Archives: Articles

IssueM Articles

A.M. Best affirms MassMutual’s “superior” rating, keeps The Hartford “under review”

Posted on September 8, 2012 by -

The financial strength, issuer credit and debt ratings of Massachusetts Mutual Life Insurance Co. and its subsidiaries remains stable since its announcement of a definitive agreement to purchase The Hartford Financial Services Group’s retirement plans business for $400 million, A.M. Best said in a release.

A.M. Best said it views the acquisition “favorably” because it brings “additional scale to MassMutual’s existing retirement business, especially in the small-to mid-sized case market.” MassMutual is rated A++ (superior) for financial strength and has an aa+ long-term issuer credit rating.

But A.M. Best said the credit ratings of The Hartford will remain “under review with developing implications.” The Hartford has a “bbb+ u” long-term issuer credit rating. The bbb+ signifies a “good” and “investment grade” credit rating. The “u” signifies “under review.”

Combined, the two retirement plans businesses will result in 3 million participants and $120 billion in retirement AUM. MassMutual is expected to finance the transaction internally. The transaction is not expected to materially impact MassMutual’s strong risk-adjusted capitalization ratios. Following some integration and infrastructure expenses, the acquired business is expected to be accretive to earnings beginning in the second year after its acquisition.

In a release, A.M. Best said, “The announced transaction remains consistent with The Hartford’s strategy to focus on its property/casualty group benefits and mutual funds businesses as outlined by management in early 2012.

“Upon the close of the announced sales of Woodbury Financial Services and its retirement plans business as well as the previously announced intention to sell its individual life business, The Hartford will have successfully executed its announced restructuring and will move forward with a strategy centered on its core strengths.

“A.M. Best believes that the basis for the under review status remains intact as the retirement plans transaction itself does not have a significant impact on The Hartford’s overall financial condition.

“A.M. Best will continue to monitor developments regarding The Hartford’s restructuring and discuss with company management its future capital plans, including any deployment of proceeds from the sales of non-core businesses, to facilitate removing its ratings from under review.

© 2012 RIJ Publishing LLC. All rights reserved.

U.S. growth rate to hit 2.8% by end of 2013: BMO Economics

Posted on September 8, 2012 by -

The North American economy should grow at a rate of two per cent in 2012 and improve during 2013, with a strong performance from residential building in the U.S. and commercial construction in Canada, according to the North American Outlook released by BMO Economics last week. The details, by country, include:

United States
The modest growth of 2% predicted for 2012 in the U.S. will pick up in 2013. Improved household finances and a strengthening housing market will help the economy accelerate to a growth rate of 2.8% by the end of next year.

“Home sales and starts have picked up from depressed levels, supported by record-low mortgage rates, pent-up demand and investor interest,” said Sal Guatieri, senior economist, BMO Capital Markets. 

“House prices are rising, lifting household wealth and encouraging first-time buyers to take the plunge. Rising house and equity values should allow households to soon recover the rest of the $16 trillion in wealth that was lost during the Great Recession,” he said.

Residential construction is now leading the expansion, he added, noting that housing starts are about 40% below demographic needs. Because of elevated unemployment, “we now expect the Fed will delay any rate hikes until mid-2015,” said Guatieri. 

Canada

Canada’s economy should grow 2% this year, reaching 2.4% by the end of 2013. “Business investment, though moderating, continues to lead the expansion,” Guatieri said. “Commercial construction is supported by low vacancy rates, and companies are taking advantage of the strong loonie [Canada’s dollar] to buy productivity-enhancing equipment.”

Elevated commodity prices will continue to drive investment in Alberta, Saskatchewan, Newfoundland and Labrador, he added. Central Canada and the other Atlantic Provinces will face challenges because of the strong currency and weak global demand. With the exception of autos, consumer spending has moderated in the face of high household debt, tepid job growth and rising cross-border shopping.

Personal loan growth has slowed the most in two decades, and the trade deficit continues to widen due to a strong dollar and weak external demand. The Canadian dollar is expected to trade close to parity against the greenback in the year ahead, benefiting from elevated commodity prices and steady capital inflows.

Recent mortgage and credit rule changes will restrain household debt growth, leading to a further moderation in consumer spending and housing market activity and a stabilization of home prices in most regions, Guatieri said. Exceptions will be British Columbia and Toronto, where high valuations point to weaker prices ahead.

Modest growth, low inflation, a strong currency, and tighter credit rules will encourage the Bank of Canada to maintain the current low-rate policy. “Further Fed easing should encourage the Bank of Canada to hold overnight rates steady at 1% for somewhat longer than we previously thought, likely until autumn 2013,” added Guatieri.

The eurozone breakup, pending spending cuts and tax increases in the U.S., a sharp correction in the Vancouver and Toronto housing markets and the potential for a hard landing in China still pose potential risks to the North American, he cautioned.

© 2012 RIJ Publishing LLC. All rights reserved.

Envestnet adds FEG hedge fund research to its platform

Posted on September 8, 2012 by -

Envestnet, Inc., the Chicago-based wealth management platform provider for investment advisors, and Fund Evaluation Group, LLC (FEG), an institutional investment consulting firm, have formed a “Hedge Fund Research Alliance.”

The partnership will add FEG’s research on more than 40 hedge funds and hedge funds-of-funds to Envestnet’s platform, complementing the existing research on separate account managers, mutual funds, ETFs and liquid alternative investments, according to a press release.

FEG’s hedge fund due diligence includes on-site meetings, operational due diligence, third party service provider verification and multiple reference checks, the release said. FEG also provides ongoing monitoring of hedge fund managers via performance analysis, risk monitoring, position level monitoring, quarterly conference calls and face-to-face meetings.

FEG advises on a reported $33 billion in assets for institutional clients and has more than $3 billion allocated to hedge fund managers via direct investment from their clients as well as discretionary access vehicles. 

© 2012 RIJ Publishing LLC.

Allianz Life to pay $10 million to settle index annuity complaints

Posted on September 8, 2012 by -

Allianz Life Insurance Co. has agreed to take corrective action, continue a remediation plan, and pay $10 million to 23 states to settle charges that actions by agents selling its popular fixed indexed annuities (FIAs) from 2001 to 2008 led to unsuitable sales or sales based on misrepresentations, the Florida Office of Insurance Regulation has announced.

Insurance commissioners and other state officials in Florida, Iowa, Minnesota, and Missouri led the regulatory action against Allianz Life. Florida alone will receive over $1 million, according to a release.

“Some consumers who purchased annuities during these years complained to Allianz regarding the suitability of the annuities for their circumstances or representations made by Allianz or its agents during the sale of an annuity,” the release said.  “Under the remediation plan, Allianz will implement a review process addressing new and previously filed complaints by customers who purchased an eligible fixed annuity product between 2001 and 2008. A list of the eligible fixed annuity products covered in this agreement can be viewed here.”

The products named in the agreement include annuity contracts that have been and continue to be among the most popular FIAs on the market. Allianz Life was the top seller of fixed annuities in the second quarter of 2012, with about $1.4 billion in sales, and its MasterDex X fixed indexed annuity was the third best-selling fixed annuity and the second-highest selling fixed indexed annuity, according to Beacon Research.

Fixed indexed annuity, or equity-indexed annuities as they were once called, are widely agreed to be highly complex products that are difficult to understand, even for the independent insurance agents who sell them.

Essentially, they are low-risk structured products consisting of bonds with a minor investment in options on common equity indexes. They are characterized as all-weather products, because the options offer upside when stocks do well and principal is guaranteed by the insurer. Their complexity comes from the fact that many different “crediting methods” can be used to translate the equity gains into higher contract value. It is difficult if not impossible for a layperson to make meaningful comparisons between the crediting methods.

The products were aggressively marketed with rich incentives and principal bonuses through independent insurance agents, and began drawing complaints from older people or their relatives who did not understand exactly what had been purchased. A television expose helped motivate then-SEC chairman Christopher Cox to lead an ultimately unsuccessful campaign to have FIAs regulated as securities.  

The sales of FIAs have been boosted recently by the addition of lifetime income riders to the contracts. Since these bond-based products entail less downside risk to principal than variable annuities, where the underlying investments include stocks, the FIA income riders can sometimes be more generous than the variable annuity income riders, giving the FIAs a competitive advantage.   

Under the multi-state agreement, consumers can have a re-review of their complaints based on the criteria spelled out in the agreed order. A new complaint can be filed by affected consumers until March 31, 2013, either through the “Contact Us” feature on the Allianz Life website or by telephone at 866-604-7488. If a complaint is found to be justified, the consumer will be offered a retroactive cancellation of their policy and a full refund. ​

© 2012 RIJ Publishing LLC. All rights reserved.

How to Maximize Social Security Income

Posted on September 8, 2012 by -

One of the more vexing problems facing pre-retirees is when to claim their Social Security benefits. Many people cash in at the first opportunity, age 62, even though each year they wait, their benefit increases until age 70. Perhaps if they could see exactly how much potential income they were passing up, they might wait longer. 

Now there’s a software tool that can help them do that.  Impact Technology Group in Charlotte, North Carolina, has just introduced a product called Social Security Explorer (SSE) that enables advisors and pre-retirees to model up to hundreds of different Social Security claiming strategies and see how much income each one provides. (To access video, click here.)

The SSE tool requires minimum input—age, projected benefit at full retirement age, longevity expectations, investment rate of return and inflation. The computer does the heavy lifting and shows advisors how much clients would collect monthly and over the course of their presumed life expectancy, depending on which age they choose.

 “Often people take their Social Security benefits right away because they don’t know what they want or don’t understand their choices,” said David Freitag, vice-president of marketing at Impact Technology Group.

With SSE, for example, you can show that a single client (with a projected payment at full retirement age of $2,400, a longevity assumption of 85 and an inflation assumption of 2.5%) would receive only $1,800 per month and $660,623 over his or her expected lifetime by claiming at age 62. The SSE tool shows that the same person would collect $3,860 per month and $830,586 over their expected lifetime by delaying benefits until age 70.

Multiplying the options

The SSE tool is even more helpful when sorting through the 81 possible age options (nine per spouse) for married couples. It can also help married couples maximize benefits by comparing the seven different age-based strategies allowed by Social Security, which lead to a daunting 567 potential scenarios. Many of these options allow couples to receive some income while waiting until age 70 to collect maximum benefits. SSE helps advisors explore different outcomes for their clients.

For example, in a one-earner couple, with two healthy spouses, the earner, call him Jim, can elect to file for benefits at 66 (the full retirement age for those born from 1943 to 1954) but suspend collecting them.  (Full retirement age is also the age when recipients stop being taxed or penalized for earned income.) Jim’s wife Mary is the same age as Jim. As a stay-at-home mom, she never paid into the Social Security system, but she qualifies for a spousal benefit. She can apply for and collect half of Jim’s benefits, while Jim suspends his separate benefit until he turns 70 and becomes eligible for the maximum benefits on his record. 

Jim and Mary can even receive some Social Security benefits to live on while they delay receiving maximum benefits at 70. At full retirement age (66) Jim can file and suspend his benefit. Mary, at 66, can file for “restricted” benefits, or an amount equal to one-half of Jim’s benefit.  At age 70, both Jim and Mary can each start collecting their respective full benefits separately, resulting in almost a $1 million lifetime payout.

Of course, to fully enjoy this larger benefit, Jim and Mary have to live past 85. “The wild card is longevity, Freitag told RIJ Advisor. “My parents lived into their 90s, so there’s a strong likelihood I will live to over 85. On the other hand, I have a good friend who has been type I diabetic since age 10.  His longevity assumption is age 75 or less. For him the best solution might be taking Social Security benefits at 62.”

Inflation also affects the amount that clients receive. In today’s current environment where interest rates are near zero, “the value of Social Security is magnified intensively.” added Freitag.  Not to mention that Social Security automatically includes spousal benefits and built-in inflation protection.

Most clients will have to rely on other sources of income while they delay Social Security, said Steve Sass, program director of the Financial Security Project at the Center for Retirement Research at Boston College. “The fundamental issue is where will they get income to pay their monthly bills?” It’s critical to have some pool of money or insurance set aside for medical emergencies, he said.

In a sense Social Security has become a default safety net for the variability of 401(k)s, says Sass. The baby boom generation is the first cohort that has had a substantial dependence on the 401(k).    “For the cohort that is currently retiring, you can’t get any return from bonds. And, if interest rates go up, you will have a capital loss.  The government is saying that in a 401(k) world; why not just delay Social Security.”

While people might do better in the stock market, “it will be difficult to get more income from your savings than from delaying Social Security,” Sass told RIJ Advisor.

Sass counsels advisors to make sure their clients anticipate the possibility of a long lifespan. “The risk of living too long is a difficult concept,” he said. “A lot of people think they’re going to die young and use that as an excuse to front-load the benefits.”

But many people will live into their 80s and 90s. “It’s the function of a good financial advisor to get people to understand what they want to do with their money and not to just succumb to momentary temptation,” Sass emphasized.

SSE should make it easier for advisors to show their clients how much they will benefit at different ages and using different strategies, said Freitag. Those decisions are more critical than many clients think and advisors now can show that. As Janet Reno, the vice president for income security at the National Academy of Social Security Benefits, has said: ‘The two most important decisions people make is when to stop working and when to declare Social Security.” Most people conflate the two. But choosing when and how to file for Social Security benefits could create a much more secure future.

© 2012 RIJ Publishing LLC. All rights reserved.

Modest GDP rebound likely in Q3: Prudential

Posted on September 5, 2012 by -

The latest commentary from John Praveen of Prudential International Investments Advisors offers the following data and analysis:

•  Despite the modest upward revisions, Q2 GDP remained below the Q1 pace of 2%. Looking ahead, the U.S. economy appears on track to a modest rebound with GDP growth tracking around 2.2% in Q3. Consumption spending is likely to recover to over 2% in Q3 from the anemic 1.7% pace in Q2.  July retail sales grew stronger-than-expected at 0.8% MoM (month-over-month) and core sales were up an even stronger 0.9% suggesting a good start to Q3 spending.  Business investment spending is also likely to strengthen. Industrial production was off to a strong start in Q3, rising 0.6% MoM in July driven by 3.3% jump in car production. However, business confidence is hovering around the 50 level, which suggests that lingering uncertainty will keep a lid on business investment spending. Consumer and business spending remain the main drivers of U.S. growth, supported by modest gains in income, profits, and a recovery in housing.

• However, there are potential risks to the U.S. economy in late 2012/early 2013 with the potential massive fiscal cliff of large spending cuts and tax increases in 2013 resulting from expiring tax cuts and spending cuts set to be triggered at the end of 2012. A total of $576bn (3.6% of GDP) of fiscal adjustment is set to occur in January 2013 as a result of the expiration of the Bush tax cuts ($280bn, 1.8% of GDP), expiration of the payroll tax holiday ($125bn, 0.8% of GDP) and temporary unemployment benefits ($40bn, 0.3% of GDP), and spending cuts or so called “sequestration” ($98bn, 0.6% of GDP).  

•  With U.S. elections due in November and the nation highly polarized, it appears unlikely that any agreement will be reached before the November 6 elections. However, a fiscal agreement is likely to be reached between the November election and year-end on extending at least some of the tax cuts and/or preventing the spending cuts. As a result the fiscal drag is likely to be smaller, around 1% of GDP, rather than the -3.6% drag from the full fiscal cliff.  However, the uncertainty about the fiscal cliff remains a risk for the U.S. economy and financial markets.

                                                                                     *         *          *

Data mavens may be interested in the following section of Praveen’s report:

•  U.S. Q2 GDP growth was revised up modestly to 1.7% QoQ (quarter-over-quarter) annualized rate from 1.5% in the advance estimate. The major contribution to the upward revision was trade, which swung from a -0.3% drag to a 0.3% positive contribution. However, this was offset by inventories which swung from a 0.3% contribution to a -0.2% drag. In revisions: Consumer spending was revised up (to 1.7% from 1.5%); the contraction in government spending was revised smaller (to -0.9% from -1.4%) while investment spending was revised down (3.0% from 8.5%).

•  Consumer spending was revised higher but remained soft.  Consumption grew 1.7% in Q2, revised up from 1.5%, after 2.4% in Q1, with upward revisions to both durable goods and services spending. Service spending was the largest contributor to Q2 consumer spending.  Government spending was revised to a smaller decline of -0.9% from -1.4% initially reported, after -3% with weakness in state and local spending.  Trade added 0.3% to Q2 GDP growth after 0.1% in Q1 with exports adding 0.8% and imports subtracting -0.5%. Exports grew 6%, while imports grew a more modest 2.9%.

•  Investment spending was revised down to 3.0% from earlier reported 8.5% growth. Spending on equipment and software grew 4.2%, revised down from 5.4%, after 7.5% in Q1. Residential investment grew 8.9%, revised down from 9.7% after 20.6% in Q1. Residential investment has now contributed to real GDP growth for five consecutive quarters and reflects the modest ongoing recovery in the housing market.

•  U.S. Q2 GDP growth was driven by revised contributions from consumer spending (1.1%), business investment (0.4%), net exports (0.3%) and residential investment (0.2%). Meanwhile, the largest drags came from decreased government spending (-0.2%) and shrinking inventories (-0.2%).

Japan gets younger, but still struggles with longevity risk

Posted on September 5, 2012 by -

Average lifespans in Japan have shortened to 79.44 years for men and 85.9 years for women, according to a survey by Ministry of Health, Labor and Welfare reported by IPE.com. The citizens of Hong Kong are now the world’s longest-lived. 

That’s of little interest to Japanese corporate pension funds, because they generally offer optional lump-sum retirement payouts, and have already adjusted to longevity risk by creating fixed-term pensions and adding optional extensions to the guarantee period. (See snapshot of Japan pension system.)

Nor does it relieve the anxieties of a healthy 60-year-old with a 20-year fixed-term pension who hopes and expects to live to 90 or beyond.     

The Ministry survey indicates that, among 60-year-olds, 64% of men and 82% of women will live to age 80, 23% and 48%, respectively, will reach 90, and 8% and 23%, respectively, will reach 95. One percent of men and 6% of women who reach age 60 will reach 100. Given this broad range, individuals will find it difficult to plan for retirement.

Japan’s public pension system tries to guarantee a minimum standard of living, but doesn’t always succeed. The minimum cost of living for the elderly is currently close to the model pension payment (¥238,000 or $3,032 per month for husband and wife combined).

However, this is not necessarily the case on an individual level, where daily expenditures, for example, can vary widely depending on the geographic region.

As one Japanese writer put it in IPE.com recently:

“Longevity risk cannot be overcome on an individual basis. Neither can corporations bear the risk. It is something that must be dealt with at the national level. Discussions should be separated into two parts: averages and the portion beyond the average.

“Self-efforts should aim for average levels, while the government should introduce in parallel some sort of public risk-sharing framework for the portion exceeding this. The crucial factor is sustainability. A system should not dump the risk on one party, but use a flexible approach, even if imperfect, that guards against new burdens.

“Traditionally children would inherit their parents’ longevity risk. However, family sizes are shrinking, and the economic circumstances of parents and children have reversed. The last bastion has thus disappeared. The problem needs urgently to be addressed.”

© 2012 RIJ Publishing LLC. All rights reserved.

The Bucket

Posted on September 5, 2012 by -

The Hartford to sell retirement plans business to MassMutual

The Hartford has agreed to sell its Retirement Plans business to Massachusetts Mutual Life Insurance Company (MassMutual) for a “cash ceding commission” of $400 million, subject to adjustment at closing, according to a release yesterday. The sale, structured as a reinsurance transaction, is expected to close by the end of 2012, subject to regulatory approvals and satisfying other customary closing conditions.

The Hartford’s chairman, president and CEO Liam E. McGee, said: “The agreement marks the second of three planned business sales as we continue to make good progress executing on our strategy.” The Hartford expects the transaction to have no material impact on its GAAP financial results and to benefit net statutory capital by approximately $600 million, including the ceding commission and a reduction in required risk-based capital, on closing. 

The Hartford’s Retirement Plans business is primarily a defined contribution business with $54.9 billion in assets under management as of June 30, 2012. The business serves more than 33,000 plans with more than 1.5 million participants, and has a strong presence in the small to mid-sized corporate 401(k) and tax-exempt markets. It also provides administrative services for defined benefit programs. As a result of the agreement, The Hartford’s Retirement Plans employees will become part of MassMutual’s Retirement Services Division.

The Hartford will continue to sell new retirement plans during a transition period, and MassMutual will assume all expenses and risk for these sales through a reinsurance agreement. Between now and the close of the transaction, there are no planned changes with respect to the day-to-day interactions or processes between The Hartford and its Retirement Plans’ distribution partners, plan sponsors and customers.

The Hartford’s financial advisors for the divestiture are Greenhill & Co. and Goldman, Sachs & Co. and the company’s legal advisors are Sidley Austin LLP.

Fitch: No immediate impact on Hartford ratings

Fitch Ratings says today’s announcement regarding Hartford Financial Services Group, Inc.’s (HFSG) planned sale of its retirement plans business has no immediate impact on its ratings.

HFSG has reached an agreement to sell its retirement plans business to Massachusetts Mutual Life Insurance Company (Mass Mutual) for a cash ceding commission of approximately $400 million. The transaction is expected to close by the end of 2012, subject to regulatory approval. The sale will have essentially no impact on HFSG’s GAAP net income but will have a positive net statutory capital impact for Hartford Life Insurance Company of approximately $600 million.

Fitch views the sale as another step in HFSG’s go-forward strategy to focus on property/casualty commercial and consumer markets, group benefits, and mutual funds businesses. To date, individual annuity has been placed into run-off and the company has reached agreements to sell Woodbury Financial Services and its individual annuities’ new business capabilities consisting of the product management, distribution and marketing units, as well as the suite of products currently being sold. HFSG continues to pursue divestiture options for its individual life business. Favorably, a successful execution of the strategic plan to sell these noncore businesses should improve HFSG’s financial flexibility, with sales proceeds increasing holding company cash that could potentially be used to reduce debt.

Fitch already maintains separate Insurer Financial Strength (IFS) ratings on HFSG’s life and property/casualty companies that reflect each businesses respective stand-alone financial profiles. HFSG’s life insurance subsidiaries maintain ‘A-‘ IFS ratings, which are two notches below the property/casualty IFS ratings of ‘A+’. This approach was implemented in February 2009 during the financial crisis to reflect the divergence in operating performance and balance sheet strength between the life and property/casualty operations.

HFSG’s announcement today does not significantly change Fitch’s assessment of the life and property/casualty operating companies’ financial strength. Fitch expects that HFSG will continue to support its insurance subsidiaries and maintain insurance company capitalization that is consistent with the current ratings.

Fitch affirmed the ratings on HFSG and its property/casualty and life insurance subsidiaries on May 15, 2012.

Symetra names actuary Craig Raymond as chief strategy officer

Symetra Life Insurance Co. has appointed Craig Raymond as senior vice president and chief strategy officer, effective Sept. 17, 2012. Raymond will report to Tom Marra, president and CEO of Symetra Financial Corp.

Raymond had been chief risk officer and chief actuary at John Hancock Financial Services since 2009, where he managed and monitored strategic, insurance, liquidity, credit, market and operational risks. He previously was chief actuary at Hartford Life.

As Symetra’s chief strategy officer, Raymond will be responsible for long-term strategic planning, business portfolio analysis, and mergers and acquisitions. He will be based in the Hartford, Conn., area.

Raymond graduated from the Wharton School, University of Pennsylvania, with a bachelor’s degree in economics. He is a Fellow and past vice president of the Society of Actuaries and a Member of the American Academy of Actuaries.

ING Group to sell stake in Capital One

The Dutch financial services giant ING Group plans to sell its 9% stake in Capital One in a deal that could be worth around $3 billion, The New York Times reported today. ING acquired the stake in the American firm when Capital One bought ING Direct USA for $9 billion in February.

ING has been forced to sell assets as part of the conditions of a 10 billion euro ($12.5 billion) bailout it received from its local government in 2008. Along with the sale of ING Direct USA to Capital One, the Dutch firm sold its online bank in Canada to a local rival, Bank of Nova Scotia, last month for $3.1 billion. ING is also planning to sell its Asian insurance businesses.

The Dutch firm said late on Tuesday that it would sell 54 million shares in Capital One, and would set the price before the start of trading in New York on Wednesday. Based on the closing share price on Tuesday, ING’s stake in Capital One is worth around $3 billion. ING said it planned to complete the transaction by Monday, September 10. 

The deal for ING Direct USA transformed Capital One into the country’s fifth-largest bank by deposits. The combined business has around $200 billion in deposits, making it larger than regional powerhouses like PNC and TD Bank. Under the terms of the deal, Capital One issued $2.8 billion worth of new shares to ING, making the Dutch firm its largest shareholder.

Shares in ING rose less than 1 percent in morning trading in Amsterdam on Wednesday. Bank of America Merrill Lynch, Morgan  Stanley and Citigroup are the joint bookrunners for the deal.

MetLife announces annuity enhancements

The MetLife Income Annuity– a single premium immediate annuity – now offers an “Increasing Income Option” and an “Early Access Option.” The Increasing Income Option will allow the owner to elect to increase their income payments, compounded by an amount they choose, each year. The Early Access Option will provide access to a portion of their income payments in the event that an unexpected need arises.

The Increasing Income Option is an inflation feature that allows the annuity owner to select that their income payments be increased each year by a percentage rate they choose, generally between 2 – 4%. Under this optional feature, income payments will compound on each payment anniversary based on the pre-selected increase rate. This option is only available at issue to contracts issued to owners at least 59½ or older.

The Early Access Option allows clients to take a portion of their future income if an unexpected need arises during their liquidity period. The liquidity period will vary based on the income type elected. MetLife locks in the assumptions used to calculate the liquidity period value when the contract is issued so that clients know at purchase how much they can withdraw during the liquidity period. This feature is only available at issue to contracts issued to owners at least 59½ or older.

Marsh & McLennan gives $1.5 million to Stanford Center on Longevity

Posted on September 5, 2012 by -

Marsh & McLennan Companies, which specializes in human resources consulting, will contribute $1.5 million through 2013 to support the Stanford Center on Longevity’s studies and activities related to financial security.

According to a release, the two organizations recently collaborated on a conference where contributors from business, academia and government addressed retirement planning in the age of longevity. This fall, the Center’s Financial Security Division will expand its web resources on that issue. 

Michele Burns, former chairman and CEO of Mercer, a Marsh & McLennan company, will serve as Center Fellow and Strategic Advisor to the Stanford Center on Longevity and to its director, Laura Carstensen, PhD, and deputy director, Thomas Rando, MD, PhD. 

“The goal is to help drive the dialogue forward in order to facilitate a healthier state of long-term financial security—both for the individual and society,” Burns said in a release.

© 2012 RIJ Publishing LLC. All rights reserved.

One 401k provider girds for price pressure as disclosure kicks in

Posted on September 5, 2012 by -

Along with the symbolic end of summer, the end of August—the 30th, to be exact—also marked the deadline for starting disclosure of 401(k) fees by plan sponsors to plan participants. As of last July 1, plan sponsors were to have received a rundown of fees from their plan providers.

At this early stage of the fee-transparency game, observers still don’t know for sure whether a spike in cost-consciousness—among sponsors or participants—will follow the fee disclosure deadlines, or if a significant number of plan sponsors will want to switch plan advisors, providers or administrators in search of lower fees.

Providers are evidently concerned about a price war, and suggest that plan sponsors take care not to sacrifice quality for low price.

An executive at Security Benefit warned in a recent release that the Labor Department’s fee disclosure rules could trigger a “fee race to the bottom” unless plan providers shift the focus to the “reasonableness” of service costs rather than the costs alone.

Simply pursuing the lowest cost is a risk for small plan providers, which account for 90% of the nation’s 401(k) plans, said Kevin Watt, senior vice president of Security Benefit’s defined contribution group.

 “The ability to easily see costs will prove invaluable to plan participants,” he said. “But reasonableness means a lot more than cheap.” If service quality decays, plan participants could be hurt more than helped by the new rule, he said.

“It’s absolutely critical that before the RFPs [requests for proposals] start going out, participants need to know what they give up for stripped-down, low-cost plans,” Watts added.  

The first round of the DOL’s fee disclosure rules, which became effective on July, requires service providers to disclose the compensation they receive to plan sponsors. Sponsors will be able to compare service prices among providers more easily, stoking price competition among providers.

As of August 30, the new rules require plan sponsors to begin disclosing the fees of the investment options in their plans to participants. Watt said disclosures will give good advisors an opportunity to stress the link between the cost of advice and investment outcomes.    

Security Benefit partners with licensed financial planners to provide advice to employer-sponsored retirement plans. The firm’s recently-launched Security Benefit SecurePoint Retirement  401(k) product includes the services of Mesirow Financial as an ERISA 3(38) fiduciary.

Plan sponsors are not compelled by their fiduciary responsibility or by the new regulations to determine that fees are low, only that the fees are “reasonable.” Their perception of reasonableness may depend on whether they get complaints about fees—or perhaps legal action—from plan participants.

Fidelity Investments, the largest 401(k) provider, has released fee data to participants and not received much feedback, but that was no surprise because Fidelity’s fees already reflect vast economies of scale. It may take longer to see how participants at tens of thousands of small, higher-cost plans will react as they learn more about their fees.

“Participants will be surprised by the size of these fees,” predicts business and tax attorney Christopher Ezold, a Philadelphia-based attorney specializing in business, employment and health care law. (According to a research group, New York City-based Demos, the total fees paid on 401(k) plans reduce accumulation in retirement accounts by 30% on average over a lifetime of saving.)

“In fact, many will be startled to see that they are paying investment management fees at all. The new rules will likely strengthen a trend to reduce fees on all 401(k) plans as long as participants learn what action they should take,” Ezold said. But he warned that the mere availability of fee information will not necessarily lead to lower fees. 

“Now that the proverbial curtain has been pulled away, the heightened focus on fees will empower the participants to demand a better return on their investment,” said Ezold. “However, participants need to do their homework and take action. These new quarterly reports need to be examined and compared if the plan participants expect to see change.”

© 2012 RIJ Publishing LLC. All rights reserved.

“America the Undertaxed”

Posted on September 5, 2012 by -

At a little past midnight in the old-fashioned clubroom of an Ivy League university a few months ago, two men settled deeper into leather chairs and swirled the ice in their last cocktails of the night. The topic of U.S. tax policy came up.   

It’s not healthy, one said, when as many as half of all Americans pay virtually no federal income taxes, leaving the rest with a huge burden. If the poorer people paid more, they might better appreciate the true cost of what society gives them and relinquish their sense of entitlement.   

Personally, I would prefer to owe more taxes. That’s not because I think it could make me a better citizen, but because I’ve noticed that bigger tax bills tend to correlate with higher standards of living. In any case, I’m not sure whether I’m taxed fairly or unfairly, relative to the services and benefits I get.

In the home stretch of a presidential race where the tax question is front and center, an MIT political science professor makes the counter-intuitive claim in the latest issue of Foreign Affairs that the U.S. is a low-tax haven compared with other advanced countries.

In an article called “America the Undertaxed,” Andrea L. Campbell claims that the overall tax burden has been shrinking in the U.S. for decades, on both rich and poor, and that the decline has led not to general prosperity but merely to a concentration of wealth in fewer hands. 

Campbell gathered a wide range of data that enable her to make comparisons between the U.S. of several decades ago and today and also between the U.S. and some 30 other countries in the Organization for Economic Cooperation and Development, or OECD.

In terms of historical data, she claims that the effective federal income tax rate for a family of four with a median income was was just 5.6% in 2011, down from 12% in 1980. Overall, the individual income tax was equal to 10.4% of Gross Domestic Product in 1980 but had fallen to 8.8% in 2005.

Wealthy families have evidently gotten about as much relief as the median family. “The top one percent of taxpayers paid an average federal income tax rate of 23% in 2008, about one-third less than they paid in 1980, despite the fact that their incomes are now much higher in both real and relative terms,” Campbell writes.

Taxes on US corporations, as a percent of all federal revenues, have fallen to 10% today from 30% in the 1950s, her data shows. And while the U.S. has a statutory corporate tax rate of 39%, tax credits made the effective corporate tax rate between 2000 and 2005 only 13%, according to a Treasury Department report cited by Campbell.

Compared with 33 other industrialized nations, total tax revenues in the U.S. were the third lowest as a percent of GDP in 2009, the article said. The highest percentage was 48.1% in Denmark. The percentages in the U.K. and Canada were 34.3% and 32.0%, respectively, and the percentage in the U.S. was 24.1%. Only Chile and Mexico, at 18.4% and 17.4%, respectively, ranked lower than the U.S. on that scale.

Looking only at personal income taxes at all levels of government as a percentage of GDP, the U.S. doesn’t differ much from other countries, on average. Our personal income taxes equal about 9.2% of our GDP, while the OECD average is 10.1%. But European countries have a value-added tax or VAT, which accounts for their higher total tax revenues, as a percent of GDP.

The VAT is a tax on the value added to goods and services at every stage in the production of a given product. On average, other OECD countries get the equivalent of 6.7% of GDP from VAT every year. The VAT is a regressive tax, meaning that it eats up a larger percentage of the income of the poor than of the rich, but the VAT is generally used to finance universal social services, which tend to have relatively more value to the poor than the rich. 

Since taxes in the U.S. are already low, according to Campbell’s analysis, she sees little point in proposals by Rep. Paul Ryan (R-Wis.), the Republican vice presidential nominee, to reduce the tax burden by cutting federal spending to 16% of GDP by 2050 from 24% of GDP today. “Ryan’s plan would give those with incomes over $1 million a tax cut of $265,000” on top of the Bush tax cuts already in place, while raising taxes on low-income households by cutting the Earned Income Tax Credit, she writes.

But, as one of the two men in the clubroom argued, wouldn’t cutting entitlements and raising taxes on low- or moderate income households give that demographic a stronger sense of responsibility? Doesn’t social insurance spoil people and encourage moral hazard?

That idea does have a certain self-serving appeal, but it’s difficult to see how someone with even an average income could afford higher taxes. A person with a gross income of $42,000, for instance, currently takes home about $2,500 a month after withholding for income and payroll taxes and deductions for health insurance and a modest 401(k) deferral. That doesn’t leave much room for higher taxes.

If our taxes have in fact been shrinking for decades, then why do we feel so hounded by the taxman? I don’t know. Maybe it’s because there are so many different taxes and fees, or because the tax code is so complex. Maybe we fail to factor in the value of the available tax credits and deductions, or don’t acknowledge the value of what our taxes buy. Perhaps higher tax rates are just an inevitable (though nonetheless unwelcome) covariant of success.

Or it may be that declines in tax revenues, such as we’ve seen as a result of the financial crisis, can’t help but translate into higher levies on those who are still able to pay. For them, it must feel like persecution.

© 2012 RIJ Publishing LLC. All right reserved.

Life annuities are more popular than retail sales suggest: AARP

Posted on September 5, 2012 by -

Sales of individual life annuities have always been relatively modest, prompting perennial explanations of the “annuity puzzle,” as well as speculation that, despite the Boomer retirement tsunami, Americans may never really warm up to the idea of insuring against longevity risk.

But a new study from the AARP Public Policy Institute shows that, when offered the choice between a lump sum and an annuity in an employer-sponsored retirement plan, Americans choose the lifetime payout surprisingly often—more often, that is, than retail sales data suggest.

That means there may be “more potential in the annuity market than many observers have assumed,” according to the authors of “Older Americans’ Ambivalence toward Annuities: Results of an AARP Survey of Pension Plan and IRA Distribution Choices,” which was published last spring.  

“People who have defined benefit plans, and who have a choice in the matter, are likely to elect an annuity,” said Sandy Mackenzie, who co-wrote the report with Carlos Figueiredo. “Even among members of defined contribution plans, one in three say they would be willing to choose an annuity.”

The world according to AARP

Even if you exclude Social Security, the study showed, annuities themselves aren’t rare in America. “Among retirees [ages 59 to 75], no less than 74% were receiving (or expecting to receive) income from an annuity of some kind, and 63% were receiving income from a life annuity,” the study found.

Among older workers [ages 50 to 75] whose most important plan was a traditional DB pension that offered a lump sum distribution option, 63% told the AARP researchers that they intended not to take a lump sum distribution. Of current retirees who had had a lump sum option, 87% had not taken the lump sum. Only about one in ten older workers and retirees with a lump sum option expected to choose or had already chosen the option of taking a full lump sum balance.

The tendency to choose an annuity was weaker among workers and retirees covered by 401(k) plans, and weaker still among those whose most important plan was an IRA. But even in those cases, the annuity was a surprisingly common choice.

In 401(k) plans that offered options other than lump sums, 31% of current older workers and 25% of retirees planned to elect or had already elected a life annuity. Another 24% of workers and 18% of retirees planned to elect or had elected a series of regularly scheduled payments in lieu of a lump sum. Only 11% of workers but 30% of retirees planned to elect or had elected a lump sum. One in four workers was still undecided decision.

The survey showed how stark a difference there is between current retirees and near-retirees in terms of the type of retirement plan coverage. In the survey, 61% of retirees said they had a traditional DB or cash balance plan, compared with only 33% of those who were 50 and over but still working.

Squaring the facts 

Mackenzie and Figueiredo can only speculate, however, why people are more amenable to the life annuity concept when it’s an exit strategy from an employer-sponsored retirement plan than when it’s a retail option.

“There may be a problem with the marketing of retail annuities or the way they’re perceived,” said Mackenzie, a former International Monetary Fund official and author of Annuity Markets and Pension Reform (Cambridge, 2006) and The Decline of the Traditional Pension (Cambridge, 2010).

“Maybe the participants feel that the in-plan annuity comes from a more trusted source. The lack of previous association with an insurance company might explain low retail sales. Our message is simply that, based on our data, the market for immediate annuities shouldn’t be so vanishingly small,” he said.

“There might be self-selection bias affecting the results [i.e., that people who like annuities choose companies that offer defined benefit plans], or because people may choose the annuity just because it’s the default,” Mackenzie added. “I don’t want to overplay the results, but if you observe that the demand for life annuities as such is pretty small, then how do you square that with the fact that, even among members of defined contribution plans, one in three say they would be willing to choose an annuity?”

The AARP study joins the relatively slim body of literature on annuitization rates in retirement plans. A 2007 study by Steve Utkus and Gary Mottola of participants in two Vanguard-administered Fortune 500 plans, a traditional DB plan and a cash balance plan, found that “annuitization was popular among a small though meaningful group: 27% of older participants in the traditional plan and 17% in the cash balance plan elected an annuity.” The older the participant at the time of the distribution—which didn’t necessarily occur at the moment of retirement—the more likely he or she was to take an annuity over a lump sum.

The data for “Older Americans’ Ambivalence toward Annuities” was collected in the spring of 2010. Some 1,750 older workers, aged 50–75, and 670 retired people aged 59–75 were interviewed. Each had to be a member of at least one pension plan or have an individual retirement account (IRA). Older workers had to have a pension plan or retirement saving account. Retirees had to have begun drawing or receiving payments from their most important retirement plan/account in the last three years.

© 2012 RIJ Publishing LLC. All rights reserved.

Bernanke, Equities and the November Election

Posted on September 4, 2012 by -

If Mitt Romney’s and Paul Ryan’s punches have failed to KO a vulnerable president, the reason may be no farther than your Bloomberg terminal, where you can see that the S&P 500 has more than doubled since the earliest days of the Obama administration.

Credit for the rally—or blame, if you’re an angry bear—arguably goes to Fed chairman Ben Bernanke, who as arbiter of U.S. central bank policy has suppressed prevailing interest rates and somehow—despite a strong undertow of risk aversion among mass investors—managed to buoy up stock prices.   

Last Friday, at the annual symposium sponsored by the Kansas City Fed at the foot of the Grand Tetons—the Olympus of the banking gods—Bernanke reiterated his commitment to keep rates low for as long as another two years; by mid-afternoon on August 31, the S&P hit 1409, up from 680 on March 9, 2009.

In the course of his address, whose meaning was as usual camouflaged in Fed-jargon and stippled with acronyms, Bernanke more or less assured the markets that his motto remains, “Easy does it.” Hence the equities outlook, as well as Obama’s, is pretty good, at least for the moment.

It could be worse

Regarding the stock market, Bernanke specifically said, “It is probably not a coincidence that the sustained recovery in U.S. equity prices began in March 2009, shortly after the FOMC’s decision to greatly expand securities purchases. This effect is potentially important because stock values affect both consumption and investment decisions.”

The first stage of the Fed’s asset-buying policy also put a floor under prices of mortgage-backed securities and lowered retail mortgage rates, he said. Lower mortgage rates helped people refinance, if they qualified, and support higher home prices.  

Once the forces of deflation were muzzled, in Bernanke’s view, the economy could begin to recover, and did. “As of 2012, the first two rounds of LSAPs [large-scale asset purchases] may have raised the level of output by almost 3 percent and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred,” Bernanke said in his speech.

“As of July,” he added, “the unemployment rate had fallen to 8.3% from its cyclical peak of 10% and payrolls had risen by 4 million jobs from their low point… Inflation (except for temporary deviations caused primarily by swings in commodity prices) has remained near the [Federal Open Market] Committee’s 2% objective and inflation expectations have remained stable.” Manufacturing, housing, and international trade have strengthened, and investment in equipment and software has rebounded, he said.

Four dangers

Four things could still go wrong, Bernanke conceded. First, the Fed’s policy could backfire if it buys too many U.S. government agency and Treasury bonds, reduces the liquidity of the market for U.S. debt, and compels private buyers to demand higher yields in return. Second, the Fed could eventually own so many assets that, when the economy revives, it couldn’t sell them fast enough to suck excess cash out of the economy and prevent inflation. Third, the Fed’s rate-suppression policy could compel investors to take bigger risks in hopes of higher yields, and thereby de-stabilize the financial system again. Finally, a sudden spike in rates could cause the assets on the Fed’s balance sheet to fall in value and the Fed might lose hundreds of billions of dollars. But the potential dangers of his policies, the central banker said, were outweighed by their positive effects.   

A number of “headwinds” are preventing the economy from recovering faster than it has, Bernanke added. He cited the facts that new construction remains at low levels, that hiring and purchasing by governmental entities is down because of depressed tax receipts, that uncertainty and anxiety persists regarding the so-called “fiscal cliff” at the end of 2012, that many homeowners and small businesses still find it difficult to borrow, and that uncertainty about the Eurozone economy is weighing on Americans.

Rates will stay low

In conclusion, Bernanke was fairly clear that interest rates aren’t going up soon, at least not if the Fed can help it. “A number of considerations,” he said, “…argue for planning to keep rates low for a longer time than implied by policy rules developed during more normal periods.”

© 2012 RIJ Publishing LLC. All rights reserved.

Letter to the Editor

Posted on August 29, 2012 by -

Dear editor:

I noticed the opening sentence of “Weighing the Value of a Variable Annuity” (July 31, 2012 RIJ) mentions that Steinorth and Mitchell indicate that a VA lifetime withdrawal benefit—especially one with a ‘ratchet’—can provide upside potential and downside protection many Baby Boomers want in retirement.

Attached is a short PDF I sent to you previously, containing selected language from the 1998 GMWB & GLWB patent filing.  Anticipating such a desire for a ratchet, I included it in the patent filing and even gave a numerical example of how this would work. (See page 3 of the attached PDF.)

Another reason a VA-writing life insurer might want to offer a “ratchet” GLWB is for persistency purposes.  Suppose the VA account value goes up substantially after the GLWB election in a product with a standard, non-ratcheting GLWB.  In the current product, a consumer’s GLWB withdrawal level is fixed at the original level.  If the consumer performs an exchange to a new VA and elects a new GLWB still of the standard, non-ratcheting form, then he or she establishes a higher GLWB withdrawal level.

If the original VA-writing life insurer had offered a “ratchet” design, such loss of business on the books could have been avoided, resulting in higher assets under management and the commensurately higher M&E&A revenue.

So while a ratcheting GLWB may offer additional value (for an additional price) to the consumer, the insurer’s self-interest can also play a role in the offering of such a design.

Best wishes,

Jeffrey Dellinger

Most participants still oblivious of plan fees: LIMRA

Posted on August 29, 2012 by -

Two-thirds of Americans with defined contribution (DC) plans or IRAs say they spend “less than five minutes” perusing their retirement plan disclosures, and 20% say they “rarely or never” read the disclosure paperwork, according to a new LIMRA survey.

Younger plan participants (age 18-35) are more likely to report reading their disclosures and are more likely to reach out to their employer for information about their retirement account than older participants, the survey showed.

“With the implementation of the Department of Labor’s new fee disclosure rule, LIMRA wanted to gauge participant sentiment throughout the process,” said Alison Salka, corporate vice president, LIMRA Retirement Research. “Not surprising, almost 9 out of 10 participants either did not know the fees they paid or did not think they paid any fees for their employer-sponsored retirement plans.

“As participants are provided more detailed information about their retirement plans’ structure and fees, we are interested to see how they respond. This survey is part of a series to track consumer knowledge and understanding of the information and the subsequent actions (if any) they take.”

Only 12% of plan participants said they could estimate the amount of fees and expenses they paid on their retirement plan account. Three-quarters of these participants said they felt the fees and expenses were reasonable. Interestingly, 56% of those who estimated the fees and expenses thought their fees were more than 2%, which is more than double the all-in median fee for a defined contribution plan participant (based on plans included in a 2011 Investment Company Institute study).

LIMRA also asked participants what action they would take if they found out their fees and expenses were higher than average. (See chart below.) One-quarter said they would move their assets into funds with lower fees, one-fifth said they would talk to their employer about trying to lower the fees but nearly half said they would take no action or they didn’t know what they would do. While men are slightly more likely than women to say they would take no action than women (19% vs. 13%), women are more likely to not to know how they would react (36% vs. 26%).

“This study underscores consumers’ lack of understanding about how their retirement plans are administered,” noted Salka. “This offers an opportunity for plan sponsors and providers to educate participants on the value and benefits of the plan.”


© 2012 RIJ Publishing LLC. All rights reserved.

Young guns want to eat your lunch

Posted on August 29, 2012 by -

Don’t look now, but a group of former MicroSoft techies and math geeks want to take over the mass-affluent financial advice market.

FutureAdvisor, the “online investment advisor for the everyday investor,” has raised $5 million in Series A funding from Sequoia Capital, according to the company.

The firm now analyzes—but does not manage—$4 billion in assets and claims to save its users, including 11 million 401(k) participants, a combined $50 million over a lifetime.

The young firm, which RIJ first wrote about last March, has just launched what it calls the industry’s first personalized 401(k) fee analysis and recommendation features, designed to help people save on fees in their 401(k) portfolios. This feature can be found at www.futureadvisor.com/401k.

“FutureAdvisor promises to democratize access to financial advice, save consumers thousands of dollars on annual fees, and enable customers to retire more comfortably,” said Warren Hogarth, a partner at Sequoia Capital, in a release.

Sequoia Capital has invested an additional $5 million in FutureAdvisor, completing its Series A round. The founding team includes financial industry veterans, top software engineers from Microsoft and math PhDs from top universities. In addition, FutureAdvisor is backed by angel investors, Square’s Chief Operating Offer, Keith Rabois and Yelp founder Jeremy Stoppelman.

A company release said, “Built on research-backed algorithms, FutureAdvisor’s free Web service gives everyday investors personalized recommendations to reduce fees, maximize tax efficiency, and select the right assets in their portfolios. Unlike traditional advisers, FutureAdvisor is free and requires no minimum assets. The founding team includes financial industry veterans, top software engineers from Microsoft and several math PhDs from top universities.”

© 2012 RIJ Publishing LLC. All rights reserved.

Participants better off in TDFs: The Principal

Posted on August 29, 2012 by -

In analyzing a subset of 2.4 million defined contribution accounts, The Principal Financial Group, marketer of LifeTime target-date funds, recently compared participants who use a TDF (the “do it for me” crowd) with participants who select their own allocation and services (the do-it-myself” group).

The Principal research showed that do-it-myself participants tended to be less diversified than participants who use one TDF option. The former used an average of two to four investment options across the board, compared to the average 15-20 underlying investment options in the typical target date portfolio.

“We believe a minimum of five asset classes should be used with a broad selection of investment options to provide adequate diversification for the typical retirement plan participant,” said Jeff Tyler, portfolio manager, Principal LifeTime Funds. “The research shows that many do-it-myself investors aren’t meeting that mark.”

The Principal took the orthodox position that TDFs for younger investors should have higher equity positions because those investors have a long time horizon. The assumption of higher risk-tolerance by young investors is not universally accepted, however.

Zvi Bodie of Boston University has claimed that there’s no evidence that time diversification works for equity holders. In addition, the directors of NEST, Britain’s public option defined contribution plan, believe that losses of principal in early life can turn young investors away from equity investments permanently. 

Principal found that, on average, do-it-myself participants born after 1987 had nearly 30 percentage points less equity exposure (54.7%) in their portfolios than the 83.95% within a target date investment option for that age.

There’s less controversy over the beneficial effects of regular portfolio rebalancing—a typical built-in feature of TDFs. The Principal found that only two percent of do-it-myself investors elected an automatic rebalancing service.

“We found that do-it-myself investors are rarely taking the important step of selecting auto-rebalancing services to keep their portfolios at the risk tolerance level they selected based on their time horizon. Auto-rebalancing is another step to take the emotion out of investing, to avoid negatively reacting to volatile markets,” Tyler said in a release.

The Principal’s research was based on a survey of participants of defined contribution (DC) retirement plans serviced through The Principal, and considered only their plan assets.

© 2012 RIJ Publishing LLC. All rights reserved.

Forecast from Morgan Stanley: Slightly bullish

Posted on August 29, 2012 by -

Morgan Stanley Smith Barney’s Global Investment Committee has released a cautiously positive economic and financial outlook this month, at least from the viewpoint of risk sellers. It expects further monetary easing by the Fed and the European Central Bank to “support risk-asset markets and eventually the global real economy.” Sellers of risk protection might not take comfort in its expectation of low rates until 2014.

On various asset classes, MSSB said its position is:

  • Overweight: Investment grade and emerging market bonds and managed futures, emerging market equities, and US region equities. Within US equities: large caps, growth.
  • Market weight:  Total equities; commodities, short-duration and high yield bonds.
  • Underweight: Cash, developed-country sovereign debt, developed market equities, inflation-linked securities and global real estate investment trusts.

On economies, the position is:

  • We expect global growth to remain positive this year and next, despite the fact that Europe is in recession and growth is slowing in the U.S. and most emerging market economies.
  • Globally, we expect core inflation to abate; fundamentals and policy options in emerging market economies are generally more robust they are in the developed market economies.

On profits:

  • Expect a softening of 52-week forward earnings per share. The S&P 500 forward earnings figure remains below $111, down from nearly $112 in early summer.
  • Forward earnings per share for global equities has dropped under $28 from more than $30 last summer.

On interest rates:

  • In developed markets, central-bank policy rates are likely to remain low at least into 2014.
  • The Federal Reserve will probably embark on a third round of Quantitative Ease.
  • The European Central Bank will further support EU sovereign debt markets and major European banks.
  • Emerging market central banks have begun easing to offset slower growth.

On currencies:

  • In the short-term, we expect US-dollar strength versus the euro will persist in the short-term.
  • Longer term, major developed market currencies will likely decline against several emerging market currencies.

 © 2012 RIJ Publishing LLC. All rights reserved.

A Time to Laugh, or Cry

Posted on August 29, 2012 by -

As of the halfway mark of 2012, the news on variable annuities, like news about the world at large, is mixed. The good news: net new money is flowing into the business. The bad news: net flows are at their lowest level since the beginning of the living benefit era.  

LIMRA released mid-2012 sales figures for the top 20 annuity issuers in the U.S. last week. This week, Morningstar followed up with its quarterly VA sales report. The numbers provide specific detail to the anecdotal reports that annuity sales have softened this year.

Sales are off 6% year-over-year for three main reasons. Supply is down as a result of the retreat or withdrawal of several once-major players. Products are also less generous than they use to be, thanks in part to the fact that low interest rates raise the cost of hedging the guarantees. In addition, the industry relies heavily on its biggest members for growth. The five largest issuers (including TIAA-CREF) account for about 58% of sales; the top 10 issuers account for 80%.    

At this point, most people know about MetLife’s intended pullback from the market, evidenced by its lower (but still high) sales this year. In 2011, MetLife sold $12.65 billion worth of variable annuities in the first half of the year. In 2012, the firm’s mid-year VA sales were $9.54 billion, a decline of just over 25%. MetLife was in third place in VA sales rankings in mid-2012, after having been first in mid-2011.

In his first-quarter 2012 earnings call, MetLife CEO Steve Kandarian told analysts that the firm was targeting total annual 2012 VA sales of “$17.5 to $18.5 billion,” following its record sales of $28.44 billion in 2011. To the chagrin of investors and brokers, MetLife has reduced the generosity of its living benefit riders to help reduce risk exposure and temper its sales.

MetLife’s chief competitors, Jackson National Life (known for giving advisors maximum investment freedom) and Prudential Financial (known for its “highest daily” benefit and asset-transfer risk management mechanism), have also moderated the generosity of their riders, but without as much impact on sales. Jackson’s VA sales are actually up slightly.

Jackson’s mid-year 2012 sales were $9.64 billion, compared with $9.53 billion for the first half of 2011, putting it in second place, up from the third spot a year ago. Prudential VA sales were down about 9%, to $10.29 billion this year from $11.35 billion in the first half of 2011.

Among the rest of the top 10, sales are down moderately at Nationwide and RiverSource, up moderately at AXA Equitable and AIG, and roughly even at Lincoln Financial, AEGON/Transamerica and Allianz Life of North America. Meanwhile, there’s been some action among smaller companies. Ohio National and Guardian, for instance, have quietly slipped into Morningstar’s top 20 list after beefing up their products earlier in the year.

Guardian Life, a mutual company, saw the industry’s biggest percentage increase in sales, going from $487.5 million in the first half of 2011 to $843.4 million in the first half of 2012, an increase of more than 70%. Ohio National sales data didn’t appear on LIMRA’s Q2 2012 sales list because it doesn’t participate in the LIMRA survey, but it did appear on Morningstar’s. The Cincinnati mutual insurer, which introduced a new living benefit rider last winter that offers a 7% annual rollup for those who agree to invest in volatility-managed funds, had first-half 2012 sales of $1.377 billion, up 65% from $837 million in the first half of 2011.

In a single year, Ohio National rose from 21st place to 13th place on Morningstar’s VA sales ranking, which was the greatest positive change in ranking of any company during that time. Ohio National was also the fourth-highest selling VA issuer in the wirehouse channel, with $367.2 million in the first half of this year. Its two most popular contracts are the ONCore Premier and ONCore Lite II.

John Hancock may have seen the biggest decrease in VA sales, with a decline from $1.05 billion in the first half of 2011 to $514.8 million in the first half of 2012. 

Sun Life Financial, the Canadian-owned company that has gotten out of the VA business in the U.S., is the only firm not on LIMRA’s top 20 list of domestic VA sellers in mid-2012 that was on it in mid-2011 (with $1.65 billion in sales). Hartford Life, which was not on the list a year ago, is back on the top 20 list this summer, with about $480 million in VA sales. The Hartford will continue to sell VA contracts until the sale of its VA business to Forethought is completed, a company spokesman said. (Hartford and John Hancock were not on Morningstar’s top 20 in the latest report; ING Group and Ohio National were there instead.)

Everything but net

Less fresh money is flowing into VAs this year. According to an analysis by product manager Frank O’Connor of Morningstar’s Annuity Research Center, only about $7.8 billion of the $73.5 billion in VA sales in the first half of 2012 was net cash flow; exchanges from one contract to another made up most of the sales volume. 

“The positive flow has gotten so concentrated in the two or three biggest companies that when they hit the brakes the industry number nose dives,” O’Connor told RIJ yesterday. He rattled off the annual mid-year net flow totals (in billions) for years 2005 through 2011: $10.0, $15.2, $15.1, $14.7, $11.2, $9.8, and $11.6.

If net flow stays at the current low pace, the variable annuity industry will end 2012 with the least total net flow than it has seen in over a decade. It will be even lower than the $17 billion recorded in 2009, during the aftermath of the global financial crisis, and far below the $46 billion recorded in 2003.

Morningstar’s VA numbers were slightly different from LIMRA’s. Second quarter 2012 variable annuity new sales were up 5.5% over first quarter 2012, to $37.7 billion from $35.8 billion, but were down 4.6% from the second quarter of 2011, O’Connor’s report said. “At the midpoint of the year new sales of $73.5 billion are approximately 48% of 2011 full year new sales, indicating a strong possibility of a flat to slightly down year for VA sales absent a significant uptick in the second half. Assets were down 3.3% due to stagnant market performance,” he wrote.

The two most significant trends in VAs this year are what O’Connor called a “back to basics” movement that emphasizes the tax-deferred growth advantage of VAs (which put no limit on contributions of after-tax money) and a trend toward simplified lifetime income guarantees.

On the “back to basics” side is Jackson National’s Elite Access product, launched last March 5. The B-share has a 1.00% combined M&E and Administrative charge. It offers no death or living benefit guarantees; rather, its focus is on tax deferral and a broad array of investment options, including alternative asset classes.

Two other “back to basics” contracts are the Midland National LiveWell and Symetra Tru variable annuities. Both offer no loads and an extensive range of investment options, but the LiveWell VA offers a guaranteed death benefit and costs more (2.65% vs. 1.32%, all in). Neither product offers an income benefit.

Both Schwab and TDAmeritrade are adding low-M&E, simplified VAs with living benefits to their platforms. Schwab Retirement Income, launched on August 1 and underwritten by Pacific Life, has an optional single or joint lifetime withdrawal benefit and three fund options: Schwab Balanced, Balanced with Growth, and Growth funds. All three options are funds of exchange-traded funds (ETFs) and each costs 0.80% a year. The contract has no guaranteed death benefit. The total cost of 2.20% (2.40% for joint) also includes a 0.60% M&E/Administrative fee and 0.80% for the single lifetime withdrawal benefit (1.00% for the joint life version).

Great West launched the Smart Track contract last February 27 for TD Ameritrade’s platform. Smart Track offers an extensive fund lineup, a tiny 0.25% combined M&E and administrative charges, average total fund expenses of 1.01%, and optional single or joint lifetime income benefits for an additional 1.00% (the joint version has a lower withdrawal percentage). Only amounts allocated to the Maxim SecureFoundation Balanced L fund, with a total expense ratio of 0.94%, are covered by the guarantee, so the all-in cost for the income guarantee in Smart Track is just 2.19%, in the same territory as the new Pacific Life product on the Schwab platform.

The most popular VA share classes remain the B-share (61.4% of sales) and the L-share (21.3% of sales), but sales of the client-friendly O share, whose M&E fee drops from B-share to A-share levels at the end of the surrender period, are growing. From virtually zero sales a year ago, the O share had a 3.9% share of sales as of June 30, 2012, according to Morningstar.

© 2012 RIJ Publishing LLC. All rights reserved.