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New modeling by the nonpartisan Employee Benefit Research Institute (EBRI) finds that Medicare beneficiaries with high levels of prescription drug use would have to save 30−40 percent more than they currently are to pay for higher drug costs if President Obama’s health reform law is repealed.
Medicare beneficiaries with median prescription drug costs would not see any change in their savings targets, EBRI’s analysis finds.
EBRI takes no position on whether or not the law should be repealed; rather, its analysis is designed to measure which groups would be affected and provide estimates of additional savings needed by those who would be affected if it was.
Repeal of the Patient Protection and Affordable Care Act (PPACA) would mean a return of the so-called “donut hole” coverage gap for Medicare prescription drug coverage (Medicare Part D), which PPACA reduces between now and 2020. The result would increase out-of-pocket costs for the highest prescription drug users and thus the savings needed to cover their health care expenses in retirement.
“Medicare beneficiaries with high outpatient drug use would be most affected by repeal and would need to save an additional roughly 30‒40 percent to make up the shortfall,” said EBRI’s Paul Fronstin, lead author of the report.

MetLife replaced Prudential as the country’s top seller of variable annuities in the second quarter and the reason was plain to see.

In a de-risking move at the end of 2010, Prudential reduced the annual roll-up on its hot-selling Highest Daily 6 guaranteed lifetime withdrawal benefit rider (GLWB) to a conservative 5%. Only a few months later, in May, MetLife introduced a “Max” version of its guaranteed minimum income benefit (GMIB). The Max promised a flexible 6% annual bonus instead of the usual 5%. 

More about the GMIB Max in a moment.

Prudential’s VA sales momentum continued through the end of the first quarter, when it sold $6.82 billion worth of product and was the top-seller in the bank, wirehouse and independent advisor channels. But sales of the HD5 dropped by a dramatic one-third, to $4.53 in the second quarter of 2011, and Prudential’s market share fell to 11.5% on June 30 from 17.6% on March 31. Presumably, Prudential knew what it was doing from a long-range risk management perspective and wasn’t shocked.

“Prudential’s reduction of the HD Lifetime Withdrawal benefit step-up rate from 6% to 5% likely contributed to the drop-off in sales activity,” wrote Morningstar’s Frank O’Connor in his Second Quarter 2011 Variable Annuity Sales and Asset Survey.

Jackson National’s Perspective II contract has been the top-selling individual contract for the entire first half of 2011, but otherwise the VA sales picture was all about MetLife in the second quarter. Led by sales of the Investor Series VA, MetLife sold a remarkable $6.97 billion, up from $5.68 billion in the first quarter.

MetLife’s market share rose to 17.7% from 14.7%, and it was among the top five companies in all six sales channels—banks (1), wirehouses (1), regional broker-dealers (1), independent advisor (2), captive agency (3), and even direct response (5) via its partnership with Fidelity on the Growth and Guaranteed Income contract offering.

Back to the design of the GMIB Max. With the introduction of this option, MetLife was betting that advisors and investors would give up a bit of investment freedom in return for the more noticeable  higher guaranteed minimum payout rate. The bet appears to have paid off. As MetLife CEO Steven Kandarian said during a second quarter analyst conference call, “Part of [our second quarter] growth was driven by our new GMIB Max offering, a simpler retirement income solution that significantly reduces our hedging costs and we believe will provide customers with more consistent returns over time.”

Specifically, the GMIB Max offers to increase the contract owner’s benefit base (the annuitizable amount) by 6% each year, up to age 91 or when the account balance fell to zero, if ever. In any individual year, the owner can choose instead to withdraw up to 6% of the current benefit base in cash without changing the base. (The Max is sold alongside the existing rider, which continues to offer a 5% roll-up and has fewer investment limitations.)

For instance, an owner who invested $100,000 at age 60 and took no withdrawals would have a benefit base of at least $179,000 after 10 years, at age 70. If the owner chose to initiate withdrawals at that point, he could take 6% of $179,000 each year for life—about $10,700—and still have the option of annuitizing at least $179,000 for life. Or, he could skip a year of income and let the benefit base go up another 6%.

What was the catch? To get the 6% rate, the owner is restricted to five investment options, four of which use various risk-dampening (and potentially return-dampening) management strategies during downturns or volatile periods. Also, the MetLife contract isn’t cheap. All-in fees for the B share, including mortality and expense risk, investment and rider fees, can run north of 3%.  

There’s little reason to believe that investors flocked to MetLife in the second quarter because they suddenly preferred the GMIB over the GLWB. As noted above, GMIB Max contract owners can opt to convert the value of their benefit base to a life annuity, and must do so if and when they reach age 91 or the account value goes to zero.  VA analyst Ryan Hinchey at nobullannuities.com, for one, has recommended the GMIB Max but advised against annuitizing it.  

So went the second quarter. Looking ahead to third quarter, Morningstar’s O’Connor was optimistic about VA sales.

“The July sales estimate of $11.6 billion, though 16% lower than the June estimate, was still 12% higher than the July 2010 estimate of $10.4 billion, and historically July is one of the weakest months of the year,” he wrote.

“Absent a significant market shock, recent volatility should continue to fuel interest in guarantees and drive sales back up to the $13–$14 billion per month level for the remainder of the year, with full year 2011 sales reaching $150 to $160 billion, or a 9%–16% increase over 2010.”

VA marketers will be crossing their fingers and hoping so. There’s been a lot of anecdotal chatter about the public’s rising interest in annuities, but the Morningstar 2Q 2011 report showed that of the $78.1 billion in total VA sales in the first half of 2011, only $11.5 billion was “net flows”, or new money. That hardly seems like a stampede. On the other hand, SPIA sales, from a low base, are up a reported 30% in the latest quarter.

© 2011 RIJ Publishing LLC. All rights reserved.

The implementation of the Czech Republic’s new pension reform – which aims to allow workers to transfer part of their contributions from the public pillar to newly created private pension funds – is facing a number of political and economic problems, IPE.com reported.  

Parliament is already poring over the reform, with the second reading of the proposed law scheduled for next week. The reform’s success is expected to depend on the political situation.

“The current opposition is strongly against the fact that part of the contributions to the pay-as-you-go system will be transferred to the private system,” said Jiri Rusnok, director of pensions at ING Pnezijni Fond. “Furthermore, the lack of consensus within the coalition government itself means the transfer of contributions from one pillar to another will be made on a volunteering system and will not in any case be compulsory.”

In addition, under the new law, workers will have to increase their allocation to the pension system, he warned.

“People who decide to join the private pillar will have to raise their contributions by 2% from their net income salary to be eligible to transfer as much as 3% of their contributions from the public system to private pension funds,” he said.

The increase of contributions is seen as an important barrier by some pension funds and consultants in the country.

However, experts agree the new pension system will give workers more flexibility in terms of investments and potentially lead to higher returns and higher pension benefits.

Petr Poncar, chairman at Allianz pension fund, said: “The return will depend on the profile of each worker who will decide on the investment strategy to adopt. Allocations to lower-risk assets will be adapted as workers reach retirement age.”

According to Poncar, as much as 25% of the work force is likely to join the voluntary private system if the pension reform is approved by parliament. But other experts warned this percentage could be much lower, closer to 10-15%.

If enacted by parliament and the president, the new pensions could be implemented as early as January 2013.

Outperformance from active management is no more or less likely in efficient or inefficient markets, but it is a lot more likely in broad markets than in narrow markets, according to a recent study by Dutch active asset manager Robeco, IP&E.com reported.

The more independent investment opportunities there are available, the greater the potential for active manager outperformance and vice versa, said Hans Rademaker, member of Robeco’s management board, during a recent seminar on active management in Rotterdam.

Robeco analysed the performance of active managers in a variety of markets, including the US and European bond and equity markets over a period of 20 years. On average, active managers underperform net of fees, the research shows.

But 20-40% of managers show persistent outperformance relative to a portfolio of investable index funds. The tricky part is selecting winning managers and avoiding losers, Rademaker said.

“If you don’t believe it’s possible to predict the winners, or if you don’t have the budget or resources to invest in a rigorous selection process, you’re probably better off opting for passive management.”

Which is not to say passive investment management is a picnic, he added. “Passive investments can be incredibly complex,” he said. “And some index products aren’t as passive as they may seem, considering their significant risks of underperformance.”

The conventional wisdom that active strategies thrive on inefficiencies and fall flat in efficient markets isn’t true, says the Robeco research. “The added value of active management is not correlated to market efficiency,” said Rademaker.  Even in very efficient markets, such as the US large-cap equity market, active managers can deliver outperformance.

Conversely, market inefficiency is not indicative of active manager success. The research shows no evidence of any indication that active strategies are more likely to outperform in inefficient markets such as high-yield corporate bond markets.

But market breadth is conducive to active management. “The potential for outperformance of active managers turns out to be higher in markets with many independent investment opportunities and lower in markets with fewer independent investment opportunities,” he said.

In addition, the number of independent investment opportunities within a specific market varies over time.

Rademaker said: “The government bond market, for instance, offered very few independent investment opportunities for a long time. But the number of independent opportunities has increased quite a bit over the last few years, changing the picture with regards to whether it makes sense to opt for active strategies in this area.”

So assessing market breadth gives investors an instrument to help them determine when and where it might pay to employ active strategies, and where it might be better to opt for passive management.

Up to half of all the people in the U.K. who buy income annuities could qualify for higher payout rates because they have medical conditions or lifestyle habits that are likely to shorten their lifespans, says the consulting firm Towers Watson, according to a report in IP&E.com.

But only about 12% of the income annuities actually purchased are higher-paying “enhanced annuities,” which are also known as impaired or medically underwritten annuities. 

The sale of enhanced annuities in the U.K. has grown substantially over the past decade. Sales reached £1.42bn ($2.32bn) in the first half of 2011, a dramatic increase from the £419.6m ($686m) sold in the UK in 2001.

As Towers Watson’s Andy Sanders told FTAdviser, “This year looks set to be another record year for enhanced annuities with sales projected to reach more than £2.8bn.”  

“Better awareness of annuity enhancement opportunities” and “an increase in ‘negative lifestyle factors’” accounts for the sales, said the global consulting firm, which estimated that 5,000 different individual medical conditions could potentially lead to the sale of an enhanced annuity. Someone who smokes heavily or consumes alcohol on a regular basis, in addition to those with heart disease or another chronic illness, might qualify for an enhanced annuity.

There has been a drive to increase awareness of enhanced and impaired life annuities in the U.K., but Towers Watson estimates that many people are unaware that they could qualify for higher annuity payouts.

Part of the problem is that most retirees in the U.K. buy their income annuity from their defined contribution plan provider without taking advantage of the Open Market Option, a service that enables them to choose from a wide range of annuity providers, including providers of enhanced annuities.

“Thousands of retirees are missing out on a higher retirement income because (you would assume) they were unaware that they were eligible. It would seem that until OMO [Open Market Option] is made the default option (and there is no current consensus on how this could be implemented), many will continue to miss out on a better annuity,” the company said.

© 2011 RIJ Publishing LLC. All rights reserved

August 26, 2011—So Ben Bernanke finally spoke today. And as I predicted yesterday, all the early headlines are expressing disappointment that he didn’t announce QE3. But this disappointment is misplaced. New policy announcements are for the Federal Open Market Committee (FOMC), not the Chairman. The most he could do is give an indication of where he thinks things will go.

And he thinks they should ease policy. Soon.

Here’s the case he made:

1. Unemployment is too high. This is the usual argument for easing monetary policy.

2. Inflation is below target. The usual constraint preventing this doesn’t bind.

3. The possibility that high long-term unemployment may persist “adds urgency to the need to achieve a cyclical recovery in employment.” There’s a special reason to be more aggressive.

4. “The growth fundamentals of the United States do not appear to have been permanently altered.” Dismissing the counter-argument that this is structural.

5. “[T]he Federal Reserve has a range of tools that could be used to provide additional monetary stimulus.” He’s not out of ammo.

6. The FOMC is now going to meet for two days instead of one to discuss how best to use them. They’ve got to figure out how to load the guns.

Reasons No. 1 and No. 2 are the standard case for monetary easing. No. 3 is the case for urgency. No. 4 poo-poos the naysayers. No. 5 says we can ease. No. 6 suggests he wants to. Add it up, and you have a slam-dunk case for monetary easing. And I think it’s the right case, too.

So I read this as Ben saying: “Here’s the case I’m taking back to the Federal Open Market Committee. When we meet, you’ll hear what they decide.”

This is really the strongest signal he could have sent. QE3—in some form or another—is on its way, probably in September.

The other highlight was Ben warning Congress against short-term spending cuts and fiscal shenanigans that could kneecap the recovery. I hope they’re listening.

Despite falling interest rates, fixed annuity sales increased again in the second quarter of 2011, according to the Beacon Research Fixed Annuity Premium Study. Overall, sales rose 8% to $20.4 billion from the prior quarter, and sales of all but one product type grew.

Income annuities advanced 30%, to $2.3 billion, while indexed annuities grew 18% to $8.4 billion. Fixed rate Market Value Adjusted annuities rose 4%, to $1.5 billion. Fixed rate non-MVAs fell 5% to $8.2 billion.

“We anticipated the sequential growth in both indexed and income annuities,” said Jeremy Alexander, CEO of Beacon Research. “Indexed annuity cap rates trended lower, but still looked good compared to the quarter’s declining fixed rates on annuities and CDs. Their guaranteed lifetime income benefits were especially attractive during a time of reduced consumer confidence.

“The secure personal pensions provided by income annuities were appealing for the same reason.  We also expected falling interest rates to dampen sales of both fixed rate annuity types.  But yield-seeking purchasers apparently appreciated the somewhat higher rates offered by MVAs.

“Looking ahead, we believe that indexed and income annuities will continue to do well.  The outlook for fixed rate annuities is more uncertain.  Sales may benefit from the continued flight to safety and wider credit spreads or decline due to very low credited rates,” Alexander concluded.

Year-to-date 2011 sales increased 3% to $39.3 billion from first half 2010. Growth in fixed rate non-MVAs (8% to $16.8 billion) and income annuities (2% to $4.0 billion) offset declines in fixed rate MVAs (- 4% to $3.0 billion) and indexed annuities (-1% to $15.6 billion).

Sales were flat compared to second quarter 2010. Improvements in fixed rate non-MVAs (up 4%) and income annuities (up 3%) were balanced by fixed rate MVA and indexed annuity declines of 12% and 2%, respectively.

By product type, the top companies were unchanged from the prior quarter. American National sold the most fixed-rate MVAs, Western National sold the most fixed rate non-MVAs, Allianz sold the most indexed annuities and New York Life sold the most income annuities. 

 © 2011 RIJ Publishing LLC. All rights reserved.

Mutual fund investors who maintained a diversified asset allocation strategy and didn’t pull out of equities came through the financial crisis in relatively good shape, according to Fidelity Investments’ second quarter 2011 review of 401(k) accounts.  

Fidelity analyzed participant actions during the market decline of 2008-2009 through the second quarter of this year4. The results reinforced the value of a long-term investment approach.

For participants who changed their equity allocations to zero percent between Oct. 1, 2008, and Mar. 31, 2009, the lowest months of the market downturn, and maintained this allocation through June 30 of this year, the cost to their account balance was significant. These participants experienced an average increase in account balance of only 2% through June 30.

Participants who dropped to zero percent equity but then returned to some level of equity allocation after that market decline saw an average account balance increase of 25%, a sharp contrast to those who stayed with an asset allocation strategy inclusive of equities. These participants realized an average account balance increase of 50% during the same period.

Fidelity also examined participants who stopped contributing to their 401(k)s during the same market decline of 2008-2009. These participants experienced an average increase in their account balances of 26% through the end of the second quarter, compared to 64% for participants who continued making regular contributions.

The average annual participant 401(k) contribution was $5,790 at the end of the second quarter of 2011, up 11% from the same quarter five years prior. More participants also increased their contribution rates than decreased them (6.1% vs. 2.7% respectively), a positive trend for nine consecutive quarters. Additionally, the Fidelity average 401(k) balance of $72,700 was up 19% over five years.

Of Fidelity plan sponsors, 72% defaulted participants into a target date investment option, up from only 8% five years prior. Additionally, more than half (52%) of participants utilized a lifecycle investment option, with 46% of these participants – one quarter overall – investing 100% of their 401(k) assets into the option.  

© 2011 RIJ Publishing LLC. All rights reserved.

Lack of financial sophistication costs Americans tens of billions of dollars a year in unnecessary mortgage interest and investment costs, according to research recently published by Anna Lusardi, a George Washington University expert in financial literacy.

The paper, entitled “Financial Literacy, Retirement Planning and Household Wealth,” was based on surveys in the Netherlands but the results are considered applicable to the U.S. Co-authoring the paper were Marteen van Rooij of the Dutch Central Bank and economist Rob Alessie of the University of Groningen. The paper was published this month by the National Bureau of Economic Research (NBER).

Regarding excess mortgage fees, the paper said, “Suboptimal refinancing among US homeowners result in mortgage rates that about 0.5–1% higher on average. Given the current size of the U.S. mortgage market, this is equivalent to $50–100 billion additional annual interest costs paid.”

In the matter of investment costs, the paper said that U.S. investors could save billions by investing in index funds instead of actively managed funds.

“US investors are estimated to have foregone 0.67% of average annual equity return because of fees, expenses and trading costs of active investment strategies in an attempt to beat the market,” the paper said. “This amounts to a total annual cost of about $100 billion that could have been saved by passively following the market portfolio.

Based on data gathered in the Netherlands, the researchers estimated that people with high financial literacy have a median net worth of € 185900 ($268,210), or about quadruple the median net worth of those with lowest financial literacy (€ 46700; $67,377).   

“The net worth difference associated with the difference in the 75th and 25th percentiles of the advanced financial literacy index”—those at the top and bottom of the middle 50%—“equals € 80000 ($115,426), i.e., roughly three and a half times the net disposable income of a median household,” the paper said.

People who are financially literate tend to accumulate more money over their lifetimes because they do more financial planning, invest in stocks, and diversify their assets, the researchers wrote. People who are less financially literate are discouraged from planning or acting on their plans because they are constantly faced with a high learning curve.

As Lusardi and her co-authors put it, “Financial literacy lowers the costs of collecting and processing information and reduces planning costs, thereby facilitating the execution of financial decisions and bringing down economic and psychological thresholds for stock market participation or retirement savings calculations and subsequent development of retirement plans.”

© 2011 RIJ Publishing LLC. All rights reserved.

A subgroup at the National Association of Insurance Commissioners (NAIC) is asking whether the current regulatory framework for separate accounts makes sense, and whether guarantees have a legitimate place in a separate account, the National Underwriter reported.

Members of the separate accounts subgroup at the NAIC’s Life Actuarial Task Force have included those questions in a response to a request from Joseph Torti III, the Rhode Island insurance superintendent and chair of the Financial Condition Committee at the NAIC, Kansas City, Mo.

Torti and his committee asked the actuarial task force to look into concerns “regarding a growing trend by life insurers to include non-unit linked products within the separate accounts,” according to Leslie Jones, the South Carolina insurance regulator and chair of the task force.

The analysis could come up for discussion Saturday during an actuarial task force meeting at the NAIC’s summer meeting in Philadelphia.

About 50 years ago, regulators say in the response, the U.S. Supreme Court told the Variable Annuity Life Insurance Company that it had to set up separate accounts for investment-linked variable annuities. The NAIC developed models that helped insurance regulators share oversight over the variable products with the U.S. Securities and Exchange Commission (SEC).

Holders of the unit-linked policies were insulated against problems in the insurer’s general account but also risked loss of principal, the regulators say.

Since then, insurers have used separate accounts in many other types of products, regulators say.

So far, regulators say, none of the models give a precise definition of the term “variable.”

“As a result there seems to be an increase in companies trying to take advantage of the flexibility available through separate account designs,” the regulators say.

Some products may be simple fixed products insulated against general account problems, the regulators say.

“This may create an unfair discriminatory situation, because if a product is in the separate account the policyholders may perceive that they are getting a ‘safer’ deal than if the product is in the general account,” the regulators say. “There is now law that allows regulators to constrain a company from putting a product in a separate account…. A question to explore is whether the current framework inappropriately allows for preferred classes to exist or be created within a separate account to the detriment of the general account.”

Another question to ask is what, if any, variable product guarantees would be covered by a guaranty association, the regulators say.

Still another “question to explore is whether guarantees have a legitimate place in any separate account, given the preferred class of policyholders and insulation issues discussed earlier,” the regulators say.

This question won’t seem to go away: As the Boomers switch from accumulation to decumulation and liquidate their securities, will the sell-off undermine the prices of equities and bonds?  

Since as far back as 1994, asset managers and academics have debated this question. Financial fundamentalists say that stock prices are determined by expectations of corporate earnings, not by demographics. A landmark 2004 study by MIT’s James Poterba scoffed at the threat. A 2006 GAO report offered the “inequality” argument: the deep concentration of equity ownership among the wealthy makes a broad wave of liquidations unlikely.

But, barring lots of immigration or foreign buying on Wall Street, common sense suggests that sellers will outnumber buyers in the future. Which is never a good omen for prices. So the question continues to nag.  

Among the most recent pessimistics are Zheng Liu and Mark M. Spiegel of the Economic Research Department of the Federal Reserve Bank of San Francisco. Their August 22 Economic Letter asks, “Boomer Retirement: Headwinds for U.S. Equity Markets?”

Liu and Spiegel compare demographic trends and trends in the price/earnings ratios of stocks and conclude that Baby Boomer accumulation helped inflate the stock market after 1982 and that Boomer decumulation will in due course deflate the market. 

“Between 1981 and 2000, as baby boomers reached their peak working and saving ages, the M/O ratio [the ratio of the size of the age 40-49 cohort to the age 60-69 cohort] increased from about 0.18 to about 0.74,” they write. “During the same period, the P/E ratio tripled from about 8 to 24.

“In the 2000s, as the baby boom generation started aging and the baby bust generation started to reach prime working and saving ages, the M/O and P/E ratios both declined substantially. Statistical analysis confirms this correlation.

“We estimate that the M/O ratio explains about 61% of the movements in the P/E ratio during the sample period. In other words, the M/O ratio predicts long-run trends in the P/E ratio well.”  

How far might the P/E decline? “Given the projected path for P/E* [the potential P/E ratio] and the estimated convergence process, we find that the actual P/E ratio should decline from about 15 in 2010 to about 8.3 in 2025 before recovering to about 9 in 2030,” they conclude.

Liu and Spiegel have reviewed the literature, and they admit that factors like retention of equities for bequest purposes and foreign demand for U.S. equities could dull the demographic undertow. But they note that Europeans and Asians are also getting older and are subject to the same decumulation trends. 

This question seems to be part of a larger question—will U.S. industry and workers be productive enough to support a large non-working population in the future? Will domestic companies generate high earnings, employ lots of people, and pay them salaries high enough to keep the economy churning and the prices of assets high? If equity prices decline, it won’t be because the Boomers aged per se. It will be because we didn’t collectively rise to the challenge. 

The 2006 GAO report offered a dour kind of comfort. It suggested that the threat of Social Security and Medicare insolvency, public pension underfunding, widespread financial illiteracy and other broad issues, are likely to pose much bigger problems for  the vast majority of Boomers, who never owned much in the way of stocks or bonds  in the first place. 

© 2011 RIJ Publishing LLC. All rights reserved.

Variable annuity (VA) sales jumped 16% in the second quarter when compared to the prior year, to reach $40.9 billion, according to LIMRA’s second quarter 2011 U.S. Individual Annuities Sales survey.

MetLife ousted Prudential from top spot as the leading seller of variable annuities, with $13.624 billion in sales in the second quarter. MetLife’s leading VA offers a guaranteed minimum income benefit (GMIB), in contrast to the guaranteed lifetime withdrawal benefit (GLWB) offered by the second and third leading VA sellers, Prudential Financial and Jackson National, respectively.   

“Variable annuity sales grew 20% in the first half of 2011, reaching $80.7 billion,” said Joseph Montminy, LIMRA assistant vice president, annuity research. “Recent market volatility will certainly affect third quarter VA sales but consumer demand for guaranteed income protection will continue to drive sales of VAs with guaranteed living benefit (GLB) riders. Eight-seven percent of new VA sales elected a GLB rider (when available at purchase) in the second quarter of 2011.”

Total annuity sales hit $62.4 billion in the second quarter, an increase of nine percent compared to prior year. Year-to-date, annuity sales reached $122.4 billion, improving 13 percent from the first six months of 2010. For the fifth quarter in a row, VA sales have improved, boosting overall annuity sales.

Fixed annuity sales continue to struggle in the current low interest rate environment, falling one percent in the second quarter compared to prior year. However, at $21.5 billion, fixed annuity sales grew six percent compared to the first quarter of 2011. In the first half of 2011, total fixed annuity sales grew one percent over prior year, reaching $41.7 billion.

After a strong first quarter, book-value sales recorded a slim one percent increase to $8.5 billion in the second quarter of 2011 compared to the second quarter of 2010. Year-to-date, book-value sales grew six percent, to reach $17.2 billion.

Market-Value Adjusted (MVA) sales declined in the second quarter of 2011, down 13 percent to $1.4 billion when compared to prior year. Year to date, MVA sales dropped 3%, totaling $2.8 billion.

While indexed annuity sales declined one percent in the second quarter of 2011 when compared to prior year, sales increased 14% from the first quarter of 2011, to reach $8.1 billion. This brings indexed annuity sales close to the record levels experienced in 2010.

Immediate annuities posted record sales results in the second quarter, up 5% compared to prior year and 22% from prior quarter, to reach $2.2 billion.

Securian buys two more insurers

Securian Financial Group is acquiring American Modern Life Insurance Company (AMLIC) and its subsidiary, Southern Pioneer Life Insurance Company (SPLIC), from American Modern Insurance Group, Cincinnati, OH, the St. Paul-based insurer said in a release. The transaction is expected to close by the end of the year following regulatory approval.

The acquisition will increase the scale of Securian’s credit protection business by 25%. Securian will integrate the acquired business into its St. Paul operations in 2012. American Modern will provide transition services until integration is complete.

AMLIC and SPLIC’s products are similar to those offered by Securian, including credit life and disability insurance and debt protection programs provided to customers of financial institutions.

With more than 50 years of experience in the financial institution market, Securian is the third largest underwriter of credit life and disability insurance in the United States measured in direct written premium according to the Consumer Credit Industry Association (CCIA).

In July, Securian announced its acquisition of Balboa Life Insurance Company and Balboa Life Insurance Company of New York.

New T. Rowe Price bond fund combines higher risk with floor 

T. Rowe Price has introduced a Floating Rate Fund (PRFRX) for individual investors. The new no-load mutual fund is T. Rowe Price’s second new bond fund launch this year, after the Emerging Markets Local Currency Bond Fund (PRELX).

The Floating Rate Fund invests in loans to below investment grade companies in search higher yields while providing some protection against interest rate risk. 

The minimum initial investment in Floating Rate Fund is $2,500 or $1,000 for retirement plans or gifts or transfers to minors (UGMA/UTMA) accounts. The net expense ratio is estimated to be 0.85%.

The Floating Rate Fund invests in floating rate loans or leveraged loans, which have interest rates that reset either quarterly or monthly, usually to a certain percentage above the London Interbank Offered Rate or LIBOR.

These loans are arranged or syndicated by banks for companies that usually have a significant level of debt relative to equity and whose loans are rated below investment grade in terms of creditworthiness. Often, the loans are used for recapitalizations, acquisitions, leveraged buyouts, and refinancings.

Many floating rate loans also have a LIBOR floor, which means they pay a certain interest rate even if LIBOR falls. In today’s low interest rate environment, LIBOR floors can be especially attractive as they could provide better current income than comparable loans without floors. As of July 31, 2011, about 47% of the loans in the Floating Rate Fund have a LIBOR floor.  

“The Floating Rate Fund has more credit risk than a fund investing in investment-grade securities, but it also can be used to manage interest rate risk and provide higher yields,” said Stuart Ritter, a T. Rowe Price planner.  

T. Rowe Price manages $2.2 billion in floating rate strategies as of June 30, 2011, and has managed the Institutional Floating Rate Fund (RPIFX) for advisors and institutional investors since its launch in 2008.

Justin Gerbereux and Paul Massaro, managers of T. Rowe Price’s Institutional Floating Rate Fund, will manage the new Floating Rate Fund for individual investors.

“This fund should not replace low-risk bond investments in a diversified portfolio, as it is a sub investment-grade asset class. However, loans usually are at the top of the capital structure, which means that they are among the first to be paid in the event of a default,” said Gerbereux in a release.

A Forrester Research Inc. survey commissioned by T. Rowe Price in the second quarter of 2011 showed that 56% of investors do not understand that the market prices of existing bonds fall when prevailing interest rates rise, and vice-versa.      

Zurich appoints Lance Henderson

Zurich has appointed Lance Henderson as head of sales, Corporate Life and Pensions North America for Global Life. Henderson will manage the Corporate Life & Pensions sales force in North America, with responsibility for strategy and marketing initiatives. Henderson, who will be based in Edina, MN and report to Sherif Zakhary, head of Corporate Life & Pensions North America for Global Life, had been Regional Director–Americas for Allianz Group, where he was responsible for managing an employee benefits network in the Americas, Middle East and Africa.

He previously worked with American International Group as deputy director in the International Benefits Division. Mr. Henderson holds a bachelor’s in Business Administration from Valparaiso University and is a Certified Employee Benefits Specialist and a certified member of the Health Insurance Association of America.  

The Hartford expands into structured settlement annuity market

The Hartford is re-entering the structured settlement annuity market as part of an ongoing strategy to grow its annuity business, the company announced today.

The Hartford’s Structured Settlement Fixed Annuity, issued by Hartford Life Insurance Co., provides tax-free payouts to people who receive settlements related to a workers’ compensation or personal injury claim.   

The Hartford also offers medical underwriting for structured settlements, a capability that not all carriers are able to provide. Because structured settlement recipients sometimes have accident-related injuries that can reduce their life expectancy, medical underwriting can potentially increase their periodic payments.

The Hartford, which has an “A” (Excellent) financial strength rating from A.M. Best, had $7.6 billion in assets under management (AUM) related to structured settlement annuities and $91.3 billion in total annuity AUM as of June 30, 2011.

New York Life reports record immediate annuity sales 

New York Life sold over $1 billion worth of fixed immediate annuities in the first half of 2011, the company reported. That was more than any other issuer and represented an increase of 26% over the same period last year. New York Life SPIAs are sold by New York Life agents and third-party distributors.   

Sales of New York Life’s affiliated mutual funds (MainStay Funds) are up 62%, totaling more than $9 billion in the first six months of the year, with sales in third-party channels accounting for more than $5 billion of the total. According to Barron’s magazine, MainStay Funds ranked third out of 46 fund families for the 10-year period ended December 31, 2010 − the second year in a row that MainStay commanded the number three spot.

NY Jets and NY Giants to play in new MetLife Stadium

MetLife has announced the signing of a 25-year agreement with the NFL’s New York Giants and New York Jets to name the New Meadowlands stadium in East Rutherford, N.J., MetLife Stadium.   

“MetLife Stadium is one of the highest-profile stadiums in the country with more than two million fans attending events every year, and it will host Super Bowl XLVIII in February 2014. As home to the Jets and Giants, it is the only stadium that houses two NFL teams, both of which are ranked among the top-five most valuable franchises in the league and have substantial national fan bases,” the company said in a release.

“MetLife’s influence in the home of the Giants and Jets will be impossible to overlook,” said Steve Tisch, chairman and executive vice president of the New York Giants. “We are pleased to partner with such a well-respected company, and be closely associated with the signature MetLife assets.”

The MetLife Stadium agreement makes MetLife the official insurance company of the Jets, Giants and the stadium complex, and includes interior and exterior branding on the venue. Specific elements of the agreement include: naming rights to the stadium; 120,000 square feet of branded space at the main west entrance; four illuminated signs on the exterior of the building; four inner-bowl signs; and TV, radio, print and online media opportunities.

Why is everyone still referring to the recent financial crisis as the “Great Recession”? The term, after all, is predicated on a dangerous misdiagnosis of the problems that confront the United States and other countries, leading to bad forecasts and bad policy.

The phrase “Great Recession” creates the impression that the economy is following the contours of a typical recession, only more severe – something like a really bad cold. That is why, throughout this downturn, forecasters and analysts who have tried to make analogies to past post-war US recessions have gotten it so wrong. Moreover, too many policymakers have relied on the belief that, at the end of the day, this is just a deep recession that can be subdued by a generous helping of conventional policy tools, whether fiscal policy or massive bailouts.

But the real problem is that the global economy is badly overleveraged, and there is no quick escape without a scheme to transfer wealth from creditors to debtors, either through defaults, financial repression, or inflation.

A more accurate, if less reassuring, term for the ongoing crisis is the “Second Great Contraction.” Carmen Reinhart and I proposed this moniker in our 2009 book This Time is Different, based on our diagnosis of the crisis as a typical deep financial crisis, not a typical deep recession. The first “Great Contraction” of course, was the Great Depression, as emphasized by Anna Schwarz and the late Milton Friedman. The contraction applies not only to output and employment, as in a normal recession, but to debt and credit, and the deleveraging that typically takes many years to complete.

Why argue about semantics? Well, imagine you have pneumonia, but you think it is only a bad cold. You could easily fail to take the right medicine, and you would certainly expect your life to return to normal much faster than is realistic.

In a conventional recession, the resumption of growth implies a reasonably brisk return to normalcy. The economy not only regains its lost ground, but, within a year, it typically catches up to its rising long-run trend.

The aftermath of a typical deep financial crisis is something completely different. As Reinhart and I demonstrated, it typically takes an economy more than four years just to reach the same per capita income level that it had attained at its pre-crisis peak. So far, across a broad range of macroeconomic variables, including output, employment, debt, housing prices, and even equity, our quantitative benchmarks based on previous deep post-war financial crises have proved far more accurate than conventional recession logic.

Many commentators have argued that fiscal stimulus has largely failed not because it was misguided, but because it was not large enough to fight a “Great Recession.” But, in a “Great Contraction,” problem number one is too much debt. If governments that retain strong credit ratings are to spend scarce resources effectively, the most effective approach is to catalyze debt workouts and reductions.

For example, governments could facilitate the write-down of mortgages in exchange for a share of any future home-price appreciation. An analogous approach can be done for countries.  For example, rich countries’ voters in Europe could perhaps be persuaded to engage in a much larger bailout for Greece (one that is actually big enough to work), in exchange for higher payments in ten to fifteen years if Greek growth outperforms.

Is there any alternative to years of political gyrations and indecision?

In my December 2008 column, I argued that the only practical way to shorten the coming period of painful deleveraging and slow growth would be a sustained burst of moderate inflation, say, 4-6% for several years. Of course, inflation is an unfair and arbitrary transfer of income from savers to debtors. But, at the end of the day, such a transfer is the most direct approach to faster recovery. Eventually, it will take place one way or another, anyway, as Europe is painfully learning.

Some observers regard any suggestion of even modestly elevated inflation as a form of heresy. But Great Contractions, as opposed to recessions, are very infrequent events, occurring perhaps once every 70 or 80 years. These are times when central banks need to spend some of the credibility that they accumulate in normal times.

The big rush to jump on the “Great Recession” bandwagon happened because most analysts and policymakers simply had the wrong framework in mind. Unfortunately, by now it is far too clear how wrong they were.

Acknowledging that we have been using the wrong framework is the first step toward finding a solution. History suggests that recessions are often renamed when the smoke clears. Perhaps today the smoke will clear a bit faster if we dump the “Great Recession” label immediately and replace it with something more apt, like “Great Contraction.” It is too late to undo the bad forecasts and mistaken policies that have marked the aftermath of the financial crisis, but it is not too late to do better.

Kenneth Rogoff is Professor of Economics and Public Policy at Harvard University, and was formerly chief economist at the International Monetary Fund.

© Project Syndicate, 2011.