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Index Annuities Set Quarterly Sales Record

Posted on August 18, 2009 by Editor Test -

Indexed annuity sales rose 21.2% in the second quarter of 2009, to $8.3 billion, compared to the second quarter of 2008, and were 18.3% higher than in the first quarter of 2009, according to the 48th annual Advantage Index Sales & Market Report, which surveyed 47 carriers representing 99% of FIA production.

With over $15 billion in sales for the first half of 2009, the industry—which still doesn’t know if its products will be regulated as securities under proposed SEC Rule 151A or as insurance products—is on track to top its full-year record of about $26 billion in 2005. Aviva leads the market with a 20% share. Allianz Life’s MasterDex X was the top-selling FIA during the quarter.

“Never has there been a more challenging period for those selling indexed annuities,” said Sheryl J. Moore, president and CEO of AnnuitySpecs.com, which conducts the survey. “Scarce capital has resulted in most carriers making changes to their annuities including commission reductions, premium bonus reductions, increasing minimum premiums, and dropping issue ages.

“We’ve even seen folks terminating distribution and halting new agent appointments. Despite these challenges, Americans have spoken, and indexed annuities are the product of choice!” she added. Moore projects record-setting sales for the remainder of 2009, despite the challenging market.

Moore tracks the percentage of indexed annuity contracts that are purchased with guaranteed lifetime withdrawal benefit (GLWB) riders. The figures are proprietary, but she said they are commensurate with the rider election rates on variable annuities, which are above 80%. Indexed annuity contract owners tend to use the rider as an alternative to annuitization, she said, while variable annuity contract owners primarily use GLWBs to protect principal.

Due in part to proposed Rule 151A, which is in limbo after being remanded to the SEC for further development by a U.S. District Court of Appeals in July, the indexed annuity industry has consolidated. A year ago, 59 carriers offered 333 indexed annuities. Today, 45 companies offer 266 contracts. Half of all indexed annuity sales continue to come through Iowa-domiciled companies, Moore said.

For indexed life sales, 32 carriers participated in the Advantage Index Sales & Market Report, representing 100% of production. Second quarter sales were $132.4 million, up almost 26% from the previous quarter and 3% from the same period in 2008.

“The indexed life market is finally improving, since the disruption due to the 2001 CSO transition,” Moore declared, referring to a change in mortality table standards. “And because of the decline of the equities markets, and the guarantees that Americans are seeking, we’re going to see more companies entering the indexed UL market.”

Aviva maintained the largest market share, with 21%. Pacific Life’s Indexed Accumulator III also held on to its rank as the best-selling indexed life product for the quarter. Nearly 80% of sales used an annual point-to-point crediting method, and nearly 47% of sales were placed into 9-10 year contracts.

Cerulli Report Reveals Investor Concerns

Posted on August 18, 2009 by Editor Test -

After losing $12 trillion in paper wealth during 2008 and 2009, retail investors are feeling more conservative. But that shift will probably be “fleeting.” In the meantime, financial advisors should promote “stepping stone” products like fixed income and low-volatility equity income products.

Those were among the conclusions of Cerulli Quantitative Update, Annuities and Insurance 2009, published recently by Boston-based Cerulli Associates and Phoenix Marketing International.

The report also found that poor investment performance is the number one reason why affluent investors change advisors, and that annuities might appeal to wealthy clients if they are positioned as part of an overall retirement solution rather than as isolated products.

The study quantified the great extent to which financial advisors act as the gatekeepers to end-buyers of financial products. Advisors influence 58% of the sales to retail investors, the survey showed, while products sold without the aid of an advisor account for only 12.9% of retail investors’ holdings.

From August to December of 2008, the number of households describing themselves as conservative investors jumped to 32% from 25%. Of people with more than $10 million, the conservative segment more than doubled, to 38.3% from 17.1%. That group also had the highest percentages of self-described “aggressive” investors, with 20% in August and 14.6% in December.

Even after investors regain their optimism, Cerulli expected there to be “a revamping of allocation and diversification strategies to better protect investors in down markets.” Interest in guaranteed products, liability-driven investment strategies, and alternative assets with low correlation to market returns is expected to rise.

“Protecting current levels of wealth” and “minimizing taxes” were the two biggest concerns of households with more than $500,000 in investable assets, the survey showed. “Getting household debt under control” and “financial impact of caring for an aging parent” were the two least concerns.

Expertise in minimizing taxes is likely to be a competitive advantage for advisors. “Asset managers that bring simplified, easy-to-implement solutions to advisors either through tax-sensitive vehicles or through value-added programs focused on tax strategies stand to gain a leg-up,” the report said.

Investors with $5 million to $10 million were most likely to have an advisor either directing their financial affairs or assisting them (40.4% were “directed” and 29.9% were “assisted”) and were least likely to be “self-directed” (17.8%).

More Large Employers to Restore 401(k) Matches

Posted on August 18, 2009 by Editor Test -

The number of employers planning to reverse salary cuts and freezes and restore matching contributions to 401(k) plans has increased in the past two months, according to the latest update to an ongoing series of surveys by Watson Wyatt, a leading global consulting firm. Nevertheless, the survey also found that many employers remain concerned about retaining their top performers.

The survey found that 33% of employers that froze salaries plan to unfreeze them within the next six months, up from 17% two months ago. Forty-four percent plan to roll back salary cuts in the next six months, compared with 30% two months ago. Additionally, 24% of employers plan to reverse reductions to 401(k) match contributions in the next six months, versus 5% in June. Watson Wyatt’s latest bimonthly survey was conducted in August 2009 and includes responses from 175 large employers.

“Some employers are seeing the light at the end of tunnel and feeling optimistic about the prospect of improved business results,” said Laura Sejen, global director of strategic rewards consulting at Watson Wyatt. “However, even as some of the program cuts are rolled back, many employees are facing smaller raises, lower bonuses and higher health care costs.”

Findings of Watson Wyatt‘s Survey of 175 Large Employers
33% of large employers that froze salaries plan to unfreeze them in six months, up from 17% in June. 44% plan to reverse salary cuts in the next six months, versus 30% in June. 24% plan to restore lost 401(k) matches in the next six months, versus 5% in June. 66% of respondents that shifted more health care costs to employees won’t reverse that decision. 40% plan to shift more health care costs to workers. Another 41% of companies expect to raise deductibles, co-pays or out-of-pocket maximums next year. 52% worry more about retaining key employees than before the economic crisis. 27% think their business results have bottomed out; another 15% think they are at bottom. 83% expect more employees to work past their desired retirement ages. 43% expect to reduce staff sizes. 50% expect more difficulty retaining critical-skill employees, and 46% in attracting them.

The survey found that 66% of respondents that increased the percentage that employees pay for health care premiums do not expect to reverse that decision. Also, 40% of respondents are planning to shift more health care benefit costs to workers by increasing the percentage of premiums they pay. Another 41% of companies expect to increase the deductibles, co-pays or out-of-pocket maximums for their 2010 health care plans.

In addition, a majority of employers (52%) are now more concerned about retaining their top performers and critical-skill employees than they were before the economic crisis hit.

In an effort to keep employees engaged, 83% of employers have increased communication and 40% have held additional employee forums such as town halls or other interactive sessions to address economy-related concerns.

While almost half (47%) have changed employee roles to expand responsibilities, a far smaller number is expanding the use of recognition programs (27%) or creating special compensation programs for high-performing or at-risk employees (18%).

“Even as employers look ahead to an eventual economic recovery, they still face many challenges, such as the potential disengagement of top performers,” said Brian Wilkerson, global director of talent management at Watson Wyatt.

“Employers can manage this to some extent not only by effectively communicating with employees, but also by ensuring that they are rewarded for the job that they do—in particular taking into account how that job might be changing in the current environment.”

Other findings:

The survey found that almost three in 10 (27%) think their company’s business results have already bottomed out, and a further 15% think they are currently at bottom.
Looking ahead three to five years, 83% expect to see an increase in the number of employees working longer, past their desired retirement ages, and 43% of employers expect to see a reduction in staff sizes. Half also expect to see an increase in the difficulty of retaining critical-skill employees, and 46% in attracting them.
More than a third of employers have noticed an increase in the number of employees taking hardship withdrawals (36%) and loans (37%) from their 401(k) and 403(b) plans in the last two months.

Impaired Risk Annuities Sell Well in the U.K.

Posted on August 18, 2009 by Editor Test -

Sales of enhanced annuities in the United Kingdom—contracts known as impaired risk or medically-underwritten annuities in the U.S.—rose to £448 million ($741 million) in the second quarter of 2009, bringing the total sales in the first half of 2009 to £891 million ($1.36 billion), according to consultants Watson Wyatt.

First half sales would imply a projected market of close to £1.8 billion in 2009, up from record sales in 2008 of £1.44 billion ($2.39 billion) and up from only £420 million ($695 million) in 2001. Enhanced annuities, sometimes known in the U.K. as impaired life annuities, make up close to 30% of all retail annuities sold in the UK.

Enhanced Annuity Sales, UK 2001-2008
2001	£419.6m ($695m)
2002	£651.2m ($1.08b)
2003	£697.6m ($1.15b)
2004	£593.4m ($981m)
2005	£638.7m ($1.06b)
2006	£815.9m ($1.35b)
2007	£1,095.1m ($1.81b)
2008	£1,444.6m ($2.39 b)

The growing popularity of enhanced annuities—which provide bigger pensions for those with serious medical conditions or with negative lifestyle factors such as weight, smoking, occupation and geographical location—is likely to continue, the consultants said.

“The continued growth of the enhanced annuity market means more consumers are benefiting from higher pensions incomes because their medical condition or lifestyle has been assessed and a lower than average expectation of life anticipated,” said Andy Sanders, a senior consultant at Watson Wyatt.

“As the enhanced annuity market grows however, there are implications for the ‘pool’ of lives that do not qualify,” he added. “This ‘pool’ of lives will be increasingly healthier and have longer expectations of life that need to be reflected in reductions to the level of pensions income that can be offered.”

Enhanced annuities were first introduced in the UK in 1995 and have gained a substantial market share of all annuities sold. They include: annuities enhanced for serious medical conditions; annuities for smokers; and annuities enhanced as a result of lifestyle factors such as weight, occupation or geographical location.

Enhanced annuities are currently offered by eleven providers: Axa, Canada Life, Just Retirement, Legal & General, LV=, MGM Advantage, Norwich Union, Partnership, Prudential plc, Reliance Mutual and Scottish Widows.

IRI: Not Just NAVA by Another Name

Posted on August 18, 2009 by Editor Test -

The Insured Retirement Institute (IRI) will host its 2009 Annual Meeting September 20-22 in Boston, and the agenda suggests that more than NAVA’s name has changed in the year or so since Cathy Weatherford succeeded Mark Mackey as president.

For instance, among the speakers lined up for the conference at the Weston Copley Place Hotel, business book authors outnumber executives of IRI member companies. And, reflective of the IRI’s new focus on lobbying, the second day consists mainly of government-related issues.

“We are taking a new, proactive approach with Capitol Hill and the states to ensure our clients and consumers are represented at the highest levels,” declared the IRI in a press release.

In a break with tradition, only one hour is devoted to the type of elective sessions where participants squeezed into hotel meeting rooms, like moviegoers in a multiplex, to debate new products and services. Of the five simultaneous break-out sessions scheduled this year, only one—“RIAs and the Annuity World”—echoes topics of conferences past.

Where NAVA might have been described as inward-looking, IRI seems to be outward-looking. Some members think that’s a refreshing change. NAVA meetings had been criticized in the past as parochial, predictable, and a parade of preachers-to-the-converted. As one abstaining annuity executive once commented, “Does anybody still go to those things?”

But that was before the world changed—before the financial crisis and before a new liberal Administration set out to re-landscape financial services. IRI has morphed from an insurance company club into what the new management apparently hopes will be the insured retirement industry’s pit bull on Capitol Hill. IRI also regards financial advisors differently—not as an adversarial target market for annuity manufacturers, as NAVA sometimes seemed to do, but as potential members.

“The revamped annual conference focus is entirely intentional-done to better reflect IRI’s new mission, to be forward thinking in looking at the industry as a whole and to truly provide valuable takeaways for our members and potential members,” IRI CEO Cathy Weatherford said in an e-mail to RIJ.

“What you see isn’t about economizing,” she said. “It’s about bringing in relevant speakers that will entertain, educate and energize our participants. And you’re correct to note that there is a renewed focus on financial advisors. The primary goal of IRI is to expand our focus on advisors by giving them the tools, research and education that will help them best serve their clients.”

The difference can be a little jarring, though. Judging by the conference agenda, you might not realize that an insurance company group was holding the conference. On the preliminary agenda’s “Schedule at a Glance,” the word insurance doesn’t appear at all, and the word annuities appears only once, buried in fine print. Aside from incoming IRI chairman Jamie Shepherdson of AXA Equitable, no insurance company executives are scheduled to speak.

The agenda doesn’t even mention lifetime income guarantees, the rider on which much of the life insurance industry still stakes its earnings future. Instead, on the first full day of the conference, three authors will talk about leadership, marketing techniques for financial advisors, social media, and post-crisis communication with consumers.

Eighteen months ago, in the NAVA marketing conference in La Quinta, Calif., the inspirational speaker was Malcolm Gladwell. The three writers slated for this year’s annual meeting—Jason Jennings, author of Hit the Ground Running, A Manual for New Leaders (Portfolio Hardcover, 2009), David Nour, author of Relationship Economics (Wiley, 2009) and Bill Losey, CFP, writer, and contributor to CNBC’s On the Money—may be worthy, but lack the equivalent starpower.

On the second day, Terry McAuliffe, former chairman of the Democratic Party, will face off against Ed Gillespie, former chairman of the Republican Party. Only two events appear to focus on retirement issues. J. Mark Iwry, a senior advisor at the Treasury Department, will talk about federal initiatives like the Auto-IRA for workers without retirement plans and a $500 federal matching contribution called the Saver’s Credit. There’s also an elective session on exit strategies for retiring business owners.

“The agenda is broader than in the past, because of a unique set of circumstances,” Clifford Jack, executive vice president of Jackson National Life Insurance and chairman of NAVA in 2007-2008, explained to RIJ.

“The power of the product is less important than the message of insurance company strength,” he said. “The concern now is, how do we position insurance companies in the eyes of the public, the advisors, the regulators and the government so that they’re sure that we’ll meet our obligations in the future? That’s how the focus has changed.”

Officially, the IRI defines itself as “the authoritative source of all things pertaining to annuities, insured retirement strategies and retirement planning. IRI exists to vigorously promote consumer confidence in the value and viability of insured retirement strategies, bringing together the interests of the industry, financial advisors and consumers under one umbrella.”

Its Technology Eases Hedging of GLB Riders, UAT Claims

Posted on August 12, 2009 by Editor Test -

UAT, Inc., the Denver-based developers of the Unified Compliance and Control System (UCCS), claims in a news release that its system can improve the effectiveness and lower the cost of hedging programs for sub-advised insurance products.

The use of insurance-type benefit riders in variable annuity products, particularly Guaranteed Living Benefits, or GLBs, has increased dramatically over the last decade. To deliver GLB benefits, insurers engage in various hedging techniques to reduce exposure to capital market risks.

But the lack of real-time portfolio statistics has hindered risk management groups from creating and stress-testing hedging strategies for their sub-advised products.

Risk analysis based on one- or two-day old data, which is often the case today for sub-advised platforms, forces risk management groups to make constant readjustments to their hedging strategies. In extremely volatile or fast-moving markets, adjusting strategies on lagging data can lead to additional exposure and expense for the underlying sub-advised portfolios.

“The need for real-time statistics in risk management of guaranteed living benefits in variable insurance products has become increasingly clear over the last year,” said Tom Warren, President of UAT, Inc. “UCCS provides the kind of real-time portfolio statistics that will enable more effective and less costly hedging programs associated with GLBs.”

The challenge to effectively hedge risk for sub-advised insurance products has led several product sponsors to lower benefits, increase pricing for GLB riders or drop the feature altogether. A growing list of companies is transitioning their actively managed equity strategies to passive management, with the goal of reducing tracking error in those portfolios.

The real-time portfolio statistics offered by UCCS will enable insurers to better preserve GLB features in their product and actively managed investment options on their sub-advised platforms.

“UCCS enables insurers and active money managers to collaboratively address this special need by providing continuous real-time data on sub-advised portfolios associated with GLB riders,” says Warren. “That and the fact the system pays for itself should encourage the continued use of actively managed sub-advised portfolios in insurance products with GLB riders.”

Types of sponsors expected to benefit from UCCS include insurance companies, pension plans, mutual fund companies, trusts, endowments and bank trusts groups.

“Without access to real-time portfolio statistics, no risk management group-sub-advised or otherwise-can effectively manage a hedging strategy,” said Geoff Bobroff of Bobroff Consulting, Greenwich, RI-based adviser to the investment management industry. “Technology that delivers real-time portfolio statistics to risk managers will almost certainly improve the effectiveness of their hedging programs, including those that include GLB riders.”

Cirque du Soleil to Help Burnish Sun Life Brand

Posted on August 12, 2009 by Editor Test -

Sun Life Financial, at the urging of a marketing director recently arrived from Lincoln Financial, has decided to burnish its brand in the United States and has hired The Martin Agency, the ad agency behind the Geico Cavemen and other successful campaigns, to help them.

“Sun Life is well-known in its native Canada, but in the U.S. we need to dramatically increase our presence to financial advisors and consumers,” said Priscilla Brown, who had been chief brand manager at Lincoln Financial Group for almost two years before joining Sun Life Financial in January 2009.

In addition, Sun Life announced a partnership with Cirque du Soleil, the organization whose musical trapeze extravaganzas have become staple entertainment in Las Vegas and DisneyWorld. Sun Life is the Official Insurance Partner of Cirque du Soleil U.S. Big Top Touring Shows, U.S. Arena Touring Shows, and the Presenting Partner of a major new Cirque du Soleil U.S. show to be announced next month.

The Wellesley-based financial services firm, a unit of Toronto-based Sun Life of Canada, ranked 18th among variable annuity issuers in the U.S. in 2008, with sales of $2.0 billion. In the second quarter of 2009, the U.S. business reported net income of $337 million, up from a $333 million loss in the first quarter of the year.

It was the U.S. unit’s first profitable quarter since the first quarter of 2008, when it netted $82 million. The company’s largest business, individual annuities, had net income of $222 million. The annuity business had absorbed losses of more than $1.4 billion during the prior three quarters.

The Martin Agency, based in Richmond, boasts a client list that includes Genworth Financial, NASCAR, BF Goodrich, The JFK Presidential Library, WalMart, and UPS. But the firm’s best-known work may be the ads it created for Geico, including the Cockney Gekko, the resentful Cavemen, and the Real People ads that paired ordinary policyholders with Little Richard, Joan Rivers, Peter Frampton, Charo and other celebrities.

“This is a dream partner for us,” said Bruce Kelley, partner and vice Chairman of The Martin Agency. “Getting consumers to take a fresh look at a venerable brand is among our favorite assignments.”

Securities America, Wealth2K Help Advisors Fight “Big Brands”

Posted on August 12, 2009 by Editor Test -

Omaha-based Securities America, a network of 1,900 advisors, and Wealth2K, the Massachusetts-based multi-media company, have released “Retirement Time,” a web-based retirement risk assessment tool designed to help the firm’s financial advisors seize the burgeoning retirement income opportunity-and hinder “big brand” intruders from poaching their client base.

Retirement Time builds on one of the capabilities of a Wealth2K product called The Income for Life Model, which uses a refined “bucket system” to provide income in retirement and which is an element of Securities America’s NextPhase Income Distribution System, which supports advisors.

“To attract more investors to their retirement products and services, advisors must introduce high-end, high-impact communications tools that convey rich and motivational educational experiences,” said David Macchia said, founder and CEO of Massachusetts-based Wealth2K.

Advisors tend to think of other independent advisors as their closest competitors. But Macchia cautioned that “big brands” such as Charles Schwab, Fidelity, and Ameritrade, which have large budgets, sophisticated technology and market directly to individual investors, may represent as large a threat.

“The big brands are targeting advisors’ clients, and they are using impressive, web-based communications technology to express the value of their products and services. Advisors who fail to recognize and manage this competitive threat do so at their peril,” Macchia said.

“The arbiter of an advisor’s success in the retirement markets will be how well he or she is able to communicate to a large and fluid universe of prospective clients,” said Paul Lofties, first vice president of acquisitions and wealth management at Securities America, Inc., whose advisors manage more than $34 billion.

Retirement Time offers consumers calculators and other tools including Seminar for One technology designed to help them anticipate their needs in retirement. It also provides educational videos such as The Power of an IRA Rollover and IRA Rollover Options to Consider.

The Seminar-for-One also provides a comprehensive look at retirement needs and the funding model offered by The Income for Life Model. Advisors who use the platform link to it directly from their own website and can customize it with their name and contact information.

Prudential Net Income Turns Positive in 2Q 2009

Posted on August 12, 2009 by Editor Test -

Buoyed by the steady market recovery since the end of March, the Financial Services Businesses of Prudential Financial Inc. reported net income of $538 million for the second quarter of 2009, compared to $566 million for the year-ago quarter.

The income nearly offset a first quarter loss, bringing the company’s first-half net income to $533 million.

Individual annuity sales boomed in the second quarter, as Prudential saw a wave of exchanges of variable annuity contracts from insurers perceived as less financial strong, as well as a drop in surrenders and withdrawals from VA contracts with “in the money” lifetime income guarantees.

Gross annuity sales reached a record $3.4 billion in the quarter, up from $2.8 billion last year. Net sales were $2.06 billion, up from $518 million a year ago.

“Our current quarter results reflect improvements in financial markets, together with our strengthening competitive position. Sales and net flows were solid across the board in the second quarter and first half. Variable annuity sales and flows, and individual life sales, were especially strong this quarter,” said chairman and CEO John Strangfeld.

Annuity-related fee income was not as robust as a year ago, however, thanks to lower account values. The individual annuities segment reported a year-over-year increase in adjusted operating income (to $432 million, from $154 million) if certain benefits related to rising customer account values in the second quarter are considered. But there was a year-over-year income decline of $79 million if those benefits are excluded, according to company figures.

Prudential’s full-service retirement business experienced gross deposits and sales of $3.9 billion and net additions of $87 million, compared to gross deposits and sales of $4.5 billion and net additions of $164 million a year ago.

Comment: The High Price of Low Rates

Posted on August 12, 2009 by Kerry Pechter -

If all goes as expected, Fed chairman Ben Bernanke will announce today that the Fed funds rate—the cost of overnight loans between banks—will remain at 0.25% for the foreseeable future.

In fact, some bank analysts predict that the Fed funds rate will remain close to zero until the second half of 2010.

Is that good news? It depends on your point of view. If you want to borrow money or invest in the stock market, it’s probably good news. If you’re a retired person who wants to eke out an inflation-adjusted return on a safe investment like a CD, it’s not such good news. It’s more like grand theft.

Low rates are a tax on retirees and anyone else who saves. Douglas W. Diamond, an economist at the University of Chicago Booth School of Business, told RIJ, “This is a transfer to the people who borrow, and a tax on the people who want to invest.” As he put it in a paper written with colleague Raghuram G. Rajan for the National Bureau of Economic Research:

“A number of households do not participate in the financial system. Interventions ‘work’ by effectively taxing them more heavily, and offering the proceeds to participants in the financial system, whose preferences set interest rates.

“Note that the interventions that we are referring to could well be thought of as monetary policy interventions that are not targeted at specific banks, and are meant to bring down the real interest rate. To have effect, they must ‘penalize’ one set of households—those who do not participate as strongly in financial markets—in order to benefit the system.” (NBER Working Paper No. 15197, July 2009).

“The government can always violate property rights and keep the banking system intact—for instance, by taxing households and gifting the proceeds to banks (or equivalently, lending to banks at rates the private market would not lend at). This sort of directed bailout would reduce household consumption while limiting project termination … Such interventions may be necessary in extremis (and is taking place even as we write).”

In another NBER Working Paper, 15138, entitled “Collective Moral Hazard, Maturity Mismatch, and Systemic Bailouts,” Emmanuel Farhi of Harvard and Jean Tirole of France’s Institut d’Economie Industrielle write:

“A low-interest-rate policy involves both an implicit subsidy from consumers to banks (the lower yield on savings transfers resources from consumers to borrowing institutions and is an invisible subsidy to the latter).” A 1% interest rate cuts the cost of capital by 75% relative to a 4% rate and can keep a number of highly mismatched institutions afloat.”

A low rate policy also creates moral hazard. When the Fed lowers interest rates to resolve a crisis, as it did in 2001 and 2007, it creates the expectation among bankers that it will lower rates during the next crisis. Bankers feel free to take big risks by investing in illiquid assets, like mortgage-backed securities. Diamond suggests a deterrent to that.

“The only way to deter the banks from choosing too much leverage and too much liquidity during low rate environments is to make them less profitable in normal rate environments by raising rates higher than you normally would, but not so high as a to destabilize the economy,” he told RIJ. He also suggested higher capital requirements during the time that rates are low to reduce the temptation to over-leverage.

Any central bank would eventually be forced to do that, Farhi and Tirole suggest in their paper, or see its reputation suffer. “Yet another cost of bailouts is the loss of reputation by the central bank. This could be modeled by introducing a tough type and soft type,” they write.

“A big bailout would then reveal the type of the central bank to be soft, raising the likelihood of future bailouts and pushing banks to take on more risk, hoard less liquidity and lever up, resulting in increased economy-wide maturity mismatch and in turn larger bailouts.

“Even a central bank of the soft type would internalize these reputational costs and be more reluctant to engage in a bailout in the first place. Similarly the tough type will try to separate itself from the soft type by taking a hard line.”

To paraphrase the Fed chairman’s own recent comment, “When the elephants fight, the grass suffers.” Retirement-bound Boomers are paying for this crisis. They paid when their 401k balances fell, they paid in lost wages when their jobs vanished, and they continue to pay by earning less on safe investments.

Their consolation may be the unemployment benefit extensions, the COBRA subsidies, the infrastructure projects, and the Cash-for-Clunkers program that the Obama administration—in the face of intense criticism—has parceled out. But, in a real sense, they paid, and continue to pay, for whatever they’re getting.

2009 Oustanding Consumer Credit

Posted on August 12, 2009 by Editor Test -

2009 Oustanding¹ Consumer Credit
	Q1	Mar	Apr	May²
Percent change at annual rate³
Total	-3.5	-7.3	-7.8	-1.5
Revolving	-8.9	-10.2	-11.1	-3.7
Nonrevolving⁴	-0.3	-5.6	-5.9	-0.3
Amount: billions of dollars
Total	2539.4	2539.4	2522.9	2519.6
Revolving	939.6	939.6	930.9	928.0
Nonrevolving⁵	1599.8	1599.8	1592.0	1591.6
¹ Covers most short- and intermediate-term credit extended to individuals, excluding loans secured by real estate. ² Preliminary ³ The series for consumer credit outstanding and its components may contain breaks that result from discontinuities in source data. Percent changes are adjusted to exclude the effect of such breaks. In addition percent changes are at a simple annual rate and are calculated from unrounded data. ⁴Includes automobile loans and all other loans not included in revolving credit, such as loans for mobile homes, education, boats, trailers, or vacations. These loans may be secured or unsecured.
Source: Federal Reserve Statistical Release

Banks Reap Record Annuity Income

Posted on August 12, 2009 by Editor Test -

Bank holding companies (BHCs) earned a record $734.5 million in commissions and fees from annuity sales in the first quarter of 2009, a 12.4% increase from $653.3 million in first quarter 2008, according to the Michael White-ABIA Bank Annuity Fee Income Report released in late July. First-quarter annuity commissions were also 12.1% greater than the $655.2 million earned in fourth quarter 2008.

Wells Fargo & Company (CA) ($177 million), Bank of America Corporation (NC) ($111 million), and JPMorgan Chase & Co. (NY) ($90 million) led all bank holding companies in annuity commission income in first quarter 2009. Wells Fargo is the largest broker-dealer in the United States, with about 21,000 advisors. Bank of America has about 18,000 advisors.

All three firms completed major acquisitions before or during the first quarter. Wells Fargo bought Wachovia Bank-which in recent years was the breakaway leader in annuity sales in the bank channel-Bank of America bought Merrill Lynch, and JP Morgan Chase bought Bear Stearns.

These three mega-banks truly dominated bank annuity sales. Their $378 million in annuity commissions was well over half of the $697.1 million in earned in annuity commissions by BHCs with over $10 billion in assets in the first quarter, and more than half the $734.5 million in annuity commissions reported by all 381 (out of a total of 940) large BHCs that reported annuity sales.

Fixed annuity sales were behind the record earnings. Sales of fixed products shot up in the first quarter of 2009 because the steep yield curve allowed fixed annuity issuers to offer much more competitive rates than CD issuers, who conform to short-term rates. New York Life’s Fixed Annuity, a book-value product, was the top-seller in the bank channel in the first quarter. Book value fixed annuities pay a declared rate of interest for a specific period.

Only a fraction of bank income from sales of investment and insurance products comes from annuity sales. The $734.5 million in annuity commissions and fees constituted 15.7% of banks’ total mutual fund and annuity income of $4.67 billion and 19.5% of total BHC insurance sales volume (i.e., the sum of annuity and insurance brokerage income) of $3.76 billion.

Annuity sales leaders among mid-sized BHCs (with assets between $1 billion and $10 billion) 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 Van Diest Investment Company, Codorus Valley Bancorp, Inc. (PA), and First Citizens Bancshares, Inc. (TN).

Compiled by Michael White Associates (MWA) and sponsored by American Bankers Insurance Association (ABIA), the report measures and benchmarks the banking industry’s performance in generating annuity fee income. It is based on data from all 7,447 commercial and FDIC-supervised banks and 940 large top-tier bank holding companies operating on March 31, 2009.

One-Stop Shopping for Retirement Risk

Posted on August 12, 2009 by Editor Test -

Many entrepreneurs are trying to surf the Great American Age Wave, but few have been as closely involved with selling financial products to “seniors”—there’s got to be another word—for as long as Steve Zaleznick has.

Four years ago, the long-time AARP executive started Longevity Alliance, Inc., a private equity-backed, Internet-based insurance product marketing organization that he cobbled together from two early web platforms, Insurance Quote Services and Long-Term Care Quote.

Operating out of headquarters in Washington, D.C. and a call center in the Phoenix suburb of Gilbert, Arizona, Zaleznick and his venture capital backers hope that increasing numbers of aging Boomers will buy immediate annuities, Medicare enhancements, and long-term care insurance (LTCI) from his low-pressure, salaried agents.

“We’re not just moving leads to other people,” Zaleznick told a skeptical inquirer who thought his multi-hued website looked suspiciously like many insurance sales-lead aggregation traps on the web that offer “free quotes” while trawling for names, addresses and phone numbers.

And despite the old saying that insurance is sold, not bought, he’s proving that there’s a viable web-mediated direct market for annuities and LTCI. “I like the idea that people can self-educate,” Zaleznick said. “Obviously, there’s a huge need for clarity and communication in this business.”

Ivy Leaguer goes to AARP
Zaleznick, who is 54, got involved with the senior market before it was cool. Some 25 years ago, he joined the then-American Association of Retired Persons as a young attorney. He had earned a BA in economics at Brown University, then gone on to get a JD degree from Georgetown University Law Center in Washington, D.C., where AARP is based.

After serving as general counsel, he founded and ran AARP Services, Inc., which acts as a marketing intermediary for AARP’s insurance, financial service, healthcare and lifestyle product partners. AARP has relationships with New York Life, The Hartford, Chase and other companies.

Zaleznick left AARP in 2002, but was still determined to do good and do well by marketing directly to older Americans. In 2005 he started his own company, Longevity Alliance Inc., and soon received backing from Kinderhook Industries, a private equity firm in Manhattan that represents $470 million in capital that was founded in 2003.

Longevity Alliance has been built on a foundation of two acquired businesses, both based in the Phoenix area. The first was Insurance Quote, an online insurance and annuities marketing site that was one of several businesses owned by entrepreneur David T. Phillips. That business survives in part as a term life insurance marketing website, iquote.com.

In September 2006, Zaleznick acquired Long-Term Care Quote (ltcq.com), a 10-year-old independent agency in Chandler, Arizona that specialized in direct sales of long-term care insurance, from Robert Davis. The deal included Long-Term Care Quote’s proprietary database and rating system for developing customized quotes and side-by-side comparisons for long-term care insurance.

“Our businesses are divided among long-term care insurance, retiree health insurance, and longevity insurance,” Zaleznick told RIJ. “The public doesn’t lack sufficient choice about these products. But it does lack navigational tools. Most people deal with their situation by not dealing with it. But, in all of these cases, it’s hard to transact without talking to someone.”

A retro look
At first glance, Longevity Alliance’s homepage appears similar to online insurance sites that exist as magnets for leads, which are often sold to commissioned agents who follow up with a high-pressure house call. The purple and orange color scheme is jarring, the photographs of smiling grey-haired couples a bit retro.

But the strategy here seems to be different. According to Tina Jones, the director of operations at Longevity Alliance’s call center in Gilbert, the leads go to one of the company’s phone representatives. While they are insurance licensed, they don’t work on commission.

“All of our agents are contracted and appointed to certain carriers, but as far as compensation goes, they’re salaried employees,” Jones said. “They assign their commissions to the corporation. The consumers out there appreciate that. Otherwise, it’s hard for them to know if the person recommending products is representing their best interests.”

“A lot of our agents come from a single carrier environment, and weren’t satisfied offering one choice. They have a desire to go home feeling like they helped people,” she added. “It’s not for everyone. If you have that aggressive sales mentality, you won’t be interested in our offering.”

About 40 agents work at the call center, along with about ten additional support staff, she said. According to the website, Longevity Alliance sells products issued by Assurant Health, Blue Cross/Blue Shield, CIGNA Medicare Services, Coventry Health Care, Mutual of Omaha, United Healthcare, Aetna, and American National.

Jones said Longevity Alliance also works with Midland National Life, Jackson National Life, Genworth Financial, John Hancock, Mass Mutual and others. Some of the sales are referred to Crump, the insurance marketing organization formerly known as BISYS.

Zaleznick is president and CEO of the company, and even writes a blog at longevitylens.com. Ken Gromacki, the director of sales operations, came to Longevity Alliance from ICMA Retirement Corporation. The chief marketing officer is Darren Gruendel, a Yale University graduate with an MBA from the Kellogg School of Management at Northwestern University. The chairman is Horace Deets, executive director of AARP from 1988 to 2001.

Longevity Alliance is clearly all business. But it evidently has ambitions that go beyond just pushing insurance products, as these thoughtful comments on its website suggest:

“Americans face three primary financial risk categories as they age: health care expense, long-term care expense, and the general risk of outliving one’s assets, ‘longevity risk.’ Each presents a unique problem to solve and each can derail an otherwise sound financial plan. Solving one is a start, but real ‘peace of mind’ can only come when all three have been addressed.”

The question is, can call center reps, even with insurance licensing and experience, create a comprehensive plan?

Lincoln Financial Group Rebounds in Second Quarter

Posted on August 5, 2009 by Editor Test -

Lincoln Financial Group, the subject of takeover rumors last March, fared better in the second quarter of 2009 than in the first quarter, with increased deposits and net flows in variable, fixed, and indexed annuities.

Compared to the second quarter of 2008, however, the Philadelphia-based company reported a net loss of $161 million versus net income of $125 million a year earlier. At $2.6 billion, overall annuity deposits were down 23% from the second quarter of 2008 but rebounded by 20% from the first quarter of 2009.

The current quarter reflected the year-over-year decline in the equity markets and included after-tax losses of $29 million on alternative investments, $170 million related to the sale of Lincoln National (UK) plc, and $109 million in realized investment losses, the company said in a release.

Among the second quarter highlights:

Consolidated net flows of $2.1 billion doubled versus the 2008 period and increased 8% sequentially, with stable retail deposits and improved lapse rates across all segments.
Issued $690 million of common equity and $500 million of senior debt and ended the quarter with holding company cash and cash equivalents of approximately $800 million.
Unrealized losses at the end of the quarter improved more than 40% sequentially, contributing to an overall increase of $1.8 billion in stockholders’ equity.
Completed expense reductions expected to yield run-rate savings $250 million, pre DAC and tax, by year-end 2009.

The individual annuities segment reported income from operations of $65 million in the second quarter of 2009 versus $116 million in the year-ago period, reflecting a $13.9 billion decline in average variable account balances compared to the prior year. The 2009 quarter included a loss on alternative investments of $5 million, after tax.

Gross annuity deposits were $2.6 billion, down 23% from the prior year but up 20% from the first quarter. Net flows were $1.0 billion versus $1.6 billion in the 2008 quarter, but more than doubled sequentially.

Variable annuity product deposits of $1.7 billion and net flows of $651 million were down 41% and 59% year-over-year, respectively, reflecting depressed economic and market conditions. Variable annuity product deposits and net flows increased 9% and 49%, respectively, from the first quarter.

Fixed and indexed annuity product deposits of $900 million were up 83% year-over-year and 49% sequentially, driving an improvement in net flows for both periods.

The defined contribution business reported income from operations of $28 million, versus $41 million for the same period a year ago, reflecting a $6.1 billion decline in average variable account balances compared to prior year.

Gross deposits of $1.2 billion were down 13% versus prior year. Total net flows increased 39% to $329 million compared to the year-ago quarter, reflecting continued strong persistency. Deposits and net flows were down sequentially, a result of normal seasonality in the first quarter.

MetLife Posts Strong Annuity Growth in 2Q 2009

Posted on August 5, 2009 by Editor Test -

MetLife reported second quarter 2009 operating earnings of $723 million and saw its U.S. annuity deposits increase 43% over second quarter 2008, to $5.5 billion. But the insurer lost $1.4 billion in the quarter, largely because of derivative losses.

“We had very strong deposits and positive net flows in our U.S. annuity business. Institutional’s top line grew 8% over the second quarter of 2008; and our International business continued to perform well.” said C. Robert Henrikson, chairman, president & chief executive officer of MetLife, Inc.

Total annuity deposits reached $5.5 billion as variable annuity deposits increased 27% to $4.5 billion and fixed annuity deposits grew from $277 million to $949 million. Annuity net flows remained positive for the fifth consecutive quarter while lapse rates declined for the second consecutive quarter.

In Japan, total annuity deposits were 137.8 billion yen ($1.3 billion), compared with 149.6 billion yen ($1.4 billion). A 45% increase in fixed annuity deposits was more than offset by a decline in variable annuity deposits, reflecting current market conditions.

Net investment income was $3.9 billion, up from $3.3 billion in the first quarter of 2009 but down from $4.3 billion in the second quarter of 2008. During the second quarter of 2009, variable investment income was lower than plan by $150 million, or $102 million ($0.12 per share) after income tax and the impact of deferred acquisition costs. The lower variable investment income was driven by negative returns from real estate funds as well as corporate joint ventures.

For the second quarter of 2009, the company had net realized investment losses, after income tax, of $2.6 billion, mostly driven by derivative losses of $1.8 billion, after income tax. The remainder were primarily due to credit-related losses and impairments across a broad range of asset classes, and were consistent with the company’s expectations.

MetLife Posts Strong Annuity Growth in 2Q 2009

Posted on August 5, 2009 by Editor Test -

MetLife reported second quarter 2009 operating earnings of $723 million, or $0.88 per share, and saw its U.S. annuity deposits increase 43% over second quarter 2008, to $5.5 billion. But the insurer lost $1.4 billion in the quarter, largely because of derivative losses.

Net investment income was $3.9 billion, up from $3.3 billion in the first quarter of 2009 but down from $4.3 billion in the second quarter of 2008. During the second quarter of 2009, variable investment income was lower than plan by $150 million, or $102 million ($0.12 per share), after income tax and the impact of deferred acquisition costs. The lower variable investment income was driven by negative returns from real estate funds as well as corporate joint ventures.

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VA Rider Hedging Has Been 94% Effective—Milliman

Posted on August 5, 2009 by Editor Test -

Milliman Inc., the Seattle-based independent consulting firm, has published a sequel to its December 2008 report on the state of the variable annuity business. In this July 2009 report, actuary Peter Sun finds that:

Based on Milliman’s study of VA writers with hedging programs, the hedging programs have been about 94% effective in achieving their designed goals during the November 2008 through March 2009 period.
Significant refinements and expansions of existing hedging programs have been explored and implemented. These changes enhance the earnings of VA writers through better management of basis mismatch, interest rate hedging strategy, volatility assumptions, and investment strategy of hedge assets.
The arms race in richness of product features has ceased as a result of the financial crisis. Simpler product designs with higher fees are becoming the new product trend.
There was a flurry of mergers and acquisitions (M&A) activities, with no successful transactions. That dynamic is bound to change. The financial crisis stands to weed out weaker players in the market, and leave stronger and bigger surviving VA writers with viable products and robust hedging programs.

Reinsurance and structured derivative solutions became less available again as a result of the financial crisis. This has prompted VA writers to reevaluate their entire risk management strategies to be more self-reliant.

Obesity Linked to Retirement Insecurity

Posted on August 5, 2009 by Editor Test -

A waist is a terrible thing to mind, they say. Now overweight people have another reason to feel guilty about the shape they’re in. A new study asserts that the obese need more medical care than slender people and drive up costs. One insurance executive even linked obesity to America’s retirement challenges.

“Obesity makes it more difficult to achieve financial security in retirement because it increases expenses and reduces the amount of savings available for retirement,” said Gregory Boyko, chairman of The Hartford’s Japanese life insurance subsidiary. At the Asia Society in New York City, he called for “private-public partnerships” to better educate populations about the need for retirement preparedness, including the “need to maintain good health well into old age.”

Just last week, the journal Health Affairs published a study by the Public Health Economics Program at RTI International in North Carolina showing that “the annual medical burden of obesity has risen to almost 10% of all medical spending and could amount to $147 billion per year in 2008.”

“Per capita medical spending for the obese is $1,429 higher per year, or roughly 42% higher, than for someone of normal weight,” the article said. “Obesity rates increased by 37% between 1998 and 2006 (from 18.3% to 25.1% of the population), which suggests that the increased prevalence of obesity is driving increases in total medical spending.”

The report cited other studies showing that obesity was responsible for 27% of the rise in inflation-adjusted health spending between 1987 and 2001. On the other hand, the New England Journal of Medicine reported in 2005 that accelerated mortality rates among the obese could reduce Americans’ average life expectancy by two to five years by 2050.

Some in the U.S. have objected that linking obesity and high health care costs represents “blame the victim” logic. But other countries are apparently already acting on this type of research. A law enacted in Japan in 2008 aims to reduce the number of obese people there by 10% by 2012 and by 25% by 2015.

Japanese employers and local governments whose employees fail to meet specific targets will face financial penalties. People between the ages of 40 and 74 must meet specific waistline standards, 33.5 inches for men and 35.4 inches for women.

‘Breakaway Broker’ Is A Myth

Posted on August 4, 2009 by Editor Test -

The exodus of advisors from wirehouses is real, but it’s not of Biblical proportions, according to Boston-based Cerulli Associates, which has just released its annual sizing of the advisor marketplace, with data on assets under management and advisor headcounts by channel for retail advisors.

“There’s this impression of lemmings leaving Merrill Lynch [for example] to go independent,” said Cerulli’s Bing Waldert. “While the trend is real, it’s happening slowly. If anything, it has decelerated slightly.”

The stronger trend, at least since the financial crisis gained momentum last year, has been for wirehouse advisors either to switch houses or accept incentives to stay put. Billions in controversial bonuses—often at companies receiving federal bailout money—have been paid mainly to retain top producers.

“Advisors are getting heavy compensation to stay in their current channel,” Waldert said. A third factor is that the “number of advisors has stayed flat or shrunk slightly in the last five years, so broker-dealers have stepped up recruiting packages. It’s a market share game right now.”

“Despite the discussion about the move toward the ‘indies,’ the wirehouses still have over 45% of the assets,” he added, or $3.95 trillion. “That’s eroding slowly, but Morgan Stanley Smith Barney alone, with $1.4 trillion under management, has more assets than either the entire RIA (registered investment advisor) or IBD (independent broker-dealer) channel.”

The 54,000 wirehouse advisors represent 18% of retail advisors. The largest group—the 98,000 advisors in the independent broker-dealer channel—represents about 31%, and manages about $1.35 trillion (16%), if dually-registered advisors are included. Dually-registered advisors have an independent RIA, but still maintain a broker-dealer affiliation for commission business.

The insurance broker-dealer channel has about 70,000 advisors, or 22% of the total headcount, but manages a disproportionately small share of the assets: only 3.4%, or about $238 billion, Cerulli reported. The bank broker-dealer channel has only five percent of the advisors and manages just 2.2% of the assets.

Last fall’s market crash dropped a bomb on advisors whose earnings are based on assets under management. Cerulli’s annual report shows that assets in all retail advisory channels fell from more than 26% in 2008, to $8.3 trillion from $11.2 trillion in 2007.

Assets by Channel, 2007-2008 ($ billions)
Channel	2007	2008	1-Year CAGR
Wirehouse	$5,458.6	$3,947.3	-27.7%
RIA	$1,106.7	$911.3	-17.6%
Including dually registered	$1,740.4	$1,360.4	-21.8%
IBD	$1,605.4	$1,182.8	-26.3%
Including dually registered	$1,809.0	$1,352.4	-25.2%
Regional B/D	$1,589.4	$1,149.2	-27.7%
Dually registered advisors	$837.4	$618.6	-26.1%
Insurance B/D	$417.4	$282.9	-32.2%
Bank B/D	$228.8	$181.9	-20.5%
Total	$11,243.5	$8,274.1	-26.4%
Sources: Cerulli Associates, Investment Company Institute, NAVA, VARDS, Strategic Insight/SIMFUND, Securities Industry and Financial Markets Association, Investment News, Financial Planning, Bank Insurance Market Research Group, National Regulatory Services, Standard and Poor’s Money Market Directories, The Institute of Management and Administration, Judy Diamond, Department of Labor, CFO, Pensions & Investments, Cerulli Associates, in partnership with the College for Financial Planning, Financial Planning Association, Financial Services Institute, Investment Management Consultants Association, and Morningstar.

Nationwide and MSSB Ink SALB Deal

Posted on August 4, 2009 by Editor Test -

Nationwide Life Insurance has inked a deal to add a guaranteed lifetime withdrawal benefit (GLWB) rider to certain unified managed accounts (UMAs) at Morgan Stanley Smith Barney (MSSB), the mega-brokerage formed as a joint venture by Morgan Stanley and Citigroup this year.

Select Retirement, as Nationwide’s GLWB is called, can be applied to assets in MSSB’s Select UMA, a product launched by Smith Barney in April 2008. All 18,444 of MSSB’s “global representatives” will be able to sell Select UMA with the rider when the two firm’s brokerage platforms are integrated.

The initial rider capacity will be $250 million, an MSSB spokesperson told RIJ, which suggests that this is a toe-in-the-water project for Morgan Stanley. MSSB manages $1.42 trillion, with $325 billion in fee-based accounts, according to Morgan Stanley’s second quarter earnings report. As of last March, $5.5 billion of that was in Select UMA accounts.

Mindful of industry-wide GLWB losses in the past year, Nationwide is managing risk by limiting the size of the book of business, capping equity allocations at 50%, reserving the right to raise rider fees, and counting all withdrawals during accumulation period against the guaranteed income base.

Marc Brookman, managing director, product development and management at MSSB, told RIJ that Smith Barney began researching an income option for managed accounts about three years ago and considered several insurance partners before choosing Nationwide.

“Nationwide was the one that wanted to build this with us,” he said. “They’d never done anything like this before. We were working on this before the Lockwood product came out”—a reference to the Phoenix Companies’ rider for Lockwood Advisors’ managed accounts that was launched at the end of 2007.

“This appeals to a majority of our money managers. A lot of advisors just don’t like annuities, but this is a very different sale from a VA,” Brookman said. With Select Retirement, “we’re not competing with annuities, we’re complementing annuities. We think we’ll run through the $250 million in the first six months,” he added, noting that York University retirement income expert Moshe Milevsky is helping MSSB give presentations about the rider to its brokers all over country.

Two for the price of one

Nationwide said it first spoke with Smith Barney about applying a so-called stand-alone living benefit (SALB) rider to wrap accounts in mid-2008. The deal has been no great secret. But the dimensions of the partnership grew substantially when beleaguered Citigroup, desperate for cash, sold 51% of Smith Barney to Morgan Stanley for $2.7 billion and created the MSSB joint venture.

Smith Barney had been ailing. It has suffered severe asset and advisor attrition, as advisors and brokers fled Citigroup, which needed $45 billion in Troubled Assets Relief Program (TARP) assets to survive. “Advisors are, now more than ever, looking for a stable [broker/dealer]. They’re not finding it at Smith Barney right now,” a recruiter told Registered Rep magazine last spring.

Morgan Stanley has had problems of its own. It disappointed analyst expectations in the second quarter with a $159 million loss on continuing operations—mainly because credit default spreads improved and because it paid back a $10 billion TARP loan. “[We] would have been solidly profitable this quarter if not for these two positive developments,” said chairman and CEO John J. Mack in a July 21 statement.

In any case, Nationwide now has a much bigger SALB partner than it initially bargained for. According to Cerulli Associates, MSSB suddenly ranks second among mega-brokerages, between Wells Fargo/Wachovia Securities, which had 21,073 brokerage reps, and Bank of America/Merrill Lynch, which had 17,978 at the end of 2008.

“We were going with a big dog as it was and this makes it a bigger dog in terms of how much they manage,” said Eric Henderson, senior vice president of the Individual Investments Group at Nationwide Financial. “The key was integrating the plumbing at Nationwide and Smith Barney. We told the advisors, ‘You can keep doing what you’re doing. But now you have the option of lifetime income.’

“Everything else is the same,” he added. “That’s key to the success of the venture. So far it’s been very well received. Smith Barney has been having meetings with large groups of advisors to roll this out. The reaction has been very positive. In general, the economic events of the last nine months have made people value guarantees more.”

A cap at 50% equities

Although Nationwide filed the rider with the SEC as a fixed income annuity, it’s actually a GLWB, Henderson said. The rider guarantees a 5% annual roll-up during accumulation and a 5% annual payout rate starting at age 65 (4% from ages 55 to 64). Purchasers must be ages 45 to 7. The minimum account value is $50,000. In contrast to past GLWB riders, any withdrawals from the account balance during accumulation—not just withdrawals in excess of the roll-up—proportionally reduce the guaranteed income base.

Because the managed account itself carries an advisory fee and fund management expenses, Nationwide earns only a rider fee on the deal, while MSSB charges wrap account and investment fees. The rider fee is currently 1.00% for one person and 1.30% for the spousal continuation option, but can rise as high as 1.45% for one person and 1.75% for two, according to the prospectus.

The equity exposure in the approved investment portfolios is capped at 50%. Managed account owners can choose among several “eligible portfolios,” including 0%, 25%, 40% or 50% equities. Nationwide reserves the right to limit the investment options further-or relax them.

“This is the deal today,” Henderson said. “If the market continues to get better, we can change it. What we’re going out with reflects where the market is right now.”

If the managed account value ever drops to $10,000 during the payout stage, the assets are applied to the purchase of a fixed income annuity that continues making payments to the managed account owner or to his or her beneficiaries until the assets are disbursed.

“We are dealing with a company that has significant managed account money and who was open and excited about doing something about this,” Henderson said. “[Nationwide and Smith Barney] had similar visions of the movement to fee-based advisory relationships. This was an opportunity to go with a big partner who sees the same thing we do.” “It’s based on Smith Barney’s underlying investments. We did not change any of them. We’re just wrapping our insurance around it.”

According to a report last spring from Strategic Insight, at the end of 2008, “the managed money industry had nearly $1.4 trillion in assets under management, with $389 billion of that in managed portfolios (investing in either mutual funds or ETFs)… there are around $700 billion of assets already in place that could have a guarantee added with no change in assets.”

Free planning tool for advisors

In another part of Nationwide’s retirement business, the company began offering a free income planning program called RetireSense to financial professionals. The program divides retirement into five segments, each invested differently and each earmarked to provide risk-free income for a five-year period during retirement.

RetireSense appears to be a variation of the time-honored “bucket method” of income planning, which has been formalized in products such as Wealth2k’s Income for Life Model, which uses six income/investment segments. “The development of RetireSense has been a three-year long process and we did extensive competitor analysis,” said Nationwide spokesman Jeff Whetzel.

“The strategy is customized for the client through the use of the R-IncomeAnalyzer, a proprietary investment analysis tool that runs simulations, calculates the amount of money suggested for each investment and performs a statistical analysis that presents the likelihood of meeting specific income needs in retirement if certain types of suggested investments are made,” Nationwide said in a release.

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