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The ‘Facebook-ing’ of Retirement Income

Posted on August 25, 2009 by David Macchia -

Facebook, the hugely popular social networking site, recently enabled its millions of users to enjoy a more personalized Web experience by allowing them to register “vanity URLs”—user-defined web addresses that lead directly to their Facebook pages. At exactly 12:01 AM on Saturday, June 13, Facebook flipped the switch.

The popularity of Facebook’s move was astounding. Within three minutes, 200,000 users had registered personal URLs. Within 24 hours, 5.75 million people had claimed their preferred web addresses.

Facebook was actually late to the game of offering personal URLs. In the past, its policy was to restrict the availability of personal URLs to certain high-profile people. (How high-profile? You can check out Barack Obama’s Facebook website at http://www.facebook.com/barackobama.)

Both MySpace and Twitter beat Facebook to the punch in offering personal URLs. Like these other popular social networking sites, Facebook realized how powerfully people respond to personalization. LinkedIn has also recently joined the personal URL stampede.

One of the drivers of personalized URLs is the fact that people enjoy searching the Web for all manner of things… including themselves! Perhaps you’ve “Googled” your own name.

People not only like to search the Web for information about themselves, they also want to make it easier for others to find them in search results generated by Google, Bing and other popular search engines. Personal URLs make locating people and businesses much easier.

Web search is second only to email in popularity. And at its current growth rate, Web search may soon overtake email as the number one online activity. Oh, and it’s good for you. Recent research suggests that searching the Web stimulates the brain more than reading books. It apparently stimulates parts of the brain that control decision-making and complex reasoning.

Says Dr. Gary Small, a professor at the Semel Institute for Neuroscience and Human Behavior at UCLA, “A simple, everyday task like searching the Web appears to enhance brain circuitry in older adults, demonstrating that our brains are sensitive and can continue to learn as we grow older.”

If the hundreds of billions of Web searches conducted each year are any indication, people must be getting smarter by the day. According to research from the Pew Internet & American Life Project, in a typical day half of all Internet users search the Web. Moreover, not just young people are searching.

The implications for retirement income businesses

You may wonder what all of this has to do with the retirement income business. The answer is that, regardless of your particular role in the retirement industry, you have a direct or indirect connection to investors. Investors’ behaviors and preferences matter to you. With millions of investors routinely searching the Web, it’s prudent to examine the changes in the way investors learn about and evaluate products and services.

Often times the most active Web searchers are the best prospects for retirement income services. Pew’s research indicates that 40% of adults between the ages of 50 and 64 use search engine sites on any given day. In households where annual income exceeds $75,000, 62% of people search the Web every day.

Let’s say that you are a financial advisor who offers retirement income planning services. Your relationship with your clients has traditionally been face-to-face. Should you be concerned about where you rank in search engine results? If you aren’t easy to find in Google, Yahoo or Bing, does it matter? I believe it does. And it should concern you.

Here’s why. The global economic disaster and stock market crash exacted a huge economic and psychological toll on millions of Americans who are approaching retirement or are already retired. In the chaotic aftermath of trillion-dollar losses, investor confidence has been badly shaken. Reestablishing trust and confidence in this climate is no easy task.

Eventually, millions of investors are sure to seek our new approaches to retirement investing. Many already have. To the extent that investors believe they need to evaluate new investing strategies, searching the Web will be more important than ever. Having a quality online presence will be essential to your success. Not having a quality online presence will diminish your potential for success.

“The Internet is no longer a niche technology,” said Jonathan Carlson, president of Nielsen Online. “It is mass media and an utterly integral part of modern life. Almost no aspect of life remains untouched by online media. As our lives become more fractured and cluttered, it isn’t surprising that consumers turn to the unrivaled convenience of the Internet when it comes to researching and buying products.”

When it comes to experiences delivered via the Web browser, financial services companies don’t set consumers’ expectations; consumers set consumers’ expectations. Investing in the technology and content necessary to meet their expectations-including personalization-is becoming essential as you search for your success in the business of retirement.

David Macchia is founder & president of Wealth2k, Inc., Burlington, Mass. His email address is [email protected].

Four New VA Filings Reported by Beacon Research

Posted on August 24, 2009 by Editor Test -

Prospectuses for four new variable annuity contracts were filed with the Securities & Exchange Commission, according to Beacon Research. Two of the filings came from The Hartford, one from AXA Equitable, and one from MetLife Investors USA.

The Hartford filed two prospectuses for Series V-A of the Hartford Leaders line of variable annuities, effective August 14. Contributions to the contract can be allocated to variable sub-accounts, to a Fixed Accumulation Feature paying a guaranteed rate, and to a Personal Pension Account—where assets accrue interest until dispersed as an annuity or as a ladder of annuities. The Personal Pension Account can also be commuted to a lump sum payout.

“The Personal Pension Account… has features and guarantees you can use to design your own personal pension plan to provide you with life-long income payments without having to use the sub-accounts or Fixed Accumulation Feature for that purpose. These guarantees let you know in advance how much your income payments will be in the future,” the prospectus said.

AXA Equitable Life filed a prospectus for a Retirement Cornerstone suite of deferred variable annuities with no specific effective date. The contracts offer an annual roll-up during the accumulation period that is tied to the 10-year Treasury rate, and three age bands.

The contract’s guaranteed income benefit pays out 4% (3.25% for joint contracts) up to age 85, 5% (4% for joint contracts) from ages 86 to 94, and 6% (4.5% for joint contracts) from age 95 on.

The optional guaranteed benefits under the contract include a guaranteed income benefit, a return of principal death benefit, an annual ratchet death benefit, and a “greater of” death benefit. Annual charges for mortality and expense risk, administration and distribution range from 1.30% to 1.70%. The income rider charge is 0.80% to start, but can reach a maximum of 1.10%.

Aside from variable sub-accounts, contract owners can invest up to 25% of assets in a guaranteed return account. Investors can also allocate funds to specific pre-set portfolios. The XC version of the contract offers a 4% credit on first-year contributions up to $350,000 and 5% on larger contributions.

MetLife Investors USA has filed a contract for a single premium deferred variable annuity contract called MetLife Growth and Guarantee Income, with no confirmed introduction date. It has with a $50,000 minimum premium and only two investment options. There’s a large cap blend fund that invests 60% in equities, 35% in bonds and five percent in cash, called the Fidelity VIP Funds Manager 60% Portfolio. It has an expense ratio of only 0.89%. The other option is a Fidelity money market fund.

The payout rates and age bands for the lifetime income benefit are 4% for contract owners ages 59½ to 64, 5% for those ages 65 to 75, and 6% for those age 76 and older. The mortality and expense risk fee is 1.90% for single annuitants and 2.05% for joint annuitants, but the surrender charge is only 2% and lasts five years.

Prospectuses:
The Hartford
www.sec.gov/Archives/edgar/data/809013/000110465909049823/a09-17206_1n4a.txt
www.sec.gov/Archives/edgar/data/1084147/000110465909049824/a09-17215_1n4a.txt

AXA Equitable Life
www.sec.gov/Archives/edgar/data/1015570/000008902409000507/e11885.txt

MetLife Investors USA
www.sec.gov/Archives/edgar/data/356475/000119312509178269/dn4.txt

Does Employer-Based Health Care Get a Free Ride?

Posted on August 24, 2009 by Editor Test -

In 2010, the exclusion of contributions to employer-sponsored health insurance plans (ESI) from income and payroll taxes will be worth $240 billion, according to a July 2009 report from the Synthesis Project of the Robert Wood Johnson Foundation.

The paper, “Tax Subsidies for Private Health Insurance: Who Benefits and at What Cost?” suggests that the U.S. government already pays part of the bill for private health insurance simply by not taxing it, and asserts that the benefits of the exclusion go disproportionately to those with the richest medical packages and in the highest tax brackets.

Proposals have been put a cap on the amount of contributions to employer-provided health care plans that can be excluded from income tax. The new tax receipts would be used to finance health care or health insurance for the uninsured. But there’s little expectation that Congress will remove the entire subsidy.

“If all premiums were taxed as income, you’d get quite a disruption in the employer system,” said the Urban Institute’s Steve Zuckerman, one of the authors of the study. “There’s no chance of the subsidy being taken away in its entirety. But there could be policy changes to lower the exclusion. And that would move us in the right direction.”

Activists who favor universal health care believe that the subsidy encourages overly generous health care packages, just as low interest rates appear to encourage the construction of bigger and fancier homes, he said. Reducing the subsidy and taxing health care expenditures might discourage over-spending on health care, the way higher gas prices discourage needless driving.

The main findings from the study were:

• Higher-income workers benefit the most from the current taxes subsidies because they are in a higher tax bracket, are more likely to work for employers offering ESI and more likely to use ESI when offered than lower-income workers.

• The subsidy is worth more than $4,500 per year to the highest-income families. The average subsidy for the highest income workers is three times the average subsidy for the lowest income workers.

• Lower-income families pay the largest percent of income on insurance (>25%), but receive the smallest tax subsidy.

• Almost 90% of workers with incomes at least three times the poverty level have ESI compared with less than one-quarter of workers below the poverty level.

• The federal subsidy for ESI may encourage overly generous coverage.

The study recommended three policy options:

• Eliminate the tax exclusion for ESI. This policy would increase payroll and income tax receipts to help pay for health coverage for the uninsured and hard-to-insure, but would also raise the cost of ESI for workers and result in much less employer coverage.

• Cap the tax exclusion for ESI. This policy could cap the exclusion at the median premium level, raising an estimated $22 billion in tax revenue in 2010. A cap at the 75% percentile of premiums would raise $22 billion. Thus, plans with higher premiums would lose part of their subsidy and would cost employers and employees more.

• Allow non-group coverage to be purchased with pre-tax dollars. This option would expand the subsidy to provide a similar tax advantage to those purchasing coverage outside of the employer system. This change might encourage young people to forego ESI in favor of individually purchased coverage, making ESI more expensive for those remaining.

Health care reform will have a big impact on retirees. Even with Medicare coverage, the average couple is expected to spend $250,000 out-of-pocket for medical care during retirement, according to the National Coalition on Health Care. Many experts believe that this figure is conservative and that $300,000 may be a more realistic number.

In 2005, a survey of Iowa consumers by the Iowa Department of Public Health found that in order to cope with rising health insurance costs, 86% said they had cut back on how much they could save, and 44% said that they have cut back on food and heating expenses.

Americans spent $2.26 trillion on health care in 2007, according to the Office of Actuary Centers for Medicare and Medicaid Services, and an estimated $2.4 trillion in 2008.

How Good Is This Ad? You Decide.

Posted on August 21, 2009 by Kerry Pechter -

And the winners are. . . MassMutual, Fidelity Investments, and Lincoln Financial Group.

Earlier this year, Phoenix Marketing International, a Rhinebeck, NY research firm, asked investors to review 27 print and TV ads and grade them from one to seven on each of 25 attributes, such as persuasiveness, creativity, and ability to spark action.

The results of the twice-a-year syndicated Retirement Services Study, in which as many as 70 companies participate, were released this month. Companies subscribe to the study and receive a detailed assessment of brand awareness and advertising awareness across the financial services industry.

The study is based on feedback from some 700 people ages 35 to 64, half affluent and half non-affluent, who are customers of at least one of the ad sponsors. The affluent participants have a household income of at least $100,000 and have non-retirement investments of $100,000 or more.

“Once a year, we do a ‘best practices’ overview, and consider all the advertising that we assessed during the year,” said Phoenix Product Manager Kristina Terzieva, who managed the survey. “We pick out the strongest ads and identify their commonalities, themes and messaging.

“The issue of trust is the most important, as well as showing something different, and focusing on the benefits without overwhelming them with information,” Terzieva said. “The company should answer the question, ‘Why should I invest with you?’”

Rainy day woman

In MassMutual’s print ad, a woman with short dark hair gazes through a rain-streaked window at a blurred backyard landscape beneath the headline, “WHAT IS THE SIGN OF A GOOD DECISION? It’s feeling secure, even when times are stormy.” Below the image a block of copy (not shown here) pitched the MassMutual value proposition.

The ad drew a wide range of responses. Many reviewers said it “spoke to them.” Some said it left them cold.

But the positive comments outnumbered the negative ones enough to make the ad the most popular print of all those reviewed. “I feel exactly like the woman looking out at the rain,” said one reviewer, who gave the ad “6” out of seven points. “Sometimes I am sad about our economy.”

Others felt reassured by the facts listed in the paragraph of text below the image. It emphasized MassMutual’s 157-year history, its $8.5 billion cash cushion, its steady delivery of dividends to policyholders, and its independence from “Wall Street.”

“There’s a lot of understandable consumer skepticism out there. They don’t want claims, they want facts,” said Vic Lipman, assistant vice president for branding and advertising at MassMutual. The ad was created by the Boston-based Mullen agency. It ran as full-pages in the New York Times and Wall Street Journal last February and March.

The ad was part of the insurer’s “Good Decisions” campaign, which MassMutual started researching in the spring of 2008. “The notion of ‘good decisions’ kept coming up in our research,” Lipman added. “It resonated with both consumers and professionals. People want help making good decisions. Later, as the financial crisis unfolded, we found that it was appropriate for that environment too.”

MassMutual career agents have been using reprints of the ad for sales and recruiting with great success, Lipman said. “We’re planning on staying the course with the Good Decisions campaign,” he said. “It has a lot of legs and we want to use it for the foreseeable future.”

First-class treatment

“We’ve identified four specific themes running through the ads,” Terzieva said. The most important is credibility. Then there must be a cognitive connection. The ad should resonate with the reader, and be informative, clear and believable. Third, there’s personal relevance.

Companies Participating in Phoenix Retirement Ad Surveys
Phoenix determines which companies are currently advertising and selects up to 30 ads for each semi-annual study. The advertisers listed below are included:
ADP	Aetna	AIG	AIM
Alliance Bernstein	Allianz	American Century	American Funds
Ameriprise	AXA	Bank of America	Bankers Life & Casualty
Charles Schwab	Berkshire Life (Guardian)	C N A	Colonial Life & Accident
Columbia Funds	Commonwealth Financial	Davis-Selected Advisors	Eaton Vance
Fidelity/Fidelity Advisors	Franklin Templeton	Genworth Financial	Goldman Sachs
Guardian	The Hartford	ING	Invesco AIM
Jackson National	Janus	John Hancock	Lincoln Benefit
Lincoln Financial	Lord Abbett	LPL Financial Services	Mass Mutual
MedAmerica	Merrill Lynch	MetLife	MFS
Mutual of Omaha	Nationwide	Northwestern Mutual	NY Life
Oppenheimer	Pacific Life	Paychex	PIMCO
Pioneer	The Principal	Prudential	Putnam
Raymond James	Scudder	Smith Barney	State Farm
Standard Insurance	Sun Life	TD Ameritrade	TransAmerica
Travelers	T.Rowe Price	UnumProvident	US Trust/Bank of America
USAA	Wachovia/Wachovia Securities	Waddell+Reed	Van Kampen
Vanguard	Zurich Kemper

“A good example of that is one of the Lincoln Financial ‘FutureSelf’ TV ads, where the individual meets his older self on an airplane,” she said, referring to 15-second spot in which a business traveler in the window seat of an airliner strikes up a conversation with a greyer, craggier version of himself, 15 years hence.

The older man compliments his younger self for saving money by flying coach-class. Soon the older man leaves, explaining that he’s returning to his seat in the first-class section. “You can afford it now,” he says.

“It was inspirational,” said Terzieva. “It touches on the needs of the end user, and it’s a little more emotional and touching than others.”

But the Lincoln ad, while highly affecting, wasn’t considered as effective as one of Fidelity Investments ‘green line’ TV ads. In it, an investor chats with his advisor in a Fidelity branch office. As the investor leaves, a green carpet unfurls on the sidewalk ahead of him. But when he steps off the green path to yearn at a vintage AC Cobra roadster through a showroom window, the advisor sets him back on the straight and narrow.

“The fourth theme is the creative,” Terzieva said. “Does the ad break through the clutter and create buzz?” Examples of that would be any of the E*Trade ads in which a verbally precocious toddler in a high chair explains how easy day-trading can be. But the most clever ads don’t necessarily get the highest effectiveness ratings, Terzieva said.

Of the major financial services firms, Charles Schwab, Fidelity, State Farm, T. Rowe Price, and Vanguard most impress investors, in terms of solid reputation, according to Phoenix. Perhaps not coincidentally, four of those five firms market direct to consumers. MetLife, New York Life, and The Hartford also had high-ranking ads in the survey.

John Hancock Issues New MVA Fixed Annuity

Posted on August 19, 2009 by Editor Test -

John Hancock Financial has launched “JH Signature,” a modified guaranteed annuity designed to provide a combination of ‘rate for term’ choices, guaranteed interest rates, and support services to help manage eldercare situations.

“We believe the JH Signature fixed annuity is an excellent addition to the strong, highly competitive John Hancock product portfolio in the marketplace,” said Ron McHugh, Senior Vice President and General Manager, John Hancock Fixed Products.

“JH Signature Fixed Annuity offers safety and security to clients as well as competitive rates and tax deferred growth backed by the financial strength of one of the most highly rated insurance companies in the industry.”

Investors can choose either a 3-, 5-, 7-or 10-year period with a matching withdrawal charge schedule. The minimum premium is $25,000, with higher interest rates for premiums above $50,000 and $100,000, respectively.

Contract owners can take withdrawals or surrender the contract during the guarantee period, but withdrawals greater than the interest credited over the previous 12 months would be subject to a withdrawal charge and a market value adjustment (MVA). The MVA, based on a formula which responds to interest rate movements, can be positive or negative.

JH Signature also offers the Family Resource Benefits, which offers professional health and lifestyle information at no additional charge. This includes discounts, referral services and programs to help clients and their families better understand and manage challenging eldercare situations.

John Hancock Financial is a unit of Canadian-based Manulife Financial Corporation, a leading Canadian-based financial services group. Funds under management by Manulife Financial and its subsidiaries were Cdn$421 billion (US$362 billion) as at June 30, 2009.

A Chat with Jackson’s Clifford Jack

Posted on August 19, 2009 by Kerry Pechter -

Having survived the financial crisis without an emergency cash transfusion, Jackson National Life posted strong second quarter sales figures last week and solidified its position among the top issuers of both fixed and variable annuities in the U.S.

A unit of Britain’s Prudential plc (PUK), Jackson reported $3.4 billion in retail sales and deposits in the second quarter, a record. First-half 2009 annuity sales were $3.8 billion (variable) and $1.9 billion (fixed). In the first quarter, the firm sold $1.51 billion worth of variable annuities and $1.05 billion in fixed.

Jackson’s A1 (Good) rating from Moody’s was based, Moody’s reported in July, on “its good position in the domestic asset accumulation business… broad annuity product offering, use of multiple distribution channels… and an efficient back office infrastructure.”

The company finished the first quarter of 2009 ranked eighth among variable annuity providers, up from twelfth at the end of 2008 after vaulting over Hartford Life, Pacific Life, AIG, and RiverSource Life. (LIMRA has not yet reported the top 20 annuity sellers for the first half of 2009.)

Jackson’s first-half annuity net flows (total premium minus surrenders, exchanges and annuitizations) totaled $2.7 billion. That was 23% higher than the same period in the prior year-a sign that Jackson has been winning the war for 1035 exchanges.

Clifford Jack, executive vice president at Jackson National, spoke with RIJ on August 17 about the company’s recent performance.

RIJ: Why was Jackson so successful in the second quarter?

Jack: Our success is attributable to the market consolidating to the strongest players. All over the market, in the variable annuity as well as the fixed and indexed annuity markets, there’s been a flight to quality. The advisors are first and foremost concerned with making sure the insurance providers will be there to meet their obligations to customers. They’re consolidating to strong balance sheets and to the stability of the Jackson offering.

The changes we’ve made to our products have been small compared to the rest of the industry because we were priced appropriately prior to the market meltdown. As a result, we have consistency in our product and our message. That has a lot to do with it. We’ve also seen a significant influx of new advisors who never considered selling variable annuities in past, but are now considering them in light of what happened to their clients’ non-secured investment.

A big part of our success stems from the fact that we’ve taken no public capital or raised private capital to deal with the crisis. We had enough cash on our balance sheet. If you take public dollars, you have handcuffs.

RIJ: But your parent company’s ADR share price took a big hit in March along with other life insurance companies. Weren’t you impacted by the collapse in values of mortgage-backed securities?

Jack: We were impacted along with the rest of the market. If you’re an insurance company investing in long term obligations, there’s a very strong likelihood that you’d have had mortgage backed securities among your fixed income holdings. In the meltdown, nothing in the bond portfolio or the mortgage portfolio was immune to the problems.

Jackson National Life At a Glance
Principal offices: Lansing, Michigan Purchase, New York (for Jackson National Life Insurance Company of New York) Denver, Colorado Strength ratings: A+ (superior) by A.M. Best AA (very strong) by Standard & Poor’s AA (very strong) by Fitch Ratings A1 (good) by Moody’s Investors Service, Inc. Asset rankings: 16th largest U.S. life insurer ranked by general account assets. 19th largest U.S. life insurer ranked by total assets, with $74.9 billion in 2008. 20th largest U.S. life insurer ranked by statutory surplus plus asset valuation reserve and interest maintenance reserve. Distribution affiliates: Curian Capital, a separately managed accounts subsidiary. National Planning Holdings, Inc. (NPH), a network of four independent broker-dealers. Source: www.jackson.com

RIJ: How do you think the market for variable annuity products has changed since a year ago?

Jack: We think there’s tremendous opportunity for variable annuities. If you compare the average performance of managed money accounts, mutual funds and variable annuities, there’s no question that the variable annuity customer has done better in terms of performance in light of the flooring provided by living benefits.

RIJ: What kind of specific changes have you seen?

Jack: Look at the number of new appointments that are coming into the [annuities] channel. They’re coming because the old paradigms were blown up. For Jackson alone, we had 12,000 newly appointed advisors in the first half of the year, compared to 16,600 for all of last year. That’s a big driver of sales.

There are two pieces in that number. There are the advisors who are coming to us as part of the flight to quality, and there are the advisors who are just coming into this market. We have the largest wholesaling force in the industry, and they tell us that they’re hearing from advisors who have never sold variable annuities before.

RIJ: Are you doing anything differently this year in terms of marketing?

Jack: With respect to marketing, we allow the producers to make their own determinations. We just tell our story. Advisors and broker-dealers have become more sophisticated in asking questions about capital, and we’ve been very happy to have those conversations.

We’ve had a significant ramp up in the number of home office due diligence meetings for broker-dealers. We spend a couple of days on due diligence of our firm, what we do, how we do it, what shape we’re in. We’re ramped up the number of those meetings significantly.

When we’ve run these meetings in the past, pre-crisis, we spent very little time on the financials of the company, because it was assumed that the ratings agencies did due diligence in that area. So where we used to spend a lot of time positioning the product relative to the competition, we now spend most of our time on financial due diligence.

RIJ: What do you consider Jackson National’s biggest challenge going forward?

Jack: To use a sports analogy, we talk all the time about not being the team that performs extremely well for eight and two-thirds innings just to screw it up on the final out. We’ve been disciplined in our approach to hedging and pricing from Day One, and now, because we’re so well positioned, we don’t want to screw it up by changing our business philosophy.

Will Boomers Pony Up for these Riders?

Posted on August 18, 2009 by Editor Test -

By attaching long-term care insurance (LTCI) riders to deferred annuities, insurers could solve three chronic conditions: the high cost of stand-alone LTCI products, the high surrender rate of deferred annuity contracts, and Baby Boomers’ fear of potentially monumental nursing home expenses.

That’s one of many insights in the July 2009 research report, “Annuity and Long-Term Care Insurance Combination Products,” from analysts Carl Friedrich and Sue Saip at Milliman, the Seattle-based global consulting firm.

“It’s reasonable to expect that the lapse rates on LTCI annuities would be substantially lower than lapse rates on deferred annuities,” Friedrich said.

“People who buy this kind of coverage are very aware of the LTC insurance element. They know that the cost long-term care insurance goes up substantially as they age, and that the likelihood of being able to clear underwriting goes down. So they are reluctant to give it up.”

Where deferred annuities have lapse rates as high as 40% to 70%, he said, the lapse rates of LTCI/annuity hybrids could shrink to as low as one or two percent—the rates associated with LTCI policies. As a result, he added, “There’s a tremendous pricing benefit to making these riders available to existing annuity owners.”

The Pension Protection Act of 2006 included a provision stating that, starting Jan. 1, 2010, payouts from non-qualified LTCI/annuity hybrid products can be distributed tax-free when used to pay long-term care medical expenses. (The effective date of the provision was delayed in order to control the long-term cost of the subsidy to the U.S. Treasury.)

Significantly, the law allows for 1035 transfers into these products from existing non-qualified annuities. Just as guaranteed lifetime withdrawal benefits churned up the annuity market, the availability of the LTCI riders could inspire producers and annuity owners to move hundreds of billions of dollars from old contracts into hybrid contracts in coming years.

So far, only about 10 insurance companies have issued LTCI/annuity hybrids. But Milliman expects that number to double during 2010. “Some of the major companies are waiting to see if these products take off in the marketplace. Some have held off because the law doesn’t go into effect until 2010,” Friedrich said.

“Another reason for holding off is that they know they’ve got a lot of training to go through,” he added. “On the other hand, if we begin to see a lot of replacement activity, with people exchanging annuities without LTC rider for annuities with riders, companies would be forced to develop combination products for their own portfolios.”

The Milliman report describes three basic product designs under scrutiny by carriers. In the so-called “tail design,” a contract owner would exhaust his or her own annuity assets before claiming benefits. In the second, or “co-insurance design,” every payment would blend client and carrier money. In the third, or “pool design,” a maximum benefit would be agreed upon in advance, and payments would continue until the pool amount was exhausted.

The co-insurance design appeals to consumers and the IRS. Consumers like to feel that they’re receiving assistance from the insurance company as soon as care begins. The IRS doesn’t like the scenario, possible under the tail design, where the client could die before the insurance company pays anything.

Under the co-insurance method, “the insurance company always has a meaningful amount of risk,” Friedrich said. That’s what the government wants to see. “The IRS did in fact issue a private letter ruling about three months ago for a company that used the co-insurance method. The IRS didn’t disclose the percentages”—that is, the exact balance of contributions—“but it said that design did include meaningful risk.”

Regulators can be expected to frown on LTCI/annuity hybrids that reduce carrier risk by insisting on long waiting periods before coverage begins, and by stopping eligibility for coverage at advanced ages-which are likely to be the ages when clients are most likely to need the benefits.

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?

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