© Copyright 2007
US FlagOctober 1, 2007 Edition


FED RATE CUT – In the first rate cut since June, 2003, the Federal Reserve cut its benchmark interest rate from 5.25% to 4.75% and its discount interest rate from 5.75% to 5.25%. The move had an immediate effect on the market and was seen as a move to protect the economy from a housing slump and financial turbulence. Some, however, are concerned the move may cause longer-term pain by bringing back inflation.

FED RATE CUT STABLIZES MARKET – The Fed’s recent .5% rate cut has resulted in markets showing the first signs of recovery. Bond-trading volume has risen, but there are still some trouble spots, including corporate-debt issues and the commercial-paper market.

M & A ACTIVITY DOWN – The shrinking credit availability has caused M & A activity to drop 42% in the third quarter. It fell from $1.74 trillion in the second quarter to $1 trillion in the third. 

FEDS STILL FEAR INFLATION – One Fed official wants to make it clear that, despite the recent cut in rates, they stand ready to raise rates again if inflation rears its head. While this position has not been expressed by many of the Fed officials, the significance lies in the fact that it marks the first time a Fed official has expressed concern over the recent bigger-than-expected rate cut.

GREENSPAN SEES RISING POTENTAL FOR RECESSION - Former Federal Reserve Chairman Alan Greenspan is concerned that the U.S. economy is nearing a recession. Earlier this year he said the likelihood of a recession was "one in three," but recently said it is now about 50/50. He said he was not forecasting a recession and "All you can basically know is whether the probabilities are increasing or decreasing."

ENOUGH GREENSPAN? – At least one financial writer is getting a bit tired of hearing from Alan Greenspan.  Caroline Baum writes for Bloomberg.  Check out her article, ”Questions for Greenspan That Need Better Answers,” by clicking here. 

LEVEL PLAYING FIELD – The domestic insurance industry is  urging Congress to pass legislation limiting the tax advantage that certain foreign insurance groups now enjoy, a tax advantage that “allows foreign insurance groups based in tax havens like Bermuda or the Cayman Islands to legally avoid paying billions of dollars in taxes on much of their U.S. underwriting and investment income.”  According to the Coalition For a Domestic Insurance Industry, this major tax advantage “could threaten the future of our domestic insurance industry.”

DONE DEAL – A.G. Edwards shareholders approved Wachovia’s $6.8 billion takeover of the company.  The new brokerage will be based in St. Louis and known as Wachovia Securities LLC.  In other merger news, an AIG subsidiary is merging with 21st Century Insurance Group, forming the new Aigdirect.com.  The merger is resulting in AIG trimming 600 jobs as a result of duplicated positions.

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PLEADING FOR ACTION – Treasury Department officials are pleading with Congress to take action on Social Security, arguing that it will be less painful to address funding shortfalls now than waiting until the trust fund is depleted.  More information on the financial challenges facing Social Security is available here.  The American Academy of Actuaries is making their contribution to this topic, with a paper titled “Social Security: Evaluating the Structure for Basic Benefits.”  The conclusion of the actuaries is that a defined benefit structure is preferable for providing basic Social Security Benefits, with a defined contribution structure limited to supplements.  You can review the paper at www.actuary.org.

SUBPRIME FAT LADY YET TO SING - Studies shows a 3.9% decline in home prices in July in selected cities and many believe that means the losses in the subprime-mortgage market will get worse before they get better. Apparently, borrowers stuck with subprime loans will have a tougher time refinancing their mortgages at better rates.

TEMPORARY RELIEF FOR FEE-BASED ACCOUNTS – The SEC is expected to adopt a temporary rule that would allow brokers to continue making principal trades on fee-based accounts for another two years. The rule is designed to give the SEC more time to review an upcoming study on how advisers and brokers should be regulated.  For an insight into how various firms are handling this issue, check out this WSJ article.  

PUBLIC DEBT INCREASE APPROVED - The Senate gave final Congressional approval to a $850 billion increase in the public debt needed, in part, to finance the War in Iraq. The measure, which was approved 53-42, gives the Treasury enough borrowing authority for the remainder of President George W. Bush's term. 

WHY YOU SHOULD LIKE INSURANCE COMPANIES – Let Kiplinger tell you why at www.kiplinger.com.  

MORE GLOOMY HOUSING PREDICTIONS - A Yale University economist predicts that the current credit squeeze and other economic factors will cause housing prices to continue to fall. In fact, he warned that falling house prices might "turn out to be the most severe since the Great Depression” and that housing prices might be more important than lax lending standards as the cause of current economic problems. 

ANOTHER MET BUY BACK - MetLife has announced an additional $1 billion common stock repurchase program. This program will begin after the completion of an earlier $1 billion repurchase program that was announced in February, 2007, of which approximately $240 million currently remains. 

PRICE WAR FEAR – According to an informal survey by KPMG, despite subprime market fears, insurance company executives fear competition more. “Pricing risk” (the risk that efforts to make sales will lead underwriters to set prices that are too low) was their biggest concern.

LIFE SETTLEMENTS AND LIFE INSURANCE COMPANIES - Fitch Ratings says it has concerns about the effects of the resale market for in-force life insurance policies. Problems could arise from loss of tax breaks, legal problems and pricing issues. The effects of life settlements on life insurers are small, because the amount of life insurance in life settlements is small, but that could change if the market grows.


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GOOD ANNUITY PRESS - Humberto Cruz is a well-respected financial writer and I thought you might want to hear what he is saying about annuities. “So far, we have three sources of lifetime income: my pension, our projected Social Security benefits, and a guaranteed minimum annual withdrawal from a variable annuity. Next, to guard against inflation, we're looking to add an immediate income annuity paying us a monthly income rising 3% a year for life. I used not to care much for income annuities, which are insurance products that turn our lump premium into a lifetime income stream. But spurred by competition and demand, many have added attractive features.  Among them are the ability to adjust income payments based on need, payments that rise every year to counteract inflation, some access to principal, and wider choices for beneficiary benefits. Insurance companies also have lowered markups, boosting the income that consumers receive.” See the entire article, including information about a positive study from the University of Pennsylvania, Wharton School of Business, by clicking here. 

BOOMERS SPENDING TO A FAULT – When it comes to spending on family, that’s the conclusion of an Ameriprise Financial study.  Boomers are providing financial help to both their children and their parents, all too frequently dipping into savings to do so (and even resorting to loans in some cases).  More information on the study is available at www.ameriprise.com.

SEC PLANS WARNING SITE – The SEC plans on opening a new Web-based initiative to inform investors about possible fraudulent sales pitches of securities and is seeking public comment. "Public Alert: Unregistered Soliciting Entities" or "PAUSE" will be available through the SEC's Web site and will detail complaints about unregistered organizations.

IRS AND 412(i) PLANS – Expect the IRS to increase audit activity of 412(i) plans - defined benefit pension plans funded exclusively with life insurance and/or annuity contracts - in an ongoing attempt to curtail abuses in the creation and funding of some of these plans. The Service has been particularly aggressive in recent audits of these plans.

SEC/FINRA AND VAs – To address sales-practice problems in deferred variable annuities, the SEC has approved FINRA Rule 2821 relating to the purchase or exchange of deferred variable annuities.  For details, click here.  

NON-QUALIFIED DEFERED COMP PLANS – It might be a very good idea to inform your clients with non-qualified deferred comp plans that the deadline for employers to adopt written non-qualified deferred compensation documents is now December 31, 2007.  Further, they must fully comply with Internal Revenue Code (IRC) Section 409A. Help is available in the Virtual Sales Assistant for attorneys who might not be as familiar as they should be with the documentation that is necessary. Check out Specimen Documents and The Tools and Techniques of Employee Benefit and Retirement Planning, Chapter 25.

HOME HEALTH/ADULT DAYCARE – The MetLife Mature Market Institute has released its first national survey of adult daycare center costs, together with its cost findings on home health care costs.  Click here to review the survey. 

ECOMOMY BAD NEWS - Consumer confidence is down, home sales are slumping, the labor market is contracting and this could be bad news for the economy. However, if things do get bad, many expect the Feds will again come to the rescue by lowering rates, but who knows?

ARBITRATORS EXPUNGE RECORDS – A Public Investors Arbitration Bar Association study reveals that brokers are often able to persuade securities arbitrators to expunge settlements from their records. In fact, FINRA has granted requests to expunge records in 98% of the cases. This doesn’t seem like a practice that is in the best interest of the industry.

JOINING FORCES – The boards of directors of LIMRA International and the Life Office Management Association (LOMA) have agreed to merge, with the new organization to be called LL Global Inc.  The two organizations will continue, however, to operate as separate entities.  The merger must be approved by the respective members.

ADVISOR DISASTER PLANNING - Financial advisors are advised to prepare disaster plans and review them regularly. Further, noting Linsco/Private Ledger had an outage in August that left 7,000 affiliated advisers unable to do anything electronically for three days, we suggest you check into the disaster preparedness of your technology providers as well. The Virtual Sales Assistant has an excellent guide for you and your clients about personal Emergency Planning located off the Main Menu under Life Guides.

MORE JOIN CALL FOR “PRINCIPLES BASED” REGULATION - The Financial Services Roundtable, a lobby group that represents financial-services firms, is calling for the U.S. to stay competitive by switching to a "principles-based" approach to regulating financial markets. "The current system, with its mishmash of contradictory rules and regulations and of conflicting charters, is gumming up the works and causing not just excess cost but the financing of industry and companies not to occur.” The amount of manpower and money that is being spent to enforce silly interpretations of current rules is costly and the efforts are often counter productive.

BIG ID THEFT - A hacker broke into the computers of TD Ameritrade and stole data on more than 6.3 million clients. However, the company does report that Social Security numbers, account data and other sensitive information was not affected. Ameritrade clients will not suffer any financial losses, but they should be prepared to receive a lot of unwanted e-mails.

VULTURES IN HOUSING MARKET? - A recent article said, "The vultures are circling the housing market" as private equity groups gear up for plans to invest in condos in Florida and other "targets of opportunity." "Local housing markets that have fallen far, yet have the potential to recover soon, are ripe targets for "vulture investors," who buy cheap in the hope that prices will rebound.  Well, it sounds like real estate business as usual to us. Buy low and sell it high...if you can!

SCHIP COST - House lawmakers voted to expand the State Children’s Health Insurance Program (SCHIP) by $35 billion over the next five years. However, the bill doesn’t have the two-thirds majority needed to override the threatened presidential veto and the same scenario is likely to exist in the Senate. The increased funds would have added four million more children to the program, but the veto threat appears to be based on high costs and the concern that expanding the program will shift more private insurance to government programs.

LTCI PREMIUMS ON THE RISE - Genworth, the largest provider of individual long-term care insurance, plans to raise premiums for existing LTCI customers. Genworth had previously said that it projected premiums would remain level for life, but has now filed in all 50 states for premium increases of 8% to 12% on most of its policies. Advisors who have not prepared their clients for the possibility of future premium increases will have some explaining to do. The move raises fears of a return to the darker days of LTCI, when many insurers raised premiums rapidly; some went further, selling off policies and exiting the business altogether. Not surprisingly, investors turned away from the turbulent products, sending sales into a free fall.

FREE DIRECTORY ASSISTANCE – With 4-1-1 directory assistance costing north of a buck fifty, you might want to put this in your speed dial. 800-FREE-411. It's free directory assistance, but you will have to listen to a few seconds of advertising.

DI COVERAGE - According to the Social Security Administration, 30% of American workers will suffer some type of disability in their lifetime. Country Insurance and Financial Services reports that though the odds of disability are that high, only 3% of Americans have enough disability insurance to replace all of their income. Further, more than one-third report that none of their income would be replaced if they were unable to work.

BANK BROKERAGE BUSINESS UP – According to a Kehrer-LIMRA study, brokerage business in community banks and credit unions increased about 16% in July over the prior year.  Further, community bank brokerage revenue was 79% higher than in July 2002 and average bank broker sales commission revenue, including trail commissions and managed money fees, jumped to $34,050, up from $20,478 in July 2006.

AMERICANS AVOID LIFE INSURANCE PLANNING - The Life and Health Insurance Foundation for Education (LIFE) reports that although approximately 75% of adults believe life insurance is an imperative resource, few take the time to plan and consider its benefits. Half of respondents would prefer to renew their driver’s license than look into their life insurance needs, 20% of participants would prefer to go to the dentist for a root canal (we can only assume that 20% has never had a root canal!) and 15% would prefer to baby sit sextuplets!

FIXED ANNUITY SALES DROP, IMMEDIATE AND IAs UP – According to Beacon Research, sales of fixed annuities were 9.2% lower than the same period one year ago. On a year-to-date basis, total market sales were an estimated $30.1 billion, down 13.8% from the first half of 2006. Sales of immediate and indexed annuities were up 23.8% and 1.6% respectively, compared to the first six months of 2006.