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Western National #1 in 4Q Fixed Annuity Sales

U.S. sales of fixed annuities were an estimated $19.6 billion in fourth quarter 2009, according to data from the Beacon Research Fixed Annuity Premium Study. Structured settlements are not included in that figure.

Western National Life, an AIG company, vaulted from sixth place to become fourth quarter’s sales leader, bumping New York Life to second place. Western National also led in book value sales, replacing Pacific Life. Allianz dropped down a notch to come in third.

By product type, American National took top market value-adjusted (MVA) sales honors from ING USA. Allianz remained number one in indexed annuities, and New York Life continued as the dominant issuer of fixed income (immediate and deferred) products.

Jeremy Alexander, CEO of Beacon Research, said that fourth quarter’s fixed annuity rate trends resembled those of the prior quarter.

“These rates continued to decline. Only a few one-year renewal rates were crediting at the threshold 5% level. Both book and MVA annuities again moved to shorter initial interest guarantee periods. As was the case in third quarter, most annuity buyers probably didn’t want to lock in low rates for more than a few years,” he said in a release.

“We expect first quarter sales to post a sequential increase,” Alexander continued. “Fixed annuity rates are somewhat higher and there’s been stepped-up promotional activity of all four fixed annuity product types. Though consumer demand should remain strong, further growth will depend on the interest rate environment and the availability of investment grade bonds to back new business.”

Fourth quarter 2009 sales were down 43% and 11% compared to fourth quarter 2008 and third quarter 2009, respectively. In calendar year 2009, total market sales were an estimated $104.3 billion, 2% below 2008.

By product type, estimated sales in fourth quarter 2009 and for all of 2009 were:

Type Q4, 2009 2009
Book value $9.0 bn $52.0 bn
Indexed 6.9 bn 29.5 bn
MVA 1.8 bn 14.8 bn
Fixed income* 2.0 bn 8.0 bn
*Immediate and deferred.


Results were behind the near-record levels of fourth quarter 2008. MVAs (whose surrender values vary, depending on prevailing interest rates) dropped 76%, book value annuities fell 47%, income annuities fell 17%, and indexed annuities declined 4%.

Compared to the third quarter of 2009, income annuities posted a small 1% increase. Estimated sales shrank for the other product types: MVA, -39%; book value, -9%; indexed, -6%. The indexed share of sales rose to an eight-quarter high of 35%, but book value annuities remained the dominant product type with a 46% share.

Compared to 2008, indexed annuity results advanced 11%. MVAs were 16% behind. Income annuities fell 7%, and book value products dropped 3%.

Fixed annuity sales by company
Company Sales ($000)
Western National Life (AIG) 1,961,481
New York Life 1,759,561
Allianz Life 1,580,424
American Equity Investment Life 899,918
Aviva USA 888,614
Pacific Life 855,178
ING USA Annuity and Life 679,241
AEGON/Transamerica Companies 616,323
MetLife 491,187


Sales by product
The Allianz MasterDex X, the only indexed annuity among the top five sellers, moved from second place to become fourth quarter’s best-selling product. All the others were book value products.

Pacific Life’s Pacific Explorer, last quarter’s leader, came in second. New York Life rejoined the top five with its NYL Select 5 Fixed Annuity in third place. Two Western National annuities – Flex 5 and a proprietary bank product – came in fourth and fifth, respectively. Fourth quarter results include sales of more than 400 products (excluding immediate annuities).

Company Product Type
1 Allianz Life MasterDex X Indexed
2 Pacific Life Pacific Explorer Book Value
3 New York Life NYL Select 5 Book Value
4 Western National Flex 5 Book Value
5 Western National Prop. Bank F Book Value


Sales by channel
Three of the top five annuities were also distribution channel leaders. Pacific Explorer became the new independent broker-dealer sales leader and continued as the top bank and wirehouse product. MasterDex X remained number one among independent producers. The New York Life Optimal Fixed Annuity (a book value product) was the new captive agent bestseller.

Channel Company Product Type
Banks and S&Ls Pacific Life Pacific Explorer Book Value
Captive Agents New York Life NYL Optimal Book Value
Ind. B-Dealers Pacific Life Pacific Explorer Book Value
Ind. Producers Allianz Life MasterDex X Indexed
Lg. Regional B-Ds New York Life NYL Select 5 Book Value
Wirehouses Pacific Life Pacific Explorer Book Value

© 2010 RIJ Publishing. All rights reserved.

The Future Of Online Customer Feedback Has Arrived

Financial services firms have always coveted feedback and opinions about their websites and online services. This information offers an invaluable blueprint for improving the user-experience for three key audiences—prospective investors, clients and financial professionals. It also sheds light on the practices of competitors.

Unfortunately, convincing visitors to provide constructive feedback online has proven to be a challenge. Firms have tried many ways to connect with online users online, with most yielding lukewarm results.

Online surveys offered by third-party vendors, such as Foresee, are the most popular. These typically pop up without notice and promise to take only a moment to complete. Universal links to dedicated feedback pages are also featured on many websites.

We have seen firms, perhaps in desperation, offer small rewards such as gift cards, donations and even petty cash in return for our time. A major financial services firm once mailed us a ten-dollar bill for completing their survey.

Last month, TIAA-CREF introduced the innovative sitelet, TC Listens, an online community that allows clients to offer feedback and suggestions for enhancing the firm’s Web offerings. The sitelet was created with Digitas, an interactive marketing agency.

TC Listens resembles TIAA-CREF’s other progressive client-focused social media endeavor, myretirement.org. When clients register for access to this sitelet, they create a unique username and furnish personal details such as email address, home address and favorite websites. They are also invited to share their thoughts on retirement and financial planning.

The TC Listens homepage features a welcome video, an interactive site tutorial and a section called Community Activities that displays current threads regarding site improvement or retirement topics. The site’s five main sections—Discussions, Activities, Resources, Sessions and People—are all accessible from the main navigation menu at the top of the homepage.

TC Listens Homepage
TC Listens Homepage

The five sections allow registered members of TC Listens to communicate with each other and the firm in a variety of ways. The Discussions forum’s message board allows users to respond either to topics posted by a moderator or to the comment of other members within the thread. The page also uses the popular Like or Dislike option for fast, comment-free feedback.

TC Listens Discussions Page
TC Listens Discussions Page

On the Sessions page, members can participate in live chats, provided by a moderator. The Activities section accepts specific feedback requests and contains an assortment of polls, surveys and other feedback-oriented discussion topics. A search of member profiles can be initiated from the People tab, and there’s a library of Flash videos and presentations at the Resources tab.

TC Listens People Page
TC Listens People Page

Financial services firms have generally been slow to establish a social media presence. Many are still scrambling to reap the benefits of popular third-party sites like Facebook and Twitter. But with its own gated community, so to speak, TIAA-CREF can mine valuable data from a focused, high-value audience. Between its new TC Listens website and its retirement-focused online community, myretirement.org (with over 10,000 members), TIAA-CREF has established itself as a leader in social media in the retirement space.

 

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© 2010 Corporate Insight, Inc. All rights reserved.


Industry Views are special reports that are sponsored and independent from RIJ’s editorial content.

 

Not Much Interest in Income Products: Cogent

Although the negative impact of the current recession on retirement savings has raised awareness of the need guaranteed retirement income, few Americans have a strong interest in retirement income products, according to Cogent Research.

“The vast majority of retirees and pre-retirees report being familiar but uninterested in these products to date (with only 15% owning and another 1% indicating they plan to own retirement income products),” the company said in the Winter 2010 issue its newsletter, Cogent Thoughts.

Only 14% of those surveyed said they were very familiar with income products and only three percent said they were very interested in such products.

“Key barriers for providers to address include: the idea that they can manage their income without help, or that they are not worried about outliving their savings (the high net worth), or more the commonly discussed aversion to giving up any control of principal.”

Bond/CD laddering and variable annuities appear to have the most traction with consumers. There’s less interest in absolute return funds or target payout funds.

“Most retirees and pre-retirees cite brokerage firms, mutual fund firms and insurance companies equally as often as the ideal providers of these solutions (although insurance companies are preferred more by the more affluent),” the newsletter said.

“Building on strong existing relationships could be a winning strategy, with most citing ‘I already use and like them’ as the reason they would consider a provider for their retirement income needs.”

© 2010 RIJ Publishing. All rights reserved.

AIG Sells Its Asian Crown Jewel

Prudential plc, the large British insurer (not related to Prudential Financial in the U.S), has agreed to buy the American International Group’s life insurance business in Asia in a deal valued at $35.5 billion, the New York Times reported.

The sale of Hong Kong-based American International Assurance, or AIA, would lead to the partial repayment of the more than $180 billion that the U.S. government has invested in AIG as part of its financial industry bailout.

The Federal Reserve Bank of New York, which holds preferred shares in AIA, would receive the first $16 billion in proceeds from a sale.

Beyond the sale of AIA, the insurer is also trying to sell another life insurance unit, the American Life Insurance Company, to MetLife for about $15 billion, according to people briefed on the matter.

AIA had an operating profit of $1.44 billion after tax in the financial year ending Nov. 30, 2009, based on unaudited figures, according to Prudential. The combination entity of AIA and Prudential plc would be the leading life insurer in Hong Kong, Singapore, Malaysia, Indonesia, Vietnam, Thailand and the Philippines and the leading foreign life insurance business in China and India.

The 162-year-old Prudential already draws a large part of its revenue from Asia, with more than 11 million policyholders in 13 markets. “We are combining the two strongest international life insurers in Asia,” Tidjane Thiam, chief executive of Prudential, said in a conference call Monday to announce the deal.

In 2008, 44% of new profit for Prudential came from Asia, Thiam said. If AIA and Prudential had combined in 2009, the figure would have been 60%.

The new company will assume the name Prudential, have headquarters and be incorporated in Britain and be traded on the London Stock Exchange with American Depository Receipts traded on the New York Stock Exchange. The AIA brand will not disappear, however.

Under the terms of the deal, Prudential would pay about $25 billion in cash and about $10.5 billion in stock, preferred shares and convertible preferred shares. The company said it would obtain the cash for the deal through a $20 billion public offering and $5 billion in senior debt.

The sales of new shares must be approved by shareholders, and the deal faces other regulatory approvals. Prudential said it anticipated that the offering would take place in May and that the transaction would close in the third quarter.

Several analysts downgraded Prudential shares on Monday. “It’s going to be enormously dilutive,” ING analyst Kevin Ryan told Reuters, speaking of the public offering. “No one knows exactly what AIA contains or how profitable it is, or how it overlaps with Pru’s existing businesses.”

Prudential first approached A.I.G. last year, but it was rebuffed because its offer was too low, according to people briefed on the matter.

AIA, founded in 1919 and one of AIG’s oldest divisions, is widely considered one of the top businesses within AIG. The division has about 20 million policyholders throughout Asia, served by 23,000 employees and 300,000 agents. It has customers in Australia, Brunei, China, Hong Kong, India, Indonesia, Macao, Malaysia, New Zealand, the Philippines, Singapore, South Korea, Taiwan, Thailand and Vietnam.

© 2010 RIJ Publishing. All rights reserved.

In a Down Year, Four Firms Grow Their VA Sales

Although total variable annuities (VA) premium in 2009 was down 18% from the previous year, according to LIMRA’s U.S. Individual Annuities quarterly sales survey, four major life insurers finished 2009 with a year-over-year increase in variable annuity sales.

The biggest gainers were Prudential Annuities and Jackson National Life, whose sales were up 58% (to $16.11bn) and 55% (to $10bn), respectively. MetLife increased sales by 10% (to $15.4bn) and Sun Life sales went up 60% (to $3.2bn).

VA sales totaled $127 billion for 2009, down from $156 billion in 2008.

The companies don’t have many common elements that might explain their success last year. Prudential and MetLife are both huge, but MetLife sells both fixed and variable annuities while Prudential focuses on variable. Michigan-based Jackson National, a retirement specialist, and Wellesley, Mass.-based Sun Life Financial are both foreign-owned (by Britain’s Prudential plc and Sun Life of Canada, respectively).

“VA sales experienced significant losses from the third quarter of 2008 through first quarter 2009 and while we are seeing VAs slowly recover, the recovery is slower than expected,” said Joe Montminy, assistant vice president and research director for LIMRA’s annuity research.

Montminy attributed the slowdown in 1035 exchanges for the reduction in overall VA sales. The transfer or “exchange” of assets from an existing contract to a new contract is counted as the sale of a variable annuity, and in a normal year such exchanges account for a large percentage of overall sales.

Because the newest products—those issued since the financial crisis—have less generous benefits than older products, contract owners have less incentive than usual to trade their contract for a new one.

Top 10 Variable Annuity Sellers in 2009
Company 2009 sales ($bn) 2008 sales ($bn) % Change
Prudential 16.11 10.20 +58%
MetLife 15.40 13.95 +10
TIAA-CREF 13.92 14.43 -10
Jackson National 10.00 6.47 +55
Lincoln Financial 7.96 11.13 -28
AXA Equitable 7.48 13.38 -44
ING 6.71 13.84 -52
RiverSource 5.52 7.43 -26
John Hancock 5.29 9.56 -45
AIG 4.75 8.22 -42
*Sun Life was the only company not among the top ten VA sellers that increased VA sales in 2009. Premiums were up 60%, to $3.2bn.

 

© 2010 RIJ Publishing. All rights reserved.

So Few Words, So Many Implications

More than a year after suspending the Bush-era proposals for regulating investment advice in employer-sponsored retirement plans under the Pension Protection Act of 2006, the Obama Department of Labor has proposed its own regulations.   

Under the new proposed regulations, “Investment Advice—Participants and Beneficiaries,” plan participants may receive investment advice only from an advisor who is compensated on a “level-fee” basis. If the adviser uses a computer model to generate advice, the model must be “certified as unbiased.” 

The main difference between the Bush and Obama regulations would probably be too subtle for most laymen to detect. But it is expected to make a significant difference in determining who can furnish advice and who can’t.    

The two versions agree that a fund company investment advisor, for instance, who is hired by a plan sponsor to educate 401(k) participants, must be paid the same no matter which fund options he or she recommends to the employee. 

 The Bush proposal, however, exempts the advisor’s manager or broker-dealer from that restriction, so that the advisor could in practice recommend one of his employer’s funds over a competitor’s without breaking the law. The Obama proposal removes that exemption. 

Advertisement Without the exemption, it is expected to be more difficult for financial services companies, or their affiliates or the affiliates’ employees, to promote their products in the workplace. It could also conceivably hurt their strategic efforts to attract 401(k) rollover money to their firms when employees retire or change jobs.

The securities industry, which lobbied for the exemption during the Bush administration, has already voiced its displeasure at the prospect of losing the exemption.   

“We are disappointed the Department of Labor decided to move in this direction after having withdrawn the previous final regulations and class exemption,” said Elizabeth Varley, managing director, government affairs, at the Securities Industry and Financial Markets Association, or SIFMA, on February 26.

“The proposed regulation, if approved, will do little to expand American’s access to investment advice. Americans are seeking the best paths to saving and investing for their retirement and deserve rules that allow them to do so. Today’s move by [the Department of] Labor will hurt participants and investors, not help,” she added.

Attorney Jason C. Roberts, a benefits specialist at the Los Angeles law firm of Reish & Reicher, has written about the two sets of proposals. He described a scenario where the exemption might make a big difference to a fund company. 

“Let’s say you’re an XYZ fund company investment advisor getting paid a level compensation for running a participant’s data through a computer model. Under the exemption, if the computer recommends an ABC fund, you could easily venture away from the model, recommend an XYZ fund instead, and document the reason in some way,” Roberts said.

In another scenario, he said, an RIA (registered investment advisor) with a pension consulting service whose broker-dealer is owned by a specific financial services company might, under cover of the exemption, recommend plan options that would benefit the larger company without benefiting him directly. 

“There was a big push for this on the lobbying front by the conflicted companies,” he told RIJ, meaning companies facing potential conflicts of interest as providers of advice for plan participants.

“Under the Bush proposal, you would have seen a whole wave of players with conflicts of interest coming into the [401(k) advice] market. Anybody could see that the original proposal would not have been sufficient to prevent that. Now we’re seeing a paring back of that.”

Democrats have opposed the exemption from the moment—the Bush administration’s last day in office—when it was proposed. “Congressman George Miller (D-CA), Chairman of the House Education and Labor Committee, and Congressman Rob Andrews (D-NJ), immediately preceding publication of the final rule, stated that they would ‘use every tool at [their] disposal to block the implementation [of the regulation],’” Roberts wrote on his blog last year. 

“The issue with the broker-dealer ‘level fee’ consideration dealt with the affiliated firms of the advisor. In January of 2009, the DoL proposed that only the advisor was required to maintain a level fee arrangement, not the firms in which he/she was affiliated,” said Chad Griffeth, AIF, president of BeManaged, a plan sponsor advisor in Grand Rapids, Mi.  

“The concern created was: Where would the advisor be receiving the analytics and research for delivering advice to 401(k) investors? Probably from the affiliated firms, serving as the ‘back office.

“Hence, the potential was there for broker dealers, mutual fund companies, and insurance companies to create a ‘puppeteer’ effect, holding the advisor out to deliver level-fee advice while providing support/asset allocation services that benefited the firms potentially more than the participants,” Griffeth added.

In another provision, the new proposal restricts the use of historical performance of funds within a single asset class as a basis for recommending one fund over another, because performance is “a factor that cannot confidently be expected to persist in the future,” the Department of Labor wrote. It acknowledges, however, that different asset classes may have persistent differences in returns.  

The regulation contains a number of other safeguards against conflicts of interest, including:   

  • Requiring that a plan fiduciary (independent of the investment adviser or its affiliates) select the computer model or fee leveling investment advice arrangement.
  • Requiring that computer models must be certified in advance as unbiased and meeting the exemption’s requirements by an independent expert.
  • Establishing qualifications and a selection process for the investment expert who must perform the above certification.
  • Clarifying that the fee-leveling requirements do not permit investment advisers (including its employees) to receive compensation from affiliates on the basis of their recommendations.
  • Establishing an annual audit of investment advice arrangements, including the requirement that the auditor be independent from the investment advice provider.
  • Requiring disclosures by advisers to plan participants.

© 2010 RIJ Publishing. All rights reserved.

Which Way Out?

In 1939, near the end of the Great Depression, Virginia Lee Burton published “Mike Mulligan and His Steam Shovel.” As any well-read child can tell you, Mike could excavate a basement in just one day. But he and “Mary Anne”—the steam shovel in the storybook’s title—dug so fast that they forgot to leave themselves a way out.

For the last 18 months, Federal Reserve Chairman Ben Bernanke has been trying to dig the U.S. economy out of a hole much deeper than a basement. Now, with the worst of the Great Recession apparently over, economists and financial industry pundits are wondering what Bernanke has in mind for an exit strategy.

Is Bernanke’s new foundation solid enough for him to stop shoring up the walls and put his tools away? Does the Fed chairman know a way out?

Dropping interest rates to the floor is, of course, a classic strategy for combating a recession. While low rates may keep government borrowing costs down and the stock market humming, however, they can be deadly to retirement savers, insurance companies, pension funds and annuity providers.

On the other hand, a return to “normal” rates can pose its own dangers. The Fed has to craft an exit strategy that doesn’t trigger new problems—like falling bond prices, a new spike in unemployment, defaults on real estate loans or another serious stock market correction.

Advertisement In remarks prepared for the House Committee on Financial Services on February 10 (a hearing waylaid by snow), Bernanke described the steps the Fed has taken to prepare for an exit strategy, but indicated that the central bank was not ready to act just yet.

“The FOMC anticipates that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period,” Bernanke’s testimony reads.

Then, eight days later, on February 18, Bernanke surprised everyone by raising the rate at which the Fed lends to banks, known as the discount rate, by a quarter-point. Was this the first move toward the exit?

“It’s a start,” says Rutgers University economist Michael D. Bordo. “I was surprised that they did it so quickly, so maybe they will get it right.”

What Fed watchers say
The Fed hasn’t always done a good job with its exit strategies, write Bordo and Rutgers colleague John Landon-Lane in a recent paper for the National Bureau of Economic Research. Since 1960, the Fed has generally waited to tighten rates until unemployment peaked—after inflation had already begun to rise.

Bordo does not believe this exit will turn into a double-dip recession. But he frets that the lingering high unemployment rate could put political pressure on the Fed and cause it to repeat the multiple mistakes of the exit from the 1990-1991 recession.

Unemployment from that downturn peaked at 7.7% in July 1992, and inflation began to rise in the first quarter of 1993. But the Fed waited until early 1994 to raise rates, and then did so very rapidly. “It broke the back of inflation here, but it also led to the Latin American debt crisis,” Bordo noted.

But interest rates have to rise at some point. Otherwise they end up damaging insurers. When Japan dropped its interest rates to zero in the 1990s, for instance, it nearly killed its insurance companies, which were still legally obligated to pay 4% on whole life policies.

U.S. life insurers learned from Japan’s experience and lobbied for lower guaranteed rates in this country, said Daniel E. Winslow, a financial planner in Lake Forest, Illinois, and a former chairman of the American Council of Life Insurers’ actuarial committee. Statutorily guaranteed rates in the U.S. are now 3% or less, depending on product or state.

While those reductions help insulate U.S. insurers from the impact of today’s low interest rates, they affect only those contracts issued since the state requirements were reduced. No one knows the size of the old book of business because the information is proprietary.

“My educated belief,” Winslow said of the low interest rate environment, “is that it is bearable as long as it doesn’t last more than a few years.”

As for the prospect of rising rates, “banks should be more concerned than insurance companies because a lot of them are still in shaky condition,” he said. “They have been feasting off lending at 6% or 7% and borrowing at zero percent. When rates go back to normal it will make it that much harder for them to rebuild their balance sheets.”

Unprecedented risks
While many observers grant that Bernanke is a well-schooled student of the Great Depression, some people note that he faces risks that were not even imagined in that period. Take, for instance, the large portfolio of mortgage-backed securities that the Fed has taken on, and the assets it shouldered as the U.S. financial system melted down in 2008.

Ricardo Reis, a professor at Columbia University, believes that the Federal Reserve System and the conduct of U.S. monetary policy have changed more in the past two years than in any period since the system was founded in 1913.

“[The Fed] made loans to a myriad of different institutions,” he wrote in a recent paper on possible exit strategies that will be published as part of a book this spring. “It started buying securities directly like a regular investor, and it found itself supporting failed companies like Bear Stearns and AIG.”

Because the Fed is now such a big player in the housing market, Reis worries, it faces new rivals. For instance, the still-powerful triumvirate of Fannie Mae, Freddie Mac and the mortgage brokerage community could make it hard for the central bank to sell its vast cache of mortgage-backed securities if they perceive the sell-off as a threat to their own finances.

“The big danger in holding all of these assets is that you can lose money on them,” Reis said in an interview. “If the Fed loses, it could lose its independence.”

The shape of the yield curve, others say, matters as much as the rates themselves. If the yield curve flattens again, as it did when the Fed raised rates in 2005, that scenario might be worse for the insurers than low rates, noted Viral V. Acharya, a professor of finance at New York University’s Stern School of Business.

“I expect the yield curve to flatten a bit to reduce the benefits to bank from borrowing short and lending long,” he added.

Acharya says the U.S. has a slightly higher risk of borrowing than it has in the past, and a reduction in the credit risk of the government should flatten the yield curve. He estimates that 40 to 50 basis points of the longer maturity U.S. borrowing rates reflect the risk that the U.S. has taken on. The unwinding of that risk should lower the cost.

The highest priority, he believes, should be to contain the over-lending and over-heating in the economy—a condition fostered by the ultra-low interest environment.

“In a low interest rate environment, the long-term yield on assets is not good,” he said. “Then everyone has to start searching for yield, and that forces people to load up on riskier assets. A rise in interest rate environment will in the long run be better for the insurance sector because it will allow them to be concentrated in lower-risk assets.”

In “Mike Mulligan”, the crowd cheered for Mike and his steam shovel to dig as fast and as deep as they could. But Fed-watchers want Chairman Bernanke to find the nearest exit ramp. “The sooner they get out [of low rates],” says Bordo, “the better.”

Photo Credit: WAYOUT Evacuation Systems Pty. Ltd

© 2010 RIJ Publishing. All rights reserved.

Vanguard’s Forecast of Future Returns

Recent research from The Vanguard Group suggests that over the next ten years the annualized real returns will most likely be 6% for stocks and zero to 2% for bonds.

Those estimates are based on the historical relationships between on earnings-to-price ratios (6.75 for stocks in December 2009) and the 10-year Treasury bond yield (3.6% on December 31, 2009).

But the range of possible returns is much wider. In the past, similar E/P ratios and bond yields have led to annualized 10-year stock returns of between zero and 15% and bond returns of between minus-3% and 8%.

These projections are included in a February 2010 paper from Vanguard called, “2009: A Return to Risk-Taking,” by Christopher A. Philips, CFA.

Philips makes the case that, contrary to conventional wisdom, diversification didn’t fail during the financial crisis of 2008. His data shows that even though investors who held bonds weren’t entirely protected during the crash, they suffered less than those who didn’t.

For example, somebody with an all S&P 500 Index portfolio on October 9, 2007 would still have been down about 25% on December 31, 2009. But a person with half their money in a bond fund matching the performance of the U.S. Aggregate Bond Index would have been down only about 10% at the end of 2009.

Advertisement Why the stock market rebounded
Market analysts rarely suggest that the Federal Reserve ever uses monetary policy to lift the stock market, but Philips’ paper comes close. “It can be argued,” he wrote, “in fact, that the actions of both the Fed and the U.S. Treasury were largely geared toward reviving investment in riskier assets.”

“With yields of Treasury bills hovering below 0.25% for the entire year,” Philips continued, “many investors needed little incentive to abandon the flight to quality that characterized the market crash and financial crisis of 2008 and to gravitate, instead, toward riskier assets in search of higher yields and greater potential returns. This new focus on riskier assets helped drive prices up across the board.”

The Vanguard paper also shows that U.S. investors have been more cautious in the aftermath of the 2008 equity crash than they were during the recovery from the dot-com bust earlier in the decade.

During the dot-com bust, money surged from stocks to money market funds, but then flowed back to stocks as the market rebounded in 2003. During the 2008 crash, money at first fled to cash and Treasury bonds, and then flowed more to longer-term bonds than to stocks.

Philips thinks that the dip to zero interest rates in 2009 (compared to 1% in 2003) may explain that difference. In 2009, the spread between Treasury bills and the broad stock market was 4.3% at the market bottom. In 2003, the spread was only 2.7%—giving investors little reason to be satisfied with bonds.

But by loading up on longer-term bonds, he said, investors are increasing their vulnerability to tightening by the Fed, because rising interest rates would depress the market price of existing bonds and hurt total returns.

© 2010 RIJ Publishing. All rights reserved.

America Speaks Out—and Against—401(k) Annuities

“Keep your hands off our 401(k)s!”

That’s how Americans are responding so far to the RIF (request for information) about lifetime income options for 401(k) plans that the Departments of Treasury and Labor published in the Federal Register at the beginning of February.

But by March 1, only 48 comments were posted at www.regulations.gov (Docket ID IRS-2010-0006) so it’s hard to say to what extent the responses were representative.

So far, no insurance companies or mutual fund providers had submitted their views. Companies that already offer in-plan annuities—MetLife, Prudential, and Genworth Financial, for instance—would be logical contributors.

Not all the comments were written in anger. Many were polite and well reasoned. Two or three even came from professionals, such as a plan sponsor and a financial advisor. But most of them seemed to reflect the latest strain of Tea Party populism.

Judging only by the first four dozen comments, many Americans apparently suspect that the Obama administration plans to confiscate 401(k) assets and somehow use the money to pay its bills, offering nothing but an unfunded promise of lifetime income in return.

Advertisement No shortage of anger
Two of the earliest comments to the RIF reflected the frustration and anger that so many Americans seem to feel these days:

“If this passes I will halt all contributions and close [my 401(k)] account with penalty. If I wanted Government bonds I’d buy them. You can thank Ben Bernanke and Tim Geithner for people not wanting the bonds.

“There’s a reason that the yield curve is steep and the short-term bonds keep going into negative yields, people don’t believe the government can fulfill its long term obligations. Cut the spending, cut the deficit and keep your hands out of our 401(k)!”

Here’s another in a similar vein:

“No, I’m not interested or willing to participate in any plan that would give the government control of my IRA, 401k, etc. in order to help offset the current administration’s deficit spending.

“I didn’t contribute funds to my retirement just to have them zapped away by the current group of profligate politicians and others on a wild spending spree, leaving me nothing for my old age…  I just don’t see how anyone could support it.”

Balances not big enough
Not all of the contributors were so incensed. A more deliberate contributor pointed out that most people can’t afford a decent annuity:

“It’s disappointing to see the DoL get involved in a vendor-driven product. The last vendor-driven initiative taken up by the DoL—the target date fund—had disastrous results in rewarding millions in fees to [a] very small group of mutual fund advisors.

“The annuity initiative seems to be a way for insurance companies to take their turn at the fee trough. The DoL seems to be buying the spin fed to them by the insurance companies that participants are somehow not given the option to purchase an annuity.

“The data is clear: people do not want annuities. People have three good reasons to avoid annuities:

1. 401(k) balances averaging $30,000 provide small annuities (around $2,000 yr) not worth the trouble.

2. All annuities force single entity credit risk (think AIG).

3. Excessive hidden fees. The big gorilla in the room is too small of balances. Let’s say to provide a typical DB pension of $30,000 a year you need a 401(k) balance of nearly $400,000. With an average balance in the $30,000 range and the vast majority under $100,000 even the best-constructed annuities would fall way short.

“With high unemployment causing leakage in loans and cashing out, 401(k) balances are growing very slowly. Almost all current annuities force participants to take single entity credit risk.

“If DOL pushes this option does this imply a government guarantee making all annuity providers? Too Big to Fail? Currently there is significant credit risk in all annuity providers as indicated by bond spreads. Annuities are currently regulated by State Insurance Commissioners. Providers flock to states with the most lax regulation.

“DOL should think long and hard before pushing participants into risky products that the government may have to bail out later.”

‘First, do no harm’
But others brought a more informed perspective to the discussion. James Hardy of Tacit Knowledge, a San Francisco software company, warned about the dangers of mandatory annuitization:

“As the plan sponsor/trustee for a 401(k) plan, I think having some form of annuitization available to plan participants would be nice and would make sense for some, some of the time (as with any investment choice).

“However, and I want to make this very clear—any annuitization option should not be mandatory, and it must not be conflated with safe harbor rules on default enrollment such that people are unknowingly forced into irreversible investment options when they are potentially not paying attention.

“Making any annuitization option mandatory or making it the only safe harbor choice for default enrollment of new hires would remove choice, possibly cause loss/hardship if the funds were needed and thus potentially violate the ‘first, do no harm’ ethos a plan sponsor choosing default options should have.”

Teach financial literacy

A financial advisor who described himself only as “David” pointed out that America needs more self-reliance, supported by financial education:

“I have been in the business of advising individuals and business owners about retirement planning for 24 years… Defined contribution plan participants already have plenty of lifetime income options available, and the burden of federal regulation on plan sponsors is a significant disincentive to employers to offer a retirement plan for their employees.

“The need that is not being adequately addressed is the need to accept responsibility for one’s own financial security, rather than depending on an employer, the governme nt or the public. People need more education, beginning in elementary school, of the need to spend less and save more, and how to invest wisely for the long term… Let’s put our energy and resources into educating the public.”

A lack of inflation-protection
A contributor identified as “DM” also tried to be constructive:

“Annuities are an excellent option. They provide lifetime income and allow individuals to determine how much they need to save to achieve a desired monthly income. States also provide protection, within limits, for this type of insurance. Consequently, this may require the use of multiple insurance companies to achieve an individual’s goal and, at the same time, protect the money invested in the policy.

“The downside is the lack of reasonably-priced inflation protection. Although available, it is too expensive to be practical. If more individuals were involved in the purchasing pool and the price came down, this would make a lifetime annuity even more attractive. Once the monthly income goal is achieved, it would provide piece of mind and limit the temptation to choose a risky alternative.”

Reduce taxes
Peter Bowler, writing from Akron, Ohio, suggested that an exemption from taxes would make annuities more attractive:

“Although I could support the idea of adding annuity choices to 401(k) plans, it is not any sort of final solution to the retirement income problem. What would be more helpful would be a reduction in taxes owed on distributions of all kinds that would preserve more of the capital so hard won over the years.”

Stop the export of U.S. jobs
David Young, no address given, answered four of the 39 questions posed by the Labor and Treasury Departments, then offered some direct observations related to the macroeconomic outlook:

“Question 1: Payments must be indexed to inflation (i.e., maintain constant purchasing power over time).

“Question 2: My strongest concerns are conversion cost (i.e., converting to an annuity in a low interest rate environment), plan fees and counterparty risk. Are there steps that [federal] agencies could or should take to overcome at least some of the concerns that keep plan participants from requesting or electing lifetime income? Other than leaning on the Fed to stop holding interest rates artificially low, I can’t think of anything.

“Question 8: Plan sponsors can vet potential annuity providers before offering their products to employees. This may give employees greater confidence in a particular annuity seller and their products.

“Question 13: Should some form of lifetime income distribution option be required for defined contribution plans (in addition to money purchase pension plans)?

“Yes; however, whatever action is taken with respect to offering a lifetime income option, it must remain just that-an option. There should be no conversion requirement imposed on defined contribution plan participants.

“If so, should that option be the default distribution option, and should it apply to the entire account balance? No, it should not be the default option and it should not apply to the entire balance.

“To what extent would such a requirement encourage or discourage plan sponsorship? I think offering the option, and associated plan communications about this option to employees, would be sufficient.

“General Comments:

1) The retirement security of all workers would be enhanced if government policy did not facilitate the export of U.S. jobs. A start would be to address the mercantilist polices of our East Asia trading partners.

2) ‘Good jobs provide wages that support families, and rise with time and productivity.’ Odd; productivity has risen over past 10 to 20 years with no appreciable increase in inflation-adjusted wages. Perhaps DoL and Treasury should examine why this has occurred.

3) The Department of the Treasury could promote economic growth, stability, and economic security by stopping the direct and indirect bailouts of insolvent financial institutions.

© 2010 RIJ Publishing. All rights reserved.

FINRA Has “Disastrous Record”: Watchdog Group

The Project On Government Oversight (POGO) sent a letter today (February 23) to the congressional committees tasked with financial oversight urging them to stop relying on private financial self-regulators like the Financial Industry Regulatory Authority (FINRA).

FINRA oversees thousands of securities brokerage firms that do business in the U.S. It is one of the self-regulatory organizations (SROs) in the nation’s financial regulatory regime.

FINRA and other SROs have “an incestuous relationship with the industry they are tasked with regulating, and therefore should not be trusted with the important job of protecting the investing public.”

In a release, POGO said:

“Although FINRA is currently seeking to expand its authority and is defending its record in paid advertisements, the organization actually has an abysmal track record of regulating the securities industry.

“SROs such as FINRA failed to prevent virtually all of the major securities scandals dating back to the 1980s. And in recent years, under the leadership of current Securities and Exchange Commission (SEC) Chairman Mary Schapiro, FINRA failed to regulate many of the larger firms that were at the heart of the financial crisis, including Bear Stearns, Lehman Brothers, and Merrill Lynch, and also failed to detect the Ponzi schemes run by Bernie Madoff and R. Allen Stanford.

“Amidst the economic collapse of 2008 during which FINRA itself lost $568 million in its investment portfolio, and despite its failure to adequately conduct oversight of the securities industry, FINRA awarded its top 20 senior executives $30 million in salaries and bonuses.”

In its letter to Congress, POGO said, “the cozy relationship between FINRA and the securities industry has resulted in pervasive conflicts of interest, and ought to raise doubts about whether FINRA can ever be an effective regulator.”

“FINRA’s disastrous track record should be all the evidence Congress needs to conclude that self-regulators can’t be trusted with protecting investors,” said POGO Executive Director Danielle Brian.

“Our fragile economy shouldn’t be left in the hands of a regulator that’s in bed with the same industry that brought the financial system to the brink of collapse.”

Founded in 1981, POGO is an independent nonprofit that investigates and exposes corruption and other misconduct in order to achieve a more effective, accountable, open, and ethical federal government.

© 2010 RIJ Publishing. All rights reserved.

Don’t Tax High-Earners’ Annuity Income, Says ACLI

The American Council of Life Insurers apparently believes that President Obama’s proposed 2.9% tax on unearned income—including annuity income—would hurt annuity owners.

It would presumably also make annuity sales less attractive, at least incrementally. And it certainly flies in the face of industry efforts to protect some level of annuity income from income tax.

The tax would apply to income from interest, dividends, annuities, royalties and rent for individual taxpayers with incomes above $200,000 and couples with incomes above $250,000.

To protest the President’s proposal, which was intended to help maintain the Medicare Hospital Trust Fund, the ACLI released a letter from its president, Frank Keating. The letter, dated February 24, says in part:

“I am writing to express serious concerns about the Administration’s proposal to apply a 2.9 percent tax on annuity income to fund the Medicare Hospital Insurance (HI) trust fund as part of a series of proposed changes to the Patient Protection and Affordable Care Act.

“Currently, Americans face unprecedented difficulties securing their retirement income in an environment that has shifted longevity, savings and other retirement risks onto the individual. In such a landscape, policy-makers should not create a disincentive for annuity products that help Americans address these risks.

“As such, I would encourage you to reevaluate this proposal that increases taxes on an important retirement security tool and instead, continue to take a proactive approach to encourage individuals to take their savings in retirement as a guaranteed lifetime income payment.”

The Obama tax was described in his recent health care proposal, released February 22. In the relevant section, it said:

“The President’s Proposal adopts the Senate bill approach and adds a 2.9 percent assessment (equal to the combined employer and employee share of the existing Hospital Insurance tax) on income from interest, dividends, annuities, royalties and rents, other than such income which is derived in the ordinary course of a trade or business which is not a passive activity (e.g., income from active participation in S corporations) on taxpayers with respect to income above $200,000 for singles and $250,000 for married couples filing jointly.

“The additional revenues from the tax on earned income would be credited to the HI trust fund and the revenues from the tax on unearned income would be credited to the Supplemental Medical Insurance (SMI) trust fund.”

© 2010 RIJ Publishing. All rights reserved.

Variable Annuity Sales Fall 18% in 2009

After dropping 26% in the first six months of 2009, variable annuities (VA) sales finished the year down by only 18%, according to LIMRA’s U.S. Individual Annuities quarterly sales survey.

Fourth quarter VA sales were up three percent, to $32.6 billion, from the third quarter but three percent below sales in the fourth quarter of 2008. For all of 2009, VA sales totaled $127 billion.

“The last time VA sales were at this level was in 2003, at the end of the last financial crisis,” said Joe Montminy, assistant vice president and research director for LIMRA’s annuity research.

“VA sales experienced significant losses from the third quarter of 2008 through first quarter 2009 and while we are seeing VAs slowly recover, the recovery is slower than expected. We attribute this partly to a decline in 1035 exchanges.”

With so many living benefit riders “in the money” because of still-depressed account balances, contract owners have a disincentive to exchange their existing contracts for new ones. Such exchanges might also be deemed “unsuitable” by broker-dealers if reps recommended them.

Overall individual annuity sales fell 2% in the fourth quarter, as compared the prior quarter, to $53.3 billion. This was a 22% decline from the fourth quarter of 2008. Total individual annuity sales declined 11% in 2009, to b$234.9 billion.

In fourth quarter of 2009, fixed annuity sales were down 10% from the third quarter and down 40% from the fourth quarter of 2008. Fixed annuity sales totaled $20.7 billion in the fourth quarter and $107.9 billion for the year, down one percent from 2008.

LIMRA predicts fixed annuity sales will remain depressed, relative to sales of certificates of deposit, while interest rates remain at current levels. 

In 2009, indexed annuities rose to a record $29.4 billion, up 9% from 2008. Indexed annuities performed very well throughout the year, with a record-high in the second quarter. Fourth quarter sales were down 5% from the third quarter, at $6.9 billion.

For the third consecutive quarter, sales of book value fixed annuities were down 10% from the third quarter and 43% from the fourth quarter of 2008. For all of 2009, sales of book value annuities were up 2%, thanks to strong first quarter sales.   

Fourth quarter sales of market value-adjusted fixed annuities were down 35% from the third quarter and 80% from the fourth quarter of 2008. For 2009, MVA sales were down 20% from the prior year. 

© 2010 RIJ Publishing. All rights reserved.

“Face-Off” at the IRI Marketing Conference

With the U.S. and Canadian Olympic hockey teams facing off in Vancouver, B.C., last Sunday night, a hockey metaphor seemed to pervade the Insured Retirement Institute’s annual marketing conference, held in New York early this week.

That was apt, given that much of the annual meeting could be characterized as a friendly face-off between annuity manufacturers and their third-party distributors. But in this case, of course, the product manufacturers don’t want to beat the distributors. They want to supply them.

Easier said than done. This year’s marketing conference, which drew some 530 or so registered guests and 22 listed exhibitors, wasn’t as crisis-stricken as last year’s meeting. But the basic marketing challenge facing annuity manufacturers hasn’t changed much in twelve months.

Manufacturers are still trying to convince brokers and advisors in every distribution channel from wirehouses to banks to independent broker/dealers to fee-based advisory practices that annuities are the financial products that aging Boomers need and—with proper education—will want.

But many intermediaries still regard insurance products as alien to their DNA. Because of complexities related to compensation, regulation, cultural differences and general unfamiliarity, annuities still trigger the equivalent of a negative immune response from the non-insurance world.

Advertisement Annuities, to continue the biological analogy, are still perceived as antigens—rather than, say, vitamins, life-saving drugs or legal stimulants—by much of the financial products distribution system. That’s why some observers think that the unbundled income guarantee, or “stand-alone living benefit,” applied to managed accounts, could turn out to be the dominant income “app.”

But it’s too early to tell who the winners and losers will be. There are so many uncertainties and so many strategies afoot in financial services today that it’s hard to see anything clearly through the fog of war. Or through the scrum of stick-waving hockey players, you might say.

The distributors’ perspective
Executives from big distributors like Wells Fargo, Morgan Stanley Smith Barney, UBS, and Edward Jones, were present in force at the conference. They made it clear that the retirement market is huge for them. But whether they will champion annuities was not as apparent.

Morgan Stanley Smith Barney, which was born when Morgan Stanley bought Smith Barney from a strapped Citigroup in January 2009, came across as especially receptive to annuities. With 20,400 advisors at a thousand brokerage locations, the combined firm has a big distribution footprint.

In a panel discussion called, “Retirement Income, Service or Product?” Mike Stern, a national sales manager at MSSB, said that his firm had established a Retirement Standard last September, which included a 10-point checklist for evaluating a client’s future income needs.

Over 1,000 advisors signed up to receive support materials and resources for the program, Stern said. The firm also adopted  a time-segmented, “bucket” approach to income planning after the start of this year. These efforts have produced “significant wins” in rollovers, attracting $250 million in new money so far, he said.

Certainly, wirehouse customers have an enhanced appetite for safety. “We’re hearing that the proposition of a guarantee is impactful,” Stern said, adding that he wants to integrate insurance solutions into income plans. “We’re working toward introducing an insured retirement solutions the same way as we introduce a large cap fund.”

Among registered reps, however, annuities are still new. If he questions a rep about a given mutual fund, Stern said, the rep can rattle off every detail of the prospectus. If he asks about a guaranteed lifetime withdrawal benefit, “I get a blank stare.” Going forward, he thinks a rising tax environment will lift variable annuities. “Tax efficiency will be big in 2011,” he said.

UBS Financial Services’ Wealth Management division has about 8,000 financial advisors in the U.S. and its over-55 clients account for 75% of its assets, so it is another object of courtship by annuity manufacturers. Like MSSB’s Stern, UBS managing director Ed O’Connor sounded receptive.

Internal surveys show that retirement income is one of his clients’ top three concerns, O’Connor said. Clients are telling UBS they would prefer a 5% guaranteed income to an uninsured systematic withdrawal income of 4.5% to 5%, he said.

Not every distributor sounded convinced about annuities, however. Bernie Gacona, director of annuities at Wells Fargo Company, said that annuities aren’t getting much traction among his force of some 16,000 reps nationwide.

“We have not added any of those products,” he said in reference to some of the new variable annuity contracts that have appeared since last summer. Participating in a panel called “Simple Annuity and Other New Products Designs,” Gacona said that the commissions on simplified contracts are too low while the expenses on the more elaborate contracts are still too high. 

“The low compensation product doesn’t sell in a commission environment,” he said. “If your commission is in the 2% range and other products pay 5% or 6%, how will your products get sold?” L-shares of variable annuities, which have no up-front charges but higher trailing fees, are not getting traction either.

The manufacturers’ perspective
While Gacona was talking, his fellow panelist, John Egbert, national sales manager in the wire/bank channel for John Hancock Annuities, was visibly stressed. Last summer, his company introduced a simplified A-share variable annuity with a three-percent commission and total annual expenses of only 1.74%. Distributors don’t seem to want it.

Called AnnuityNote, the product has no death benefit, no credits for delaying withdrawals, and involves passive investments. It pays out 5% of the original investment or the contract value on the fifth anniversary, if greater. Income starts five years after issue.

Though simplicity seemed to be just what the post-crisis world wanted, AnnuityNote has not sold well. Egbert and his team are still trying to figure out why. “We were either early or we were wrong,” he said. “But we’re not stopping.” The product is the right thing for the 80% of producers who don’t currently sell annuities and for mass-market investors, Hancock still believes.

Hancock’s approach was just one of many. Executives from New York Life, The Phoenix Companies, Genworth Financial, Hartford Financial, ING Annuities, Nationwide, Lincoln Financial, and AXA Equitable also took part in panel discussions and described their approaches to the market.

ING, like John Hancock, has gone the simplified, low-cost var iable annuity design route. Michael Katz, head of variable annuity product development at ING Financial Services, described ING’s rational from reducing client expenses on its VAs from 314 basis points before the crisis to 225 basis points after.

“The equity markets are stabilizing, and the chirping over costs will start as markets recover,” he said. Advisors won’t like a product that pays out 5% a year in income but costs 3.50% a year, he said, and clients won’t like accumulating 30% less over 20 years because they owned a high-cost contract. 

Hartford and AXA Equitable, represented at the conference by Peter Stahl and Steven Mabry, respectively, have gone another route entirely.

They’ve decided to “decouple” the investment and income segments or “sleeves” of their products into a bucket dedicated to accumulation and a bucket dedicated to income. The manufacturer only takes on the risk of insuring the assets that the owner allocates to the much-tamer income bucket.

Robert Grubka, vice president, Retirement Solutions Products at Lincoln Financial Group, said that his company tries to exploit parts of the market that other companies neglect. “If everybody goes to the same spot on the ice,” he said, using a hockey metaphor, “it gets very crowded and you get jostled around.”

Lincoln will go its own way, he said, perhaps by putting its weight behind a long-term care annuity hybrid product. Such products, which were blocked by regulatory barriers until January 1, 2010, enable annuity owners to, in effect, use their annuity assets or guaranteed income streams to buy low-cost, high-deductible long-term care insurance. 

Chris Blunt, the head of the Retirement Income Security at New York Life, the largest mutual life insurer, came at the market from still another angle. “We want to take immediate annuities into the world of broker-dealers,” he said.

So far there have been “operational” obstacles to doing that in a big way, he said, but eventually New York Life would like to see “guaranteed income treated as an asset class alongside mutual funds.” Demographics will drive the market his way, Blunt added: “Our target clients are in their mid-60s to 70s, so we’re still five years from seeing a tsunami of interest” from Boomers.

Stand-alone living benefits
Although there was no panel discussion devoted purely to stand-only living benefits (SALBs), several panels touched on them. Genworth Financial, the Phoenix Companies, Nationwide and Prudential have already launched group or individual forms of these income guarantees. Although their progress was slowed by the financial crisis, they have by no means disappeared.

Applicable to after-tax managed accounts or to qualified money, SALBs provide advisors and investors with the income guarantee of a variable annuity without the restricted fund selection, fund expenses, or marketing costs associated with one. Their sales potential is unknown, but could extend far beyond the traditional market for variable annuities.

The only conference panelist specifically representing SALBs was Philip Polkinghorn, president, Life & Annuity, at The Phoenix Companies. Phoenix, whose financial strength rating slipped out of the A range in the financial crisis, created the first SALB with Lockwood Asset Management, a Philadelphia-area managed account provider, in late 2007.

“The vast amount of retirement money is not in variable annuities,” Polkinghorn said, referring to the managed account market, which is $1.5 trillion and growing, as well as 401(k) and 403(b) accounts that will eventually roll over to IRAs. SALBs will appeal to that market than variable annuities, he thinks. 

“[SALBs] focus entirely on longevity risk—the tail risk,” he said. They are contingent on both the owner’s life and the exhaustion of the covered portfolio. Deferred income annuities, aka longevity insurance, also cover that risk, but have no cash value. “We’re putting a liquidity feature in longevity insurance.”

Best of all, perhaps, SALBs are not perceived as annuities.

© 2010 RIJ Publishing. All rights reserved.

Fixed Annuity Sales Fall Overall in 2009

Performing inversely to the equity markets, overall fixed annuity sales weakened over the course of 2009 and in the fourth quarter sales were down more than 40% from the same quarter a year earlier.

After a record-setting first quarter 2009, when overall fixed annuity sales reached $34.8 billion, sales fell to $27.8 billion, $22.1 billion, and $20.4 billion in the last three quarters of the year. Sales for the fourth quarter were $20.4 billion, down slightly from $22.1 billion in the previous quarter, representing an 8% decline.

Most of the decline in sales across the year could be attributed to weakening sales of book value and market value adjusted fixed annuities. They sold a combined $25.7 billion in the first quarter of 2009 but were only $10.8 billion in the last quarter, a decline of almost 60%.

Quarterly U.S. Fixed Annuity Sales, By Product Type
Quarter Ended 12/09 9/09 6/09 3/09 12/08
Total Sales ($millions) 20,360 22,140 27,810 34,760 34,110
Book Value 8,994 9,940 13,862 19,194 17,120
Market Vale Adjusted 1,855 2,907 3,563 6,549 7,445
Indexed 7,588 7,349 8,215 7,076 7,179
Income 1,915 1,942 2,167 1,941 2,362
Source: Beacon Research

By contrast, sales of fixed indexed annuities, which are structured notes whose returns fluctuate with equity markets, and sales of immediate annuities, were relatively stable throughout the year.


In a way, the sales decline was a return to normalcy, after the panicky flight from equities in last quarter of 2008 and the first quarter of 2009. Year-to-year sales were down marginally, from a record $106.7 billion in 2008 to $105.1 billion in 2009, posting a 1.5% decline.

“Fixed annuity sales in 2009 were second only to the record-setting prior year,” said Jeremy Alexander, CEO of Beacon Research, which compiled the data and released it in partnership with the Insured Retirement Institute. “Due to strong demand for secure retirement savings and income alternatives, 2009 results were achieved despite financial pressures on consumers and other challenges.”

Quarterly Market Share
By Product Type
(As a percent of total sales) 12/31/09
Book Value 44.2%
Market Value Adjusted 9.1
Indexed 37.3
Immediate 9.4
Source: Beacon Research

Fixed indexed annuity sales climb at the end of the year, with fourth quarter sales totaling $7.6 billion, up 3.2% from the previous quarter. Total fixed index annuity sales for 2009 were $30.2 billion, posting a year-to-year increase of $3.5 billion.

Total fixed annuity sales were $105.1 billion in 2009, just 2% less than the record high in 2008. During the last quarter of 2009, fixed indexed annuity sales represented 37.3% of all fixed annuity sales, compared to only 21% in the last quarter of 2008.

Beacon Research, based in Evanston, Ill., is an independent research firm and application service provider that tracks fixed and variable annuity features, rates and sales. Beacon also licenses information to Insurance Technologies’ VisibleChoice annuity sales platform, Ebix, Lipper, and Ibbotson Associates.

© 2010 RIJ Publishing. All rights reserved.

Record Sales for Indexed Annuities in 2009

Forty-four indexed annuity carriers representing 99% of indexed annuity (IA) production reported combined fourth quarter 2009 sales of $7.0 billion, down 2.7% from the same period last year, according to the 50th edition of AnnuitySpecs.com’s Indexed Sales & Market Report (formerly the Advantage Index Sales & Market Report).

But “The big story this quarter is that sales of IAs exceeded $30 billion in 2009, setting an all-time record. That tops our previous 2007 annual sales record by more than 10%,” said Sheryl J. Moore, President and CEO of AnnuitySpecs.com.

Sales were down 6.7% from the prior quarter. “The past two quarters’ sales have been the strongest the IA industry has ever seen. It is natural to rebound to a normal sales level after such record highs,” Moore added.

Allianz Life remained the top-selling carrier in the quarter and for 2009. Aviva regained its position as the second-ranked company, while American Equity, Jackson National and ING rounded out the top five, in that order.

Allianz Life’s MasterDex X was the top-selling IA for the third consecutive quarter. Jackson National Life dominated sales of IAs in the bank and wirehouse distributions for the quarter.

For indexed life sales, 33 carriers in the market participated in the AnnuitySpecs.com’s Indexed Sales & Market Report, representing 100% of production.

Fourth quarter sales were $151.3 million, an increase of nearly 16% from the previous quarter and a reduction of 4.0% from the same period in 2008.

“A third of the companies in the indexed life market experienced greater than 50% growth since this period last year,” said Moore. “The IUL market is going to become increasingly competitive now that so many of these new entrants’ distributions are comfortable with the product.”

Aviva held its top position in indexed life, with a 22% market share. Pacific Life, National Life Group, Minnesota Life, and American General Companies completed the top five.

Pacific Life’s Indexed Accumulator III remained the best-selling indexed life product for the fifth consecutive quarter. Nearly 77% of sales utilized an annual point-to-point crediting method, and the average target premium paid was $7,596.

© 2010 RIJ Publishing. All rights reserved.

 

‘Saving More’ Trumps ‘Working Longer’

“I’ll postpone retirement” is the first thought that many people have when their retirement accounts drop in value. But emergency financial counseling can persuade them to decide to increase their saving rate instead.

That is one of the conclusions of a survey conducted by a team at the Center for Retirement Research at Boston College last summer. The finding was important, say the designer of the survey, because it shows that well-timed advice can produce more positive financial outcomes for many people.

Why is saving more preferable to retiring later? Because few people can or do work as long as they’d like, according to the paper that describes the survey, “Workers’ Response to the Crash: Save More, Work More?”

“The intent to work longer is potentially a powerful response to the loss of retirement wealth. But many workers retire earlier than planned. Increased saving is a more certain and immediate response to a large negative wealth shock,” researchers Steven A. Sass, Courtney Monk and Kelly Haverstick wrote.

This team asked people ages 45 to 59 about the impact of the financial crisis on their finances. Two-thirds had retirement accounts that lost value. Each expressed their way of coping with the loss. Later the researchers (in the guise of a “finance professor”) told some of the people: You could offset your loss by saving 11% more each year, retiring one year later, or living on 8% less in retirement.

Advertisement After this minor intervention, there was a definite shift away from inertia, as well as a shift from working longer to saving more.

The percentage who said they would do nothing to recover their investment losses fell (to 24% from 41%) while the percentage who said they would work longer fell (to 28% from 36%).

The segment who said they would save more and work longer rose (to 30% from 13%) and the percentage of those who said they would save more rose (to 18% from 10%). In sum, 48% said they would save more, either with or without working longer.  

The study supports the argument that retirement plan participants should receive counseling after a market crash so that they do not a) fail to respond at all to the crisis and b) that they do not simply delay pain or sacrifice into the future by making hard-to-keep resolutions to work longer.  

Counseling worked best on those who had succumbed to inertia. “A striking 60% reconsider[ed] their decision, with 24% saying they would increase their retirement age, 20% saying they would increase their savings, and 16% saying they would do both. This outcome suggests that credible information can substantially change both retirement and savings behavior.”

Not surprisingly, individual responses to the survey reflected personal circumstances to at least some extent. People who were more dependant on their investments for retirement security (as opposed to those with good pensions), those closer to retirement, and those with higher degrees of anxiety about their losses tended to respond more actively to the impact of the crisis on their finances.

The survey also showed:

A widespread rise in the expected age of retirement. About 40% expect to retire later than they had before the downturn with most of those who intend to work longer delaying retirement by four or more years.

Relatively little change in retirement saving. Two-thirds of respondents reported no change in how much they save for retirement in 401(k)s, IRAs, or other accounts.

A decline in spending. However, nearly 60% reported that they are spending less (which is equivalent to saving more if income is unchanged).  

Some reallocation of retirement savings. About 30% reported changing the allocation of assets in their accounts or contributions to these accounts, with 81% reallocating away from stocks.

A substantial minority did nothing. Forty-three percent did not intend to change their planned retirement age or savings rate. These households may have suffered little or no loss of retirement savings; may plan to only decrease consumption; may be too overwhelmed to take an active role in rectifying their financial situation; or may just be unaware of their options.

© 2010 RIJ Publishing. All rights reserved.

401(k) Balances Bounced Back in 2009: Fidelity

A new study by Fidelity Investments finds that the average balances of 401(k) retirement plans rebounded in 2009, recovering much of the value they lost in 2008, National Underwriter reported.

Average 401(k) account balances ended 2009 at $64,200, up 5.7% from the end of the third quarter and up 28% for the year, according to Boston-based Fidelity. Standard & Poor’s 500 index showed a total return of 26%. The average balances include employer and employee contributions as well as market appreciation.

The average deferral rate remained relatively flat for the year at about 8.2%, but the fourth quarter saw the continuation of a trend of more participants electing to increase their deferral rates than to decrease them, Fidelity said.

The company’s analysis of employed participants who had a Fidelity 401(k) account from 1999 to 2009 showed their account balance increased nearly 150% in the period, to $163,900 at the end of 2009 from $65,800 at the end of 1999.

The increase in balance was due to continued participant and employer contributions, dollar cost averaging and market returns, Fidelity says. These continuous participants had a median age of 51 years with a deferral rate of 10.4%, the analysis found.

In 2000, Fidelity found participants on average directed over 80% of their new contribution dollars into equities. By contrast, participants were contributing less than 70% to equities by the end of 2009. At the same time, the proportion of participants contributing 100% to equities dropped to 19% in 2009 from 47% percent in 2000.

© 2010 RIJ Publishing. All rights reserved.

 

Brokers Are More Than “Blackjack Dealers,” PA Regulators Say

The commissioners of the Pennsylvania Securities Commission (PSC) today warned that failure to require a higher “fiduciary standard” for stockbrokers would be a blow to investor confidence and slow down economic recovery.

“If Wall Street wants the freedom to engage in the development of new financial products it should shoulder the responsibility to protect investors from inappropriate risks and the best way to do that is to impose on brokers the same fiduciary standards we require of investment advisers,” the commissioners said. “Otherwise, we may as well treat brokers as croupiers and Blackjack dealers.”

PSC Chairman Bob Lam and Commissioners Steve Irwin and Tom Michlovic made the prediction in a letter to Pennsylvania’s two U.S. Senators in response to media reports that the Senate Banking Committee was backing off on efforts to hold stockbrokers to the same ethical standards set for investment advisers.

“What’s at stake here is consumer and investor confidence,” the commissioners said in their letter to Sen. Arlen Specter and Sen. Bob Casey Jr. “Congress acted quickly and effectively through the Troubled Asset Relief Program (TARP) and the American Recovery and Reinvestment Act (ARRA) to prevent the total collapse of t he nation’s economic systems. Rebuilding our economy—especially the retirement and investment portfolios of ordinary Americans—will require much more and it begins with appropriate and effective measures to protect individuals.”

The commissioners noted that other members of the North American Securities Administrators Association (NASAA), representing regional securities administrators in the United States, Canada and Mexico, shared their views.

© 2010 RIJ Publishing. All rights reserved.

In UK, BMW Is “Ultimate Pension Machine”

The largest longevity insurance deal seen yet by a pension fund has been completed by the UK pension fund of BMW, the German automaker, with Deutsche Bank unit Abbey Life and Paternoster, IPE.com reported.

BMW confirmed it has agreed to a customized longevity swap that will provide the BMW (UK) Operations Pension Scheme with a hedge for life expectancy risks. The sum protects nearly £3bn (€3.4bn, $4.6bn) of pension scheme liabilities related to approximately 60,000 pensioners and contingent benefits such as spouse’s pensions.

The announcement came a week after Hymans Robertson estimated the longevity swap market could reach £10bn (€11.3bn) in 2010. (See earlier IPE article: Longevity swap market to hit £10bn in 2010)

Abbey Life will insure the longevity risk of the scheme for the whole of life (until the last pensioner or their spouse dies) but has already reinsured part of the risk with a consortium of reinsurers including Hannover Re, Pacific Life Re and Partner Re. Abbey Life has also used the structuring expertise and longevity modeling techniques of Paternoster, which is also partly-owned by Deutsche Bank.

BMW was revealed to be considering its options for a longevity deal earlier this month, as part of a risk reduction strategy, and “chose to insure this risk in order to protect the sponsor against a financial risk in its UK pension scheme”. Latest figures from the 2007 actuarial valuation of the scheme showed the pension fund at that time had a deficit of £584m and a funding ratio of 87%.  

Martin Bird, principal and head of longevity & risk solutions at Hewitt Associates, the consultancy which advised scheme trustees on the transaction, said:

“Entering into a bespoke longevity hedge to mitigate against continued improvements in member life expectancy is a natural extension to the scheme’s current liability-matching investment strategy and is designed to enhance further the security of members’ benefit.”

The policy is a named life policy, which means rather than being referenced against an index, the transaction actually covers the longevity exposure of the members in the BMW scheme, so it is bespoke and customized in a manner similar to the Babcock longevity deals. The transaction is also fully collaterized, despite being written as an insurance-regulated policy.

Bird said the hedge has also been constructed to provide flexibility, which “has not been done before”, so the hedge can be realigned over time to adjust the specific benefit structure and better match the longevity risk of the scheme.

Nardeep Sangha, CEO of Abbey Life said: “In bringing this leading solution to BMW and its UK pension scheme, we have demonstrated our ability to combine our balance sheet strength and internal expertise with the specialist pensions and longevity know-how at Paternoster to bring about a landmark transaction. As this market develops, we are committed to providing innovative solutions to UK pension schemes.”

© 2010 RIJ Publishing. All rights reserved.

Prudential Financial Reports Turnaround in 2009

Prudential Financial, Inc. reported net income of its Financial Services Businesses of $3.411 billion ($7.63 per common share) for the year ended December 31, 2009, compared to a net loss of $1.140 billion ($2.53 per common share) for 2008.

After-tax adjusted operating income for the Financial Services Businesses was $2.481 billion ($5.58 per common share) for 2009, compared to $1.087 billion ($2.62 per Common share) for 2008.   

Pre-tax adjusted operating income for Financial Services Businesses reached $3.3 billion for year 2009, more than double the level of 2008. GAAP book value for Financial Services Businesses reaches $24.2 billion or $51.52 per common share, compared to $14.3 billion or $33.69 per common share a year earlier.

For the fourth quarter of 2009, net income for the Financial Services Businesses attributable to Prudential Financial, Inc. amounted to $1.788 billion ($3.79 per common share) compared to a net loss of $1.656 billion ($3.89 per common share) for the fourth quarter of 2008.

After-tax adjusted operating income for the fourth quarter of 2009 for the Financial Services Businesses amounted to $495 million ($1.07 per common share), compared to a loss, based on after-tax adjusted operating income, of $879 million ($2.04 per common share) for the fourth quarter of 2008.

“We completed over $4 billion of long-term debt and equity issues during the year, significantly adding to our financial strength and flexibility,” said Prudential chairman and CEO John Strangfeld.

“In December, we sold our stake in the Wachovia Securities joint venture for $4.5 billion of cash proceeds. With this transaction we realized a substantial return on our investment, which had an initial book value of $1.0 billion in 2003,” he added.

The Individual Annuities segment reported adjusted operating income of $88 million in the current quarter, compared to a loss of $1.04 billion in the year-ago quarter. Individual annuity gross sales for the fourth quarter were $4.8 billion, up from $2.2 billion a year ago; net sales were $3.2 billion, up from $434 million a year ago.

For the year, individual annuity gross sales were $16 billion, Full Service Retirement gross deposits and sales were $23 billion, International Insurance annualized new business premiums $1.4 billion, each at record-high levels.

The fourth quarter showed net pre-tax benefit of $30 million in Individual Annuities from reserve releases for guaranteed death and income benefits, reduced amortization of deferred policy acquisition and other costs, and mark-to-market of hedging positions and embedded derivatives.

The U.S. Retirement Solutions and Investment Management division reported adjusted operating income of $215 million for the fourth quarter of 2009, compared to a loss of $975 million in the year-ago quarter.

Full Service Retirement gross deposits and sales of $4.0 billion and net additions of $903 million, compared to gross deposits and sales of $6.5 billion and net additions of $2.7 billion a year ago. Individual Life annualized new business premiums of $91 million, compared to $86 million a year ago.

Current quarter results benefited $47 million from net reductions in reserves for guaranteed minimum death and income benefits and $32 million from a net reduction in amortization of deferred policy acquisition and other costs, reflecting an updated estimate of profitability for this business. These benefits to results were largely driven by increases in customer account values during the current quarter.

© 2010 RIJ Publishing. All rights reserved.