© Copyright 2005
US FlagAugust 15, 2005 Edition
1stLifeSettlements


PAINS WANE AT AIG – AIG appears to be rapidly bouncing back from the recent executive and accounting scandals. Results for second quarter income at about $3.3 billion, up more than 14% over last year's figure. Results were also solid in the life insurance segment. Operating income rose over 13% and premiums climbed 7%. All good news for shareholders.  Ex-CEO Hank Greenberg, however, has delivered a paper to federal regulators in which he disagrees with the company's decision to restate past earnings.  In part, the paper claims that the restatements may be explained by "outside directors' interest in legitimizing their removal of Mr. Greenberg."

AIG'S PAIN WANING BUT NOT GONE - Seventeen insurers have sued AIG for trying to collect too much money on reinsurance coverage it bought from them.

COST SAVING IN FEDERAL REGULATION OF INSURANCE - The American Council of Life Insurance (ACLI) study shows a clear economic case for structural changes in insurance regulation that will benefit both consumers and life insurers. Structural changes highlighted in the study were those drafted in the ACLI's optional federal charter (OFC) proposal, which aims to give life insurance companies the choice of a new federal regulator or continued state regulation. ACLI believes an optional federal charter, based loosely on banks' regulatory model of state and federal regulatory options, best addresses the needs of 21st century consumers and companies. For a copy of the full report, visit http://www.acli.com

END ANTITRUST EXEMPTION - NY Attorney General Eliot Spitzer is calling for an end to the McCarran-Ferguson Act, which exempts the business of insurance from federal antitrust laws.  In its place, he recommends a uniform federal antitrust standard combined with the current state regulatory system.

REGULATORS TAKING A HARD LOOK AT IAs – In a move that could greatly increase regulation, the SEC may be considering whether indexed annuities should be treated as securities, rather than insurance products. Reasons: IAs are selling big time, big claims from some marketers and big commission for some carriers. Sales of EIAs climbed 67% to $23.4 billion in 2004. NASD cites marketing campaigns with slogans like "Growth potential without market risk!" and "A win/win investment vehicle!" Commissions on IAs are stout...on average, 8.1% with some companies offering 10% or more.

WHY IA SHOULD NOT BE SECURITIES – Lots of controversy on this with good points on both sides, but it appears to us that the crux of the argument to not consider them securities is this. With a fixed annuity, the board of directors determines the annual crediting rate. With an IA, the rate the board credits is simply controlled by an underlying index. A problem not mentioned above is the awfully complex and varying methods used to tie the rate to the index.

MORE ON "EIA" - Expressing concerns about marketing, supervision, disclosure and investor protection issues, NASD issued formal guidance to registered firms selling equity indexed annuities (EIAs). The notice does not take a position on whether a particular EIA is a security. Nevertheless, this uncertainty over whether a particular unregistered EIA may be a security complicates a broker-dealer's supervisory responsibilities. If an EIA is an insurance product, then a firm would have to treat sales of the EIA by its brokers as an outside business activity. If the EIA is a security, the firm would have to supervise the sale as a private security transaction.

INSURANCE M&As TO RETURN – Driven by savings that can be achieved by merging back-offices, expect at least two multibillion-dollar mergers in the next 12-18 months. Institutional bankers at BOA Securities say, "There are, call it 10 to 15 players in the life insurance sector in the United States that are all circling with each other and trying to figure out if or when they want to consolidate and with whom and under what terms."  FYI, French insurer AXA is said to have digested MONY and be hungry for more.


FIRED - This past Friday, Morgan Stanley fired 1,000 underperforming brokers from its ailing retail brokerage unit (the Individual Investor Group).  Morgan Stanley's focus has historically been on wealthy individuals.  As part of its 1997 merger with Dean Witter, however, arrived a brokerage unit targeting middle-income consumers.  Apparently not a match made in heaven!

TRIA EXTENSION - Word is that the House Financial Services Committee is likely to include group life insurance in its legislation extending the Terrorism Risk Insurance Act, which is currently set to expire on December 31.

COURT BLOCKS FUND RULE - The U.S. Chamber of Commerce won a ruling by a federal appeals court temporarily blocking a SEC regulation requiring that the chairman and three out of every four directors of mutual funds be independent, with no connection to company management.

SPITZER SUBPOENAS MOODY'S - New York Attorney General Eliot Spitzer may be turning his attention to rating companies as he has subpoenaed Moody's, one of the largest credit rating agencies in the country. At issue is how the company derived ratings for insurance companies and other securities.

OKLAHOMA SUBPOENAS METLIFE & UNUM PROVIDENT – Both MetLife and UnumProvident have received subpoenas from Oklahoma's insurance commissioner regarding possible improper broker compensation and bid rigging. Met also got one from Florida. As a side note to all this, New York Attorney General Eliot Spitzer has now collected over a $1 billion in similar actions against other insurance brokers and companies. Could these state regulators smell money?

STOCK OPTIONS AND BUSINESS ETHICS - A new study by the University of Minnesota found a link between stock options for executives and financial accounting mismanagement at businesses. In essence, when large option packages are handed out to chief executives, there is a greater likelihood that accounting misrepresentations will be uncovered at the company. As one analysis puts it, "The concern about stock options is that they can encourage companies to make short-term business decisions that are not in the best interests of shareholders."

IT'S BACK - The Treasury Department announced that it will reintroduce 30-year Treasury bonds in 2006.  These so-called "long bonds" were discontinued in 2001 because, in a time of budget surpluses, they were no longer needed.  With the growing federal budget deficit, however, this long-term debt instrument is again necessary.  Insurers are expected to be the primary buyers of the bonds.

H&R BLOCK BUYS AMEX TAX BUSINESS - H&R Block will buy the American Express tax division for $220 million. The move will propel Block into the nation's top five accounting and business services firms with more than $1 billion in revenue, making it the largest firm focused on the mid-sized market.

QUEST BUYS LabOne - Quest Diagnostics is buying LabOne in order to jump into the paramedical and risk-assessment services for life insurance companies. Quest had 2004 revenue of $5.1 billion and 39,000 employees and LabOne had 3,100 employees and 2004 revenue of $468 million. The lion's share of revenue came from risk-assessment services to life insurance companies, thanks to legions of LabOne employees who visit people applying for insurance policies to give them blood tests and other medical screening.
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BOOMERS WANT MORE THAN MONEY – An Allianz survey reveals that boomers say they are more interested in their parents' personal keepsakes, family stories and final instructions than the trillions of dollars they are expected to inherit. 75% of boomers said understanding their parents' values, 65% said enacting their parents' last wishes and 34% felt receiving their parents' sentimental treasures are very important. Only 10% of boomers said it was very important their parents bequeath financial assets or real estate. We suspect that the boomers' children will have a very different attitude.

RETURN OF PREMIUM TERM (AND WHOLE LIFE) – Apparently some in the hard core "buy term and invest the difference" crowd have experienced an epiphany. An Atlanta planner "crunched the numbers" on a "new" return of premium term product and found that the rate of return on the "difference" for a 30-year policy was 7% tax free and 5%. Both returns are better than the returns in comparable investments such as bonds. This begs the question as to why planners who recommend only term to their clients refuse to fairly analyze permanent insurance products against comparable safe, long-term investments?  Beats us, but we will tell you this...the long-term safe return on whole life insurance combined with the fact that most folks "spend rather than save the difference" makes permanent insurance a great buy and a true "miracle of pen and ink."

HAPPY BIRTHDAY - As the Social Security system turns 70 this month, a bi-partisan panel of experts has issued a report raising questions on how, if enacted, funds in Social Security private accounts would be paid out.  Among the questions are whether retirees would be required to purchase life annuities, who would design, administer and sell them, who would regulate the Social Security annuity market and what kind of inflation protection would be available on annuity income.

AVERAGE 401(k) BALANCES UP – Fidelity reports that the average 401(k) account balance rose 10% in 2004, reaching a five-year high of $61,000, but still remains below 1999 levels of $64,000. The market bubble burst drove the average 401(k) balance down to $44,000 in 2002 so this is good news.

NATIONAL SAVINGS RATE IS ZERO – If the above is good news this certainly is not. The Commerce Department said the national savings rate was zero in June...only the second month the rate was at zero since the monthly figure started being calculated in 1959. The annual rate for 2004 was 1.8% and the last time the annual rate was lower was 1934. Major reason: Why save when the value of your largest asset (your home) is "going through the roof?" The rise in the value of homes has given the average U.S. household a net worth of greater than $400,000. Worse yet, some people are using their home equity like it was a free ATM.

PROPOSED SEC VA RULES – The SEC has extended the comment period for a proposed VA sales suitability rule from August 11 to September 19.  Most comments thus far have opposed the proposal, citing that simply enforcing current regulations would be sufficient.

EMPLOYEES UNDERESTIMATE COMPANY PAYMENTS - MetLife reports that more than one-third of employees ages 21 to 30 and 28% of workers overall believe their companies spend less then $1,000 annually toward each individual's health insurance and about half the respondents believe the annual figure is less than $2,000. The real figure is an average $7,200 a year for family coverage and around $3,000 for single coverage. You don't know what you got until you lose it!

WEALTHIEST AMERICANS LIKE MUTUAL FUNDS – A study from Spectrem Group reveals that although the wealthiest Americans have ample access to alternative investments, they are increasingly turning to mutual funds. In fact mutual fund usage has doubled from 6% of investable assets in 2003 to 12% in 2005. The "Ultra High Net Worth 2005" study is based on investors with $5 million or more in net worth.

BLUES TO SELL LTCI – Blue Cross Blue Shield of Michigan announced that it will offer long-term care insurance policies beginning in July 2006.

HAVE AN OPINION? - The American College has launched a new web log (or blog) called the Wealth Channel.  You can express your opinions at http://www.wealthchannel.blogspot.com/.

ECONOMIC OPTIMISM – How is this for conflicting reports?  The Wells Fargo/Gallup Small Business Index that measures the optimism of small business owners fell to 99 in June from 110 in March. That is the lowest in 18 months, when the index was at 93. Concurrently, the Business Confidence Survey conducted by Administaff found that owners of small and medium-sized businesses "are feeling positive about their companies' performance in the first half of the year and are expressing optimism for the rest of 2005."  More than three-quarters of the respondents in the Administaff survey said their companies have either met or exceeded growth plans in the first six months of 2005, and over half predicted their companies would grow at an even faster pace in the next six months.

HOUSE POOR – USA Today reports that although home ownership is at a record level, affordability is a growing problem. Home prices rose 78% from 1994 to 2004 while personal incomes rose 64%. Further, the number of middle-income families spending more than 30% of their income on housing - a benchmark of affordability - rose from 3.2 million in 1997 to 4.5 million in 2001.

REPLACE INEFFICIENT APPLIANCES – Now may be time attack your utility bill by replacing some "old" energy hogging appliances. The recent energy bill signed into law by the president will soon provide tax credits for manufacturers who produce energy-efficient dishwashers, washing machines and refrigerators. Look for the Energy Star logo on products that meet or exceed established efficiency criteria set by the government. Energy Star products can save 10-50% over those not meeting the standards. And check this out:  According to the Association of Home Appliance Manufacturers, the typical refrigerator manufactured in 1993, back when the federal government first introduced refrigerator efficiency standards, was 99% more energy efficient than a similar model produced in 1980. Further, a 2001 model (when those standards were raised) was 146% more efficient than the 1993 model!