Is it Better To Be Saved By Luck Or Killed By Knowledge? 1/09
I have talked with hundreds of producers that have told me the way they present index annuities to the consumer is by saying potential losses make owning stocks and mutual funds too risky, which is why the consumer should move to index annuities. The problem is this was usually a personal opinion presented as fact, and as such, it drove financial advisors nuts.

Many advisors have conducted extensive research on the market performing thousands of stochastic (means random) Monte Carlo simulations (also known as Vegas Roulette Spins) where past periods are presented in different future patterns and the probabilities assessed. Based on these statistical measures these planners and other securities experts knew that the probability of a massive loss was almost nonexistent and therefore could generally be ignored.  

Because avoiding almost certain stock market losses is a good sales story some consumers were persuaded by annuity producers to move money from investments into index annuities where they have avoided loss. Based on these documented statistical measures many investment advisors kept a significant portion of consumer portfolios in the stock market where they may well have lost a third or more of their client’s money in 2008.  

There were two wrongs here. The first one is that opinion should be presented as opinion and not as fact. A key reason for the regulator attention to index annuities is when the securities people complained about losing assets to index annuities the securities regulators were able to find several cases where annuity producers acted as if they were giving investment advice and not personal opinion, without being registered to do so. The first amendment should allow a producer to say, “I feel the stock market is too risky and this is why I like fixed annuities,” but it may be securities advice to say, “my research shows the stock market is too risky.” The second greater wrong was the arrogant presumption by the securities folks that they thought they could predict the future.  

I believe the securities world relies too heavily on a frequentist statistical approach (assumes one can objectively predict the correct odds of an event occurring). What this meant was because the current financial meltdown was statistically improbable it was mostly ignored. The planners used their flawed, but well documented logic to show the regulators that annuity producers were making unfounded statements about stock market risk and should be silenced, and one result is the SEC decided index annuities are securities at least partly based on the securities industry saying that annuity producers were lying to consumers by saying stocks and mutual funds were too risky.  

The securities world was wrong because they relied too heavily on frequentist statistical theory and did not optimally combine that with a Bayesian statistical approach (where probability is subjective and open to personal interpretation). The argument behind a Bayesian approach is that relying too heavily on unsorted historical data may provide a more misleading picture than trying to use informed guesses reflecting beliefs about the current financial environment.  

This Bayesian view is well expressed in Gary Smith’s paper, The Next Best Thing to Knowing Someone Who is Usually Right where he says “the fact that, over the last 80 years, long-term Treasury bonds have yielded an average of 5% and stocks 10% is not a persuasive reason for assuming that the expected values of the returns on bonds and stocks during the coming year are 5% and 10%.” Unfortunately, the securities world and the SEC continue to accept that logic. 

The annuity producers were right because they were lucky (but this could mean that annuity producers were not lucky but are unknowingly experts at Bayesian probability). In the future, annuity producers need to generally do a better job of ensuring the consumer understands when a personal opinion is expressed, and securities folks need to realize that the prospectus language “past performance does not predict future results” is there for a reason.  

6 Failed Banks In January 2/09
From Florida to Washington the country quickly added to the 25 banks that failed last year with 6 new banks entering the tomb in January.

In the middle of the month depositors of the Bank of Clark County in Vancouver, WA and National Bank of Commerce in Berkeley, IL received FDIC telegrams telling them their money had moved during the night. These were followed by 1st Centennial Bank of Redlands, CA the following weekend  and then joined by MagnetBank of Salt Lake City, Bank of Essex in VA and Ocala National Bank  on the last business day of the month.

In these 31 bank failures all insured deposits were immediately available after FDIC action. Whether uninsured deposits are fully paid out is a crap shoot, because it largely depends on how nice the acquiring bank feels – and there usually is an acquiring bank. Unlucky uninsured depositors may not get all their money back, and it can take years to get what you can.

The FDIC fund has NOT been strained by these closings, at least not yet, and always remember the US Treasury provides a bottomless wallet if FDIC needs more funds.

How Safe Is My Bank
FDIC does not publish any ratings regarding the financial safety of banks, but six independent firms do. The ratings are typically available to paid subscribers, but Bauer Financial (http://www.bauerfinancial.com/btc_ratings.asp) will tell you their rating for a bank simply by filling in the state and bank name.  

An Alternative To FINRA Regulation Of Annuity Producers 2/09
Thirty years ago the banker, stockbroker and insurance agent offered distinctly different products to consumers and were regulated by separate regulators that were built to regulate the distinct products. Over the years the stockbroker morphed into an investment products generalist, the bank started selling mutual funds and annuities alongside checking accounts, and many insurance agents went from offering risk transfer products to selling wealth creation ones. The result was a shadowy product wall replaced the distinct one and regulations designed for one world were forced to try to cover several. 

Securities regulators reacted by expanding turf. Banks generally went along with all of this because their trust functions were protected from securities regulation encroachment and the federal banking regulators fought to ensure bank could still offer bank products under banking regulators.   

Meanwhile, many agents were entering the insurance business and would never sell insurance. Instead they were selling interest yielding fixed annuities that were alternatives to the stock market or the bank. The problem was the insurance regulatory model was still based on an agent, directly trained and supervised by a general agent or broker, selling a relatively simple life insurance or annuity product. The reality was these new agents were selling increasingly complex financial instruments without adequate training or supervision because the insurance industry distribution system had changed to independent agents appointed to carriers thru marketing organizations. The agents received some training on how to get prospects and how to sell products, but there was little attention paid to when the products were suitable and even less to supervising the sale.   

The securities regulators are saying these annuity agents are acting as securities salespeople because they are advising people on wealth creation instead of only risk transfer, and should be securities regulated, but the FINRA model is the wrong one for many annuity agents because the agents don’t want to sell investments; they only want to sell annuities. The agents want to work in a corner of the financial store selling no-market-risk-to-principal annuities and no-market-risk-to-income retirement solutions. 

The FINRA model is too broad. Altho a basic understanding of how stocks, bonds and mutual funds work is needed so the annuity agent can fairly compare investments with fixed annuities, it doesn’t make sense for someone that will never sell mutual funds to remember breakpoints, or be able to explain a butterfly straddle when they will never sell an option. Last year FINRA published 3,928 pages of rule changes and only 2 pages remotely applied to fixed annuities. FINRA poorly manages the security world and does not understand the annuity one.    

Insurance regulators are unwilling to admit their model is broken due to changed distribution and products, and their plate may be too full ensuring carriers remain solvent to do the necessary agent enforcement. Frankly, the best regulator for annuity agents might be NASAA based. 

Why should state securities departments regulate fixed annuity agents? My main reason is in many states the securities and insurance department already work closely together. The insurance department would ensure the annuity company is financially strong, and the securities department would provide regulatory enforcement on the distribution side. Altho some state securities regulators have told me they simply don’t like annuities, the insurance regulators could provide balance by getting NASAA members to admit it really isn’t the product they dislike, but their current impotency in being able to go after the “bad agents”. 

Having joint NAIC/NASAA supervision of annuity agents and carriers would preserve the local regulatory feel and hopefully permit greater participation by agents in the process. It is worth looking into, because the alternative is a world where everyone is regulated by FINRA. 

SEC Sued By Coalition to Reverse 151A 2/09 
As soon as Rule 151A was published in the Federal Register on 16 January a lawsuit was filed with the U.S. Court of Appeals for the District of Columbia Circuit to have the courts reverse the SEC Rule. Altho over 50 carriers sell index annuities only four are actively fighting for index annuity producers and were willing to be listed as petitioners, these carriers are American Equity Investment Life Insurance Company, Midland National Life Insurance Company/North American Company, National Western Life Insurance Company, and OM Financial Life Insurance Company. They are joined by the marketing companies of BHC Marketing and Tucker Advisory Group. The Press Release

FDIC Fund Down To $17 Billion   3/08
Altho FDIC does not foretell which banks will be closed, they do keep an internal list of “problem banks.” At the end of 2007 assets of problem banks were $22 billion – not too worrisome when you have a $50 billion fund-chest. At the end of 2008 assets of problem banks were $159 billion – and the insurance fund-chest had shrunk to under $19 billion. And the FDIC fund is even less today.

Based on reports of expected payouts, I estimate the sixteen failed banks so far this year will cost FDIC $1758.4 million, which means the insurance fund is currently down to around $17 billion. FDIC does have $22 billion in other retained monies that can be used to cover failed banks, but all in all there is less than $40 billion to back $159 billion of realized “problems.” In recognition of all this FDIC decided that beginning in the second quarter banks would be hit with a special assessment of 20 basis points based on deposits – an increase from the 12 to 16 bps usually requested (stronger banks pay the lower amount). 

It should be noted that annuity guaranty funds have a zero fund-chest with carriers only asked to ante up after the loser folds.

Index Annuity Complaints Lower   4/09
In 2004 index annuity carriers averaged one customer complaint for every $614 million of premium sold, in 2005 the rate was one complaint for every $310 million and in 2007 the index annuity carriers averaged one customer complaint for every $109 million of premium sold. For 2008 there was one complaint for every $126 million of premium and the top 25 carriers averaged a slightly better rate of one complaint per $131 million. There were fewer index annuity complaints in 2008 than in 2007 or 2006. 

2008 Complaints were lower than in 2007 or 2006

Led by Forethought, five of the top 25 index carriers had no index annuity coded complaints last year. The other top 25 carriers with zero complaints were Investors Insurance, Lafayette Life, Fort Dearborn and CUNA Mutual. Two of the top ten sellers – Lincoln National Life and LSW – had only one complaint. The worst complaint record for a top 25 annuity carrier was one complaint for each $17 million of sales.  All in all, index annuity coded complaints declined for the first time. In both total complaints and in relation to sales the 2008 complaint ratio is better than it was in 2007 or 2006.  

No Complaint Carriers
There are three carriers that have never received a complaint in the seven years I have been compiling statistics. They are Union Central (UNIFI), Standard Life of Indiana and Woodmen. [a 7 year complaint history for all index annuity carriers is included in the print version of the Index Compendium].

Complaint Factor Chart
This chart compares the complaint ratio of the top 10 index annuity sellers with the industry average NAIC index annuity coded complaints, represented by 1.0, since 2002. To wit, if a carrier’s complaint factor is 3.0 it means the carrier had three times the industry average complaints per dollar of sales for the year, if the factor is 0.5 the carrier had half the industry average complaints; zero means no complaints for the carrier. LSW and Lincoln National Life had the lowest level of complaints for the last seven years with the average insurer generating six times more index annuity complaints than either of these carriers.

2008 Deferred Annuity Sales By Market Share Chart  5/09
This chart shows the approximate market share of deferred annuity sales distribution for 2008 compiled and interpreted from a variety of data sources. Because index annuity sales are not specifically separated from fixed annuity sales on the available independent broker/dealer sales information there could be some shifting of market share between independent B/D fixed, and independent agents. 

 Retirees Look At Quantity Not Value 5/09
Many studies find seniors tend to choose the product with the greatest number of benefits instead of the product with the greatest value, even if the benefits aren’t important to them. As an example, a senior that was strongly interested in having an annuity that waived surrender charges upon death would be more likely to choose an annuity that waived surrender charges for critical illness, nursing care needs and unemployment – and did not waive charges for death – over an annuity that only waived charges for death because three waived benefits are a bigger number than one waived benefit, even tho the three don't address the primary need. Seniors tend to ignore information on the importance of the benefits and make selection based on quantity of benefits.

In a similar vein, in decisions where the odds are presented younger consumers tend to follow the odds and choose payoffs based on highest probability, by contrast seniors treat all choices as having equal probability even when the odds are presented. This could be the reason why seniors congregate at the slot machines instead of enjoying the better odds at the blackjack and craps tables, and why showing the highest, lowest and median hypothetical index annuity return deludes seniors into thinking they have a 1 in 3 chance of earning 12% a year forever.

Irrational Investors - Blame it on the Media 5/09
A February study blames the media, at least in part, for causing bubbles in good times and a crisis mentality in bad. The study concludes that individuals strongly rely on media guidance for investment purposes. They say that it seems plausible that the media prints stories to attract the greatest audience, and what this means is the media says what has been happening yesterday and today will continue to happen tomorrow, with little justification for doing so. The study ends by saying “this calls for a close inspection of media behavior in financial crises and bull markets.”  

Brandes, L. K. Rost. How Media Make People Buy Stocks: Market Homogeneity and Bubbles. Working Paper No. 98. February 2009

Create A Success Paper 5/09
It is tough to think successful thoughts and keep swinging away when everything you are trying isn’t working. When a bad patch hits the negativity feeds a downward spiral that makes it hard to keep going.

One thing that helps is to sit down and write about your past successes. Remember when you closed the difficult sale, when they said you couldn’t do something...but you did, how you got thru the last bad patch and how you learned that rough times are temporary. Success in life is often achieved by getting up one more time than you fall. We simply need to remind ourselves from time to time of our past triumphs.

Zero Interest For I Bonds 5/09
I Savings Bond rates are a combination of a fixed rate and changes in the Consumer Price Index. For the last period the index declined at an annualized loss of 5.56%, more than offsetting the fixed rate credited. The good news is you can't lose interest so the worst that happens is you earn zero, and that's what you will earn until they recalculate the inflation rate next November. The traditional EE Bond pays 0.7% and it won't go up for 20 years.

First Quarter Index Annuity Sales Dip   6/09
The AnnuitySpecs.com Indexed Sales & Market Report shows first quarter 2009 index annuity sales were $7097 million compared with sales of $7253 million for the previous quarter. First quarter sales were up 23% when compared with the same period one year ago.

The top ten carriers for the first quarter:

Aviva	$ 2,397,628,461		Jackson National	353,743,600
Allianz Life	1,119,386,614		North American Company	282,400,000
American Equity	630,063,608		LSW (National Life)	227,807,625
Lincoln National	368,013,241		ING	220,104,443
Midland National	358,900,000		Old Mutual	139,361,885

Average Commission
Even with a plethora of indices to select from the S&P 500 is still the major index accounting for 79% of all equity index allocations.  

Winners & Losers
The big top mover is Lincoln National increasing sales 27% from the previous quarter and 68% from a year ago. Jackson National was up 83% from a year ago. RBC is up at least six fold and National Western is up 50% for a quarter or yearly look. Big losers are Old Mutual, and for the recent quarter ING and Lincoln Benefit. Another big loser are index life sales plummeting 33% from the previous quarter to fall to $105 million in the first.

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Nothing New - Products Have Been Pulled & Sales Curbed Before 6/09
Although I continue to read somewhat hysterical reports talking about annuity products being pulled, agent contracts cut and limits being placed on sales as unprecedented the reality is this has happened before. 

In the spring of 2003 the number of fixed rate & index annuities dropped from around 1000 to under 700. During that same spring Allianz, American Equity, Aviva (AmerUs), Midland, and others either pulled product, cut commissions, or both. As I wrote then "fixed annuities are being squeezed. Insurers are reducing costs, cutting commissions, pulling unprofitable products, or a combination of these actions to try to cope".    

The climate will change again for the better.

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 A Perfect Storm Of Bad Writing   7/09
Adam Smith reportedly said, “When you get inflation, unemployment and depression you get a perfect storm in economics.” I made that quote up to show how a bad writer often begins their story. When I speak of bad writers I’m not talking about poor grammar and split infinitives. A bad writer is someone that says nothing original or doesn’t clearly communicate with the intended reader. Here are four areas of bad writing and what should be done.

Quotes Many writers open with quotes that are not even related to what they are writing about as in “Yogi Berra said ‘a nickel isn’t worth a dime anymore’ and so it is with monopolies...,’’ but even if the quote fits the topic the writer is telling the reader that they have nothing new to contribute so why bother reading any further. Is there ever a place for quotes? Yes, if you need to support a fact or need an ally for your position. As an example, if you are writing an article against monopolies it might be good to show that experts hold the same opinion by writing “as Adam Smith said ‘monopoly is a great enemy to good management’’. But please don’t open with the quote. First, show why readers should listen to you.

Clichés
It was a better book than movie, but I wish Sebastian Junger had picked a different title. Every blow-dried TV anchor or third-rate columnist uses “a perfect storm” whenever they can tie three things together in a feature, but “a perfect storm” is a cliché that adds nothing meaningful. Some clichés never go away – it ain’t over til it’s over, some eventually fade away – people again are saying model instead of paradigm, and some are cresting – but since tweeting is for birds and not people it will soon be forgotten. The problem is using a cliché also shows that the writer has nothing original to say.

Industry-Speak (or not writing to the reader)
It is fine to use the phrase ‘acute myocardialinfarction’ if the readers are doctors, but if the article is in Reader’s Digest call it a heart attack. A frequent problem is where the writer uses industry jargon as shorthand, but the reader isn’t in the industry. A writer needs to write to communicate with the intended audience.  If the writer is not sure of the audience then the writing needs to be at a level that anyone will understand – no industry-speak jargon. The writer should attempt to find out who will read their article and write to that reader. What this means is an article written for Best’s Review should read differently than one written for Reader’s Digest and that one will differ from the Fortune article.  

When You Run Out Of Things To Say, Quit
You’re asked to write an 800 word article, but after 490 words you have thoroughly covered the points you wanted to cover. Stop writing.    

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Court Action May Stay 151A Enactment  7/09
On 21 July the District of Columbia U.S. Court of Appeals stayed the enactment of SEC Rule 151A as written and sent it back to SEC for consideration. What this means is index annuities may not be treated as securities in January 2011 but remain as fixed products. 

The Court did rule that the SEC had the right to say index annuities were not exempt based on the Rule 151 Safe Harbor and could be considered securities. However, the Court also ruled that SEC did not consider the new rule's economic impact on carriers and distributors, so the rule has been sent back to SEC for reconsideration. The Court said "We hold that the Commission’s consideration of the effect of Rule 151A on efficiency, competition, and capital formation was arbitrary and capricious."

When the issue was first raised I said SEC would rule index annuities were securities. I also said the Courts would void the ruling and the main reason would be the negative economic impact. In June of 2008 I wrote "together the most conservative estimate of additional expenses to insurance agents combined with lost revenues to marketing organizations, the proposal could result in a loss of $852 million to insurance industry distribution channels. Most of this loss would be incurred by small entities, it would have a significant effect on the economy, and it would result in a major increase in costs for insurance agents" and it was on this basis that 151A was sent back for SEC to assess the economic damage 151A might cause.

The SEC could revisit this area and conduct a thorough analysis on the economic effects and try this again, but I don't think they will. First, the SEC plate is a little fuller than it was last summer with other regulatory needs - since the lack of SEC oversight has been blamed for billions of dollars in securities losses it is harder to justify attacking an instrument that protects against loss. 

Second, there are active bills in Congress that, if passed, would mandate index annuities are not securities, so SEC could wind up simply wasting their time in an area they may not control. 

Third, the issue that was the real reason 151A was passed - that index annuity sellers are unregulated cowboys - is being handled. FINRA has effectively backdoored putting supervision on index annuities by making B/Ds responsible for supervising rep sales sales of all products, whether securities or not. In addition, NAIC is quickly moving forward on new suitability regs that could cause the agent and supervising marketing company to lose their insurance license for an unsuitable annuity sale. The unregulated sales issue is being addressed.

The bottom line. The index annuity industry may have won this battle, but only an act of Congress will make it go completely away.

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Would You Rather Have All Of A Loss Or Some Of A Gain 8/09
Over the last decade the S&P 500 declined 20%. But an annual reset approach produces a 99% total gain.

Red is total loss for S&P 500 over period
Blue is total gain using an annual reset method

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Hope is defined  8/09
as yearning for a positive outcome. People with high hope tend to be less rational and more risk-averse. Hopeful is when one believes there is a strong chance of an outcome occurring. Highly hopeful folks tend to be more rational, more knowledgeable about the odds, and more satisfied once they’ve made a decision. Meaning, a Cub fan with high hopes may believe in a possible World Series win, but a hopeful Cubs fan will be happy if they don’t wind up in the cellar by October.

What happens when hope is dashed? A person with high hopes will search for information and become more of a risk-taker to keep the hope alive. A hopeful person will rationally adjust what they are doing to restore hopefulness. What does this mean for annuities?

There are consumers that hope they will have a secure retirement, but are clueless as to whether it will really happen. They need to be shown the reality of their current situation because if the reality doesn’t match the yearning these people will be receptive to a solution that gives back their hope. There are consumers that were hopeful about a secure retirement and are aware the bear market has upset their chances. They are searching for a rational way to better the odds. Both groups need to shown how fixed annuity GLWBs can put hope back into retirement.

Nenkov, G. MacInnis, D. Morrin, M. 2009. How do emotions influence saving behavior? Center for Retirement Research at Boston College. April. 9-8   

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Second Quarter Index Annuity Sales Set Record9/09
TThe AnnuitySpecs.com Indexed Sales & Market Report shows second quarter 2009 index annuity sales were $8395 million compared with sales of $7097 million for the previous quarter. Second quarter sales were up 21% when compared with the same period one year ago. Annualized index life premium was $132 million for the 2nd quarter.

The top ten index annuity carriers for the second quarter:

Aviva	$ 1,611,448,143		Jackson National	505,146,408
Allianz Life	1,486,567,292		Midland National	375,300,000
American Equity	1,143,151,457		North American Company	339,900,000
Lincoln National	638,601,702		LSW (National Life)	306,364,317
ING	595,331,316		Forethought	165,598,977

Average Commission
The average agent commission was 6.8%.  

Winners & Losers
The top 7 carriers represent 75% of production. The biggest percentage mover was RBC with sales of $124 million, up 1320% from the previous quarter. American Equity increased sales by $513 million. Allianz and ING each increased sales over $300 million. The biggest loser was Aviva losing $786 million in quarterly sales.

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Which Crediting Method Works Best In A Bear Market?  9/09
In the September print edition of the Index Compendium I calculated the annual returns using three different crediting methods assuming you had purchased an index annuity every day for the next year after the bottom of the cycle's bear market. The charts for 1974, 1987 and 2002 were furnished, here are the charts for 1978 and 1982.

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3/4 of Web-vertisers use Ads that 7/8 of us hate 9/09
A LinkedIn Research Network/Harris poll finds consumers are frustrated by web ads that expand on the page, can’t be closed or play music, which are features three-quarters of advertiser have added to their web ads in the last year.

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FDIC Fund Bottoms 9/09
At the end of June the FDIC Deposit Insurance Fund stood at $10.4 billion. During July and August 39 banks failed and FDIC estimates it will need to pay out $10.723 billion to cover the insured accounts. Having $10.4 billion and paying out $10.7 billion should mean the piggybank is busted, but insured deposits are still covered. There is $32 billion dollars sitting in FDIC’s contingent loss reserves account. The bad news is the cash hoard of $56 billion last summer is $20 billion less today, and there are 420 fewer banks than there were two years ago. The good news is FDIC can borrow a half trillion dollar from the Treasury if needed. Insured deposits are still okay. 

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Replacing The Loss 10/09
Even with the upswing of the last 6 months the typical 401(k) is still down 20% from where it was at the start of 2008 (US News & World Report, Oct 2009). What do you do if you planned to retire in the next 1 to 5 years? Your first hope is that stock market quickly recovers the rest of the loss, but what if this current run up is a bear market rally that is poised to fizzle? Remember, the millennium bear market took over 7 years to recover from its low point. Assuming the goal is to use retirement assets to produce retirement income – as opposed to leaving an estate – index annuities with guaranteed lifetime withdrawal benefits (GLWBs) guarantee that the income is available for retirement.

If you had $100,000 the typical Wall Street scheme would have had you withdrawing $4,000 a year (4%). Today, your $100,000 may only be worth $80,000 and the same 4% withdrawal rate would mean $3,200. However, depending on the GLWB selected you could be guaranteed a lifetime withdrawal rate at age 65 of 5% to 6% meaning you receive $4,000 to $4,800 today. The index annuity gives you an equal or better payout without the uncertainty. But wait there’s more.  

There are GLWBs guaranteeing the payout will increase by 7% to 8% a year if you delay taking an income. In three years you could be guaranteed a lifetime payout of $5,000 to $6,000 even if the stock market swoons. There is a catch. Wall Street’s plan has their payout hopefully increasing at the rate of inflation and these GLWB payouts are fixed. However, at 3% inflation it would take 14 years for Wall Street’s suggested payout of $3,200 to even match the top GLWB payout you get today, much less beat it.

And there is another alternative, the Forethought GLWB would give you an immediate 25% credit to the index side allowing you to start at $4,000 and this income is guaranteed to increase by 2% a year ($4,080 next year, $4,160 the year after that...). It’s not directly tied to inflation, but it means a payout of $5,000 in 12 years and $6,000 in 21 years guaranteed. GLWBs replace the loss and remove the uncertainty.

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Keeping Pace With Inflation 10/09
 At 3% inflation an age 66 couple with a static income loses half of their purchasing power by age 90, at 4% inflation they lose half of their power by age 84. It is important to remember Social Security income is already indexed to inflation, but if the remaining income is not indexed then assets are needed to preserve purchasing power. 

If you start with an income of $50,000 and inflation is 3% a year you’d need $75,629 at age 80 to maintain the purchasing power and over $100,000 by age 90. It would take a side account of $343,710 earning 5% to cover the needed increases for the next 30 years on the $50,000 income.

The other factor is what is the retiree’s personal inflation rate? The CPI for urban consumers contains things like increases in the cost of children’s clothes, college education and commuting, not typical retirement expenses. However, seniors are probably more affected by changes in medical care costs. Recognizing that retirees experience a different inflation scenario the Bureau of Labor Statistics is fooling around with an experimental CPI for retirees. So far they’ve found that a retiree’s inflation rate was about 20 basis points higher than the public at large  http://www.bls.gov/cpi/cpiexpcpie2005.pdf

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Golden State Mutual In Conservatorship 10/09
On 30 September the California Insurance Commissioner served Golden State Mutual Life Insurance Company with a conservation order and ordered it to cease selling products. In 2008 Golden State was active in 12 states with assets of $90 million. Annuities represented 12% of premiums (I estimate 2008 annuity premiums at $3.4 million) with life insurance accounting for 85% of all premiums. This action was not unexpected; Golden State had been under scrutiny by California Department of Insurance since 2004 and posted operational losses for the last three years.

This is the third annuity carrier to be taken over by regulators in the last 10 months. For more information policyowners should contact Golden State at  www.gsmlife.com  

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5 Year Returns 11/09
There were 34 carriers active in the index annuity market in September 2004. Six carriers marketed term end point designs that have not yet reached the end of their index period and they cannot be included in the study, two carrier are out of the business and refused to provide data. I asked the remaining 26 carriers for copies of customer statements with customer information whited-out for contracts issued closest to 30 September 2004 for a five year period ending 30 September 2009; thirteen of these carriers provided data on 27 annuities. The carriers providing information are:

Allianz                       American Investors	American Equity	Aviva
EquiTrust	ING	Lincoln Benefit
Lincoln Financial Group	LSW	Midland National
National Western	North American Company	Union Central

This is the eighth year I have collected 5-year return data and I deeply appreciate the cooperation and support of the carriers that were open in sharing what some of their annuityowners earned in their index annuities. 

Comparative Returns  
The average index annuity credited 4.19% annualized interest for the five year period. Compare that to the 3.92% they would have earned in 1-year CDs or the 3.58% earned in a 5 year CD [www.bankrate.com]. In a 5-year period where the annualized return for an S&P 500 index fund with an 0.18% expense ratio was 0.95%  index annuities did what they were supposed to do – be a safe money place with the potential for more interest.

The average reported FIA return was 4.19%, more than four times greater than what was earned in an index fund with reinvested dividends

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Third Quarter Index Annuity Sales Drop 12/09
The AnnuitySpecs.com Indexed Sales & Market Report shows third quarter 2009 index annuity sales were $7563 million compared with sales of $8395 million for the previous quarter. Third quarter sales were up 11% when compared with the same period one year ago. Annualized index life premium was $131 million for the 3rd quarter.

The top ten index annuity carriers for the third quarter:

Allianz Life	$ 1,398,813,317		ING	579,013,630
American Equity	953,215,101		LSW (National Life)	337,022,438
Lincoln National	859,158,000		Midland National	284,100,000
Jackson National	769,383,095		RBC Insurance	216,762,160
Aviva	670,517,629		North American Company	206,400,000

Average Commission
The average agent commission was 6.7%.  

Winners & Losers
The two stories are the fall of Aviva from #1 to #5 in a single quarter enabling Allianz to regain the lead. The bigger story is Lincoln National and Jackson National gaining sales in bank and wirehouse channels, altho it appears Lincoln National is being sold as a MYG rather than for its indexed interest potential.

Deferred annuity sales totaled $51 billion, down from $63 billion in the 3rd quarter of 2008  

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SEC Halts Treating Index Annuities As Securities Until 2 Years Past Whenever  12/09
In response to legal action taken by Old Mutual on the lawsuit against 151A - the SEC rule stating index annuities are securities and most be treated as such beginning in January 2011 - the SEC has said that any implementation will be delayed until two years after a final rule is issued, and that the final rule will not be issued until after a comment period is opened and concluded on the economic effects of 151A, according to the court brief filed by the SEC with the U.S. Court of Appeals for the D.C. circuit.

Background 
Last summer the court said the SEC had the authority to say that index annuities were securities, but that the SEC had ignored their own rules by not fully examining how this change would economically affect the annuity industry, so the rule could not go into effect until SEC went back and did their homework and submitted it to the court for approval. The Old Mutual court filing in November proposed that since this homework was due in December 2009 that the court should tell SEC they were too late and simply kill 151A. SEC responded by saying they will do their proper homework at sometime in the future and then submit it, and the initial 2 year delay in implementation that would have gone into effect 12 January 2011 is delayed until two years after the final SEC rule is issued. 

What This Means   
What was hoped for was that SEC would react to this new legal action by saying "we give up" and simply killing 151A. SEC did not do this. SEC will first open a comment period so the public can talk about the economic effects 151A would have on the industry, close the comment period and write an analysis of these effects, and then issue a final rule. 151A would go into effect 2 years after this final rule is issued. What this means is 151A will not become effective anytime earlier than spring or summer 2012, and that assumes SEC quickly opens the comment period and gets active.

Will SEC Write A Final Rule?
I don't know, it depends on what the SEC is trying to accomplish. The motive behind 151A was not the issue as to whether index annuities were securities but was based largely on unsupported allegations by FINRA and NASAA that index annuities were being sold unsuitably and that state insurance departments were not regulating these agents. In the last year the NAIC has advanced new annuity suitability rules and is talking with the SEC about going after bad agents. It is very possible the SEC may decide that the state insurance departments will be more effective in regulating agents and thus securities regulation is not needed. It is also possible the SEC may decide that with FINRA and NASAA members currently taking a stronger look at index annuity sales by insurance agents that are securities registered that securities oversight is already effectively happening without 151A being implemented. Or the SEC may not bother going through the full comment, analysis and ruling process because there are active bills proposed in Congress that if passed would declare index annuities not to be securities, which means SEC could waste a lot of time and resources and ultimately be trumped by Congress. I am hopeful that Congress will rule in favor of index annuities, but there are over a thousand proposed bills active in Congress today and many of them have a lot more sponsors than H.R. 2733. 

The Bottom Line
For index annuity players it is business as usual at least until sometime in 2012, which is a long time in the political world. In June of 2008 I wrote the best way to stop 151A was for the insurance regulators to show they were regulating index annuity sellers and for the industry to demonstrate the economic harm that would be caused by declaring index annuities securities. If the SEC does open 151A up for comments these points should be stressed.

Jack Marrion