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The fixed annuity trade association, NAFA, is urging insurance producers to converge on Washington, D.C., and march in protest against the federal regulation of equity-indexed annuities.

In a recent broadcast e-mail to those who sell EIAs and others, NAFA executive vice president Kim O’Brien said, “the annuity industry is at a boiling point.” She invited producers to attend NAFA’s annual meeting and join in a “March to Capitol Hill” in Washington on May 6-8, 2009.

Last summer, the Securities and Exchange Commission, under then-chairman Christopher Cox, ruled that EIAs should be federally regulated as securities and not as state-regulated insurance products because, despite the principal guarantees they offer, their returns are uncertain. The ruling, known as 151A, is set to take effect in January 2011.

The ruling rocked the EIA industry, because it in effect denies insurance agents the right to sell EIAs and earn substantial commissions from doing so. The vast majority of EIAs have been sold by insurance agents, only some of whom also have licenses to sell securities.

“The fact is, the SEC is out to take control of the insurance industry,” O’Brien said in her letter to producers, reflecting the opinion in some insurance circles that the SEC ruling was a disguised attempt by the securities industry and its broker/dealers to arrogate the lucrative EIA business. 

EIAs are a type of structured product, issued by insurance companies, that offers protection against losses and the opportunity to benefit from rising stock prices. EIAs vary in design, but they all involve an investment in bonds coupled with a much smaller investment in equity index options.

None of the assets are invested directly in equities. The bonds offer safety and the options allow the investor to participate in positive equity returns. EIAs are well suited to a low interest rate environment like the one that followed the dot-com crash of 2001 and the one that currently prevails.

Many of the insurance companies that manufacture EIAs have allied themselves with NAFA on this issue by contributing to a 151A “opposition fund.” As of April 8, the fund had raised $83,500, or about one-third of its $250,000 goal. The money will be used for legal fees and marketing.

Among those companies are AIG American General, Allianz Life, American Equity, Conseco, CUNA Mutual, Genworth Financial, Jackson National Life, Lincoln Financial Group, Midland National, Old Mutual, Protective Life, and Sun Life Financial. Also listed as “premier partners” in the opposition fund are several independent marketing organizations, which act as EIA wholesalers, including Ann Arbor Annuity Exchange, Creative Marketing, and others.

© 2009 RIJ Publishing. All rights reserved.        

Conning Research and Consulting’s “Life-Annuity Forecast & Analysis, 2008” puts dollar estimates on the life and insurance industries losses stemming from the market crash of 2008 and predicts a modest recovery by 2010. A copy of the report can be obtained at conningresearch.com.

Individual annuity net premiums are expected to grow to $225.2 billion in 2010 from $188.5 billion in 2007, while net flows should improve to 15.1% in 2010 from -1.5% in 2007, thanks to a reduction in surrenders, according to the report’s executive summary. Carriers will significantly strengthen general account reserves to support guaranteed death and living benefits.

Net operating losses after taxes and dividends were an estimated $1.6 billion for 2008, with positive operating gains of $2.7 billion and $4.6 billion predicted for 2009 and 2010, respectively. Operating margins are forecast to be -0.8% in 2008, 1.3% in 2009, and 2.0% in 2010, according to the research firm, which is based in Hartford, Conn.

“A projected decline in capital and surplus, due to the combination of negative net income and realized and unrealized capital losses in 2008, combines with a potential increase in the minimum capital required to support variable annuity guarantees to produce a capital squeeze that could reduce some insurers’ ratings,” the report warns. It forecast a drop of $76.8 billion in surplus in 2008 would result in the median dropping to approximately 325% for 2008.

“It is likely that 2009 will bring additional reductions in surplus as the full force of the crisis takes effect. Therefore, the ratio will drop below the ratio reached in the 2001-2002 downturn. This capital squeeze could lead some insurers to exit the individual annuity line, seek additional capital, or merge with other insurers,” the executive summary said. 

© 2009 RIJ Publishing. All rights reserved.

On February 13, 2009, a jury rendered a verdict in a patent infringement lawsuit in favor of The Lincoln National Life Insurance Company and against three Aegon USA companies: Transamerica Life Insurance Co., Transamerica Financial Life Insurance Co., and Western Reserve Life Assurance Co. of Ohio. The jury found Lincoln’s ‘201 patent valid and determined that a reasonable royalty for Transamerica’s infringement was $13.1 million.

The E*Trade commercial where the baby spits up his pablum after he off-handedly explains how easy it is to trade securities online occupies an honored niche in my pantheon of favorite TV commercials.

But while as a viewer I find the commercial very funny, as someone who wishes that the Street policed itself more effectively I don’t think it’s amusing at all.

If E*Trade intends the commercial to popularize day-trading by suggesting that it is child’s play—and what other purpose could it have?—then the ad should have been censored long ago as promissory.

Day-trading, as everyone knows (unfortunately, I don’t have the statistics at my fingerprints), is a sucker’s game. Even active trading is dangerous; day-trading eventually ruins most of the people who pursue it. It’s like crack cocaine.

In a responsible world, Wall Street’s narcissistic watchdog, the Financial Industry Regulatory Authority, would have blocked that commercial from ever traveling over the airwaves and coaxial cables to the ears of the naïve. 

That’s just one reason why President Obama shouldn’t have picked Mary L. Schapiro to become the chairman of the Securities and Exchange Commission.  

Ms. Schapiro spent the past ten years as president of FINRA or its predecessor, NASD. During that time, FINRA dithered while two stock market bubbles and the Enron crime etherized the savings of millions of Americans.

In 1998, Ms. Schapiro talked tough about the need for a rule requiring variable annuity sales to be suitable. It took almost 10 years for her organization to promulgate a suitability rule. Perhaps Wall Street, via K Street, thwarted her. Either way, she’s been ineffective.

FINRA’s compliance lawyers are fastidious about ensuring that variable annuity marketing writers don’t imply that clients’ investments will appreciate. But when it comes to preventing the likes of a Bernie Madoff scandal, FINRA has slept as soundly as FEMA when Katrina hit New Orleans.  

The inconsequence of FINRA—during the Madoff affair, the press has largely ignored it and held the SEC accountable instead—makes Ms. Schapiro’s super-sized compensation as its chief executive unjustifiable.

As the Wall Street Journal reported on January 29, FINRA paid her $2.7 million in 2008. She earned hundreds of thousands of dollars a year more as a board member at Kraft Foods Inc. and Duke Energy Corp.

But her annual compensation, the story said, is dwarfed by “a lump sum payout of between $5 million and $25 million from defined benefit plans of her former employer.”

Call me a wild-eyed radical, but I think I speak for everyone who recently who lost 30% of their savings, or their job, or their home, in asking why someone who protected our money so poorly deserves such lavish rewards. 

First, the fact that the securities industry can afford to pay its top watchdog $25 million demonstrates that our supposedly efficient markets aren’t. If the system contains so much slack, investors are paying too much in fees.

Second, the money fatally compromises Ms. Schapiro. She’ll recuse herself on matters related to Kraft, Duke, Walt Disney Co., Starbucks Corp., and General Electric Co., whose shares she owns. But how can she play hardball with an industry that pampered her? How tough will she be on executive compensation?

When I started this rant, I thought I held a minority opinion. Then I read a chain of reader comments about Ms. Schapiro’s appointment on the Journal’s website. Her selection irks, insults and confuses many of us who hoped for a fresh start after years of regulatory dysfunction. It’s disappointing. Like that baby in the commercial, I feel like spitting up.

© 2009 RIJ Publishing. All rights reserved.

SPRINGFIELD, Mass. — MassMutual’s Retirement Services Division has published a new white paper entitled “The Successful Retirement Advisor Part II: Best Practices and Key Drivers of Success.” The paper explores factors that help make retirement advisors successful and the correlation between advisor success and plan sponsor satisfaction.

This second study, from the advisor’s perspective, helps advisors understand the characteristics, attributes and best practices that contribute to a plan sponsor’s satisfaction and to an advisor’s success in retaining satisfied clients and earning new retirement plan business. It follows MassMutual’s “The Successful Retirement Advisor Part I” white paper that provided the plan sponsor’s perspective, including interests, concerns and priorities in relation to the role of the advisor.

For “The Successful Retirement Advisor Part II,” MassMutual commissioned Brightwork Partners to survey 250 advisors representing a diverse cross-section of financial services distribution channels – including fee-based and commission-based advisors. Overall, the surveyed group serves more than 8,700 plans with a total asset value of nearly $24 billion.

“Our findings indicate that the most successful retirement advisors have four common characteristics . . . focus, preparedness, proactive strategic planning and consistent relationship management,” says Hugh O’Toole, senior vice president and head of national distribution and client relationship management for MassMutual’s Retirement Services Division. “One noteworthy factor is that the successful retirement advisor participates in face-to-face sponsor visits at least three times per year and averages at least two calls per sponsor per month,” he adds.

Other characteristics of the successful advisor covered in MassMutual’s white paper include the advisor’s business model, relationship management and business development practices, and client retention strategies. To request a complimentary copy of MassMutual’s “The Successful Retirement Advisor Part II” white paper, please contact your MassMutual Retirement Services representative or call MassMutual’s advisor support team at 1-888-626-4911. The report is also available by logging in to MassMutual’s website for financial professionals, http://www.massmutual.com/powertogrow.

© 2009 RIJ Publishing. All rights reserved.

Kerry H. Pechter, the author of Annuities for Dummies (Wiley, 2008) and former editor-in-chief of Retirement Income Reporter, has formed RIJ Publishing. The new firm’s first editorial venture, appearing in April 2009, will be the online magazine, Retirement Income Journal. Screenshots of the magazine’s home page will be distributed at the LIMRA Retirement Industry Conference, April 1-3, 2009.

NEWARK, N.J. – Prudential Annuities has raised the price and lowered the minimum purchase age of its popular variable annuity living benefit, known as Highest Daily 7 because it has a 10-year rollup (pre-income) period during which the guaranteed income base rises at the market rate or at a 7% annual rate every day. Contract owners who don’t take withdrawals for 25 years receive a 600% minimum increase in their income base.   

“In today’s environment, guarantees are critical to investors and their focus on retirement income,” said Stephen Pelletier, President of Prudential Annuities. “The new Highest Daily Lifetime 7 Plus benefit allows Prudential to respond to the changing needs of American investors in today’s turbulent financial market. Our Highest Daily benefits are designed to provide guarantees, for income purposes, while ensuring that in the event of significant market declines, the protection we provide responsibly manages risk for the client as well as for the company.”

Similar to its predecessor, the new options capture the annuity’s highest daily value and grow that value at an annual 7% compounded rate, until lifetime income begins. Highest Daily Lifetime 7 Plus and Spousal Highest Daily Lifetime 7 Plus^SM will replace Highest Daily Lifetime Seven^SM and Spousal Highest Daily Lifetime Seven^SM in all states where they have been approved.

© 2009 RIJ Publishing. All rights reserved.

By Garth Bernard, principal, Retirement Income Solutions Enterprise, Inc.

In recent times there have been premature reports of the demise of annuitization, but has anyone truly studied the history of annuitization with the aim of understanding where we’ve come from and how far we’ve come as an industry?

I was reminded of what is at stake when I came across an article in the Times Magazine of July 2, 1956,  “Insurance Companies are Pro and Con”.

This fascinating history lesson describes a developing row over “variable annuities”, then the new kid on the block, having been pioneered by CREF in 1952. Various companies weighed in then, including “the world’s biggest insurance company”, Metropolitan Life, which was against, and Prudential Insurance, who weighed in heavily for the new idea. Even then, there was recognition of the retirement opportunity and the interests of “our retired people” which was the context of the debate.

The NASD and the mutual fund industry were opposed to the idea. The NYSE was also opposed and questioned why the insurance industry should enjoy such “unfair” tax advantages compared to the investment industry. The SEC provided some commentary, and the State Insurance Departments were absent (at least not quoted in the article). If you read the article without referring to the date, you would think this article was written in recent times (although certain cultural norms common for the time would have been a dead giveaway).

While the article is clearly describing the “birth” of the variable annuity, it may not be apparent from the brief description in the above paragraphs that that article in not referring to what is typically understood today by the term “variable annuity.” In fact, the most enlightening lesson in this look-back at history was the fact that throughout the article, the word “annuity” was explicitly and commonly understood then to mean the income stream and the “variable annuity” vehicle starring in the article was an immediate variable annuity, or the variable version of the immediate fixed annuity or SPIA. In other words, the word “annuity,” without a qualifier, meant “immediate annuity!”

In addition, the change in the landscape since 1956 is interesting to observe. MetLife, then the leading critic of variable annuities, is now a market leader in the sale of (deferred) variable annuities with a guaranteed income benefit rooted in annuitization and a leading innovator of (immediate) variable and fixed annuities. Prudential, then the leading supporter of the immediate variable annuity, does not market an immediate variable annuity today, but is focused primarily on deferred variable annuities with withdrawal guarantee features.

What will they say in the year 2060?
The article was written over 52 years ago – not that long ago when you think about it – but how soon we forget. This window into history and the point in time when variable annuities were born provides two important perspectives. First, if anyone suggests that annuitization is not a viable option, educate them about this slice of history, when annuities meant annuitization, and they appeared to be quite desirable in both fixed and variable form. Second, there is no reason that we should not look back in 2060 through a window to today’s era and see the “rebirth” of annuitization. The point is that we must never forget our history and our roots.

What is called for is a return to the basics, including the use of simple examples that make truths about annuitization more self-evident to advisors and consumers. The insurance industry needs more champions of annuitization who can provide the schooling and lessons that are desperately needed by the audiences who stand the most to gain from it – retirees and pre-retirees who are otherwise without hope that their retirement goals can be met, and the advisors who can make a big difference in their clients’ chances of retirement success.

So in 2060, how will our era be described? Will they look back through that window and say that it was the era of the rebirth of annuitization, or will they say, we forgot our own history and missed one of the greatest opportunities ever presented to the insurance industry to capitalize on its unique franchise to underwrite mortality? Only time will tell.

But perhaps, the new era of “annuity” rebirth has indeed already started today. Despite all of the obstacles, both real and perceived, advisors are increasingly discovering the power of annuitization and income annuities as part of a more effective retirement plan. Income annuities include immediate fixed annuities, immediate variable annuities and deferred income annuities (such as deferred period certain annuities and longevity insurance).) There are several leading advisors, pioneers in their own right, who have seen the light and are changing the face of retirement planning as we know it by using annuitization and income annuities, in addition to accumulation vehicles such as deferred annuities and investments. In addition, there are a few insurance companies – such as New York Life, Mass Mutual, Lincoln National, MetLife and Hartford Life – who are leaders in promoting annuitization by providing innovative income annuity products along with sales that prove the desirability of annuitization.

We should light the path forward, enlighten the way, and provide encouragement to leaders who defy the conventional wisdom of those who have forgotten our annuity roots and do what the majority today say cannot be done. As Samuel Adams (1722-1803) once said, “It does not take a majority to prevail, but rather an irate, tireless minority keen on setting brush fires in people’s minds.”