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It’s Crunch Time for Annuity Issuers: Conning Research

Posted on May 12, 2010 by Editor Test -

Now that annuity issuers have patched up their vessels from the storm of the financial crisis, they need to think about increasing sales. But, given the end of the variable annuities arms race and a decline in 1035 exchanges, fresh premium is scarce.

Growth will have to come from a new opportunity—providing income guarantees to the defined contribution market, for instance—or from capturing a larger share of the market, or from acquisitions.

That is the thrust of a new study from Conning Research & Consulting.

“The first priority for individual annuity insurers following the financial crisis has been to rebuild capital,” said Scott Hawkins, analyst at Conning Research & Consulting. “Insurers have made significant progress in repairing their capital positions.

“At the same time, premiums have actually declined, and rebuilding them will be a challenge. As insurers seek new growth, each will analyze and leverage their unique competitive advantages to position themselves for either organic or acquisitive growth,” he added.

The Conning Research study, “The Real Challenge in Rebuilding Individual Annuities: Developing Competitive Advantage in a Concentrating Market” reviews the recent history of concentration and consolidation that has altered the competitive landscape and premium growth rate.

Looking forward, the study addresses key strategies that will distinguish successful competitors in this new environment.

“Individual annuity insurers have responded to a slowing rate of growth over the past fifteen years with product development heavily focused on variable annuity benefits,” said Stephan Christiansen, director of research at Conning.

“Yet as insurers look to the future, it is unlikely that enhancing benefits alone will provide the support it has in recent years. Our analysis points to the need for insurers to refine their individual success factors, including superior product development, distribution effectiveness and new market penetration,” he said.

“The Real Challenge in Rebuilding Individual Annuities: Developing Competitive Advantage in a Concentrating Market” is available for purchase from Conning Research & Consulting by calling (888) 707-1177 or by visiting the company’s web site at www.conningresearch.com.

TIAA-CREF Comments on Retirement Income

Posted on May 5, 2010 by Editor Test -

TIAA-CREF, which administers some 15,000 retirement plans for some 3.6 million participants, most of them university employees and staff, has filed a 29-page response to the Department of Labor’s request for information on retirement income.

Like many of the individuals who responded to the RFI since early February, TIAA-CREF took a position against mandatory annuitization of defined contribution assets.

“Automatically placing participants in a lifetime income option has the potential to confuse, anger, and ultimately drive participants away from annuities, while having little positive impact on the overall take-up rate for annuities as an income option,” wrote Larry Chadwick, the organization’s vice president for government relations public policy.

The organization also recommended that the DoL prepare educational materials on lifetime income that plan sponsors could use without worrying about liability.

“General educational materials prepared by the DOL would help mitigate this concern, especially if the DOL would take the position that plan sponsors would not be liable for distributing materials prepared by the DOL on this subject,” the brief said. “In addition, the DOL can offer guidelines and templates for insurance companies to provide educational materials relating to lifetime income options.”

TIAA-CREF had a lot to say about complexities involved in turning defined contribution savings into a joint and survivor annuity.

“One of the disadvantages of in-plan options is that Qualified Joint Survivor and Annuity (QJSA) rules can often be cumbersome, confusing, and difficult to administer resulting, in some cases, in a delayed start to receiving annuity payments. This is one area where the Internal Revenue Service (IRS) could offer some relief by taking steps to ease this burden through regulatory action,” the brief said.

“The most critical plan qualification rule affecting a DC plan sponsor’s willingness to provide for a lifetime income option involves the qualified joint and survivor annuity (QJSA) rules under IRC §401(a)(11) and IRC §417, as well as ERISA §205 (with respect to §401(a) and §403(b) plans respectively). Certain plans are exempt from the QJSA rules provided they satisfy all three of the exemption criteria. IRC §401(a)(11)(B)(iii)(II) (and parallel ERISA section 205) provides that a plan that provides a life annuity payment option cannot be exempt from the QJSA rules.

“The extensive notice and waiver requirements that are triggered once a plan is subject to the QJSA rules provide an additional layer of administrative complexity, costs, and risk for non-compliance and associated corrections. As a result, many DC plans are designed to be exempt from the QJSA rules.

“Consequently, many plans will avoid lifetime income options solely to avoid the QJSA rules, even if such options may ultimately be beneficial for the participants. To make such options viable, the QJSA rules should be amended to provide for a means to have annuity payment options available under the plan without triggering all the QJSA rules and specified means of payment, while still protecting spousal rights and the related policy objectives.

“One approach would be to maintain the spousal beneficiary rules with respect to all forms of payment, including multiple life annuity forms, absent a waiver, and to require a spousal consent for a single life annuity form of payment that does not include a 50% spousal benefit.

“Another potential remedy is to not apply QJSA rules until a participant elects an annuity and then only if the annuity is not a QJSA. This can be accomplished with little burden to plan sponsors since insurance companies would be willing to administer these rules as part of the annuity contract.”

From GAO, a Primer on Retirement Income

Posted on May 5, 2010 by Editor Test -

The Government Accountability Office, which has researched retirement income several times in the past, delivered its latest report on the topic to Senator Herb Kohl (D-WI), chairman of the Senate Special Committee on Aging, on April 28.

Kohl, whose committee will hold hearings on the state of retirement income next month, had asked the GAO to examine the “options that retirees have for drawing on financial assets to replace preretirement income,” the “options retirees choose,” and “how pensions, annuities and other retirement savings vehicles are regulated.”

The GAO’s report, “Retirement Income: Challenges for Ensuring Income throughout Retirement,” surveys the landscape of retirement income thoroughly, without offering many surprises for close followers of the defined contribution and individual annuity markets. For the person who’s new to this topic, or who wants a handy compendium of facts and figures on this subject, it could be highly valuable.

The report shows, for instance, that Americans over age 65 live on income from Social Security, employer-sponsored defined benefit pensions, distributions from defined contribution plans, individual annuities, investments in stocks, bonds, and mutual funds, and earned income.

For most people, it doesn’t add up to much. After reading the report, you’re likely to be left with the impression that the median American retiree—if such a notional character exists—will start retirement with under $50,000 in guaranteed household income and perhaps $100,000 in savings.

Whether that amount can suffice will undoubtedly vary from household to household, depending on home equity, health, region and a near-infinite range of other variables. Among some policyholders, it indicates a national retirement crisis.

Social Security

Extrapolating from the GAO data, it appears that for people who earned between about $48,000 and $106,800 during their working years, Social Security benefits average about $25,000 per year.

For people who made less than that, Social Security payments will be lower but will replace a higher percentage of their former income. For people who are used to making over $100,000, Social Security payouts will level off at about $25,000 but replace a declining percentage of their former income.

As the GAO puts it, “Social Security benefits for retired workers at full retirement age (age 66) in 2010 provide 90% of the first $761 of average monthly indexed earnings, 32% of additional earnings up to $4,586, and 15% of earnings above $4,586, up to the limit on the annual base of covered earnings each year or $106,800 per year ($8,900 per month) in 2010.”

The GAO doesn’t calculate the present value of Social Security benefits for the average person. But its figures suggest that a new retiree would need about $400,000 to purchase a retail income annuity that would produce an annual income equal to the average Social Security benefit.

Even then, the annuity income wouldn’t have the inflation-adjustments that Social Security has. If you consider that the average household saves only around $100,000 by retirement, the value of Social Security to the average person looms large.

Defined benefit pensions and annuities

Many Americans are still eligible for defined benefit pensions. The ones who aren’t are not making up for it by buying income annuities. About one in three American households still had a traditional defined benefit pension plan in 2007, according to Survey of Consumer Finances data cited by the GAO. In that year, according to the IRS, the average combined taxable pension and annuity income was $19,500.

Of that amount, the portion attributable to annuity income would appear to be negligible. Few households—about 6% percent—owned individual annuities in 2007. Only 3% ($8 billion) of the total amount of annuities sold in 2008 was fixed immediate annuities, designed solely to provide lifetime income.

The GAO indicated concern about the costs of variable annuities with lifetime income guarantees, noting, “one variable annuity prospectus we reviewed indicated that maximum expenses for a $10,000 investment and a 5% annual rate of return could exceed $7,000 over a 10-year period.”

Defined contribution plans and investments

Of the people who have DC plans and taxable investments, few have balances large enough at retirement to buy an income annuity that pays as much as the average DB pension. In 2007, before the recent recession, half of the households with someone aged 55 to 64 had financial assets of $72,400 or less.

An estimated 61% of households “at or nearing typical retirement age” have a defined contribution plan account or an IRA, as of 2007. The median account value was only $98,000. At current rates, that would purchase a fixed income of less than $6,500 a year for a 65-year-old couple, GAO figures showed.

About one in five households headed by someone ages 55 to 64 holds stocks directly, with a median value of $24,000, while 14% hold pooled mutual funds, with a median value of $112,000. Only 2% held bonds directly, which had a median value of $91,000.

It might be inferred from those figures that wealthier people hold bonds, but it’s not clear. Certificates of deposit are held by 21% of near-retirement households, with a median total value of $23,000. An estimated 35% of those households had cash value life insurance, with a median value of $10,000.

The Hidden Risk in Target Date Funds

Posted on May 5, 2010 by Ron Surz -

Choosing the appropriate target date fund (TDF) for an investor is not easy, given the large number of products in the marketplace and the lack of tools to easily compare those offerings. That choice, however, is made a lot easier if one focuses on the component of TDFs where investors are exposed to the greatest risk—what I call the “risk zone.”

The risk zone is the five to ten years before and after retirement. During this period, investors are least able to tolerate the impact of adverse market conditions, where significant dollar losses in their portfolio can be offset only by reductions in their standard of living.

The risk zone is also critical from the plan sponsor’s perspective. Older, more senior, employees are more likely to sue, or at least make their voices heard, than are younger employees with smaller account balances. Employers should fear the risk zone for both its litigation threat and its importance to employee morale. Fiduciaries need to set objectives for the risk zone, and safety first should be the order of the day.

Glide paths of TDFs differ markedly as they approach the risk zone, and this divergence creates a hidden risk for investors. Without understanding the implications of an excessively risky glide path in the risk zone, investors may face painful choices in their retirement. I have created a simple metric, which I explain below, that can help advisors and investors choose the right TDF.

Equity Allocation of Target Date Funds We need to be especially diligent and protective during the risk zone, but how do we measure and evaluate safety in this critical period? As shown in the graph on the right, TDFs have a wide range of equity exposures in the risk zone; they disagree about the appropriate level of risk. The range of equity allocations widens as retirement approaches.

The Safe Landing Glide Path^TM (SLGP) is also shown in the graph. The SLGP^TM is designed to achieve two common sense objectives:

Build a portfolio that, at retirement, delivers to each participant at a minimum his or her accumulated contributions plus inflation.
Grow assets as much as possible without jeopardizing the first objective.

The safety-first objective necessitates an end point where the fund is invested mostly in safe inflation-protected assets, such as TIPS and T-bills.

Let’s consider the risk and reward trade-offs for varying equity exposures in the risk zone. Since investors should be concerned with lifestyle risk, I define risk as a dollar loss rather than percentage loss. Losing 10% of a one-dollar portfolio is significantly less painful than losing 10% of a million-dollar savings account.

Lifestyle in retirement depends on money, not percentages. Accordingly, I have measured ending wealth and risk for all 40-year glide paths from 1926 through 2009. There are 44 such 40-year paths ending in calendar years. I assumed that the investor contributes $1,000 initially and increases this $1,000 by 3% per year, roughly equal to the historical inflation rate. I measured risk as the dollar-weighted downside deviation, and “reward” as the dollar growth. I also analyzed just the last 10 years of the glide path to focus on the risk zone. There are 74 such 10-year periods.

I compared the reward (dollar growth) and risk (of dollar loss) of the SLGP^TM target date fund to that of the average TDF, shown as the middle line in the graph above. The glide path of the SLGP^TM ends almost entirely in safe assets, whereas the typical TDF ends with 40% in equities because it is a “through” fund designed to continue beyond the retirement date, so it is substantially riskier in the risk zone. The results for the ratio of reward (ending wealth) to risk (dollar-weighted downside deviation) are as follows:

Reward-to-Risk Ratios 1926-2008

The SLGP^TM unsurprisingly delivers superior reward-to-risk in the last 10 years before retirement. Somewhat surprisingly, however, the reward-to-risk ratios are about the same for the entire 40 years prior to retirement, primarily because the glide paths of the two approaches are similar for the first 25 of those 40 years. When viewed over the continuum of their lives, TDFs look deceptively similar; their hidden risk is revealed only when one examines the risk zone.

Danger: Risk of Large Losses Enlightened advisors should focus on the risk zone in their TDF selection. Most TDFs provide similar asset allocations prior to the risk zone, and then diverge widely in their equity exposures as the target date nears. Most TDFs view the target date as a speed bump on the highway of life, ignoring the risk zone altogether. During this critical period TDFs demonstrate their mettle, by protecting or not.

“Safety first” is the right choice as the target date nears because lifestyles are at stake. Advisors can help protect their clients from lifestyle risk by choosing the right TDF.

For an entertaining and informative description of the risk zone, and an explanation of why spending is harder than saving, please see the video of Prof. Moshe Milevski, York University, at Return sequence risk.

Ron Surz is president of Target Date Solutions.

Top 10 Bank Holding Companies in Annuity Fee Income

Posted on May 5, 2010 by Editor Test -

Top 10 Bank Holding Companies in Annuity Fee Income (Millions)
	2009	2008	Change
Wells Fargo & Co.	$678.00	$118.00	474.6%*
JPMorgan Chase & Co.	328.00	363.00	-9.6%
Morgan Stanley	253.00	N/A	N/A
Bank of America Corp.	251.83	145.89	72.6%
PNC Financial Services	121.28	69.50	74.5%
Regions Financial Corp.	93.53	109.50	-14.6%
SunTrust Bank Inc.	80.46	123.84	-35.0%
US Bancorp	66.00	100.00	-34.0%
KeyCorp	60.73	56.42	7.6%
BB&T Corp.	46.07	45.94	0.39%
Source: Michael White-ABIA Bank Annuity Fee Income Report *Reflects acquisition of Wachovia Bank.

US Mutual Fund Inflows On Record Pace

Posted on May 5, 2010 by Editor Test -

US mutual fund investors have put nearly $200 billion into stock and bond mutual funds so far in 2010, making it likely that full-year net inflows would top $450 billion. That would make 2010 a record year, according to Strategic Insight.

The previous record was set last year, when just over $400 billion went into long-term funds, according to Strategic Insight’s Simfund database. These figures include open- and closed-end mutual funds and funds underlying variable annuities, but exclude ETFs.

Inflows have been this high this early in only one previous year—in 2007, when net inflows to stock and bond funds totaled more than $210 billion.

“Lately we are observing the early signs of thawing of investors’ reluctance to get back on the stock market train,” said Avi Nachmany, SI’s Director of Research. “Assuming further economic and employment improvements in the coming months, more such investors should inch higher in their risk curve. But turmoil in Europe and the fragility of the US recovery are just a few of the many concerns still on investors’ minds.”

For all of 2010, Strategic Insight projects that US stock and bond fund new sales are on track to rise 20% (or more) from their 2009 pace. Net inflows are new sales minus investors’ redemptions out of funds.

Worldwide, mutual fund investors have added nearly $1.4 trillion of net flows to bond and stock funds since March 2009’s market bottom, according to Strategic Insight’s Simfund databases, which track more than $20 trillion of fund assets globally. About half of these gains occurred in the US. This year through early May, global inflows to stock and bond funds are nearing $400 billion.

ING Responds to Income RFI

Posted on May 5, 2010 by Editor Test -

ING Insurance U.S. announced today that it has filed suggestions and comments in response to the Department of Labor and the Department of Treasury (the Agencies) joint request for information on lifetime income options for participants and beneficiaries in retirement plans.

Through its filing, ING supports a number of key positions with respect to lifetime income products, while recognizing certain items need to be addressed in order for these products to be more widely embraced by employees who save in a workplace plan. These include the following:

1. ING broadly supports investing in guaranteed lifetime income options within a retirement plan. Retail products, such as individual IRAs or guaranteed income annuities, are also important vehicles for consumers to plan for and manage retirement assets.

2. Regulations must be simplified and clarified in order to address employer fiduciary and administrative concerns. Employers and plan fiduciaries should be given a streamlined fiduciary standard with more objective criteria than exists under current ERISA regulations. Some of the administrative burdens that come with carrying annuities need to be eased in order to attract more employers to offer these types of products.

3. The workplace is the best time to reach participants with materials, resources and communications that can increase their financial literacy and positively influence their behavior.

4. Offering and investing in guaranteed lifetime income options should be encouraged but not mandated. Plan sponsors and participants indicates a prefer choice and control when it comes to plan design and benefit distribution matters.

5. A desirable strategy for many workers would include investing a portion of one’s retirement assets in a lifetime income product. Plans that offer lifetime income distribution strategies tend to present this option to employees as an “all or nothing” decision with respect to their account balance. ING favors steps that would encourage individuals to complete a financial plan and then commit only an appropriate portion of their account balance to a guaranteed income stream, while retaining control of the uncommitted balance.

Lincoln Financial Group Profitable So Far in 2010

Posted on May 5, 2010 by Editor Test -

Lincoln Financial Group net income for the first quarter of 2010 of $283 million, including net realized losses of $27 million, compared to a net loss in the first quarter of 2009 of $579 million, which included net realized losses of $136 million.

The current quarter included income from discontinued operations of $28 million, including a gain on the disposition of Lincoln UK and Delaware Investments. The first quarter of 2009 included a non-cash charge of $600 million, after tax, for the impairment of goodwill in the annuity business.

The Individual Annuities segment reported operating income of $119 million in the first quarter of 2010, up from $74 million a year ago, reflecting a 34% increase in average annuity account values. The first quarter of 2010 included a net positive after-tax impact of approximately $21 million, primarily from DAC unlocking.

Gross annuity deposits were $2.3 billion and net flows were $575 million, up 4% and 34%, respectively, versus the prior year.

Income from Defined Contribution operations was $36 million, up from $30 million a year ago, reflecting a 26% increase in the average account values.

Gross deposits of $1.3 billion were down 16% versus the prior year quarter. Total net flows in the current quarter were $109 million, down from $657 million in the 2009 quarter. The year-over-year declines are primarily attributable to the timing of the placement of a few large cases.

The first quarter income from operations was $276 million, up from $163 million in the first quarter of 2009. Income from operations in the current quarter reflected growth in average variable account values driven by positive net flows and improvement in equity markets, favorable unlocking of deferred acquisition costs (“DAC”) in the annuity business and unfavorable mortality in the individual and group life businesses.

Genworth Financial Announces 1Q 2010 Results

Posted on May 5, 2010 by Editor Test -

Genworth Financial is much healthier than it was a year ago.

The Richmond-based company reported net income of $212 million in the first quarter of 2010 (before provision for non-controlling interests), compared to a loss of $469 million in the first quarter of 2009. Net operating income was $147 million, up from $14 million a year ago.

Genworth’s results in the quarter included net operating income of $122 million from the Retirement and Protection segment and $91 million from the International segment. This was partially offset by lower net operating losses of $36 million in the U.S. Mortgage Insurance (U.S. MI) segment and a loss of $63 million in Corporate and Other. The impact of foreign exchange on net operating income in the first quarter of 2010 was a favorable $19 million.

Net income in the quarter included a $106 million tax benefit related to separation from the company’s former parent recorded in the first quarter of 2010.

The company spun off ownership of 42.5% of Genworth MI Canada last fall with an initial public offering (IPO) transaction, raising net income available to common stockholders to $178 million the first quarter of 2010. On the same basis, net operating income available to common stockholders for the first quarter of 2010 was $114 million.

Net investment losses, net of tax and other adjustments, decreased to $42 million from $483 million in the first quarter of 2009, and decreased on a sequential basis from $54 million in the fourth quarter of 2009. Net unrealized investment losses, net of tax and other adjustments, declined to $900 million from $4.1 billion in the prior year quarter.

Retirement and Protection earned $122 million compared to $38 million a year ago. Consolidated U.S. life insurance companies ended the quarter with an estimated RBC ratio of approximately 385%.

Retirement income fee-based earnings increased to $17 million from a $27 million loss in the prior year. Results in the prior year were significantly impacted by declines in the equity markets, which accelerated deferred acquisition cost (DAC) amortization and reduced variable annuity income. Earnings in the current quarter reflected equity market growth, lower death related claims and an $8 million favorable DAC amortization adjustment. Total variable annuity sales increased to $205 million compared to $143 million in the prior year from improved equity market conditions.

The retirement income spread-based business had net operating income of $17 million compared to a loss of $20 million in the prior year from improved investment income. Earnings in the prior year included a $39 million loss from lower valuation of limited partnership (LP) investments. Total spread-based AUM remained flat sequentially ending at $18.9 billion reflecting the company’s targeted annuity strategy and favorable persistency.

Life insurance earnings decreased to $37 million from $38 million a year ago as improved investment income and lower taxes were more than offset by less favorable mortality, lower persistency on policies coming out of the post level term period and a $5 million unfavorable correction related to the calculation of ceded reinsurance premiums.

Total life sales reflected a mix shift to the new more capital efficient product suite as well as lower universal life (UL) excess deposits associated with the low interest rate environment. Sales from the combination of term life insurance and the new Colony Term UL product grew 26% versus the prior year and 9% sequentially. The more capital efficient Colony Term UL product, in late 2009, demonstrated strong producer adoption.

LTC earnings declined $1 million to $40 million, as higher net investment income was more than offset by higher claims on old generation policies and a return to lower levels of policy terminations experienced historically. Individual LTC sales increased $7 million year over year, primarily reflecting growth in overall industry sales. Group LTC sales increased to $8 million in the quarter from $1 million a year ago, while linked benefit sales grew to $11 million from $5 million a year ago.

Wealth management earnings increased from $6 million to $11 million primarily from increased revenue associated with a 41% increase in assets under management (AUM) and also included a $2 million favorable tax item. Net flows were $504 million, representing the fourth consecutive quarter of positive net flows. This, combined with favorable market performance, resulted in a $1.2 billion sequential increase in AUM to $20.0 billion.

The Savings Sweepstakes

Posted on May 5, 2010 by Kerry Pechter -

Eighty-six-year-old Billie June Smith of tiny Lake, Michigan, was beaming last February 4 as she stepped forward to accept a check for $100,000 from Steve Winninger, CEO of the NuUnion Credit Union.

At the ceremony in Lansing, the state capital, she held a cardboard mock-up of her sweepstakes check. Measuring about 4′ by 2′, the check was nearly as wide as she was tall.

Luck and thrift had brought Ms. Smith to Lansing. She was one of more than 11,600 Michiganders who deposited over $8.6 million in accounts at one of eight credit unions around the state in 2009. Each depositor was eligible for small monthly cash drawings and an annual grand prize of $100,000.

And her ticket number was drawn for the big one.

A lottery? At a credit union? Bingo! No, this wasn’t some maverick banker’s update on 1950s toaster giveaways. It’s part of a grassroots campaign based on the research of Peter Tufano of the Harvard Business School and a Boston-based nonprofit he chairs, the Doorways to Dreams Fund (D2D).

Life-altering prizes

As millions of Americans reel toward retirement without adequate savings, policymakers and 401(k) plan providers have conjured up lots of different strategies to encourage low- and middle-income people to start saving more.

This effort has produced carrot or stick solutions like auto-enrollment in retirement plans, the proposed Saver’s Credit, tax breaks on saving for health care, college tuition, retirement and long-term care, and research into framing and choice architecture. Yet many Americans still lack the means, motive or opportunity to save adequately.

But they do buy lottery tickets, to the tune of about $60 billion a year in 42 states. So Tufano urges policymakers to channel that compulsion into thrift by linking savings accounts to irresistible, “life-altering” cash prizes.

Instead of buying chances to win, people get tickets for savings. The more money they sock away, the more tickets they get. The yields on savings are small, just like the chances of winning the grand prize. But to many people, the size of the prizes, psychologically, seems to make up for it in both cases. In prize-linked savings programs, participants at least get return of principal.

“Fifty percent of Americans say they can’t lay their hands on $2,000 in 30 days—not from savings, from a bank loan, or from friends or family,” said Tufano, who presented a paper on prize-linked savings programs at the Pension Research Council’s conference on financial literacy, held last week at the University of Pennsylvania’ Wharton School of Business.

“But in 2008, Americans spent an average of more than $540 per household nationwide on state lotteries,” said Tufano, who co-authored the paper, “Making Savers Winners,” with Erick Hurst, Melissa S. Kearney and Jonathan Guryan. “In Massachusetts, people spent an average of $725 per person on lotteries. In the same year, American households spent $430 on all dairy products and $444 on alcohol. We buy more lottery tickets than milk or beer.”

“You have to go where the people are,” he said, rather than try to persuade them to come to where you are.

Unfortunately, prize-linked savings programs are illegal in the United States—except in credit unions. That’s where Doorways to Dreams has directed much of its effort, by organizing pilot prize-linked savings programs at credit unions in Michigan and elsewhere.

It’s not too surprising that prize-linked savings programs are illegal, and not just because they’d break the monopoly on lotteries that state governments currently enjoy. Even if the programs help the masses save, does it make sense to enrich a tiny fraction of them with jackpots while depriving the rest of decent compound interest? And they can hardly be said to make people more financially literate.

But that may not matter. One of America’s leading experts on financial literacy, Dartmouth’s Annamaria Lusardi, is a fan of Tufano’s work.

“What Peter is doing is combining what people like to do into a financial instrument,” said Lusardi, who co-organized last week’s conference with Pension Research Council director Olivia Mitchell. “If low-income people think they only way to become rich is to play the lottery, why don’t we offer an instrument that allows them to save and to play the lottery? I do not find anything paternalistic about it. Quite the opposite. The return may be low, but the objective is to make people save.”

Mentioned by Jethro Tull

Prize-linked savings programs do seem to have a productive track record. As Tufano’s research shows, these schemes been used in various parts of the world since the 17th century. In Britain, a government agency called the National Savings & Investments has been marketing Premium Savings Bonds for over 50 years.

First sold in England in 1956 to encouraged savings after World War II, Premium Bonds are now owned by 26 million Britons with £26 billion ($39.4 billion) invested. Each month’s prize fund—the top prize is £1 million ($1.5 million)—equals a month’s interest (currently 1.5%) on the principal. The minimum single purchase is £100, which buys 100 chances to win. The maximum account balance is £30,000.

(Tufano’s research shows that the premium bond has even appeared in the lyrics to a classic rock song. A line from Thick as a Brick, the title track of the 1972 Jethro Tull album, reads: “… how’s your granny and good old Ernie: he coughed up a tenner on a premium bond win.”)

The first recorded prize-linked savings program was the “Million Adventure” in the UK in 1694. Intended to help pay off debt from the Nine Years’ War (1689-97), the British government sold 100,000 tickets at £10 each. Lower-income people brought fractions of tickets through syndicates. As a savings program, it paid out £1 per year, and each year 2,500 of the tickets would win prizes of up to £1,000.

Premium bonds became popular all over Europe at the end of the 19^th century. Today, they’re offered in 20 countries from Brazil to Germany to Sri Lanka. Prizes include gold bars, DVDs, apartments, cars and motorcycles, encyclopedias and, of course, large and small cash prizes. In early 2009, JP Morgan Chase ran a no-purchase-necessary, “Double Your Deposit” sweepstakes that paid up to $10,000 to savers.

The unlikelihood that prize-linked savings will ever become a huge phenomenon in the U.S. has apparently not stopped Tufano and the Doorways to Dreams Fund from continuing to pursue programs at credit unions or from pursuing fundamental research into the psychology of non-saving.

D2D has partnered with Olson Zaltman Associates, a Pittsburgh-based consulting firm that uses the ZMET, or Zaltman Metaphor Elicitation Technique. It requires individuals who are not highly verbal to describe their feelings or attitudes with a collage of digitized visual images.

In the process, they claim to be “probing the minds of lower income consumers in order to bring innovation to the marketing of savings.” D2D says it “hopes to dramatically strengthen the storehouse of consumer data and insight from which financial service vendors, policymakers and non-profit providers may draw.”

AIG Mending, But Still Dependent, GAO Says

Posted on April 28, 2010 by Editor Test -

The Government Accounting Office (GAO) has issued an 89-page report, “Trouble Asset Relief Program: Update of Government Assistance Provided to AIG,” that offers a portrait of the global insurance giant’s financial health two years after its near-fatal losses in the subprime mortgage crisis.

While AIG is healthier than it was 18 months ago, as indicated by the price of credit default swaps on its debt, its share price, and reductions in its debt to the Federal Reserve, the GAO says the company has mainly exchanged government debt for equity, turning U.S. taxpayers from creditors to shareholders, and it is not ready to function without outside assistance.

The report says in part:

AIG’s commercial paper programs, which reflect the amount of commercial paper AIG has issued to third parties, have steadily decreased from a high of about $13 billion in December 2007. Due to the general breakdown of the U.S. commercial paper market and reluctance from market participants to purchase or roll over AIG’s commercial paper, by September 30, 2008, the balance had dropped to $5.6 billion.

As of December 31, 2009, AIG had no outstanding commercial paper held by third parties. According to AIG, this is because all of AIG’s third party commercial paper had matured and, currently, AIG’s subsidiaries do not have access to third party commercial paper funding. This funding source had been replaced by commercial paper purchased by FRBNY’s CPFF, which was utilized by AIG until the facility expired on February 1, 2010.

As a result of the facility closing, AIG’s CPFF amount outstanding had decreased to $4.7 billion from a high of $15 billion one year earlier. However, given AIG’s ongoing reliance on federal assistance, it remains unclear when support provided by CPFF will be replaced with funds from AIG’s own operations. Unlike many of the other large institutions that received government support as a result of the financial crisis, AIG has not yet been able to tap traditional sources of short-term capital, including commercial paper or other debt markets until recently.

In particular, International Lease Finance Corp. (ILFC) and American General Finance (AGF) recently have been able to access the capital markets. In March 2010, ILFC sold $4.05 billion of secured debt and unsecured debt, and in April 2010, AGFS Funding Company-a wholly- owned indirect subsidiary of AGF-entered into and fully drew down a $3 billion, 5-year term loan.

In closing, the report says:

Federal assistance provided to AIG has gradually shifted from debt to equity, with a reduction in the authorized amount of the FRBNY Revolving Credit Facility and an increase in the amount of preferred equity interests held in AIG and various special purpose vehicles for the government. Consequently, the government’s, and thus taxpayer’s, exposure to AIG is increasingly tied to the success of AIG, its restructuring efforts, and its ongoing performance.

However, the sustainability of any positive trends in AIG’s operations depends on how well it manages its business in this current economic environment. Similarly, the government’s ability to fully recoup the federal assistance will be determined by the long-term health of AIG, the company’s success in selling businesses as it restructures, and other market factors such as the performance of the insurance sectors and the credit derivatives markets that are beyond the control of AIG or the government.

U.S. Retirement Assets

Posted on April 28, 2010 by Editor Test -

U.S. Retirement Assets
	1994	2007	2008	2009
Private DC	$1.16T	$3.73T	$2.67T	$3.34T
403(b), 457	$0.24T	$0.81T	$0.72T	$0.78T
IRA/KEO	$1.06T	$4.78T	$3.58T	$4.28T
Private DB	$1.28T	$2.67T	$1.93T	$2.12T
State&Local	$1.11T	$3.30T	$2.33T	$2.67T
Federal	$0.51T	$1.20T	$1.22T	$1.32T
Annuities	$0.52T	$1.60T	$1.40T	$1.53T
Total	$5.91T	$18.09T	$13.85T	$16.04T
Source: Retirement Income Industry Association, Federal Reserve and Profit Sharing Council of America

Great-West Enters the In-Plan Income Space

Posted on April 28, 2010 by Editor Test -

The fourth largest retirement plan recordkeeper in the U.S. has begun offering an in-plan group variable annuity option that allows defined contribution plan participants to add a guaranteed lifetime withdrawal benefit (GLWB) option to their target-date fund assets.

Great West Retirement Services, a unit of Power Corporation of Canada, announced the option, called SecureFoundation, last February and began accepting assets on April 1, according to Sara Richman, FSA, a vice president of product development at the Denver area company.

“We’re doing presentations to companies that have recordkeeping relationships with us. One sponsor has taken it already and we have a list of companies that will be adding it in the coming months,” Richman said. She declined to name specific clients.

“They’ve embraced what we’re doing. They understand the value of the income protection,” she added. “They’re saying, ‘This is exactly what we need and we’re going forward with it.’ Others are still asking questions like, ‘How do I know if this is priced right?’ ‘How do I know if you’ll be around in 30 years?’ ‘Is it the right product for us?’”

As of the end of 2009, Great-West Retirement Services’ FASCore recordkeeping division served 23,000 defined contribution in the corporate, government, healthcare/non-profit and institutional markets, representing 4.2 million participants with $123 billion in assets, according to the company.

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SecureFoundation is just one part of Reality Investing Lifetime Solutions program, Richman said. It offers different levels of guidance for different participants—those who want someone to manage their accounts for them, who want help with their accounts, or who intend to manage their accounts on their own.

Like Prudential’s IncomeFlex

Because target date funds and in-plan GLWBs are a qualified default investment alternative under the Pension Protection Act of 2006, participants in plans that offer auto-enrollment can now be defaulted into programs like SecureFoundation and passively ride such a product for the rest of their lives. If participants change jobs, they can maintain the same investment and benefit in a rollover IRA.

“What we’re really trying to do with our SecureFoundation retirement income product is put back in play some of the attributes of a defined benefit plan into the defined contribution market,” said Great-West Retirement Services president Charles P. Nelson in a published interview. “We’re defining that up front, leveraging the portability functionality that has been developed in the defined contribution market through self-directed brokerage-type options.”

SecureFoundation resembles Prudential Financial’s IncomeFlex program, an in-plan GLWB that was introduced in 2007. Both options allow participants to add a certain level of protection against investment risk, timing risk and longevity risk in retirement. Both are potential game-changers in the employer-sponsored retirement plan industry.

“SecureFoundation is similar to IncomeFlex or Nationwide’s SALB (stand alone living benefit), in the sense that they are all income guarantees applied on traditional investment vehicles. SecureFoundation is more similar to IncomeFlex, because both are engineered to DC accounts. Nationwide’s SALB is for a brokerage managed account program.”

Maxim Target Date Fund Starting Asset Allocations
Maxim SecureFoundation Lifetime Portfolio	Equity Fund Allocation	Fixed Income Fund Allocation
2015 Portfolio	50-70%	30-50%
2025 Portfolio	60-80%	20-40%
2035 Portfolio	70-95%	5-30%
2045 Portfolio	75-95%	5-25%
2055 Portfolio	75-98%	2-25%

As of the end of 2009, Prudential’s IncomeFlex product was offered in 170 retirement plans, where 5,000 participants were using it and had invested $261.5 million.

The “all-in” cost of SecureFoundation is 160 basis points per year, including 90 bps for the insurance rider and 70 bps for the eligible funds, which include five Maxim SecureFoundation target date funds (2015, 2025, 2035, 2045 and 2055) or Balanced Portfolio.

Typically, the contract owner would begin paying the 90 bps for the rider at a “trigger date” ten years before their target retirement date. Unless they decided to turn it off, they would continue paying it for the rest of their lives. Under the current contract, Great West could increase the annual rider fee to a maximum of 150 bps.

Glide-paths by Ibbotson

GW Capital Management LLC, a Great West unit doing business as Maxim Capital Management, manages the funds. The “glide-paths” for the target date funds were created by Ibbotson Associates, a unit of Morningstar, Inc. Putnam Investments, which Power Corporation purchased in 2007, is not involved.

Like all GLWBs, SecureFoundation guarantees, in effect, that if the contract owner’s account goes to zero during his or her life-either because of market depreciation, permitted distributions and/or fee attrition-the contract owner will still receive a specific percentage of the protected benefit base (the initial premium or higher) every year until he or she dies.

In theory, a 65-year-old could obtain somewhat similar protection by purchasing an advanced life deferred annuity (also known as longevity insurance) that would provide life-contingent income at, say, age 83. But that would require the kind of irrevocable, lump sum payment that most consumers resist. GLWBs offer longevity insurance on the installment plan.

“It’s a very intriguing approach,” said Joe Bellersen, president of Qualified Annuity Services, a group annuity specialist. “The fact that you’re paying for the tail coverage out of the returns is a convenient way to overcome the resistance to paying for longevity insurance. You’re essential paying for it in installments and paying for it out of the return. I can see that as an appealing approach to someone getting ready to retire from a plan.”

This type of option has been extremely popular as an individual variable annuity rider, with almost all recent purchasers of variable annuities electing it. Prudential and Great West are the first to offer it to the $3.34 trillion private defined contribution plan market. Under the Pension Protection Act of 2006, both target date funds and GLWB riders on target date funds are blessed as QDIAs—qualified default investment alternatives.

Retirement plan consultant and ERISA attorney Fred Reish of Los Angeles is familiar with the in-plan GLWB concept and believes that it will become more prevalent. “I think it has legs. This product has a lot of appeal from a 401(k) perspective. Ultimately the marketplace will decide who the winners and losers will be. But there’s a clear-cut need for guaranteed income, particularly among people will end up with account balances of $200,000 to $500,000,” he said.

“The fact that the premiums [in SecureFoundation] begin at age 55 is very good, since that’s when people will have larger account balances and the guarantee will be worth the most,” he added. “I like the idea that the protection is built-in, but that people also have the freedom to get out if they want to. I like the institutional pricing. This costs 1.5% or 1.75%, while even a reasonably priced retail product might cost 2.5% or 3%. There are just a lot of advantages to an in-plan solution.”

Sleep-easy blanket

By all accounts, annuity manufacturers don’t tout the rider as a source of guaranteed income, but rather as a layer of sleep-easy investment insurance that enables retirees to tolerate a relatively high level of equity exposure in retirement, knowing that, if the market slumps, they’ll get a minimum payout per year. The rider doesn’t guarantee the account balance or the investment performance, only the “benefit base.”

In a roundtable discussion sponsored by Great West, Ibbotson president Peng Chen commented on the difference between the Maxim target date funds in Secure Foundation and the funds Great West offers without a GLWB.

“We made a couple of tweaks compared with the standard Maxim Lifetime Asset Allocation Series offered by Great-West,” he said. “Unlike the typical glide path that assumes you’ll continue to de-risk as you get into retirement, this actually stays relatively flat because, since you have this protection, to some degree, you can afford to invest a little bit more aggressively and enjoy the long-term upside of the equity market.”

“The second thing we did was look at the underlying investment options inside the fund, and we worked with Great-West to implement this asset-allocation glide path using index-type products, which significantly reduced the cost of that protection,” Chen added.

Age Bands and Payout Rates under SecureFoundation
Single Coverage	Joint Coverage (Based on age of younger spouse)
4.0% for life at ages 55-64	3.25% for life at ages 55-64
5.0% for life at ages 65-69	4.25% for life at ages 65-69
6.0% for life at ages 70-79	5.25% for life at ages 70-79
7.0% for life at ages 80+	6.25% for life at ages 80+

The rate at which contract owners can withdraw each year depends on their age, and in this respect SecureFoundation adds an interesting twist to traditional GLWB designs. People who take income at 55, 65, 70 or 80 and receive 4%, 5% 6%, or 7% of their benefit base, respectively, aren’t necessarily locked into that percentage for life. (For joint coverage based on the age of the younger spouse, the withdrawal rates are 75 basis points lower for each age band.)

For instance, a person might retire at age 65 and begin taking the guaranteed 5% of the benefit base per year. When that person reaches age 70, he or she could opt to change the payout rate to 6% of the current account value. This would make sense only if the new payment turned out to be higher, which would depend on how far the account value had dropped from the benefit base as a result of market performance, distributions and fees.

Although the potential market for an in-plan income option like qualified retirement plan market is huge, some have wondered whether sales might be limited by the insurers’ underwriting capacity. Ibbotson’s Chen believes, however, that if demand is great enough for in-plan GLWBs, insurers will create capacity.

“There’s no question that these guarantees require insurance companies to manage their balance sheets effectively,” he said. “I think if you take a static view, then, you can figure out how much ‘capacity’ there is. And if you calculate the potential amount of dollars that might come under the guarantee, then there is potentially a capacity issue. Right now, there isn’t really an issue-at least not a big issue). You may have a few firms pulling back from offering VA guarantees, but there is plenty of supply right now.

“The financial market is also quite dynamic, and there are many ways that a company can manage that “capacity” issue, i.e., expand it,” he added. “For example, there are discussions about rolling out “longevity swaps” to help securitize longevity risk in the market. Another point is that, if the demand does come, I would expect more capacity to be created.”

The Future of DC Plans, Via PIMCO

Posted on April 27, 2010 by Editor Test -

Are custom target-date strategies, where a retirement plan provider or advisor cobbles together “open-architecture” target-date investment options out of a plans’ existing funds, the wave of the future in defined contribution plans?

PIMCO, the giant bond manager and unit of Allianz AG, thinks so. That’s the gist of a new book by Stacy Schaus (at left), a senior vice president and leader of PIMCO’s defined contribution practice and of PIMCO’s just-released Fourth Annual Defined Contribution Consulting Support and Trends Survey.

Schaus’ book, “Designing Successful Target-Date Strategies for Defined Contribution Plans” (Wiley Finance, 2010), lays out a vision of the DC world of tomorrow—a vision that might also be interpreted as PIMCO’s retirement business strategy.

In this vision, made possible by the Pension Protection Act of 2006, millions of new DC participants would be auto-enrolled and defaulted into custom TDFs, which would be held in low cost collective trusts and be institutionally managed. Their contributions would be “auto-escalated” over the years to enhance their nest egg.

At retirement, according to this scenario, participants wouldn’t leave their plans. They would roll their assets into in-plan “deemed” IRAs, allocate part of their money one of PIMCO’s TIPS payout funds and then cover their longevity risk tail by purchasing an advanced life deferred annuity from PIMCO sibling Allianz Life.

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This, of course, isn’t the only vision that retirement plan providers are pitching to plan sponsors. Another feature in RIJ this week, “Great-West Enters the In-Plan Income Space,” describes Great-West Retirement Services’ SecureFoundation program, in which participants are encouraged to buy off-the-shelf TDFs and protect them with a lifetime income rider starting ten years before retirement. Prudential Retirement introduced this concept with its IncomeFlex program in 2007.

Both the PIMCO and the SecureFoundation/IncomeFlex strategies will inevitably compete with rival strategies that involve individual income annuities, deferred income annuities, or payout mutual funds. In addition, a wide range of retirement income planning tools offer individualized strategies for financial advisors and their high net worth clients. Given the $15 trillion retirement market, there’s likely to be room for many players.

In an interview, Schaus explained the drivers of and philosophy behind PIMCO’s strategy. In designing custom TDFs, she said, PIMCO would focus on helping the participant achieve “retirement income adequacy.” At the same time, the strategy would reflect the “more conservative” approach to investing that might be expected from a company like PIMCO, with its fixed income roots.

Schaus was asked if PIMCO believes in “to” or “through” TDF “glide-path.” In a “to” target date fund, generally speaking, the investor’s bond allocation lands at its permanent maximum—perhaps but not necessarily 100%—at his or her retirement date. In a “through” fund, the investor’s equity allocation might still be 50% or more at retirement, and the fund won’t reach an all-bond allocation for many years, if ever.

“There’s no single answer,” she told RIJ. “Our philosophy regarding the to/through issue is that the allocations are based on each plan’s needs, and the level of certainty that’s required.” She noted that if the retiree adds a TIPS ladder and longevity insurance to their retirement portfolios, those products would absorb much of the market risk, interest rate risk and longevity risk that would otherwise fall on the target-date funds. In that case, the to/through issue wouldn’t be as pressing.

Selected Findings, PIMCO’s 2010 Defined Contribution Consulting Support and Trends Survey*

60% of consulting firms actively promote custom target-date strategies.
100% of firms recommend that clients offer a target date or target risk investment tier.
90% consider custom target-date strategies for plans with assets of $500 million or less.
66% said “insufficient asset size” and 59% said “difficulty of operational setup” deterred plan sponsors from custom strategies.
60% believe collective investment trusts are critical or very important for DC clients.
43% believe exchange-traded funds (ETFs) have no place in DC plans beyond availability in a brokerage window.
73% expect passive strategies in DC plans to proliferate.
82% believed that Treasury inflation-protected securities (TIPS) would bring the most value as an added asset class in DC plans, followed by emerging market equities (57%) and commodities (54%).
75% of plan sponsors would like to retain retiring participants assets in their plans, but only 32% try to do so.
80% believe it is “somewhat to highly likely” that plan sponsors will add a guaranteed income option to their plans over the next two years, but at a slow pace.
Fixed annuities, living benefits, and longevity insurance were the retirement income products most likely to interest plan sponsors.
Hewitt, Mercer, Schwab, Fidelity, JPMorgan and ING are the recordkeepers most supportive of custom strategies.
54% recommend an equity allocation at retirement of 30% to 50%, while 29% recommend less than 30%.
89% said different demographics among companies should drive unique “glide paths.”

*Results are based on responses from 30 U.S. consulting firms serving 2,000 defined contribution plan sponsors with aggregate plan assets of $1.7 trillion.

Life Insurer Capital and Surplus Grew in 2009

Posted on April 27, 2010 by Editor Test -

U.S. life insurers enjoyed double-digit growth in total capital and surplus last year, according to a new report from Moody’s Investors Services, Inc., National Underwriter reported.

Moody’s rated compani es reported a 13% growth in capital and surplus for the year ended 2009. Capital and surplus, including asset valuation reserves (AVR), rose to $237 billion from $210 billion.

Fueling the increases in capital and surplus were improvements in operating income to $41 billion from a loss of $9 billion in 2008. The “robust equity markets” markedly improved earnings in both group and annuity operations.

Offsetting the gains in operating earnings were large realized and unrealized losses in derivatives, the result of losses from hedging variable annuities. In 2009, net realized and unrealized losses totaled $36 billion, as compared to $56 billion in 2008, observes Moody’s.

Other factors contributing to the improvements in companies’ capital and surplus in 2009, says Moody’s, were gains in the carrying values of non-insurance affiliates and equity holdings, both of which show up in unrealized gains (losses). Life insurers also replenished capital by reducing dividends to stockholders (e.g., holding companies) to $4 billion in 2009 from $14 billion in 2008.

Given the substantial capital raises during 2009, operating entities of publicly traded companies were under less pressure to support the needs of affiliated holding companies, says Moody’s. That enabled companies to retain more capital.

A comparison of individual life insurers shows that Hartford Financial Services Group Inc., Hartford, Conn., raised the most capital among Moody’s rated companies in 2009. The total, $6.7 billion, was secured through the federal government’s troubled asset relief program (TARP), plus debt and equity issues.

The three next highest capital raises-$3.65 billion, $2.79 billion, $2.44 billion-were secured, respectively, by Prudential Financial Inc., Newark, N.J., Metropolitan Life Insurance Company, New York; and Lincoln Financial Group (Lincoln National Corp.), Radnor, Pa.

Vanguard Sees Institutional TDF Flows Triple in Five Years

Posted on April 27, 2010 by Editor Test -

Target-date fund use among defined contribution plans administered by Vanguard skyrocketed between 2004 and 2009, with 75% of the plans offering the funds last year compared with only 13% five years earlier, Vanguard said.

According to a Vanguard research report, 12% of those plans’ assets were invested in target-date funds in 2009, compared to only 3% in 2004.

Participants in Vanguard-administered plans put $21.4 billion into target-date funds in 2009, up from $680 million five years earlier. The number of target-date fund investors jumped to 1.2 million last year, from 40,000 in 2004.

“This level of support indicates the funds’ importance in the future of retirement savings and runs counter to the views of some critics that they are not suitable investment options,” Jean Young, a researcher at the Vanguard Center for Retirement Research, said in a release.

The analysis was based on records of 2,200 DC plans administered by Vanguard in 2009 and 2,100 Vanguard DC plans in 2004.

Financial Reform Bill Blocked, But Derivative Bill Proceeds

Posted on April 27, 2010 by Editor Test -

Senate Republicans voted on Monday to block debate the Democrats’ legislation to tighten regulation of the financial system, most recently known as the Wall Street Reform Act.

Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking, Housing and Urban Affairs Committee, filed a 1,408-page version of the bill April 15. A compromise version of that bill was to be debated on Monday.

Meanwhile, members of the Senate Agriculture Committee have approved the Wall Street Transparency and Accountability Act, a bill that would regulate the use of derivatives by insurers.

The committee passed the bill, which does not yet have a bill number, by a 13-8 vote. Sen. Charles Grassley, R-Iowa, joined 12 Democrats in supporting the measure, which was sponsored by Sen. Blanche Lincoln, D-Ark., chairman of the Agriculture Committee.

The proposed bill would not regulate the use of custom derivatives by commercial users such as airlines, farmers, and others who use derivatives to lock in the cost of the fuel or other raw materials used in the products or services they make or sell.

But life insurance companies would face new constraints. Insurers who use derivatives to hedge life insurance policies or other policies against interest rate risk would have to use standardized derivatives contracts listed on exchanges, an insurance industry lobbyist says.

The House financial services reform bill provides an exemption for insurers that use custom derivatives, however.

The April 15 version of Senate Bill 3217-the Dodd bill-included sections that would:

Create a Financial Stability Oversight Council with some ability to oversee non-bank financial companies.
Create an “orderly liquidation authority” for large, troubled financial companies.
Form an Office of National Insurance.
Promote uniformity in regulation of reinsurance and surplus lines coverage.
Create new derivatives markets regulations that might affect how insurers hedge credit and default risk.
Change the rules governing asset-backed securitization.
Overhaul rating agency rules.
Impose new executive compensation system rules.
Create “senior investor protection” rules, including annuity marketing standards developed by the National Association of Insurance Commissioners.
Reorganize and consolidate the federal bank and thrift regulatory agencies.
Impose a federal regulatory system on hedge fund advisors.
Put new restrictions on banks’ capital markets activities.
Revamp securities arbitration system rules.
Increase the borrowing limit on Treasury loans.
Establish a Bureau of Consumer Financial Protection that would not oversee insurance products.

The April 15 version of the bill would also call for studies on mutual fund advertising, conflicts of interest, the use of financial designations; municipal bond disclosure rules, and “harmonization” of the customer relationship standards that apply to brokers, dealers and investment advisors.

Democrats need support from at least 60 senators to have S. 3217 come up for a vote. Observers are speculating that at least one Republican, such as Sen. Scott Brown, R-Mass., might agree to vote for the bill, and then might have some ability to fine-tune the bill.

AXA Equitable VUL Offers Downside Risk Buffer

Posted on April 27, 2010 by Editor Test -

AXA Equitable Life has introduced a Market Stabilizer Option on its variable universal life insurance product. Using upside caps and a downside buffer, the Market Stabilizer Option “can help smooth the impact of equity volatility on a policy,” the company said.

The MSO offers a rate of return tied to the S&P 500 Price Return index*, up to a growth cap. It also provides a downside buffer of up to 25% if the index underperforms.

“The last two years have been among the most turbulent periods ever for equity investors. The related economic insecurity has actually increased consumer awareness of the need for life insurance,” said Christopher M. “Kip” Condron, chairman and chief executive officer of AXA Equitable.

The following hypothetical example, using a 15% growth cap rate, illustrates the MSO:

If the S&P 500 rate of return (excluding dividends):

Increases 15% or more, the linked rate of return on The Market Stabilizer Option indexed-linked rate of return on the Segment Mature Date will equal 15%.

Increases less than 15%, the linked rate of return on The Market Stabilizer Option indexed-linked rate of return on the Segment Mature Date will equal the index performance, excluding dividends.

Stays flat or declines 25% or less, the linked rate of return on The Market Stabilizer Option indexed-linked rate of return on the Segment Mature Date will equal zero.

Declines 30%, the linked rate of return on The Market Stabilizer Option indexed-linked rate of return on the Segment Mature Date will decline by 5% (or the excess beyond the first 25% decline).

AXA Equitable’s MSO, option available for an additional fee, is offered along with more than 50 other investment options to purchases of IL Optimizer. Gains from other policy investment portfolios can be swept into a new MSO segment, without triggering a taxable event.

New Stable Value Unit at New York Life Investments

Posted on April 27, 2010 by Editor Test -

New York Life Investments has launched Stable Value Investments (SVI), a new unit that will create and distribute proprietary fixed income money management solutions backed by book value guarantees from the New York Life Insurance Company.

Aruna Hobbs, who joined New York Life in November 2009 from AEGON Insurance, will lead the new unit. As director and head of Pensions and Savings at AEGON, she was elected to the Stable Value Board of Directors for two terms and was a member of the LIMRA Marketing Officers Round Table.

“Although this is a new group at New York Life Investments, the asset class represents over $8 billion in assets under management firm-wide,” Hobbs said. She estimated the current stable value market at $600 billion.

Wells Fargo Tops Bank Annuity Fee Chart

Posted on April 27, 2010 by Editor Test -

Income earned from the sale of annuities at bank holding companies (BHCs) reached $2.62 billion in 2009, up only 0.5% from the 2008 figure of $2.61 billion, according to the Michael White-ABIA Bank Annuity Fee Income Report.

Of that amount, Wells Fargo & Co. accounted for $678 million, or almost 26%, thanks to its acquisition of the perennial leader in bank annuity sales, Wachovia Bank, during the depths of the 2008-2009 financial crisis. The ten largest bank holding companies accounted for about three-fourths of annuity fee income. (See chart on RIJ homepage, April 28, 2010.)

The report is based on data from all 7,247 commercial and FDIC-supervised banks and 913 large top-tier bank holding companies, of whom 391 or 42.8% participated in annuity sales activities during the year.

Their $2.62 billion in annuity commissions and fees constituted 13.0% of their total mutual fund and annuity income of $20.17 billion and 17.5% of total BHC insurance sales volume (i.e., the sum of annuity and insurance brokerage income) of $14.96 billion.

Of the 7,247 banks, 985 or 13.6% participated in annuity sales activities. Those participating banks e arned $824.2 million in annuity commissions or 31.5% of the banking industry’s total annuity fee income.

Sixty-eight percent (68%) of BHCs with over $10 billion in assets earned annuity commissions of $2.48 billion, constituting 94.7% of total annuity commissions reported. This was an increase of 1.2% from $2.45 billion in annuity fee income in 2008.

Among this asset class of largest BHCs, annuity commissions made up 15.7% of their total mutual fund and annuity income of $15.84 billion and 17.6% of their total insurance sales volume of $14.11 billion, the highest proportion of insurance sales volume of any asset class.

Annuity fee income at BHCs with assets between $1 billion and $10 billion fell 9.8% in 2009, to $116.7 million from $129.4 million in 2008, and accounted for 2.7% of their mutual fund and annuity income of $4.32 billion, the lowest proportion of investment sales of any asset class.

Top 10 BHCs in Annuity Fee Income (Millions)
Bank Holding Co.	2009 Fees	2008 Fees	% Change
Wells Fargo & Co	$678.00	$118.00	474.6%*
JPMorgan Chase & Co.	328.00	363.00	-9.6%
Morgan Stanley	253.00	N/A	N/A
Bank of America Corp.	251.83	145.89	72.6%
PNC Financial Services	121.28	69.50	74.5%
Regions Financial Corp.	93.53	109.50	-14.6%
SunTrust Bank Inc.	80.46	123.84	-35.0%
US Bancorp	66.00	100.00	-34.0%
KeyCorp	60.73	56.42	7.6%
BB&T Corp.	46.07	45.94	0.39%
Source: Michael White-ABIA Bank Annuity Fee Income Report *Reflects acquisition of Wachovia Bank.

BHCs with $500 million to $1 billion in assets generated $21.9 million in annuity commissions in 2009, down 15.2% from $25.8 million the year before. Only 35.4% of BHCs this size engaged in annuity sales activities, which was the lowest participation rate among all BHC asset classes. Among these BHCs, annuity commissions constituted the smallest proportion (13.6%) of total insurance sales volume of $160.7 million.

Among BHCs with assets between $1 billion and $10 billion, leaders included Stifel Financial Corp. (MO), Hancock Holding Company (MS), and NewAlliance Bancshares, Inc. (CT). Among BHCs with assets between $500 million and $1 billion, leaders were First Citizens Bancshares, Inc. (TN), CCB Financial Corporation (MO) and Codorus Valley Bancorp, Inc. (PA).

The smallest community banks, those with assets less than $500 million, were used as “proxies” for the smallest BHCs, which are not required to report annuity fee income. Leaders among bank proxies for small BHCs were Vantage Point Bank (PA), FNB Bank, N.A. (PA) and Sturgis Bank & Trust Company (MI).

Among the top 50 BHCs nationally in annuity concentration (i.e., annuity fee income as a percent of noninterest income), the mean Annuity Concentration Ratio was 8.5%. Among the top 50 small banks in annuity concentration that are serving as proxies for small BHCs, the mean Annuity Concentration Ratio was 22.7% of noninterest income.

Among the top 50 BHC leaders in annuity productivity (i.e., annuity income per BHC employee), the mean Annuity Productivity Ratio was $2,775 per employee. Among the top 50 small banks in annuity productivity, the mean Annuity Productivity Ratio was $4,574 per employee.

Data Connection

Lists*