FSO E-NEWS WEEKLY

March 1, 2010 Edition

TIME OF POSSESSION – In football, the team that has the ball the longest usually wins...but not always. Here is the breakdown on the health care summit: Democrats: 223 minutes (119 from President Obama) and Republicans: 110 minutes. It remains to be seen who "won," but don't be surprised if the Dems attempt an "end around" with the so-called "nuclear option" of reconciliation, which requires only a simple majority to pass legislation.

DON'T MESS WITH MY CADILLAC! - A Forbes article points out that the proposed tax on "Cadillac heath care plans" may come with little known unintended consequences. The tax is touted as targeting only luxury plans, but "generous" coverage only accounts for a part of what makes plans costly. Plans are often more expensive because they cover older or sicker members, as well small businesses. These plans would be taxed the same as plans for big corporate CEOs. Also, expect big companies to reduce benefits to avoid this tax. The unions are right on this one.

MORE LIKE $2.5 TRILLION - The Congressional Budget Office (CBO) has not yet had an opportunity to review and assess the latest "health bill." However, Administration officials have claimed that it would cost $950 billion over a decade, is "fully paid for," and would cut the deficit in the short and long term. Each of these claims, which were made also about the House- and Senate-approved bills, rests on highly questionable assumptions. A closer look at the President's plan shows that its costs are likely to come in well over $1 trillion over 10 years, ten full years of implementation would cost closer to $2.5 trillion, and the plan would make the nation's budget outlook much worse, not better. See complete article at www.heritage.org.

AMERICAN PUBLIC HEALTH ASSOCIATION URGES REFORM – The APHA threw its support behind an affordable health reform with a focus on prevention and wellness. "We applaud leaders of both parties for meeting today and urge them to find common ground to reform our nation's health system. This should not be a political exercise. They should lay their swords at the door and forge a path forward to address a serious, growing problem facing the American people and representing 17% of our nation's economy." According to APHA, a lot is at stake, as 47 million people don't have health insurance, leading to more than 44,000 excess deaths each year, and 100,000 additional deaths are caused annually by medical errors. Looks to us like more people are dying because they get medical care than because they don't!

NAIC TO OPPOSE FEDERAL REGULATION - The National Association of Insurance Commissioners (NAIC) says it is prepared to oppose any provisions in proposed health care reform legislation that allow federal preemption of state insurance rate regulation. Not sure how they can stop it. "States rights" don't seem too high on the federal government agenda.

ANTI-TRUST BUST – By a vote of 406-19, the House passed a bill that would remove the federal anti-trust exemption for health insurance companies. Speaker Pelosi said, "The Health Insurance Industry Fair Competition Act will change the playing field for the insurance industry by making the companies play on the people's field." Insurance industry trade groups say the bill will have no practical effect, but will increase uncertainty for the insurance industry and where "uncertainty exists, increased litigation is sure to follow...raising costs at a time when cost-containment tops the agenda of all Americans."

TERMINAL FLAW – Regarding the proposed health care plan, the Congressional Budget Office to this point has assumed that few employers will drop their plans even when the government offers generous subsidies and imposes penalties that are absurdly low. Here is the fatal flaw...companies that drop their plans face relatively minor penalties under the provision that's won the most Congressional support, an annual fine of $750 per worker. Most big industrial companies are already paying around $15,000 per family in health-care costs. Dropping healthcare coverage appears to be a "no brainer" for a CFO.

THE BIGGER PROBLEM? - Our healthcare system has two major components: healthcare delivery and healthcare financing. In our humble opinion, any attempt to reform one without addressing the other is doomed to failure. We have proposals to cap health insurance premiums without addressing healthcare costs...kind of like pumping unlimited air into a balloon...at some point it's going to burst. Then we have eliminating health insurance underwriting (i.e., pre-existing conditions) without a meaningful requirement that everyone purchase health insurance (see above)...why not allow the purchase of auto insurance after an accident or homeowners insurance after the house has burned down? Ain't going to work! Perhaps the biggest obstacle to meaningful healthcare reform, however, are the two widely divergent positions held by Republicans and Democrats. Broadly speaking, Republicans feel that the free market is the solution to healthcare reform, while Democrats want a tightly controlled and regulated health insurance industry or a single-payer system. It's hard (impossible?) to find much common ground in these two positions.

INSURERS GOOD - The Geneva Association, a group backed by insurers and reinsurers, has released a commentary stating that "insurance companies that are focusing on selling insurance cause no 'systemic risk' and do much to stabilize the financial system." The full article is available at www.lifeandhealthinsurance.com. The objective of the commentary is to encourage regulators and policymakers to focus on controlling activities that lead to systemic risk, rather than on controlling financial institutions.

AIG - AIG posted an $8.9 billion loss for the 4th quarter of 2009, or $65.51 per share. The reason given is the costs associated with selling off large stakes in its insurance businesses in order to repay the debt it owes to the government. Speaking of which, AIG just announced that it is selling its Asian life insurance business to Britain's Prudential PLC for $35.5 billion, $25 billion in cash. The company reportedly plans to pay $16 billion of that to the government to purchase back preferred shares given in the bailout and use the remaining $9 billion to pay down its debt to the New York Fed.

MORE FANNIE AID - Fannie Mae needs another $15 billion in federal assistance, bringing its total to more than $75 billion and the quasi-government mortgage finance company warned its losses will continue this year. Fannie was seized by federal regulators in September 2008 and has racked up losses totaling $136.8 billion over the past three year. Late last year, the Obama administration pledged to cover unlimited losses through 2012 for Fannie Mae and Freddie Mac, lifting an earlier cap of $400 billion. Fannie and Freddie play a vital role in the mortgage market by purchasing mortgages from lenders and selling them to investors. Together the pair own or guarantee almost 31 million home loans worth about $5.5 trillion...about half of all U.S. mortgages.

MOST BROKE COUNTRY? - That would be us. According to the CIA World Factbook, our current account balance is a negative $380.1 billion. China has the most cash on hand with a positive $296.2 billion. See the full list at https://www.cia.gov.

WONDER WHY? - Here's a sobering article from CNNMoney.com...America's hidden debt bombs. According to the article, "America's total debt load is on pace to top $13 trillion this year, and $22 trillion by 2020 - and that's just the debt we're counting." Public debt currently stands at roughly $8 trillion (that's the money owed to purchasers of U.S. Treasurys) and there's another $5 trillion that the federal government owes to government trust funds (e.g., Medicare and Social Security). That's the "counted" debt. What's not counted are, for example, the costs of the Fannie Mae and Freddie Mac guarantees, future entitlement debt (e.g., when the Medicare and Social Security trust funds go broke) and the true costs of tax breaks (e.g., what will the new Roth IRA conversion rule really cost long term?).

CURBING DEBT - What's at stake? Potentially the United States' status as a first-class economy. Over the past decade, administrations of both parties have attempted to reform three "big ticket" items: the tax code, Social Security and health care. So far, all reform efforts have been dropped, largely due to partisan resistance on both sides of the aisle. Now we find ourselves facing unsustainable public debt and the only answers may lie in some combination of cutting spending and raising taxes. It's a bleak picture unless and until strong bi-partisan leadership arises out of Washington's current hyper-partisan political atmosphere.

GOVERNMENT IS PROBLEM 2 AND 3 - According to the latest Small Business Economic Trends survey conducted by the National Federation of Independent Businesses, 31% of respondents said the single most important problem facing small businesses is "poor sales." "Taxes" and "Government Regulations and Red Tape" came in second and third place at 22% and 13% respectively.

STATE PENSIONS - A Pew Center survey of state-administered pension plans, retiree health care and other post-employment benefits in all 50 states blamed a decade's worth of policy decisions for a $1 trillion (perhaps much more) funding shortfall in public sector retirement benefits. The study concludes that states may be forced to reduce benefits, raise taxes or slash government services and warns of even more debilitating costs if immediate action isn't taken.

GDP JUMPS - The AP reports that "the economy rocketed ahead at a 5.9% annual rate in the final quarter of 2009, stronger than initially estimated." Well, maybe "roman candled" is a better description. They also explain that the jump was from businesses increasing inventory rather than consumer spending and, therefore, unlikely to be sustained. Consumers increased their spending at a pace of just 1.7%. That was weaker than first thought and down from a 2.8% growth rate in the third quarter.

PRESIDENT MAY STOP ALL FORECLOSURES - President Barack Obama is considering stopping all home foreclosures unless they have been rejected by the $75 billion Home Affordable Modification Program (HAMP). Opponents say HAMP is making the economic crisis worse and many homeowners would be better off as renters.

FINRA CRITICIZED - The Project On Government Oversight (POGO) is asking Congress to reconsider the idea of self-regulation, specifically aiming criticism at the Financial Industry Regulatory Authority (FINRA). "In light of Finra's abysmal track record, and the flawed premise of self-regulation in general, POGO calls on Congress to consider vastly curtailing the power of (self-regulatory organizations.)" The letter went on to say that the only way to properly regulate markets is through "independent and efficient government regulation." Well, it sure might be cheaper...as the current head of the SEC Mary Shapiro is reported to make $163,000 per year versus the $1.5 million or so she made as the CEO of FINRA.

PRETTY GOOD YEAR, WALL STREET BONUSES UP 17% - Employees at Wall Street financial firms collected more than $20 billion in bonuses in 2009, the year after taxpayers bailed out the financial sector amid the economic meltdown. Further, total profits could surpass last year's unprecedented $55 billion and the average bonus of $124,850. The New York state controller says, "Wall Street is vital to New York's economy, and the dollars generated by the industry help the state's bottom line, but for most Americans, these huge bonuses are a bitter pill and hard to comprehend. ... Taxpayers bailed them out, and now they're back making money while many New York families are still struggling to make ends meet." He added, however, that the bonuses help state revenues tremendously as NY faces an $8.2 billion deficit.

BIPARTISAN FISCAL PANEL - President Barack Obama has signed an executive order that will create a National Commission on Fiscal Responsibility and Reform, an 18-member bipartisan panel that will be charged with recommending strategies to reduce the national debt and deficits. Here is a tip for the members: QUIT SPENDING MONEY!

PREDICTION OF 3.1% GROWTH FOR 2010 & 2011 – The National Association for Business Economics in a survey of 48 top economic forecasters finds that analysts expect the economic recovery to remain firmly on track, with the U.S. experiencing steady growth throughout the next two years.

PERSONAL SOCIAL SECURITY ACCOUNTS - Jose Pinera, the architect of social security reform in Chile, sees a serious crisis pending in America's addiction to entitlement programs, government-dependence, and imaginary "rights" to live off future generations. Thirty years ago, the social security system of Chile was broken and entitlements were destroying the nation's finances. The Harvard educated Pinera pushed through a plan to privatize their entire entitlement system, including social security. Today there is no government social security in Chile and everybody has a private account. "In only seven years the social security system will begin to have a deficit. You will have to raise the retirement age, you will have to raise the payroll tax, cut benefits...unless you change the paradigm and you go to a system of personal accounts. Personal accounts are very simple: you save for old age and you benefit from the extraordinary rate of compounding interest. It is a system we had all over the world before Otto van Bismarck created this monster of the unfunded welfare state that is bankrupting Europe and eventually will bankrupt the U.S."

MDRT MILLION MEALS - The Million Dollar Round Table (MDRT) Foundation is coordinating its largest-ever volunteer event to package 1 million meals for children and families in impoverished communities around the world. The Million Meal Challenge will take place at this year's MDRT Annual Meeting in Vancouver, June 13-17, at the Vancouver Convention Center, in partnership with Kids Against Hunger (KAH) and Kids Around the World.

ANNUITY SALES – LIMRA reports variable annuity sales fell 26% in the first six months of last year, but rebounded to end up down 18%. Indexed annuities showed record gains, increasing 9% from the prior year. "The last time VA sales were at this level was in 2003, at the end of the last financial crisis."

LAST LAUGH GOES TO VA PRODUCERS - Not only have variable annuities outperformed stocks over the past decade, but another advantage has emerged. While some investors think not having access to their money is a drawback, many now see that, "For me, it was a very good savings program. I couldn't spend it, and I had to ignore that it existed." Read the complete article at www.investmentnews.com.

ANNUITY CHANGES AHEAD - Click here for a perspective of what the annuity distribution landscape will look like over the next decade.

ACLI OPPOSES UNEARNED INCOME TAX - The American Council of Life Insurers is opposing a new proposal to tax unearned income. The potential tax is part of proposed changes to the Patient Protection and Affordable Care Act of 2009 and is expected to include a 2.9% Medicare tax on income from interest, dividends, royalties, rents, and annuities for single taxpayers earning more than $200,000 in income and married couples making more than $250,000. (Sounds like a reason for divorce.) The life insurance industry opposes the tax because it adds to Americans' problems in securing retirement income and may discourage them from purchasing annuities.

GENERATIONAL PROFILES - Thanks to MetLife's Mature Market Institute for producing a series of generational profiles that provide a great deal of interesting information about the 65+ generation, older boomers, middle boomers, younger boomers, Gen X and Gen Y. If you target your marketing efforts to any of these groups, the profiles are worth your review.

STANDARD OF CARE – According to the National Underwriter, the Senate Banking, Housing and Urban Affairs Committee (that is a pretty all encompassing committee!) is set to use the "standard of care" amendment in the new financial services reform bill. The proposed amendment is supported by the industry and calls for the SEC to study what standards should apply, and not apply the same "fiduciary standard" to both broker-dealers and investment advisors.

NAIFA RESPONSE TO NYT ON STANDARD OF CARE - In response to a New York Times article, NAIFA President Tom Currey, CLU, ChFC, LUTCF commented, "This proposal is a major departure from current law and has never been analyzed to determine if it would provide any greater consumer protection than the current standard that now governs the business transactions between broker-dealers and their customers. That standard is based on the 'suitability' of products that meet a customer's needs and includes detailed and heavily enforced FINRA consumer protection rules. Suffice it to say, the fiduciary standard did nothing to protect Mr. Madoff's clients."

THIRD PARTY VA SUIT - We're not sure how suitability factors in here, but Transamerica and Western Reserve are suing three broker-dealers for fraudulently selling to third parties variable annuities with lucrative death benefits issued to terminally ill individuals. The insurers claim that they were misled by the broker-dealers and their registered reps about the relationship between the investors and annuitants, that the brokerage firms and reps failed to disclose the annuitants' terminal illnesses and that the firms violated contractual obligations to train and supervise their reps. The broker-dealers claim they had no duty to tell the insurers that the annuitants were terminally ill.

403(b) ADVICE - The Employee Benefits Security Administration, a part of the Labor Department, has issued Field Assistance Bulletin 2010-01, which provides new guidance to employers that offer 403(b) plans and their advisors.

FINRA AND SOCIAL MEDIA - "It's the same issues as with e-mails - if you're going to conduct business through e-mail, you can't go home and do it there." Jeez.

MORE FROM FINRA - In Regulatory Notice 10-05, FINRA reminds firms of their responsibilities under FINRA Rule 2330 for recommended purchases or exchanges of deferred variable annuities.

MEDICARE ADVANTAGE PREMIUMS JUMP - Medicare beneficiaries who purchase Medicare Advantage plans are facing sharp premium increases this year, a sign that spiraling costs are a problem even for those with solid insurance. Medicare Advantage plans offering medical and prescription drug coverage jumped 14.2% on average in 2010, after an increase of 5.2% last year. Expect those increases to grow if the additional subsidies paid to Medicare Advantage plans are reduced or eliminated.

1.5 MILLION MEDICAL BANKRUPTCIES – A study in The American Journal of Medicine concludes that "62% of all bankruptcies in 2007 were medical" and other reports put the number of "medical bankruptcies" at 1.5 million. The study is getting a lot of play lately and was led by a Harvard professor who co-founded an advocacy group for a single-payer national health care system. The study seems to have more than a few flaws. See ABC's take by clicking here.

NEW HOME SALES AT RECORD LOW - New home sales dropped 11.2% last month to a seasonally adjusted annual sales pace of 309,000 units, the lowest level on records going back nearly a half century. The big drop was a surprise to economists who were expecting a 5% increase over December's pace. While winter storms were partly to blame, home sales have fallen for three straight months despite sweeping government support.

CONSUMER CONFIDENCE DOWN - Consumer confidence in February fell to its lowest level in 10 months. The index of consumer attitudes fell to 46.0 in February from a 56.5 in January.

LTC IN HEALTH CARE - The Community Living Assistance Services and Supports (CLASS) Act, the Nursing Home Transparency Improvement Act and the Patient Safety and Abuse Prevention Act are long-term care-related provisions in the proposed health care plan. The proposal also includes incentives for home- and community-based care programs, initiatives to expand the senior care workforce and a provision to reform Medicare physician pay to incentivize quality of care over quantity of services.

NEW "MOSTLY" FINANCIAL TERMS – New times call for new terms:

Cashtration: The act of buying a house, which renders the subject financially impotent for an indefinite period of time. 　
Ignoranus: A person who's both stupid and an a**hole. 　
Intaxicaton: Euphoria at getting a tax refund, which lasts until you realize it was your money to start with.
Giraffiti: Vandalism spray-painted very, very high. 　
Sarchasm: The gulf between the author of sarcastic wit and the person who doesn't get it. 　
Osteopornosis: A degenerate disease. 　
Dopeler Effect: The tendency of stupid ideas to seem smarter when they come at you rapidly.