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Mr. Indexed Annuity Goes To Washington

On a sultry afternoon in Washington, D.C. in early May, the U.S. Capitol looked stark, lonely, and forbidding. The famous white dome, broad steps and balustered porticos glowed like the Taj Mahal but appeared deserted except for two or three black-clad sentries cradling automatic rifles.

Eighty-some members of the National Association for Fixed Annuities (NAFA) were undaunted and undeterred, however. In groups of four or five they had cabbed to the Hill from the gilded luxury of the Renaissance Mayflower Hotel and were bound for appointments with their legislators—or at least with their legislator’s legislative aides.

The purpose of the meetings—a “March to the Hill” orchestrated for NAFA by the lobbying arm of the Washington law firm Blank Rome—was to educate senators and congressmen or their aides about indexed annuities and SEC Rule 151A, which made equity-indexed annuities subject to SEC regulation.

Most of all, the purpose was to urge legislators from both major parties to co-sponsor a bill that would reverse 151A, which reclassified index annuities as securities rather than insurance products. The rule was approved by the SEC last December but doesn’t take effect until 2011.

The new bill, which apparently has not yet been submitted or given a number, would nullify 151A and “clarify” the Securities and Exchange Act of 1933 to ensure that EIAs are exempt from federal securities regulation. The original co-sponsors of the bill are Gregory W. Meeks (D-NY) and Tom Price (R-GA). There is no companion bill in the Senate yet.

Rep. Meeks’ legislative director, Tre Riddle, explained the Queens, New York congressman’s interest in the bill: “We have a number  of constituents who hold annuities who have expressed concern about this issue, as have independent insurance agents who live or work in our district and insurance companies based in New York.

“As a member of the House Financial Services committee, we’re acutely aware of the financial markets, globally, nationally, and in New York. We’re also sponsoring the bill because we disagree with the SEC interjecting itself in a traditionally state-regulated matter.”

The Meeks-Price bill is part of NAFA’s “two-pronged assault” on 151A, which includes a lawsuit filed against the SEC by indexed annuity manufacturers and wholesalers, including American Equity Life, National Western Life, Midland National Life, OM Financial Life, BHC Marketing and others.

The lawsuit argues that indexed annuities are annuities, with guarantees that shift risk from the consumer to the insurer, and therefore should be regulated as other insurance products are—by the states, not by the SEC. It rejected the SEC’s claim that indexed annuities are risky assets because their upside is variable, even though they guarantee principal.

If successful, the lawsuit and the legislation would eliminate the ambiguity of EIAs’ regulatory status forever. “Litigation locks the door and legislation throws away the key,” said Danette Kennedy, NAFA’s government affairs director.

Rule 151A has roiled the world of EIAs, which are a type of structured product in which most of the assets are invested in bonds and a small portion is used to buy options, typically on the performance of the S&P 500. The bonds offer principal protection (less costs) and the derivatives allow the contract owner to participate in S&P gains, if any.

Such products—especially those issued by Allianz Life—sold extremely well after the 2001 dot-com crash, when many investors felt paralyzed by a fear of buying stocks and the absence of attractive returns in fixed income investments. EIAs might be expected to shine in the current environment—a murky outlook for equities and low interest rates—but uncertainty about the outcome of the fight over 151A has caused far more EIA manufacturers to pull products off the market than introduce new ones.

Privately, many in the EIA industry claim that the SEC created Rule 151A to divert lucrative EIA transactions from insurance agents and IMOs to broker-dealers and their registered reps. Kim O’Brien, the executive director of NAFA, said that, while NAFA is fighting 151A on legal grounds, the stakes are ultimately economic. “Clearly, [the broker-dealers] are desperate for money,” she told RIJ.

Others have said that then-SEC chairman Chris Cox, a Bush administration appointee, was moved to regulate indexed annuities after watching a Dateline NBC news episode in the spring of 2008 that depicted alleged mis-selling of EIAs to senior citizens for whom the products were inappropriate.

If 151A takes effect in January 2011, as scheduled, only those with securities licenses will be able to sell EIAs, and all EIA sales will have to be cleared through broker-dealers. To avoid seeing their EIA business diverted to broker-dealers, insurance agents will have to get securities licenses and IMOs must consider becoming broker-dealers—at no small cost.

That’s what one large IMO, Financial Independence Group of Cornelius, NC, is doing, according to Brian K. Williams, its chief operating officer. “We want to be prepared for whatever comes along,” he told RIJ at the NAFA annual meeting.

Before the NAFA members dispersed in taxis from the Renaissance Mayflower Hotel to their various meetings at the Capitol and the Dirksen, Hart, Longworth, Russell, Cannon and Rayburn office buildings, they received some inside tips on how to lobby Congress.

“Most folks in Congress want to do the right thing,” Rep. Price said. “But when it comes to insurance, they don’t know what the right thing is. You know much more than they do about fixed annuities, so you have to educate them. Above all, be passionate, or your representatives won’t feel compelled to act. Show passion for their constituents, not for your pocketbooks. And don’t be discouraged if you don’t get to meet your representative. The legislative aides are the key people here in Washington. They’re the ones you need to impress.”

© 2009 RIJ Publishing. All rights reserved.

New Variable Annuity Prospectus Filings, week of April 27

Information provided by Advanced Sales Corp.
Click Contract/Benefit title to access the SEC Filing.
Contract/Benefit Effective Date
AIG
MarketLock for Life Plus (Single & Joint) Benefit 5/1/2009
MarketLock Income Plus (Single & Joint) Benefit 5/1/2009
AXA
Accumulator Select 8.0 (2/09) Product 5/1/2009
Guaranteed Withdrawal Benefit for Life-Single & Joint (Lifetime GMWB) Benefit 5/1/2009
Accumulator Plus 9.0 Product 6/8/2009
Genworth
RetireReady Bonus (National & NY) Product 4/21/2009
ING
LifePay Plus & Joint LifePay Plus with Income Optimizer (Lifetime GMWBs) Benefit 5/1/2009
LifePay Plus & Joint LifePay Plus with Income Optimizer (Lifetime GMWBs) Benefit 5/1/2009
John Hancock
Income Plus for Life w/Annual Step-Up-Single (Lifetime GMWB) Benefit 5/1/2009
 
Class XTRA 6 (NY) Product 5/4/2009
Enhanced Death Benefit 
5/4/2009
GMIB II Benefit 5/4/2009
GMIB Plus 2008 (GMIB Plus II)  Benefit 5/4/2009
GMIB Plus II (New York) Benefit 5/4/2009
Series XTRA 6 Product 5/4/2009
Metropolitan
Enhanced Death Benefit 
5/4/2009
GMAB Benefit 5/4/2009
GMIB Plus II NY Benefit 5/4/2009
National Security
GMIB Benefit 5/1/2009
GMIB Plus Benefit 5/1/2009
GMIB Plus w/Annual Reset Benefit 5/1/2009
Annual Stepped-Up Death Benefit 
5/15/2009
GMIB Plus w/5 Year Reset Benefit 5/15/2009
Guaranteed Principal Protection (GPP) Benefit 5/15/2009
Nationwide
10% Lifetime Income Option-Single & Joint (Lifetime GMWBs) Benefit 5/1/2009
7% Lifetime Income Option-Single & Joint (Lifetime GMWBs) Benefit 5/1/2009
America’s Achiever Annuity (C-Share) Product 5/1/2009
America’s Achiever Annuity (L-Share) Product 5/1/2009
America’s All American Gold (C Share) Product 5/1/2009
America’s All American Gold (L Share) Product 5/1/2009
America’s Future Annuity II (C-Share) Product 5/1/2009
America’s Future Annuity II (L-Share) Product 5/1/2009
Destination C Product 5/1/2009
Destination L Product 5/1/2009
New England
GMAB Benefit 5/1/2009
Enhanced Death Benefit 
5/4/2009
GMIB II Benefit 5/4/2009
GMIB Plus 2008 (non-New York version of GMIB Plus II) benefit 
5/4/2009
GMIB Plus II (New Yorks) benefit 
5/4/2009
Ohio National
5% GMDBR80 Plus (DB) Benefit 5/1/2009
ARDBR (DB) Benefit 5/1/2009
GMDBR80 Plus (DB) Benefit 5/1/2009
GMDBR85 Plus (DB) Benefit 5/1/2009
GMIB Benefit 5/1/2009
GMIB Plus Benefit 5/1/2009
GMIB Plus w/Annual Reset Benefit 5/1/2009
GMIB Plus w/Annual Reset (2009) Benefit 5/1/2009
GMIB Plus w/Annual Reset II (with & without inv. restrictions) Benefit 5/1/2009
5% GMDBR80 Plus (DB) Benefit 5/15/2009
5% GMDBR85 Plus (DB) Benefit 5/15/2009
Annual Stepped-Up Death Benefit 
5/15/2009
ARDBR Benefit 5/15/2009
ARDBR II Benefit 5/15/2009
GMDBR80 Plus (DB) Benefit 5/15/2009
GMDBR85 Plus (DB) Benefit 5/15/2009
GMIB Plus w/5 Year Reset II Benefit 5/15/2009
GMIB Plus w/Annual Reset Benefit 5/15/2009
Pacific Life
CoreIncome Advantage (GMWB & Lifetime GMWB) Benefit 5/1/2009
Flexible Lifetime Income Plus (GMWB) Single and Joint Benefit 5/1/2009
Income Access (GMWB) Benefit 5/1/2009
Penn Mutual
Growth and Income Protector-single & joint (GMAB, GMWB & Lifetime GMWB) Benefit 5/4/2009
Purchasing Power Protector-single & joint (Lifetime GMWB) Benefit 5/4/2009
Protective
Contract Value Death Benefit 
5/1/2009
ProtectiveValues Product 5/1/2009
ProtectiveValues Access Product 5/1/2009
ProtectiveValues Advantage Product 5/1/2009
Return of Purchase Payments Death Benefit 
5/1/2009
SecurePay Advantage-single & joint (Lifetime GMWB) Benefit 5/1/2009
SecurePay w/R72-single & joint (Lifetime GMWB) Benefit 5/1/2009
SecurePay-single & joint (Lifetime GMWB) Benefit 5/1/2009
Prudential
GRO Plus 2008 (GMAB) Benefit 5/1/2009
Highest Anniversary Value DB 5/1/2009
Highest Daily GRO Benefit 5/1/2009
Riversource
AccessChoice Select C & L Shares Product 5/1/2009
Symetra
Spinnaker Choice Product 4/30/2009
Transamerica
Retirement Income Choice 1.2-single & joint (Lifetime GMWB) Benefit 5/1/2009

© 2009 RIJ Publishing. All rights reserved.

The End of the VA Arms Race

Part I: The Great De-Risking

Part II: Why the Arms Race Ended

Part III: The Future of VA Living Benefits



Part I: The Great De-Risking

The fabled variable annuity arms race is over. The new reality is reflected in the dozens of “de-risked” VA contract prospectuses filed ahead of the recent May 1 SEC deadline. Life insurers have decided to quit making 30-year promises they can’t afford to keep.

In their latest filings, most of the top VA manufacturers have either raised the fees and reined in the benefits of their once-generous guaranteed living benefit riders contracts, or they’ve withdrawn the contracts entirely. Gone are the gaudy seven percent annual roll-ups, the quarterly step-ups, and the aggressive payout rates.  (See “New VA Product Filings” stories in this issue of RIJ.)

Why did the VA arms race end? The final blow was the unusual coincidence of a vertical bear market and historically low interest rates. But the deeper reason was that the product spread itself too thin. To satisfy all its stakeholders—issuers, shareholders, contract owners, fund managers and distributors—it needed a sustained bull market.

To compete with fund companies for the trillions of dollars that will roll out of retirement plans in coming years, life insurers (mainly the publicly-held insurers) built a product that seemed to offer Boomers everything: downside protection, upside exposure, guaranteed income, full liquidity and even a bequest.

But in vying with each other for market share, the insurers embraced a features race and price war, raising each other’s exposure to market risk.   The products’ doomsday scenario came far sooner than expected, and by late 2008, VA guarantees suddenly outweighed account balances by $240 billion, according to Milliman.

Now there’s a vacuum in the formerly go-go retirement income “space.” Insurance product developers need new killer-apps for capturing qualified plan rollovers. Boomers need new options to cure their retirement blues. Whether fixed annuities, income annuities, or indexed annuities can fill the void remains to be seen.

A fast fall starting last fall
The VA arms race took a dozen years to heat up but only a few months to go stone cold. It started with Jerry Golden’s guaranteed minimum income benefit (GMIB) at The Equitable in 1996, and climaxed in 2008 with double-your-money roll-ups on guaranteed lifetime withdrawal benefits (GLWBs).

Then, last fall, the retrenchment came fast, broad and deep. “I’m seeing kind of a reverse arm’s race [in living benefits] right now, except nobody’s declaring that there’s a reversal. Features are being scaled back quietly,” Moshe Milevsky, the York University finance professor and author, said in April. In early 2007,  Milevsky had written about the under-pricing of living benefit, but the warning was ignored. 

At least 20 insurance companies have taken some 40 VA contracts with living benefits off the market, according to Sue Saip, a VA analyst at Milliman. Among those companies were some of the biggest VA marketers, including AXA/Equitable, MetLife, Prudential, Principal Financial, Nationwide, Jackson National, Lincoln Financial Group, Sun Life Financial, The Hartford and Pacific Life. (See accompanying story, “VAs with No More Shelf Life.”)

In March, for example, Allianz Life put out the following obituary: “Effective April 1st we will suspend sales of the C-share option and all living benefits (Lifetime Plus, Lifetime Plus II, Lifetime Plus 10 and Target Date 10) on these products; the optional death benefit will remain available. Removing the living benefits is a bold step, but given these tough economic times our first obligation is to ensure that we continue to meet the promises we’ve made to our customers.”

“A lot of insurers have de-risked their variable annuities,” Saip told RIJ. “Withdrawal rates have gone down by as much as one percent on every age band. Roll-ups that had been seven percent a year for 10 years have come down five percent or six percent, and double-your-income-base rollups are going to 12 years from years” or disappearing entirely.

“Quarterly ratchets are becoming annual ratchets,” she added. “Rider fees are up 10 to 50 basis points across the board.” In addition, asset allocation restrictions have been tightened or eliminated and in-force policies are no longer taking additional premiums.

A review of GLWB (guaranteed lifetime withdrawal benefits) at several of the 25 largest individual annuity insurers by Conning Research showed an average increase of 30 basis points—a 40% hike from the original price, in some cases. “Some insurers altered their product line, reducing benefits or removing them from products. The use of investment restrictions is a common approach to reducing the increased investment risk in guaranteed benefits,” the Conning report said.

The VA business is now a drag on insurers instead of the growth engine they’d hoped for. Hartford Financial, to choose one example, has had to shut down its VA businesses in Japan and the United Kingdom, VA deposits fell to only $702 million in the first quarter of 2009, from $2.5 billion a year earlier. VA cash flows were a negative $2 billion, from a positive $1.2 billion a year earlier. The value of VA assets fell over 40%, to about $70 billion.

“Product development has come to a standstill if not gone backward, both from a product feature and a risk management perspective,” said John Yamauchi, former vice president at Nationwide. “This is a perfect storm, and at this point most companies would rather not be in this business. If they’re in it, it’s to maintain a presence. Companies are hunkering down and saying ‘How can we make it through this?’’

© 2009 RIJ Publishing. All rights reserved.

Read Part II: Why the Arms Race Ended

VAs with No More Shelf Life

The end of the variable annuity “arms race” has been marked by the removal of many contracts and/or living benefits—the guaranteed minimum income benefit (GMIB), minimum accumulation benefit (GMAB) or lifetime withdrawal benefit (GLWB)— from the marketplace.

Milliman variable annuity analyst Sue Saip has compiled the following list of recently discontinued products and, in most cases, the type of living benefit they offered for Retirement Income Journal. The exact reason for discontinuation of a specific contract was not available.

Company Product
Allianz Lifetime Plus (GLWB)
Target Date Retirement Benefit (GMAB)
Lifetime Plus 8 (GLWB)
Lifetime Plus (GMAB)
American United Life Lifetime Guaranteed Minimum Withdrawal Benefit Rider (GLWB)
Owner & Spouse Guaranteed Minimum Withdrawal Benefit Rider (GLWB)
Guaranteed Return of Premium Rider (GLWB)
AXA/Equitable GMIB with 6.5% rollup
Fidelity Investments Life Guaranteed Minimum Income Benefits (GMIB)
Genworth Payment Optimizer Plus
Jackson National LifeGuard Ascent/Ascent with Joint Option
John Hancock Principal Plus for Life (GLWB)
Principal Returns (GLWB)
Lincoln National Smart Security Advantage (GLWB)
Mass Mutual Guaranteed Minimum Income Benefit 5 (GMIB)
Lifetime Payment Plus (GLWB)
Guaranteed Income Plus 6
MetLife Compounded Plus Death Benefit (GMDB)
GMAB
GMIB II
Nationwide CPPLI (GMAB/GLWB)
CPP (GMAB)
Old Mutual Financial OM Financial Asset Allocation Models
Guaranteed Minimum Withdrawal Benefits (GLWB)
Guaranteed Minimum Death Benefits (GMDB)
Pacific Life Foundation 10 (GLWB)
Penn Mutual Guaranteed Lifetime Benefit Withdrawal Rider (GLWB)
Phoenix Guaranteed Minimum Income Benefit (GMIB)
Principal Financial Investment Protector Plus 2 (single life only) (GMWB)
Protective Life SecurePay GMAB
Prudential Guaranteed Minimum Income Benefit (GMIB)
Highest Daily Lifetime 5
Sun Life Financial Secured Returns for Life Plus (GLWB)
Income ON Demand II (GLWB)
Income ON Demand II Plus (GLWB)
Transamerica/Aegon 5 for Life (GLWB)
5 for Life with Growth (GLWB)
Income Select for Life (GLWB)

© 2009 RIJ Publishing. All rights reserved.

Without Golden, Will MassMutual’s RMA Lose Its Glow?

Jerome S. Golden, who developed the first variable annuity living benefit while at Equitable Life in 1996, has retired from his post at Mass Mutual, leaving some uncertainty over the future of the Retirement Management Account, a proprietary system for creating ladders of income annuities inside rollover IRAs.

MassMutual said Golden’s departure does not mean that the company plans to abandon the RMA concept, which Golden had developed as an independent consultant before joining the insurer in 2005.

“The RMA remains available,” said Mark Cybulski, a MassMutual spokesman. “We’re reviewing our entire retirement income business, and until the review is complete it’s premature to comment. We continue to see opportunity in the retirement income market,” he told RIJ.

As for Golden’s next move, “My immediate plans are to do some consulting, but I expect to find some interesting business opportunities in this dynamically changing environment,” he told Investment News last week.

In 1996, Golden created the guaranteed lifetime income benefit, the first variable annuity living benefit. It allowed the owner of a rollover IRA to stay invested in the stock market while getting protection from market risk, sequence-of-returns risk, and longevity risk. At the time, Golden was president of the Income Management Group at Equitable Life.

Starting at least seven years after purchase, any owner of that product between ages 60 and 83 could apply the purchase premium, grown at a guaranteed six percent annual rate during the intervening years, to the purchase of a life annuity with a 10-year period certain, based on rates guaranteed at the time of purchase.

Through the product’s “Assured Payment Option,” the investor also had access to cash value after the lifetime income was purchased. Equitable, now AXA-Equitable, has since become a leading issuer of variable annuity contracts.

After leaving The Equitable and starting his own company, Golden Retirement Resources, Inc., Golden remained an advocate of income annuities. He created the RMA, and in 2005 MassMutual acquired his company and the RMA technology and brought Golden on as president of its Income Management Strategies Division.

With the RMA, advisors invest a client’s rollover IRA assets in MassMutual’s Oppenheimer mutual funds. Then they gradually use chunks of those assets to buy a series of single-premium immediate annuities, or SPIAs. The program is designed to be largely invisible to the client, who receives a single monthly distribution check and one account statement.

This form of annuity laddering moves clients into annuities at a pace or on a schedule that matches their need for income. By purchasing annuities incrementally, the program reduces investment risk and eliminates the need for a large lump-sum annuitization. The annuities offer optional cost-of-living adjustments.

“It’s not a product, but a program,” said Golden in a 2006 interview. “Combining equities and annuities is the best way for people to secure lifetime income, and it appears that gradual laddering of the annuities is the way to go. The RMA can give clients more security than simply investing their savings and drawing on them year after year for income. And it provides more flexibility than simply buying a lifetime annuity with a lump sum, which can limit a client’s options if unexpected needs or emergencies arrive.”

The RMAs “sweet spot is people ages 55 to 75 who have already rolled out of a 401(k) or 403(b) plan and have an IRA,” he said. The product was initially available only through investment advisor representatives of MML Investors Services, Inc., a MassMutual affiliate, but was expected to be more widely offered later.

The client and advisor decide when the client will begin receiving income from the IRA, and how much he or she will receive each year. Based on that determination, they decide how to divide the assets between mutual funds and annuities. The annuities can be purchased at an optimal time, such as when interest rates are favorable.

“We offer a universe of funding strategies, ranging from keeping all of the money in mutual funds, to putting it all into an annuity upfront, to gradually shifting from the mutual funds to the annuity,” Golden said. “The beauty of this is that in the IRA account, it’s all tax-deferred.” The advisor earns a commission on the sale of each SPIA, as well as an asset-based fee for ongoing services to clients.

© 2009 RIJ Publishing. All rights reserved.

Democrats Expected to Tweak, Not Scuttle, IRAs and 401ks

Contrary to conventional wisdom, the Obama administration is more likely, not less likely, to pursue an activist social spending agenda in the face of the global financial storm, said Washington attorney James M. Delaplane at the annual LIMRA Retirement Industry Conference in Orlando April 1-3.

In his wide-ranging presentation, Delaplane, a partner at the Washington law firm of Davis & Harman LLP and a financial services industry lobbyist, also discussed how the arrival of the Obama team and the Democratic advantages in Congress might affect the interests of the retirement industry.   

The combination of Democratic control of Congress and the trauma of the financial debacle will bring greater scrutiny of the financial services industry in general and will make it “tough to get new tax incentives for savings vehicles” passed, Delaplane said.

With votes from the two liberal Republicans from Maine, Olympia Snow and Susan Collins, Democrats can muster a filibuster-proof majority in the Senate, he noted. A phalanx of liberal legislators from California—Nancy Pelosi, Henry Waxman, and George Miller in the House and Diane Feinstein and Barbara Boxer in the Senate—also contribute to the Democrats’ strength. 

Emphasis on middle-class retirees
The Obama-led Democrats bring a “distributional perspective” to government, Delaplane said. They will favor programs that help lower middle class earners over programs that help the rich—who are defined informally as those earning $250,000 or more a year. Since the tax benefits of insurance products, for example, accrue disproportionately to those in high tax brackets, he said, the administration is likely to question those benefits.

A tactical change in the budget rules may be used to further that strategy. Democrats may revive the “pay-as-you-go” budget rule—i.e., the requirement that new spending must be offset by cuts in spending or rescission of tax breaks—which the Bush presidency did not follow, Delaplane said. If they do so, insurance tax incentives might be sacrificed to pay for middle class tax relief.  

Clues to Obama’s legislative priorities are evident in the budget he sent to Congress in March, Delaplane said. For instance, a program requiring workers without access to a retirement plan to enroll in an IRA and a program that would finance a government matching contribution to retirement accounts were both in the budget. An initiative to require auto-enrollment of employees in their employers’ defined contribution plans was not.

Social Security reform “has a pulse” in the new administration, Delaplane said, despite the conventional wisdom that tampering with the popular social insurance program is politically dangerous. The retirement security of the middle class is one of Obama’s principal concerns, he added, noting that the president has created a task force on middle class families under the direction of vice president Joe Biden.

Tweak of 401ks foreseen
There will probably be no radical reform of the 401k-based defined contribution system in the foreseeable future—despite Congressman Miller’s criticisms that the 401k plan “has deep flaws that were hidden during the good times” and that the “30-year experiment with the 401k has failed,” Delaplane said.

Miller chairs the House Education and Labor Committee, which has held widely publicized hearings on the 401k. Three congressional committees are said to be studying the collapse of retirement account values last year, a phenomenon that legislators are calling the “Boomer Bust.”

Ironically, there’s little evidence that the crash is changing Boomers’ behavior. Although a study by Transamerica in January showed that Americans have lost confidence in their ability to retire comfortably, Delaplane said, the number of people taking hardship withdrawals or borrowing money from their retirement accounts has not gone up.

If the White House or the congressional Democrats do push for 401k reform, they are likely to focus on greater fee transparency and to question the value of target date funds (TDFs), which are said to become less risky as the owner approaches retirement, Delaplane said.

Though the government has allowed TDFs to serve as default investment choices for retirement plan participants who don’t choose their own investments, TDFs apparently have problems. For instance, they aren’t standardized. Equity allocations within supposedly comparable TDFs have been found to vary from a low of 8% to a high of 62%. And they aren’t necessarily safe. One TDF designed for people retiring in 2010 reportedly lost 40% of its value since last fall.

Another likely area of scrutiny will be the glaring absence of retirement distribution options in most defined contribution plans. “Annuities as a default distribution option is on the radar—not for 2009 but in three or four years,” Delaplane said.

Democrats may also reevaluate the tax deferrals associated with IRAs. According to Delaplane, those accounts cost the government an estimated $110 billion in revenue each year. Since Obama’s people generally regard tax deferral as a transfer to the wealthy, Delaplane predicted that Democrats might try to replace the IRA tax benefit with a 28% tax credit or a federal matching contribution.

© 2009 RIJ Publishing. All rights reserved.

EIA Trade Group To March Against Rule 151A

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.        

 

The Sage of Omaha Says GLWBs Were “Crazy”

Billionaire investor Warren Buffett has criticized some life insurers for taking on “crazy” financial risks by selling variable annuities, or retirement products that promised unrealistic guarantees to buyers, Reuters reported.

“I always thought they were crazy when they were doing it,” said Buffett, at a press conference in Omaha, his hometown, because of the financial risks to the insurer. The products are tied to stock market performance and in some cases guaranteed a certain periodic return, while principal could not be eroded by investment losses.

Insurers such as The Hartford and Genworth Financial have been badly burned by over-selling these products, which performed badly as the credit crisis sent markets plummeting. Buffett, chairman and CEO of Berkshire Hathaway, is said to be the world’s best investor.

Roger Lowenstein, one of Buffett’s biographers, wrote that the Sage of Omaha was invested mainly in cash when the 1974-1975 bear market struck, and bought a slew of Fortune 500 company stock at historic discounts.

Of the variable annuity living benefits, Buffett said: “If you buy a policy, you the policyholder get some of the upside, and [the insurers] guarantee you always get your premium back.” From a company’s perspective, “that’s poison.” Life insurers have also lost money on investments securities linked to commercial mortgages, he added.

Berkshire was asked to reinsure variable annuity guarantees, and declined, Buffett said. “Life companies had those two temptations, one on the asset side, one on the liability side, and those that succumbed are in real trouble.”

The Dow Jones U.S. Life Insurance Index (DJUSIL) has fallen nearly 65% since the beginning of 2008, as investment losses, declining revenues from asset-based fees, and rising costs to hedge variable annuity guarantees have decimated many insurers’ profits.

But Buffett predicted the government would assist any major life insurer that was in danger of collapse. The government has already offered Troubled Assets Relief Program (TARP) funds to some U.S. life insurers. Of those offered TARP money, Allstate Corp., has declined it. Prudential said May 15 that it had not yet made a decision.

© 2009 RIJ Publishing. All rights reserved.

Annuities Are Just Part of Our Story

After seeing so many stories about annuities in our first issue on May 21, Francois Gadenne, president of the Retirement Income Industry Association, asked if retirementincomejournal.com will cover all “silos” of the decumulation industry.

Absolutely.

Our publication covers all of the products that Boomers will use to turn their assets into lifetime income. That includes structured products, payout mutual funds, reverse mortgages, life settlements, as well as all manner of immediate, deferred, variable and fixed annuities.

Wherever the decumulation trend goes, we will follow it.

No single product or group of manufacturers can satisfy the Boomers’ need for guaranteed income. As Moshe Milevsky notes in this week’s cover story—and in his recent book, Are You a Stock or a Bond?—an income-driven portfolio should include a diversity of risk-reducing products, including insurance-based, derivative-based and diversification-driven investments.

At the same time, our publication is for everyone who participates in the business that has formed around the so-called Boomer retirement opportunity. That includes home-office veeps at insurance companies, asset managers and broker-dealers; wholesalers, brokers and producers in the field; software developers, actuaries, regulators and attorneys; academics and public policy wonks.

It’s a big job, but …

While this is only our second issue of retirementincomejournal.com, I and my associate publisher, Randi Goldsmith, an experienced web business developer and html wrangler, were encouraged to see the warm reception to our first mailing.  New subscribers have been registering at our website every day.

Besides publishing a free weekly e-bulletin of news and analysis of the decumulation trend, we plan to build a warehouse of useful information at our website. We’ll have compilations of historical data, a research library of links and pdfs, as well as a continually expanding archive of articles and charts.

We’ll put an emphasis on stockpiling information that will help you do your job better—information that will have tangible economic value to you and your company or organization. We think you’ll find it worth paying for. While our newsletter will always be free, we eventually plan to limit access to our website to those who pay an annual subscription fee.

The fee, you’ll find, will not be huge. But only by charging for our publication, I feel, will we be able to maintain an independent voice and to dedicate the many hours that it takes to deliver quality journalism.  That may sound a bit hokey. But it’s never been truer than it is today.

Kerry Pechter
Editor and publisher
Retirement Income Journal
[email protected]

Could Uncle Sam Guarantee a 5% Return for Life?

In a new report, authors at the Center for Retirement Research at Boston College (CRR) attempt to calculate how much it might cost to give American workers guaranteed an attractive long-term return on retirement savings invested in the stock market over a lifetime.

The brief, entitled “What Does It Cost to Guarantee Returns?” concludes that the government, with its access to cheap capital and its multi-generational investment horizon, could guarantee a return of between 4% and 6% at no net cost to taxpayers.

The report was written by Alicia H. Munnell, director of the CRR and the Peter F. Drucker Professor of Management Science at Boston College’s Carroll School of Management, and Alex Golub-Sass, Richard A. Kopcke, and Anthony Webb.

The study arose from concerns that many Baby Boomers will be financially unprepared for retirement. Given the increase in longevity, the increase in the age of full eligibility for Social Security, the relatively low participation rate in 401(k) plans and the low balances in many accounts, the authors postulated that a “new tier of retirement accounts” may be necessary to help Americans save for old age.

To be truly valuable, the new tier of accounts would have to guarantee that would provide smooth, attractive returns, the authors said. They then set out to determine how much a guarantee would have cost under historical conditions and how much it might cost in the future.

They concluded that private industry wasn’t suited to the challenge. “Relying on the private sector for even low levels of guarantees raises issues relating to the continuity of the insurer and the availability of a natural hedge. Given the recent demise of Bear Stearns and Lehman Brothers and the plight of AIG, individuals would have no confidence that the firm offering the guarantee would be there for the payoff 40 years down the road.

And private sector firms would have no natural hedge to insure against the possibility of having to cover the guarantee, since very few counterparties exist that would gain from a sharp economic downturn. Thus, the government becomes the only realistic source of guarantees.”

The authors’ calculations showed that if the government put a floor of 4% under returns and kept the returns in excess of 6%, it could afford to provide the guarantee at no added cost to taxpayers. Alternately, the data showed that the government could guarantee a minimum return of 2%, with no cap, for a premium equal to about 13% of contributions to the program. 

© 2009 Retirement Income Journal. All rights reserved.

Study Assesses Market for “Unbundled” Living Benefits

“Guaranteed Retirement Income Beyond Annuities,” a new white paper from Annuity Insight, a unit of Strategic Insight, Inc., offers a 137-page, 50-exhibit analysis of Standalone Living Benefits (SALBs), which are lifetime withdrawal riders unbundled from annuities and applied to select mutual fund or ETF portfolios.

SALBS are currently available to investors on Allstate’s ClearTarget mutual funds and on managed accounts available through Genworth’s LifeHarbor, Nationwide’s Portfolio Innovator, and Phoenix’s Guaranteed Income Edge programs. They allow insurance companies to offer longevity risk protection (and, to a lesser extent, investment risk protection) to investors averse to buying annuities. 

Written by Annuity Insight editor Tamiko Toland and based on “interviews with representatives along the entire chain of production,” the study asserts that counting managed accounts as well as conventional mutual fund accounts, “there are around $750 billion of assets already in place (and growing) that could have the guarantee added with no change in assets.”  The study is available for purchase at sionline.com.

©2009 RIJ Publishing. All rights reserved.

Conning Predicts Life Annuity Rebound By 2010

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.

Lincoln Financial Wins Patent Suit

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.

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.”