US FlagJuly 15, 2007 Edition


BROKERS STOP CLASS ACTION – Using a brokerage distribution system may actually protect insurers against class action suits. A federal judge ruled that plaintiffs cannot bring a class-action suit against Midland National, in part because the independent producers who sold the contracts used different sales presentations and different marketing materials. In essence the judge ruled that since the presentations were different for different customers and often tailored to the specific need, a class action approach is not warranted. This is a good thing.

NEW NAME - The new SRO formed by merging the NASD and NYSE's regulatory unit won't be called with Securities Industry Regulatory Authority after all.  Turns out that the acronym - SIRA - "could create confusion, or might even be considered offensive by some, because of its similarity to an Arabic term used to refer to the traditional biographies of Muhammad."  The new SRO name is to be the Financial Industry Regulatory Authority, or FINRA.

LINCOLN CEO CALLS FOR FEDERAL OVERSIGHT - Jon A. Boscia, CEO of Lincoln Financial, is making a strong pitch for federal oversight of insurers. "Fortunately, The National Insurance Act of 2007 recently was introduced in Congress. If passed, it significantly would change the way life and annuity insurers conducted business — by creating one set of nationwide regulations for those who operated in multiple states." Makes sense to us.

PANNING PRIVATE EQUITY - Moody's Investors Services isn't high on the private-equity industry.  "The current environment does not suggest that private equity firms are investing over a longer-term horizon than do public companies despite not being driven by the pressure to publicly report quarterly earnings."  The report also questioned whether companies are better off in private hands and expressed concern about the issuance of special dividends despite commitments to cut down on leverage.

TEFLON DOW – The DOW closed at an all time high and is now knocking on the 14,000 door. Merger activity helped, but considering subprime mortgage defaults, rising gas prices, housing woes and international terror attacks, this is nothing sort of amazing.  We wonder how long it will continue.

DEFICIT CONTINUES TO DROP - The Office of Management and Budget reports the federal deficit declined for the third consecutive year and has already dropped $43 billion dollars this year, to $205 billion. Is it because of tax cuts?  Who knows, but it is obvious that businesses and the wealthy are making more money and therefore paying more taxes.

SMALL INVESTOR PROTECTIONS - Newsweek columnist Jane Bryant Quinn writes that the ongoing trend of weakening government regulations is most likely to hurt small investors.  You can read the article here. 

CHINA TO 'FUND' BOOMER RETIREMENT? – The retirement of U.S. boomers may be dependent upon the capital markets and the willingness of the Chinese to buy U.S. stocks and bonds. Here is the situation: In the coming years, boomers will be selling stocks and bonds to fund their retirement, yet there will be fewer working Americans to buy stock for their 401(k)s. The Chinese have practically no old age safety net and are potentially large purchasers for stocks and bonds...hopefully, U.S. stocks and bonds.

SYMETRA TO GO PUBLIC – Symetra, the former financial services arm of Safeco and currently partially owned by Berkshire Hathaway, is set to go public. The company will offer up to about $750 million in common stock.

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HEDGE FUND OVERSIGHT - The SEC has adopted a rule making it easier for the agency to sue hedge fund managers who mislead investors.  Visit www.sec.gov for more information. 

ALLIANZ CLASS ACTION TO PROCEED – A federal court has affirmed the class action lawsuit against Allianz alleging that the company fraudulently marketed some of its annuity products. The number of plaintiffs could include up to 400,000 purchasers of the Allianz annuity products. The plaintiffs allege that Allianz violated consumer protection laws by enticing customers to purchase equity index annuities by falsely marketing that the insurance products offer large "up-front" bonuses that can overcome investment losses and surrender penalties.

KIBOSH - Despite its failed attempt to buy the London Stock Exchange in an offer the LSE rejected as too low to even consider, NASDAQ owns a 30% share of the LSE, making it the exchange's largest shareholder.  In a move deemed "hostile," NASDAQ exercised its clout last week by vetoing the LSE's proposed merger with the Italian exchange. 

AARP/GENWORTH - AARP is replacing MetLife with Genworth as its endorsed long-term care insurance provider, meaning that Genworth will have access to AARP's 38 million members.  Genworth products are expected to first be made available to AARP members in October.

MORE ON 12(b)-1 FEES – Brokers trying to deal with the court ruling rejecting fee-based brokerage accounts are now being hit by consumer advocates. Under the Investment Advisers Act of 1940, brokers cannot use 12(b)-1 fees as compensation for advice to clients, but many contend they are. However, the SIFMA says the fees are charged "at the fund level and aren't applicable under the [Investment Advisers] Act" so it is "non issue." However, if the SEC requires that fees be paid directly by clients to make them more visible to investors, there could be a problem.

BOA BUYS U.S. TRUST - Bank of America has purchased U.S. Trust from Charles Schwab for $3.3 billion.

SPITZER PUSHES FOR HEALTH CARE – NY Governor Eliot Spitzer has begun a push to provide health care to nearly three million more NY residents.  Estimates are the move could cost the state $3 billion to $6.2 billion annually, but could reduce costs for some employers. That is a pretty broad range, but we'd bet the cost comes in north of the $6.2 billion.

NYSE MARGINS AT RECORD – Investors on the NYSE are borrowing record sums to finance trades. Margin debt jumped 11% from $318 billion in April to $353 billion in May.

FITCH EXPECTS RISE IN COMMERCIAL DEFAULTS – Many landlords and developers who loaded up on interest-only loans with high loan-to-value ratios are hoping for increased rents. Fitch says rent increases are unlikely and predicts increasing defaults in the sector.

S&P, MOODY DOWNGRADES PLANNED - Standard & Poor's and Moody's will downgrade hundreds of bonds backed by subprime mortgages. Both predict subprime defaults are likely to continue over the next few years as adjustable loan rates continue to rise.


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JULY 11, COST OF GOVERNMENT DAY - Americans for Tax Reform, a conservative group that opposes tax increases and advocates for a low flat tax, says this year we worked until July 11 to pay for all government spending and regulation. That is two days later than last year and 11 days later than in 2000. Critics contend that the estimate is misleading because government regulation costs are difficult to measure, but the group says its estimate of regulatory costs does not include the economic costs of regulation (preventing a company from expanding because it can't afford to comply). But it also doesn't measure the economic benefits of regulations (implementing safety measures that save lives and reduce lawsuits). Whatever, we sure seem to paying more to watch the government waste more.

JUST WHAT IS THE FAIRTAX PLAN? -  According to Fairtax.org, the plan is a comprehensive proposal that replaces all federal income and payroll based taxes with an integrated approach including a progressive national retail sales tax, a rebate to ensure no American pays federal taxes on spending up to the poverty level, dollar-for-dollar federal revenue neutrality, and, through companion legislation, the repeal of the 16th Amendment, which affirmed the constitutionality of the income tax. The FairTax Act (HR 25, S 1025) is nonpartisan legislation. It abolishes all federal personal and corporate income taxes, gift, estate, capital gains, alternative minimum, Social Security, Medicare, and self-employment taxes and replaces them with one simple, visible, federal retail sales tax administered primarily by existing state sales tax authorities. The FairTax taxes us only on what we choose to spend on new goods or services, not on what we earn. The FairTax is a fair, efficient, transparent, and intelligent solution to the frustration and inequity of our current tax system. The FairTax:
  • Abolishes the IRS
  • Closes all loopholes and brings fairness to taxation
  • Ensures Social Security and Medicare funding
  • Brings transparency and accountability to tax policy
  • Allows American products to compete fairly
  • Reimburses the tax on purchases of basic necessities
  • Enables retirees to keep their entire pension
  • Enables workers to keep their entire paycheck
Okay, how much will the tax be? Estimates are 23% on everything you purchase. More information at http://www.fairtax.org and there is a pretty good article located here.

TAX MESS - While a FairTax may be in our future, we still have to deal with our current federal tax situation or, as Forbes terms it in an interesting article, "The Washington Tax Mess."  While the article focuses on the AMT, it points out the underlying problems in the way Congress approaches taxation and offers some possible solutions.  The issue of how Congress deals with the AMT is of larger significance when applied to the 2010 expiration of the 2003 package of tax cuts. 

COLLEGE GRADS INCOME UP – The grads who do best are chemical engineering majors.  Their average starting salaries are $59,361...up 5.4% more than last year.  Computer engineering majors are making $56,201, up 4.8%.   Business and financial grads get $48,483 and $47,239 respectively.  Even liberal arts graduates starting salaries are up, with political science majors averaging 5.9% more at $34,590.

LONGEVITY INSURANCE - Kiplinger Magazine has an interesting article entitled "Retirement Income You'll Never Outlive." It explains investing some of retirement savings in "longevity insurance, a new type of annuity" that will pay a lifetime income when you get older. For example, a 65-year-old man who invested $50,000 in MetLife's Retirement Income Insurance would receive $3,405 per month ($40,860 per year) starting at age 85. Wonderful return, but in the basic longevity policy you don't get any of your money during the 20 years before the benefits start and there is no death benefit. However, the policies usually offer optional benefits to counter these limitations.

FIXED ANNUITIES - An organization called the Retirement Security Institute has a publication titled "The Truth About Annuities and Retirement Income" that focuses on the role of fixed income annuities in retirement income planning.  More information is available here. 

POST-RETIREMENT BENEFITS - The 5th annual MetLife Study of Employee Benefits Trends reports that employers are beginning to consider the availability of post-retirement benefits as part of "a competitive strategy for attracting and retaining experienced workers."  More information on the survey is available at http://www.whymetlife.com/trendspr

RETIREMENT AGE CONFLICTS - If Americans were to work longer, it could help shore up Medicare and Social Security.  According to a GAO study, however, the federal government actually offers incentives for people to retire early.  For example, while the normal Social Security retirement age is increasing to age 67, Medicare eligibility remains at age 65.  Social Security early retirement age remains at age 62.  In addition, the calculation of defined benefit plan benefits doesn't encourage people to work longer.  Highlights of the report are available at www.gao.gov. 

ALLIANZ TO ADD AGENT TRAINING – In what may be an attempt to prevent future legal problems, Allianz Life plans an education program for all life agents by the end of the year. This is a very good idea for all insurers and a great place to start is with the Virtual Sales Assistant (VSA). The program is not only the most comprehensive support tool in the industry, but appropriate content has also been reviewed by the NASD...see details at http://vsa.fsonline.com/vsa/compliance.html. If you are not one of the dozens of insurers, broker-dealers and IMOs who already use the VSA to keep their producers out of compliance problems, you should be. E-mail (boquin@fsonline.com) or call (225-387-9854) Bill O'Quin, CLU, ChFC, RFC for details.

WHAT IS COVERED? - According to a survey by Watson Wyatt, a whopping 43% of employees don't understand their health care coverage.  This despite 52% saying they read all of the material provided by their employers. Sounds like the plan explanations are too complex.

FEWER REGIONAL BROKER DEALERS BUT... - Advest, Legg Mason, Piper Jaffray, Dain Rauscher and A.G. Edwards (recently sold to Wachovia) have all been swallowed by large firms. This is certainly a trend, but many remaining regional B-Ds say they don't need the capital infusion of the "big boys" and are determined to remain independent. Time will tell. 

401(k) FEES AFFIRMED...FOR NOW - A district court dismissed a lawsuit that claimed excessive recordkeeping and investment-related fees for managing 401(k) plans. The judge ruled that the company had no fiduciary responsibility because ERISA requires plan sponsors to advise participants that they're responsible for their own investment choices. In a separate case, a class action lawsuit alleging a company used 401(k) fee structures that were excessive and unfair to participants was put on hold. The rulings put a damper on plans of workers and retirees who filed similar suits.

PREVENTIVE DENTAL – Hartford and others are offering low-cost dental plan options that cover preventive and diagnostic procedures. "This low cost plan enables employers to offer full coverage on preventive and diagnostic procedures for their employees. Encouraging employees to seek early, regular dental care for themselves and their families helps ensure better oral health and overall health."

WEB-BASED MEDICAL CARE – According to Kaiser Permamente, you can expect to see Web-based options playing a larger role in doctor-patient interaction. Patients with online access to an electronic health record (EHR) are choosing to use secure e-mail, thereby decreasing the number of primary care office visits and telephone contact rates.

DI NEEDED, SELL MORE – Industry stats show people of working age are "more likely to become disabled than they are to die prematurely, even though twice as many people have life insurance as have disability coverage." Further, the Social Security Administration says one-third of 20-year-old workers today will become disabled before they reach the retirement age of 67. However, MetLife says 42% of workers have no short-term or long-term disability insurance.

RANDOM AUDITS BACK – Well, the IRS isn't out of business yet. The Internal Revenue Service has announced plans to return to its practice of selecting random tax returns for audits this fall. Beginning in October, the Service will target approximately 50,000 income tax returns from 2006. The random audit process had been discontinued five years ago when the IRS began its mission to be recognized as a kinder, gentler agency.

ESTATE TAX UNCERTAINTY POLICY – Because of hard-to-predict changes in federal laws, Pac Life has introduced a second-to-die universal life insurance policy that doubles the death benefit if both insureds die within the policy's first four years.