polkinghorn, SEVP and president of Business Development, said.

Some of Phoenix’s most recent products add even more flexibility by allowing an annuity holder, for an additional fee, to choose from up to three different benefits (including lifetime income, chronic care and an enhanced death benefit) to create a customized solution that meets their particular retirement needs.

Phoenix’ distribution company, Saybrus Partners, Inc., works with about two dozen insurance marketing organizations, each of which has access to between 1,200 and 1,500 agents.  

Phoenix works with its IMO partners in a variety of ways, including Phoenix co-develops proprietary products with its IMOs and provides proprietary client education, sales training and support, and technology to support the agents. that all make it easier for agents to find suitable products for their clients and complete the sale.

After launching the first two products in its new fixed indexed annuity line at the end of 2009, Phoenix had nearly $200 million in deposits in 2010. In 2011, that number approached $1 billion, and the company has said it expects about $1 billion in deposits again in 2012. Since the end of 2009, fixed indexed annuity funds under management have grown to $1.5 billion at June 30, 2012.

Long-term funds receive net $23 billion in August, nearly $220 billion YTD

So far in 2012, U.S. Stock fund investors benefitted from over $600 billion of wealth creation as stock indices reached and eclipsed multi-year records, and stock funds’ appreciation exceeded 10%. Yet, stock fund investors continued to redeem some of their holdings, with August net stock fund redemptions estimated at $11 billion, the highest monthly redemptions so far in 2012, according to Strategic Insight. (Flow data in open-end and closed-end mutual funds, excluding ETFs and funds underlying variable annuities.)

While stock fund redemptions have risen modestly in August, the amount withdrawn represents just $2 for every $1,000 invested in U.S. stock funds (internationally-invested stock funds continued to exhibit modest inflows in August). “Overall, stock investors remain in a holding pattern, with many watching the rising stock prices with regret or disbelief, while others take some of their recent profits of the table,” said Avi Nachmany, SI’s Director of Research.

Nachmany added, “Stock prices continue to rise in a background of lingering economic, employment, and political anxiety. But investors’ wall of worries will be easier to climb as confidence on Main Street slowly improves with the budding real estate recovery taking shape, with further employment gains, and with political clarity achieved.”

An insatiable search for investment income and stability remains behind strong inflows to bond funds, which are on path to exceed $300 billion for the full year, with August flows adding $34 billion. Since year-end 2008 assets held in bond funds more than doubled, now exceeding $3 trillion. Demand to bond funds remained widespread, spanning high-quality and high-yield strategies, U.S. and emerging market bond funds, as well as municipal bond funds. Almost all bond fund strategies experienced positive flows during August.

“We anticipate recent investors’ preference to persist in the coming months, but that a slow rotation towards stock funds may emerge in early 2013,” added Mr. Nachmany.

Fund-of-funds inflows so far this year eclipsed $54 billion, with August adding $7 billion. Fund of funds’ assets under management now exceed $900 billion. In addition, fund-of-funds used by investors in variable annuities gained about $20 billion so far in 2008, with assets in such funds over $400 billion. “Lifecycle and other asset allocation solutions have become ‘go-to’ products for those seeking balanced retirement portfolios,” added Bridget Bearden, head of Strategic Insight’s Defined Contribution and Target Date funds practice.

Money-market funds saw net positive flows of $10 billion in August, but redemptions in such funds exceeded $140 billion so far in 2012.

ETFs: Exchange-traded products enjoyed $2 billion in net inflows in August 2012, bringing total ETF net inflows (including ETNs) to $94 billion for the first eight months of 2012. The most popular ETF categories in August were Gold / Precious Metal as returns of such funds surged in August. At the end of August 2012, US ETF assets (including ETNs) stood at $1.2 trillion.

BlackRock joins DST Vision lineup  

BlackRock, Inc., is now participating in DST Vision, the Web-based account management tool for financial intermediaries. The provider of investment, advisory, and risk management solutions, went live with its Vision participation on June 16, 2012. The firm joins more than 415 mutual fund, insurance, and real estate investment trust companies currently on the DST Vision platform.

With the addition of BlackRock, all of the top 25 wholesale-distributed fund families now participate in Vision.

DST Vision has become the market leader by consistently delivering vital functionality and advanced technology to help advisors simplify their day-to-day practice management. Vision provides one-stop access to client account information consolidated across its participating companies for an aggregated book-of-business. Providing advisors access to real-time, critical information and self-servicing tools, Vision helps them spend less time managing information and more time on their clients’ investing needs. With more than 130,000 advisors accessing it every month, DST Vision enables product companies to reduce support costs and optimize distribution. 

BlackRock serves a broad range of investors in more than 100 countries. The firm’s retail and high-net-worth investors are served primarily through intermediaries, including broker-dealers, banks, trust companies, insurance companies, and independent financial advisors. At year-end 2011, assets under management for these investors totaled $403.7 billion. 

AXA Equitable introduces Fiduciary Educator

AXA Equitable Life Insurance Company has launched Fiduciary Educator (www.axa-equitable.com/fiduciaryeducator), a retirement plan fiduciary education website created for 401(k) and 457 retirement plan sponsors and the financial professionals who work with them.

Applying leading edge technology and best practices in interactive adult online education, the site guides users through the basics of what it means to be a plan fiduciary and shares strategies that can help them fulfill a fiduciary obligation.

Through a series of short videos, Fiduciary Educator helps plan sponsors understand:

• Who is a plan fiduciary?
• Consequences of a breach in fiduciary obligations
• Due diligence and procedural prudence
• Participant communication
• How to alleviate and shift fiduciary burden

Interactive quizzes follow each video to help assess if fiduciary duties are being fulfilled, and whether a fiduciary service provider might be helpful.
Fiduciary Educator provides users with access to a library full of education materials shared by an array of leading industry firms. Users can preview the materials online or save them in “knowledge baskets” for later reference.

Financial professionals are also invited to visit Fiduciary Educator. The site offers educational materials tailored to financial professionals who work with plan sponsors.

Access the Fiduciary Educator at www.axa-equitable.com/fiduciaryeducator

Principal Retirement+ website offers resources for advisors

To help financial professionals work with clients to fill this gap and address their retirement needs, the Principal Financial Group has introduced a new suite of tools and resources.

“Our top-tier product portfolio includes products designed specifically for the business market with flexible funding options, coupled with traditional and innovative policy riders”

Through Principal Retirement+, financial professionals have access to comprehensive information, education and resources including:

• A simple online retirement gap calculator to prepare a customized gap analysis for clients.
• Consultative expertise including one-on-one case design, analysis and presentation.
• Post-sale support and ongoing administrative services.

The new Principal Retirement+ site, www.principal.com/retirementplus, leads financial professionals through the entire sales process from identifying the savings gap to creating an action plan. Financial professionals have direct access to a team of CPAs, attorneys and plan design consultants with years of experience in the business market. Choosing from a wide range of possible supplemental retirement solutions, professionals at The Principal will develop a customized proposal to help meet each individual client’s needs.

DST introduces IRA functionality to retirement income solution

DST Systems, Inc., a leading provider of sophisticated information processing solutions to the asset management, insurance, retirement, and brokerage industries, today announced the addition of IRA functionality to its recently-introduced Retirement Income Clearing Calculator (“RICC”).

RICC, the industry’s first middleware solution designed specifically to support guaranteed retirement income products through traditional recordkeeping platforms, was initially designed to support retirement income products in defined contribution plans.

The introduction of IRA functionality presents new opportunities for mutual fund companies, investment managers, and other wealth management providers to support retirement income products in IRAs and other retirement-focused investment accounts. 

First introduced in February, the RICC solution was built to provide investment product providers an efficient way to offer income products outside of direct servicing on policy administration systems which are typically but not limited to insurers. Beyond facilitating broader distribution, the new DST recordkeeping platform allows for greater portability of income products.

RICC’s design contemplates a broad array of income solutions, enabling the platform to incorporate any number of functionalities to deliver an income solution to the market.

Following the Treasury Department’s sale of about $18 billion of American International Group, Inc., common stock, which reduced government ownership of AIG from to 21.5% from 53%, Fitch Ratings has upgraded the firm’s Issuer Default Rating (IDR) to BBB+ and affirmed AIG’s unsecured senior debt is BBB.

The move created “standard notching” between those two ratings. The notching was compressed during the period of government majority ownership.

Consistent with the upgrade of the IDR, the ratings on AIG’s existing subordinated debt and junior subordinated debentures are upgraded to ‘BBB-‘ and ‘BB+’ respectively. All other AIG ratings, including the ‘A’ Insurer Financial Strength (IFS) ratings on AIG’s core property/casualty and life insurance subsidiaries, are affirmed. The rating outlook is Stable.

The upgrade in the IDR considers AIG’s success in restructuring and deleveraging efforts over the last three years that have strongly improved the organization’s stand alone rating profile. Further, AIG has created an adequate liquidity position and has demonstrated access to capital markets through execution of several recent financing transactions.

These deleveraging efforts have led to the repayment of all government related borrowings by AIG. The company’s financial leverage as measured by the ratio of financial debt and preferred securities to total capital (excluding the impact of FAS 115) declined from 77% at year-end 2010 to approximately 21% currently. Fitch’s Total Financial Commitment (TFC) ratio, while still high compared to most insurance peers, has improved from 2.5x at year-end 2010 to a current level of 1.3x.

Fitch’s ratings on AIG and its subsidiaries continue to reflect the benefits of the AIG organization’s strong competitive positions in life and non-life insurance partially offset by the comparatively poor recent operating results of the company’s core insurance operations.

AIG reported a significant improvement in first half 2012 profitability as net income increased by 76% relative to the prior year to $5.5 billion. This earnings improvement was largely attributable to investment income growth, as well as better underwriting performance within Chartis property/casualty insurance operations. Chartis combined ratio improved to 102.3% in the first half of 2012 from 111.1% in first half 2011 largely due to sharply lower catastrophe losses. Core operating subsidiary interest coverage on financial debt was 5.5x in the first half of 2012.

Key triggers that could lead to future rating upgrades include:

• Demonstration of higher and more consistent earnings at insurance subsidiaries’ Chartis and SunAmerica that translate into average earnings-based interest coverage above 7.0x;
• Further improvement in AIG’s capital structure and leverage metrics that reduce the company’s TFC ratio to below 0.7x.

Key triggers that could lead to a future rating downgrade include:

• Increases in financial leverage as measured by financial debt to total capital to a sustained level above 30%, or a material increase in the TFC ratio from current levels.
• Large underwriting losses and/or heightened reserve volatility of the company’s non-life insurance subsidiaries that Fitch views as inconsistent with that of comparably-rated peers and industry trends;
• Deterioration in the company’s domestic life subsidiaries’ sales or profitability trends;
• Material declines in RBC ratios at either the domestic life insurance or the non-life insurance subsidiaries, and/or failure to achieve the above noted capital structure improvements.

The U.S. Treasury expects to receive an additional $2.7 billion from its underwritten public offering of AIG common stock, American International Group has announced.

On September 10, Treasury had priced an offering of approximately 553.8 million shares of its AIG common stock at the initial public offering price of $32.50 per share, for expected proceeds of approximately $18.0 billion.

Combined with the exercise of the over-allotment option, Treasury’s proceeds from the public offering are expected to be approximately $20.7 billion and the total number of shares sold in the offering is expected to be approximately 636.9 million.

The underwriters, led by Citigroup, Deutsche Bank Securities Inc., Goldman, Sachs and J.P. Morgan Securities, have exercised their over-allotment option in full to purchase approximately 83.1 million additional shares of AIG common stock at the initial public offering price of $32.50 per share.

AIG agreed to purchase approximately 153.8 million shares of AIG common stock in the offering at the initial public offering price for an aggregate purchase amount of approximately $5.0 billion.

Treasury currently owns approximately 53.4% of AIG’s common stock outstanding. With the completion of this offering and the exercise of the over-allotment option, and an approximately $5 billion share purchase by AIG, Treasury will still own about 15.9% percent of AIG’s common stock outstanding.

BofA Merrill Lynch, Barclays Capital Inc., Morgan Stanley & Co. LLC, RBC Capital Markets, LLC, UBS Securities LLC, Wells Fargo Securities, LLC and Credit Suisse Securities (USA) LLC have been retained as joint book-runners for the offering.

CBO estimates in its Monthly Budget Review that the Treasury Department will report a deficit of $1.17 trillion for the first 11 months of fiscal year 2012, almost $70 billion less than the deficit at the same point last year.

In CBO’s most recent budget projections, the agency estimated that the deficit for fiscal year 2012 (which will end on September 30, 2012) will total $1.13 trillion, about $175 billion less than last year’s shortfall.

Receipts in the first 11 months totaled $2.2 trillion, $126 billion more than those in the same period last year. Compared with collections during the same period in fiscal year 2011:

• Net receipts from corporate income taxes grew by $45 billion (or 31 percent). Corporate income taxes contributed the largest amount to the overall increase in revenues, largely because of changes in tax rules in recent years—in particular, the rules governing how quickly firms may deduct the cost of their investments in equipment.
• Individual income tax receipts grew by $39 billion (or 4%). Growth in wages and salaries boosted withholding by $30 billion (or 3%), and nonwithheld payments increased by $11 billion (or 4%). Those gains were partially offset by an increase of $2 billion (or 1%) in tax refunds.
• Receipts from social insurance taxes rose by $26 billion (or 3%). Withholding for payroll taxes grew by about $15 billion (or 2%). The current 2 percentage-point reduction in the payroll tax was not in effect for the first quarter of fiscal year 2011 (October through December 2010); if it had been in effect during that time, the year-over-year increase in withholding for payroll taxes would have been larger by about $25 billion, CBO estimates (yielding growth of 6% percent in that source of revenue). In addition, collections of unemployment insurance taxes rose by $11 billion (or 19%) through August 2012, as states continued to replenish trust funds depleted by the recent recession.
• Receipts from other sources increased, on net, by about $17 billion (or 9%). Collections of excise taxes grew by $7 billion; receipts of estate and gift taxes rose by $6 billion; and, together, revenues from customs duties and miscellaneous fees and fines increased by $6 billion. Those gains were partially offset by a decline of $2 billion in receipts from the Federal Reserve.

Outlays through August totaled $3.4 trillion, $57 billion (or 2%) more than spending in the same period last year. As adjusted for shifts in the timing of payments, outlays were 1 percent higher. Some of that increase reflects changes recorded in the budget for the estimated cost of the Troubled Asset Relief Program (TARP): Adjustments to the estimated cost of the program were recorded as a $42 billion reduction in outlays in 2011 and as a $21 billion increase in outlays in 2012. Excluding those revisions to previous estimates and the effects of shifts in payment dates, spending through August 2012 was about 1% less than spending in the first 11 months of fiscal year 2011.

By CBO’s estimates, outlays decreased for several major categories of spending:

• Medicaid—Outlays fell by $26 billion (or 10%) because legislated increases in the federal share of the program’s costs expired in July 2011.
• Unemployment benefits—Spending dropped by $24 billion (or 22%), mostly because fewer people have been receiving benefits in recent months.
• Defense—Outlays fell by about $16 billion (or 3%), in part because of lower spending for military operations in Afghanistan and Iraq.
• Education programs—Net outlays were lower by $28 billion (or 31%), excluding changes recorded in the budget in the estimated cost of student loans. That decline has occurred largely because of waning spending from funding provided by the American Recovery and Reinvestment Act. (Most of that spending occurred before 2012.)
• Making Work Pay tax credit—The refundable portion of this credit is recorded in the budget as an outlay. That spending declined by $14 billion because the credit expired last year.

For some major programs, spending increased:

• Social Security—Payments for benefits increased by $39 billion (or 6%).
• Medicare—Net spending was up by $18 billion (or 4%).

Second quarter 2012 indexed annuity sales advanced 8.3% from the prior quarter and income annuities were up 6.1% according to the Beacon Research Fixed Annuity Premium Study. Both product types had their second-best quarter ever.

Total fixed annuity sales increased 1% sequentially. Total fixed annuity sales declined 17.2% from the year-ago quarter and 13.2% year-to-date despite stronger sales of indexed and income annuities.

“Both indexed annuities with GLWBs and lifetime payout immediate/deferred income annuities provide much-needed guaranteed retirement income,” said Jeremy Alexander, CEO of Beacon Research.

“Carriers also may have emphasized sales of both product types over fixed rate annuities because their profitability was somewhat less affected by second quarter’s record-low interest rates,” he added. “Indexed and income annuities should continue to do well,” Alexander concluded. “But much will depend on the interest rate environment and the collective decisions by carriers to expand or pull back on sales.”

Allianz remained the leading company. New York Life and Aviva USA switched placed to come in second and third, respectively. American Equity continued in fourth place and Great American again came in fifth. Second quarter results for the top five study participants were as follows:

Lincoln National took the lead in direct/third party sales and Pacific Life was the new wirehouse channel leader. The other distribution channel leaders were unchanged from the prior quarter, as were the top issuers by product type.

A Security Benefit Life indexed annuity was among the top five for the first time, with Secure Income Annuity taking second place. New York Life’s Lifetime Income Annuity remained the bestselling product. Indexed annuities issued by Allianz, Aviva USA and American Equity continued in the top five as well.

The Beacon Research quarterly study tracks and analyzes product-level fixed annuity sales on an ongoing basis. Historical industry, company and product sales information is available at www.annuitymarketstudy.com.