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 September 15, 2008
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QUICK SUMMARY
– Industry news for the last two weeks can be summarized in seven
words...Gustav, Ike, Fannie, Freddie, Lehman, Merrill and AIG.
GUSTAV
– Hurricane Gustav spared New Orleans from another
“Katrina-like” disaster, but racked south Louisiana with an
estimated $10 billion in damages, an estimate we expect will
grow. The capital city of Baton Rouge suffered its worst natural
disaster ever and forced a nearly two-week closure of FSO/VSA's
“Eastern Home Office.”
IKE –
Hurricane Ike spared nothing and no one. It was a very broad storm and
it clobbered Galveston and Houston, as well as the Texas and Louisiana
coasts with initial damage estimates of $25 billion. Yes, we expect
that number to grow as well. In fact, estimated damages to the oil
industry alone range from $8-12 billion. FYI, Katrina's cost exceeded
$80 million.
GUSTAV, IKE AND GAS PRICES
– Since approximately 23% of the nation's gas is processed at
refineries in the Houston/Galveston area and over 25% of our crude oil
supply flows through Louisiana, you can bet on serious increases
“at the pumps.” Key to duration of the increase will depend
on how quickly the refineries can be brought back online and how soon
the offshore production and delivery can be resumed.
FANNIE AND FREDDIE
- The federal government's dramatic takeover of mortgage giants Fannie
Mae and Freddie Mac will be the largest government bailout in history,
with estimates ranging up to $100 billion each. This puts the
government in charge of the $5 trillion in home loans backed by the
“quasi-private” firms. To give you a grip on the magnitude,
compare that to the $1 billion bailout of Chrysler in 1979. The
Chrysler deal was basically a loan that was, in fact, repaid. I
wouldn't hold my breath on taxpayers getting any money back on this
latest financial debacle. Also, the 1990 savings and loan crisis,
which took six years to resolve, cost in the neighborhood of $125
billion in taxpayer money. Here are a series of articles that provide
more insight into the significance of the Fannie/Freddie
takeover:
LEHMAN...ANOTHER CASUALTY
– Large financial institutions continue to prove that they should
not have the right to manage money for anyone. Lehman Brothers suffered
from holdings in “toxic” mortgage bonds and is filing for
bankruptcy. Following a weekend of negotiations, potential Lehman
buyers backed off when Treasury Secretary Henry Paulson made it clear
that there would be no federal bailout of Lehman Brothers. With
the value of its shares declining 94% this year, the 158-year-old
investment bank announced that it would file for Chapter 11 bankruptcy.
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MERRILL SOLD
– Bank of America will acquire Merrill Lynch for $50 billion in
an all-stock deal. Like Lehman Brothers, Merrill suffered from
bad real estate bets, with the value of its shares down 65% this year
(down 27% just last week). The deal will give Bank of America the
largest brokerage in the world, with more than 20,000 advisors.
AIG IN TROUBLE
– With its stock price plummeting, AIG is reported to be working
on a “survival plan” that could include raising in the
neighborhood of $40 billion in fresh capital, selling some of its units
and asking the Fed for a $40 billion bridge loan to help it ward off a
liquidity crisis and ratings downgrades. New York State is also
allowing AIG to use $20 billion in assets held by subsidiaries as
collateral to enable AIG to borrow cash to fund its operations.
A TALE OF TWO ECONOMIES – This is an interesting article from Forbes.com
about how we currently have two economies in the U.S., one generally
doing okay and the other overwhelmed by foreclosures, tight credit and
unemployment problems.
BIG HEALTH COST INCREASE
– No, we are not kidding. A Buck Consultants survey of 79
insurers reports that employers can expect double-digit increases in
health care benefit costs.
NAIFA SUPPORTS OPTIONAL FED CHARTER
- Members of the National Association of Insurance and Financial
Advisors' (NAIFA) agreed to support the optional federal charter (OFC)
concept of letting insurance industry players choose between state
regulation and federal regulation.
HEDGE FUND WARNING
– The GAO wants federal pension regulators to provide pension
plan administrators with more information about the risks of investing
in hedge funds. Click here for more information.
ENRON MONEY -
Enron shareholders, investors and attorneys will split $7.2 billion
from financial institutions accused of participating in the fraud that
caused energy company Enron to collapse. That includes $688 million
plus interest in attorneys’ fees...the largest award of its kind
in history. "We're pleased that the court recognizes the
tremendous amount of work, skill and determination required to overcome
significant obstacles in this complicated case," said Patrick Coughlin,
attorney for the lead plaintiffs. Okay let’s do some numbers,
Pat. About 1.5 million individuals and entities eligible to share
in the distribution under the settlement plan will share $7.2 billion.
That is an average of $4,800 each. Isn't that a great decision by the
“court.”
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SUMMARY OF SEC AND IA
- Citing a high number of complaints from consumers, the SEC has
proposed a rule that would classify indexed annuities as securities and
place them under its watch. The comment period for the SEC proposal
ended on Sept. 10 and, needless to say, opposition to the proposal is
vehement among independent insurance agents. The reclassification would
mean that indexed annuities could only be sold by licensed securities
brokers. Indexed annuities were introduced about a dozen years ago, and
quickly became an important product for insurance companies. They are
appealing because indexed annuities include some guarantees. Money put
into an indexed annuity will earn a minimum rate of return, plus a
potential upside based on the performance of an index. The SEC contends
that there are often fees attached to indexed annuities that buyers may
not fully understand, questionable marketing practices and significant
risks. The insurance industry contends that the only risk is a
limit to the upside and that the insureds are guaranteeing principle as
well as a small gain. Stocks, bonds, mutual funds, etc. have no similar
guarantee. The Financial Planning Association, on the other hand,
praised the proposed SEC rule. We'll see.
LAPSED TAX BREAKS
– According to Kiplinger, a variety of tax breaks that have
lapsed, including state sales tax deduction, college tuition,
teachers’ classroom supplies, AMT minimum tax exemptions and
direct distributions of IRAs to charities, will be renewed by Congress
for 2008. Here’s the catch though...Congress is planning to
adjourn by September 26 and won’t return until after the
election. If legislation isn’t passed this month, the 2008
tax forms will have already been printed without the tax breaks,
leading to confusion in the 2008 tax filing season. This really
gets dumb. They know they’re going to extend these tax
breaks, we know they’re going to extend these tax breaks, so why
don’t they get off their duffs, pass the legislation and avoid
filing confusion?
PROFESSIONAL TRAINING SERIES
– Working with The American College, the American Institute for
CPCU and America’s Health Insurance Plans, NAIFA has announced
the launch of a professional development series designed to assist
NAIFA members in multiple practice specialties and career stages.
Visit www.naifa.org for more information.
SENIORS WARY OF THE ECONOMY
– A MetLife survey finds that most Americans over 60 years old
think today’s economy is worse than any they have experienced in
the past. And why not? Currently, you have to dig really hard to
find anything positive in the financial media.
PONY FOUND! -
ProducerWeb reports, “For the second consecutive month, consumer
confidence rose dramatically, largely fueled by drops in energy prices,
the presidential conventions and the government bailout of Fannie Mae
and Freddie Mac. The RBC Consumer Attitudes and Spending by Households
Index rose from 35.4 to 69.2, while the Expectations Index, measuring
consumers' economic outlook, climbed 81 points to reach 76.3.
Additionally, the Current Conditions Index climbed to 55.2 from 36.7
the previous month. The Investment Index, which measures the attitudes
of Americans regarding stock and real estate investments, also rose,
climbing from 36.1 in August to 63.8. Finally, the Jobs Index, a
measure of perceptions about job security, rose from 85.8 last month to
95.5.”
ARE YOUR ACCOUNTS SAFE?
- No...just kidding, but with the bailout of Fannie Mae and
Freddie Mac, you do have to wonder which bank will fail next. The FDIC
reports that 117 banks, the highest number in five years, are on its
"problem" list, and "more banks will come on the list as credit
problems worsen." In general, the real answer is that your retirement
accounts are safe depending on the type of account you have, where the
account is located, and how much is in each account.
BANK ANNUITY SALES UP
- According to the Michael White-Symetra Bank Fee Income Report, bank
annuity commissions and fees hit $539.6 million in the first half of
2008, up 13% over the same six months last year.
FINANCIAL SOUL MATE?
- Well, it may not sound romantic, but marrying a person who shares
your attitudes about money is a major issue in avoiding a divorce. Key
points: Talk and share goals, Run a home like a business, Be supportive
of careers, Enjoy life but within reason, Use a mediator if necessary,
Maintain some independence, and invest in your marriage.
FINANCIAL MATCHMAKER
– You can be one by providing clients and prospects with the
Virtual Assistant's Life Guide called Marriage and Money. See a sample here. Learn more about how you can better serve your clients and make money with the VSA by going to www.thevirtualassistant.com.
CHEERY WEATHER NOTE
- Tropical Storm Risk (TSR), a climate and risk forecasting consortium
based in London, predictions increase the likelihood that hurricanes
will strike the United States this season, which runs from June 1 to
November 30.
HARTFORD TRAINING ASSISTANTS
– In an attempt to win over brokers to sell their variable
products, Hartford is developing a training program designed
specifically for sales assistants. FYI, a sales assistant survey shows
that 24% want to become brokers. There is also a current program
designed to support brokers and their assistants...www.thevirtualassistant.com.
SOCIAL SECURITY KNOWLEDGE – There are a lot of nuances to Social Security that few planners and even fewer participants understand. For example:
- A minor child of a retired worker is eligible for benefits on his/her own.
- If
a two-income husband and wife apply for benefits at their normal
retirement age, they can restrict their application to spousal benefits
and delay collecting on their own record until later, when their
benefits would be worth more. Depending on your birth year, your
retirement benefit increases by 7% to 8% for every year you delay
collecting, until age 70.
Check out Secret Ways to Boost Your Social Security from Kiplinger. Also, spend some time on the Social Security online calculator
that is tied to your own earnings record and allows you to experiment
with "what if" scenarios to determine how much your Social Security
retirement benefit would be at various ages.
LIFE INSURANCE EXCUSES
- The LIFE Foundation recently released a survey revealing the primary
excuses consumers give for not having life insurance. While 93%
of Americans think it is important to have life insurance, almost 50%
say they do not own enough. Top three reasons: 58% said that the
coverage is too expensive; 23% say they just haven't gotten around to
it; 22% say they don’t know enough about it to buy. LIFE says
that while procrastination in other aspects of life usually doesn't
lead to catastrophe, this is one instance when it can. Check out this A/V and send it to your clients!
ANNUITIES UP, LIFE DOWN
– LIMRA reports individual annuity sales increased 4% in the
second quarter...variable annuity sales fell 12% but fixed annuity
sales increased 46%. Premium revenue from sales of new life insurance
policies fell about 2% during the same period.
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