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.
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Heck Of A Job, FINRA!
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.
How to Succeed at Advising Retirees
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.
‘Dummies’ Author Launches Retirement Magazine
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.
Prudential Enhances HD7 Product
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 PlusSM will replace Highest Daily Lifetime SevenSM and Spousal Highest Daily Lifetime SevenSM in all states where they have been approved.
© 2009 RIJ Publishing. All rights reserved.
Talk About a Shake Out
Faced with capital shortages and ratings downgrades, the ranks of major publicly-held life insurers appears to be headed for consolidation. Historically low stock prices alone have made merger talk inevitable.
But a shortage of acquisition financing means the anticipated shake out may not happen in 2009. And, despite the available bargains, divestitures of specific blocks of businesses are considered more likely than takeovers.
The companies mentioned as potential targets include Genworth Financial, Lincoln Financial Group, Principal Financial, and Hartford Life, which have all applied for TARP funds, along with Phoenix and Protective. Prudential Financial applied for TARP funds and suffered a ratings downgrade, but is believed to be strong enough to survive and even to be an acquiror.
“We probably will [see consolidation],” said Terence Martin, an analyst at Hartford, Conn.-based Conning Research. “I’m not going to predict who. I don’t know who. But obviously some companies are having some issues with the current situation economically.”
“No one’s untouched,” he added, “but certainly some are faring better than others. You may well see some companies in relatively stronger positions able to pick up either entire companies or blocks of business from those looking to sell off parts or all of themselves as a way out of their current situation.”
In a report last November, Goldman, Sachs & Co. insurance analyst Chris Neczypor noted the struggles of Hartford, Lincoln, Principal, MetLife and Prudential, and cited MetLife and Prudential as long-term winners in the contest for BabyBoomer savings. He also predict consolidation, with large property & casualty companies among the likely acquirors.
“The [life insurance] industry’s problems may ultimately force some of the smaller institutions to exit the business,” Neczypor wrote. “We would not be surprised to see well capitalized P&C insurers play some role in taking advantage of the current dislocation in equity valuations of the life insurance arena.
“Those insurers who survive the fallout, however, will be able to consolidate distribution, invest in appropriate capital markets infrastructure, and eventually lead the financial services industry in capturing the opportunities associated with the retirement of the baby-boomers,” he added.
And why are some companies more vulnerable than others? According to Martin, analysts look at an insurer’s current profits and capitalization, its risk-based capital ratio, the soundness of its pricing strategies, and its operating margin to see if its core underwriting businesses is profitable.
The amplitude of the merger talk about any single company appears inversely proportional to its stock price, which is driven by ratings, balance sheet strength, the magnitude of recognized losses, and investment and risk management policies. It’s unclear to what extent a company’s main problems exist at the holding company level, as with AIG, at the life insurance subsidiary level, or within an insurer’s variable annuity book of business.
Possible targets
With a closing price of only $1.21 as of March 1, down from a 52-week high of $24.88, shares of Genworth Financial, a former unit of General Electric, have lost more than 90% of their value in the past year. The Richmond-Va.-based carrier cut its workforce by 13% last December. It recently acquired Minnesota–based InterBank in order to apply for TARP funds.
“If [Genworth] doesn’t get those TARP funds, they’re in trouble, said Scott DeMonte, director of variable annuities at Boston-based Financial Research Corporation. I think the insurance end of [Genworth] is OK. The parent holding company is where all the problems are,” said DeMonte. “Everyone knows they are hurting.”
“I definitely see consolidation probably sooner rather than later,” DeMonte added. “Whether it’s a state-sponsored merger or whether it’s done on its own accord remains to be seen. I think firms out might have to merge in order to survive, unfortunately.”
Capital-hungry insurers should not expect the kind of taxpayer-funded rescue that AIG received, said DeMonte, because AIG was too big to fail. “But is Genworth too big to fail? I think the answer is no. But they have a good brand name and a good book of business, so someone will absorb them—if, heaven forbid, they do go out.”
Shares of Lincoln National Corp., parent of Lincoln Financial Group, have fallen more than 80% in the past year, to $8.59 on March 1 from almost $60. A February 2009 Citi Investment Research report on Lincoln noted: “At this juncture we believe management’s best option appears to be an outright sale to a stronger competitor.”
“Lincoln’s annuity business all by itself might have been valued at approximately $3.72 billion about ten years ago,” a former Lincoln executive told RIR. “To have the entire corporation valued today at only $2.86 billion—including life insurance and Jefferson-Pilot—may seem cheap in comparison. Of course, current financial dynamics might warrant such a valuation.
“Clearly Genworth and Lincoln have a low market capitalization right now, making this an opportune time for any insurers looking to acquire specific blocks of business from these two companies or the companies in their entirety,” the executive added. “To the extent that Genworth and Lincoln are looking to increase capital, they might be amenable to selling selected blocks of business.”
Hartford Financial Services Group, whose stock fell to $6.10 from a 52-week high of almost $80 a share as of March 1, appears to be in similar straits. Hartford received $2.5 billion in capital from Allianz last fall and was granted a $1 billion reduction in its reserve requirements by the Connecticut state insurance commissioner in February.
Any takers?
For an industry that has seen few big mergers and acquisitions in recent years due to the lack of interested sellers, a new conundrum exists for struggling outfits: the absence of capital for interested buyers. “Lots of people may be looking to sell,” said Martin. “But no one can buy.”
That may not be entirely true. MetLife, for instance, could be among the potential buyers, DeMonte said. While MetLife’s fourth-quarter income fell 12%, it exceeded Wall Street’s estimates. Though downgraded by Goldman Sachs, MetLife raised $2.3 billion in October through a stock offering.
“The ability to raise that kind of money in this market was impressive,” said DeMonte. “And they’re just enormous. They are so diversified have so much cash on hand. They could actually do a big merger.” According to A.M. Best, Metlife has about $28 billion in unrealized losses but about $30 billion in cash and short-term investments.
SunLife Financial, the Boston firm whose parent is based in Canada, has also been mentioned as a possible buyer. Last October, SunLife sold its 37.6% stake in CI Financial Income Fund, Canada’s third-biggest mutual fund, for C$2.3 billion and, according to one insider, has had less exposure to VA losses than some larger competitors.
“Sun Life for one recently announced its interest in finding a suitable life and annuity target in the U.S.,” said a February 6 bulletin from Tamiko Toland of Annuity Insight, a publication of New York-based Strategic Insight, which quoted a Sun Life source saying that “We have people on both sides of the border beginning to think about [acquisitions] and starting to take action.”
“The list of potential buyers includes Ameriprise, MetLife, [and Canada-based] ManuLife,” Toland reported. “Prudential, which itself applied for TARP funds, mentioned its history of acquisition during ‘choppy markets’ in its fourth quarter earnings call.”
“Prudential has proven itself adept at capitalizing on distribution and manufacturing synergies, making the possibility of a merger real despite financial circumstances that would deter many other companies. MetLife, which has been interested primarily in international targets, would consider a domestic acquisition in the right circumstances,” Toladn wrote.
In October 2007, Toronto’s Financial Post cited ManuLife as a possible suitor for Lincoln National Corp. or Principal Financial Group, based in Cedar Rapids, Iowa, whose stock price was down 85% as of March 1. But the Canadian dollar was much stronger against the U.S. dollar at that time.
Analysts cautioned that in a buyers’ market, prospective sellers might fail to get a good price. That applies to companies with long-term weaknesses that already wanted to sell as well as to companies that are forced to sell because they’re short of capital. “The pricing is just not going to be attractive,” said John Nigh, a managing principal at TowersPerrin.
Consumer impact
A shrinking life insurance industry might not hurt the consumer, one analyst said. Even in 2004, Nigh believed there were too many insurance companies. “I expected to see consolidation whether we had economic travails or not,” he said. “I think the current economic environment will merely force or accelerate some of the consolidation we needed.”
He doesn’t think pricing will be any less competitive from a consumer perspective. “I don’t see any impact on the consumer,” he added. “We have about 500 life insurance companies. There’s no way we need that many. Even if we went from 500 to 100, that’s still a lot of competition.”
Baby boomers were already driving the simplification and consolidation of the retirement business anyway, says Larry Cohen, vice president and director of New Jersey-based Consumer Financial Decisions, a research firm.
As they evolve from full-nesters and empty-nesters to pre-retiree and retirees, they will naturally reduce the number of financial relationships they have and the number of financial products they use. Boomers might even benefit from having fewer insurers to choose among.
“I think the choices now have actually been paralyzing,” Cohen said. “Free choice is a wonderful thing but sometimes you can’t make a decision because there are too many choices.”
But less competition could lead to higher prices. “I believe that reduced competition would take away the pricing issue,” said DeMonte. “Somebody could come out charging 2% for a living benefit. And if there are fewer companies out there, they could all do it.”
Uncertainty about TARP
As of February 27, the Treasury Department had not given any indication that it would provide TARP money to any of the insurance companies that had applied for it, including those that purchased banks in an effort to qualify for the bailout money.
A February 27 report in the New York Times noted that while AIG “still seems to enjoy bottomless support from the government . . . the rest of the insurance industry has growing needs and little indication that any support will be coming its way.”
Frank Keating, president of the American Council of Life Insurers, which lobbied the government last fall for TARP assets on behalf of its members, said the government hasn’t been sympathetic. He told the Times: “As we say in the monastic life, it’s the magnum silencium—the great silence. We have not had our phone calls answered.”
© 2009 RIJ Publishing. All rights reserved.
Remembering Our Roots: Putting the Income Back In Annuity
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.”
