FSO E-NEWS WEEKLY

October 15, 2006 Edition

ALLIANZ EIA DIRECTION TROUBLING – Allianz, far and away the nation's largest seller of equity index annuities with about 35% of the market, has made a fundamental change in the way it will market the product. The "old way" was a model based exclusively on "independent" wholesalers selling the products through so-called field marketing organizations (FMOs), while the new approach will allow large broker-dealers to access EIAs directly from Allianz wholesalers. The program, scheduled to start on November 6, is said to be driven by a 20% drop in sales and/or increased regulatory scrutiny. Some, in fact, believe that 05-50 (the guidance from NASD requiring broker-dealer supervision of EIAs) has made it impossible to distribute EIAs through FMOs. Enter some intrigue...Pat Foley, chief marketing officer at Allianz, announced the change, and then a few days later, Allianz announced that "he is no longer with the company."

UNITEDHEALTH CHAIRMAN OUT - Faced with major problems arising from a stock option program used to compensate executives, UnitedHealth Chairman and CEO Dr. William McGuire has given up his seat on the company's board and his post as chairman and will leave the company completely by December 1. UnitedHealth hired a law firm to investigate reports that the company might have inflated executive compensation by backdating stock options. The law firm review revealed substantial problems with the stock option program. A copy of that report is available here.

HE'S OUTRAGED - Stating that "I don't profess to be impartial," Senator Trent Lott inserted a provision into recent legislation that directs the Department of Homeland Security to investigate potential fraud by the insurance industry in rejecting flood damage claims related to Hurricane Katrina. The good Senator also indicated he is drafting legislation to challenge the industry's antitrust exemption and has directed his staff to investigate the industry's tax rates. Based on the policy's flood damage exclusion, Senator Lott's $400,000 claim for the loss of his home in Mississippi was rejected by State Farm. If Senator Lott didn't understand that his homeowner's insurance didn't cover flood damage, we wonder why he purchased separate flood insurance (which, by the way, has already paid him the maximum benefit of $350,000). Senator Lott is also suing State Farm.

MORE KATRINA NEWS - In order to have access to an unbiased juror pool, State Farm has filed a motion to change the venue for lawsuits arising from denied Katrina claims from southern Mississippi to northern Mississippi. What led State Farm to this action? In a survey commissioned by the company, 49% of southern Mississippians agreed with the statement that "insurance executives ought to be held in the same low esteem as child molesters" and that "insurers will lose every case."

BERNANKE ON BOOMERS - The Fed chief has released his most extensive comments to date on the challenges facing the U.S. with the looming retirement of 78 million baby boomers. Bernanke said that unless Social Security and Medicare are revamped, the massive burden from retiring baby boomers will place major strains on the nation's budget and the economy. "Reform of our unsustainable entitlement programs" should be a priority. "The imperative to undertake reform earlier rather than later is great."

401(k) FEE SUITS - Boeing, Lockheed, General Dynamics, United Technologies, Bechtel, Caterpillar, International Paper and other major companies face class action suits that allege they allowed employees to be overcharged in 401(k) plans. The outcome of these suits could open the door to more legal action over 401(k) fees in smaller plans.

VISA TO GO PUBLIC - Just five months after rival MasterCard completed a $2.4 billion IPO, Visa, owned by member banks, plans to do its own. Don't be surprised if we see heavy borrowing from MasterCards as folks use the money to buy Visa stock!

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RECORD TRADE DEFICIT – In August, the U.S. trade deficit reached a record high of nearly $70 billion, even though exports rose 2.3%. Oil is the primary "culprit" behind the record deficit.

FEDERAL DEFICIT DOWN – The deficit for 2006 is about $248 billion...down from $318.7 billion in 2005. The current deficit is 1.9% of Gross Domestic Product, a sharp drop from 3.6% in fiscal 2004.

TAX GAP - Okay, so the current federal deficit is about $248 billion. Guess what? According to recent IRS estimates, some $290 billion is lost each year due to unreported income, overstated deductions and other tax cheating...more than enough to erase the current deficit.

RECORD DOW - The Dow Jones industrial reached an intraday high just above 11,900 and most expect it to top 12,000 soon.

PRIME RATE – The Feds are not tipping their hand regarding future interest rate cuts. Fed statements to the effect of being "quite concerned about inflation" would seem to indicate, however, that future rate cuts may not be in the cards.

CFP RESIGNATION - In the wake of considerable opposition being voiced to proposed changes to the CFP Board's rules of ethics, the CFP Board of Standards CEO, Sarah Ball Teslik, has announced her resignation effective October 31. In its opposition to the proposed changes, the Financial Planning Association said that the proposed revisions "fail to enhance consumer protections or advance the profession of financial planning."

RETIREMENTALITY – A consumer survey conducted by Mintel indicates that there are both challenges and opportunities remaining for the annuities industry. Less than half (48%) of all respondents were familiar with annuities. Of the respondents who were familiar with annuities, more than 60% expressed concern with being "locked in"...a significantly higher number than those who cited fees and expenses as a major issue (32%). As the Baby Boom generation reaches retirement, an entirely new "retirementality" has emerged — a much more individualized planning experience than seen in years past. As retirees look for more flexible options to address retirement planning, annuity providers are adding features to their products to address these concerns.

MORE HEALTH M&A IN 2007 – "Consolidation among U.S. health insurers is predicted to heat up next year as companies have largely finished integrating past acquisitions and new deals can help cut costs and generate members." Targets: Cigna, Coventry, Health Net and Universal American. Humana is likely to be a consolidator.

FINANCIAL CHECK UP FOR PBGC – Due to the increased usage of late, two Senators have asked the Government Accountability Office to study the financial health of the Pension Benefit Guaranty Corporation. The goal of the review, according to the senators, is to see if the agency needs an overhaul or more financial backing. Want to bet on the need for more "financial backing"?

SUN LIFE/UNUMPROVIDENT RUMOR – Shares in UnumProvident rose more than 13% on speculation that the disability insurance company could be the target of an acquisition by Sun Life. The stock surged after a large number of options on UnumProvident were purchased.

AETNA CUTS - Aetna will be eliminating 200 management positions and 450 rank-and-file positions...about 2% of the company's 30,000 employees.

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RAYMOND JAMES REQUIRES LOWER FEES ON VAs – Raymond James is now requiring all its annuity providers to offer an alternative pricing structure that reduces client costs without impacting standard or optional benefits. The purposes are to lower policy fees, create consistent commissions and reduce opportunities for confusion by simplifying offerings. Some believe the move could have industry wide implications.

FUND MANAGERS VS. S&P INDEX - According to the Standard & Poor's Indices Versus Active Funds Scorecard, the S&P 500 beat 80% plus of actively managed large-cap funds. This is not an isolated result. Morningstar also reported that mutual funds delivered third quarter returns of 2.5%, compared to the 5.7% return from the S&P 500 for the quarter ending Sept. 30. Have to wonder what fund owners are paying for.

RECRUITING BONUSES – Employees of A.G. Edwards are being offered some nice recruiting bonuses...bounty for an $800,000 producer is $50,000 and a $350,000 producer will net you $25,000. That is better than Dog, The Bounty Hunter gets and not nearly as hazardous to your health!

BANK OFFERS NO FEE TRADING ONLINE – Bank of America is offering free online equity trade fees to about 15 million investors who have more $25,000 in their combined Bank of America deposit accounts. The customers will get up to 30 free trades per month. This deserves further watching as it represents another shot in the battle for online trading.

"DO GOOD" BROKERS - According to panelists at a Securities Industry Association meeting, Wall Street firms are looking for ways to reward brokers not just for bringing in revenue, but also for doing so in an ethical and professional manner. The emphasis on do-the-right-thing rewards comes amid increased scrutiny by regulators. Hmmm, and all this time we thought all brokers were "doing the right thing."

GET BRUTAL ON LOW-PRODUCING BROKERS – That is the word from James Gorman, Securities Industry Association chairman and president of Morgan Stanley's global wealth management group. Gorman, who has terminated about 1,000 brokers at Morgan, believes brokers who were less successful hurt a company's reputation and tended to cause a disproportionate amount of regulatory trouble. Wonder if he was on the panel mentioned above?

BERNANKE ON BOOMERS - The Fed chief has released his most extensive comments to date on the challenges facing the U.S. with the looming retirement of 78 million baby boomers. Bernanke said that unless Social Security and Medicare are revamped, the massive burden from retiring baby boomers will place major strains on the nation's budget and the economy. "Reform of our unsustainable entitlement programs" should be a priority. "The imperative to undertake reform earlier rather than later is great."

JUMPING ON THE BANDWAGON - Investment News reports that "a number of significant insurers with extensive long-term-care-insurance experience have recently introduced or are preparing to launch new annuity or life products" that include LTC riders. Why? Under the new pension law, funds taken from a life insurance or annuity contract's cash value to pay for an LTC rider are not included in taxable income. In addition to the tax advantages, premiums for a combination product are expected to be 10% to 20% less than if the products were purchased separately. One concern being voiced is that life insurance and annuity products are already complicated and adding an LTC rider adds to the complexity.

COST DISCLOSURE STANDARD - ING has agreed to a settlement with New York that requires the company to pay $30 million in restitution to more than 50,000 members of the New York State United Teachers union for failing to inform teachers that it was paying $3 million per year to the union to reward it for promoting ING group annuity plans. Another part of the settlement requires ING to include "comprehensive, one-page retirement plan cost disclosures with every solicitation or account opening package." New York officials hope that this cost disclosure will establish a model for retirement fee disclosures.

HEALTH BENEFIT LAWS - There are a lot of them! To assist employers in complying with the various federal health benefit laws, the Department of Labor has launched an interactive Web site to serve as a resource for employers. It's available at www.dol.gov.

MIDLIFE FINANCIAL CAREERS – The WSJ reports that middle-aged professionals changing careers are a great fit in financial services. Firms hiring financial advisors "are swooning over midcareer types." They are ideal because of "professional polish, contacts and life experience."

529 COLLEGE SAVINGS TO BOOM – According to a study and thanks to the Pension Protection Act, 529 college savings plans are poised for take-off. A new poll by Fidelity reveals that more than 54% of parents with children under age 10 who don't currently own a 529 plan say they are now more likely to open one. Motivator: Federal income tax-free distributions for qualified education expenses.

UNDERESTIMATING COLLEGE COSTS - A study by AllianceBernstein Investments looked at the college saving habits and goals of parents with children under 18 and compared them with what college financial aid administrators have to say about college funding. The study found that 87% of parents believe scholarships and grants will cover at least part of their children's undergraduate expenses, and nearly 75% think their children are "special or unique" enough to win a scholarship. Unfortunately, financial aid administrators said 92% of parents overestimate the amount of scholarship money their children will receive and parents are not saving much on their own for their children's educations.

LEAD WITH ADVICE - This from speakers at the recent Wealth Management Forum..."Wealth management firms can no longer differentiate themselves in the marketplace for high-net-worth clients by the financial products they offer." Instead, wealth management companies need to "lead with advice" and move to a "team-based relationship manager model."

INSTANT LEGACY - From New York Life, we have the "Instant Legacy" single-premium universal life insurance policy. Designed to attract "rainy day" assets, product features include a guaranteed death benefit, a simplified underwriting program with no medical exams, and the ability to withdraw up to 10% of the policy's cash value without paying a surrender charge.

E-DOCTORS? – Some major health care providers are now covering e-mail visits between patients and doctors. The move is an attempt at reducing exploding health care costs. Experts say such e-visits could produce billions of dollars a year in savings, and cut down on time and travel for patients with routine medical issues.

PET TRUSTS – By know, we are sure you are all familiar with pet health insurance, but we want to make certain you are aware that pet trusts are available in 38 states. These trusts allow people to name animals as their heirs by naming a caretaker for a pet and appointing a trustee who ensures that the money is being spent appropriately.