Cap Gain-Not Loss (a/k/a Monthly Cap)  7/04
The fastest growing crediting methodology being adopted by carriers is the Cap Gain-Not Loss structure, also called the Monthly Cap design. The Cap Up method determines index movement for each month, adds any gains – up to a cap, or subtracts any loss – without a cap, to the previous subtotal. At the end of the period – one, two or three years – any final gain is credited to the index annuity. If the period ends with a loss the annuity is credited with zero gain. The cap may be raised or lowered (subject to a minimum limit) at the end of the crediting period when the design resets.

Salomon Smith Barney used the cap forward methodology a few years ago in an offshore asset trust. The first carrier to offer an index annuity version with the Cap Forward method was National Western and when I last counted half a dozen carriers were using the method with more on the way. It is not a bad design. However, I have found an incredible amount of confusion and hype surrounding the return realities of the methodology.

You Won’t Earn The Cap
Based on historical index performance, it is very unlikely that a 3% cap forward-fall back method will ever produce a year with a 36% return, or even a 20% return for that matter. Indexes do not tend to go straight up, and returns depend on when you begin and end the years.

If you look back over the last 50 years and apply the 3% cap forward structure you would have earned a 20%+ return three times (1959, 1996 and 2004), and only if you ended your annual periods during the school year. If you use the method with years beginning during the summer months you only have one year in the last 50 years with 20%+ returns.

A 3.5% monthly cap produces 20% annual returns three or four times over the last 50 years, but not one of those years produces a 42% return. The best of the best year flirts with 30%.

What about a two-year design with a 5% cap on upward monthly index gains? Well, you never hit a return of 120%, but unless you bought in the spring of the year you had at least one two year period in the last half century that delivered a 50% gain.

The correct way to describe a 3% annual cap forward or a 5% biennial cap forward is by saying “this method limits monthly index gains to 3% (or 5%) but any upward movement is not locked in and the cap doesn’t apply to index losses”. The wrong way to describe this method is to say, “your annual cap is 36%” or “you could make 120% in two years”. It is inaccurate to multiply the cap percentage by the number of months in the holding period because it creates an unrealistic picture of potential returns. If the cap forward design is presented as “maximum cap potential” you might meet me down the road – as a witness for the prosecution.

Cap Forward Designs Won’t Post Great Returns In Bad Times
Cap Forward designs are not going to produce great returns when the market becomes more volatile; although I have had several producers tell me this. The Cap Forward structure has a greater potential for producing at least some index-linked return in highly volatile times where other methods won’t.

Higher volatility means index-link sellers demand more money because the risk of big market swings – both up and down – has increased. Because the risk of catching the index-link seller on a big upswing is greater the cost of the index-link goes up. Higher costs mean insurers cannot buy as much index-linkage so traditional caps and/or participation rates go down.

Cap Forward methods share in this volatility, and with caps on monthly gains and not losses the index-link seller can be more generous on up cap limits, hoping that the down months will offset. This does not mean Cap Forward designs will post great returns in bad markets – 2001 and 2002 were years of high market volatility and Cap Forward methods would have credited the same zero returns as other methods – what it does mean is during periods when high volatility effectively shuts down returns from traditional crediting methods the Cap Forward design will still have caps that offer the potential for index-linked returns.

How Do They Perform?
I will begin by saying past performance in any shape or form whatsoever has absolutely no bearing, correlation or predictive powers regarding future returns of any financial vehicle. I also want to say if you’re looking at hypothetical performance using only the last ten or twenty years your vision is even more distorted. I plugged in current rates for a few different annual reset index annuity crediting methods for ten year segments using calendar years going back 50 years (there are 42 ten-year periods 1952-1962, 1953-1963...1993-2003). I then determined the average annualized return produced for each ten-year period and saw how often returns occurred.

For example, looking at the ten-year period annualized returns over the last 50 years for an annual point-to-point method with a 100% participation rate and a 9% interest cap shows 81% produced annualized returns between 5% and 6.99% a year and 19% of the periods had annualized returns below 5% a year. Here are current rates used for a few other methods and the dispersal of returns:

While, on a hypothetical historical basis, even a 3.5% cap forward design never produced a ten-year period averaging double-digit returns, the method can compare favorably with traditional cap designs.

This is a very limited comparison. When I took a broader view using current rates plugged in for periods during the last 50 years, and compared the hypothetical returns of cap forward products with other index annuities of the same surrender period, the cap forward methods tended to have higher average returns than other averaging methods. It should be noted that Cap Forward products, as with almost every other reset annuity on the market, have the ability to change a crediting variable – in this case the amount of the monthly cap – prior to the end of the surrender period, and future caps could, and probably will, differ from current levels, which will affect returns.

Summary
The bottom line is the Cap Forward design is a legitimate crediting methodology with the potential for higher returns than some other methods. It is a credible addition to the methodology lexicon. My concern is that it will be marketed to consumers using the maximum theoretical period cap rather than realistic return reality. The crediting method and the potential index-linked returns are real; overselling is not necessary. As with most other index annuities, cap forward returns will depend more on how the carrier treats you at renewal than the methodology used.

Methodology And Percentage of Index Gain Realized    7/04
This study shows how different index crediting structures and rates would have hypothetically performed for ten year periods ending during the 1980s (71-81, 72-82...80-90) and 1990s (81-91...90-00) calculated as a percentage of S&P 500 Index returns. For measurement the study uses the end of the year value for the S&P 500 index in calculating the returns. The results obtained should not be taken as a representation of actual returns for any product or period. This study is neither sponsored or endorsed by Standard & Poor’s or any insurance company, nor does Advantage Compendium market, sell or endorse any index product.

Example: The annualized S&P 500 Index return for ten year periods ending in the 1980s averaged 7.88%; the average for ten year periods ending in the 1990s was 13.06%. If you apply the Term End Point method with a 75% rate averaging the last 52 weeks of the period to ten year periods in the 1980s the average return of the method equaled 78.2% of the S&P 500 Index. Or, applying an Annual Reset offering 60% of annual point-to-point gain approach to ten year periods would have produced an average return that was equal to 88.2% of the average S&P 500 index return for the same ten year periods

Blatant Benefits of Index Annuities   8/04 
Modesty may be a fine quality for one desirous of living in a monastery, but it is at odds with the marketing of annuities. With all the noise created by purveyors of other financial product an annuity provider cannot be soft-spoken in relaying the benefits of buying one. You need to state annuity benefits loud and clear.

Don’t simply say Higher Potential Return, instead Shout – In the last year index annuities have delivered 3 to 8 times the return of CDs.

Don’t simply say Protected from market risk, instead Shout – No index annuity owner has ever lost a dime due to market downturn.

Don’t simply say Safe, instead Shout” – No index annuity owner has ever lost a dime because a carrier failed.

Don’t simply say An index annuity is an alternative to a bond, instead Shout – Unlike bonds index annuities don’t lose value when interest rates rise.

Don’t simply say Annual Reset, instead Shout – An index annuity let’s you take advantage of market drops.

Marketing is finding people that may need the solution you offer. In today’s crowded world you may only get one chance to be heard, so make it strong. 

A Minnesota Winter Lasts 9 Months  8/04 
In northern Minnesota January lasts 3 months, and then you add on the other snow months of October, November, December, February, March and April. So, by simple arithmetic, a Duluth winter lasts 9 months. That means the other seasons each last one month (The preceding is not really accurate; a northern Minnesota summer actually lasts from 4 July until 15 August – 6 weeks, so spring and autumn are each three weeks long).*Before I receive angry letters from frostbitten people on the Iron Range it should be noted that the writer grew up in Duluth and moved when he realized there were places where 21 March meant more than the occasion of penultimate snow storm.

That is my perception of a Minnesota winter, and although the reality of the calendar may have other dates, my beliefs and actions are guided by my perceptions. Annuity purchases are also driven by perceptions. Based on my talks I perceive consumers have many perceptions regarding annuities that do not reflect reality. A major part of the blame for these misconceptions is the extremely inept job the insurance industry has done in explaining and defending what fixed annuities do, but regardless of the reason a producer needs to address these perceptions before the annuity story will be believed and understood. What are the most common misperceptions?

A Fixed Annuity Is An Income Stream
A fixed annuity is a savings vehicle that offers minimum guarantees, tax advantages and the ability to receive an income one cannot outlive. Anecdotal evidence suggests 98% of the fixed annuities purchased are not annuitized, but instead used as a conservative savings instrument offering availability of interest and the ability to pass along assets to a designated beneficiary. And yet when I ask consumers what a fixed annuity is they tell me it is an income vehicle. They also often tell me they will not buy one because they do not need income.

The income benefits of a fixed annuity are wonderful. What other financial vehicle guarantees you will not outlive your money? And this benefit will become more important in years to come. But the income feature is only one benefit of owning an annuity. Tell the consumer you want to talk about a savings vehicle.

This is a savings vehicle that guarantees you will earn at least a minimum return regardless of where future interest rates go – only United States Savings Bonds also offer this feature.

This is a savings vehicle protected by a special fund designed to guarantee account values if the company backing the savings vehicle fails – only certain bank accounts also offer this feature.

This is a savings vehicle that can provide an income one cannot outlive – no one else offers this feature.

This is a savings vehicle that gives you a choice of receiving a stated rate of interest or the potential for more interest by participating in an external index – and this savings vehicle is a fixed annuity.

A Fixed Annuity Is A Variable Annuity
Often the financial press will write about annuities, usually with a negative tone, but invariably the article is about variable annuities. Variable annuities are as far away from fixed annuities as mutual funds are from certificates of deposit, and yet many consumers, and reporters, confuse the two.

When I get a call from a reporter wanting to talk about fixed annuities I always ask them a question – “Do fixed annuities have fees?” If they answer yes, I tell them to go to my web site and read the article “A Reporter’s Guide To Fixed Annuities”. Producers need to ask consumers the same question and then educate them on what a fixed annuity is.

A Fixed Annuity Is For Old People
A fixed annuity candidate is not determined by age but by needs and risk tolerance. To wit, a 75 year old with good genes and sufficient resources may never be a fixed annuity candidate because they do not want or need the safety features. On the other hand, an age 30 worker with scads of time until retirement may never develop the emotional tolerance to risk money and would be a good fixed annuity candidate.

I have heard fixed annuities slammed when used with people some deem too old or too young. The too old criticism usually is based on surrender charge and goes something like “an 80 year old should not buy an annuity with a (7, 10, 12, 15) year surrender charge because it ties up their money”. The truth in this argument depends on the needs – and not the age – of the annuity owner and the features of the annuity chosen. If the annuity owner will probably need access to most or all of the money before the annuity’s surrender period is over then they should buy a different annuity with a shorter surrender period, and other concerns can also be met by selecting an annuity with the features needed.

If an annuity owner believes they may need access to more than annual interest down the road then the annuity selected should offer a cumulative penalty-free withdrawal feature. If an annuity owner wishes to make all of the annuity value immediately available upon death, then the annuity chosen should not have any restrictions on payment of death proceeds. If the annuity owner is concerned about possible nursing home bills if future health fades, then the annuity selected should have a nursing home provision permitting access to funds. You can never be too old for the right annuity.

The “too young” slap against annuities is usually based on the IRS rule requiring a 10% penalty on most annuity withdrawals when under age 59½. Whether this really is a factor depends on the comparative returns of other vehicles. If the choice is between a certificate of deposit yielding 2% or a fixed annuity crediting 4%, the annuity still pays more even if hit with the IRS penalty.

I have discovered when you get pass the consumer’s misperceptions of what they think an annuity is and show how an annuity really works consumers like them. The industry needs to provide this education.  

A Reason To Believe  8/04 
When presenting an index annuity a producer will cite features, and how those features translate into benefits needed by the prospective buyer. However, even if the benefits perfectly mesh with the needs of the buyer a purchase will not result unless the buyer believes what the producer is saying. Without belief there is no sale. Consumers need a reason to believe they are hearing the truth and here are a few ways to help with that belief.

3^rd Party Sources: Last week I was asked if I had something that would counter an 8 year old negative article about index annuities. I said, “Yes, the fact that it is an 8 year old article”. There have been few general press articles on index annuities, either positive or negative.

The best one was “A Bear-Proof Way To Ride The Market” appearing in the 30 April 2001 issue of Business Week. “Retirement Years a Time To Lower Investment Risk” was in the 18 January 1998 edition of The Washington Post and another article titled “Equity-Indexed Annuities Appeal to the Squeamish” was syndicated by Los Angeles Times on 6 January 2002. A more recent one written by John Waggoner was in the 30 July edition of USA Today on page B3. It is balanced containing information like “EIAs are appealing because the stock market, in a word, stinks.” And it also contains nuggets like “Equity-indexed annuities offer juicy commissions, which is one reason people like to sell them.” There will be more articles in the mainstream press about index annuities because sales are growing. However, because bad news sells better than good I foresee more negative articles than positive ones.

Show Actual Interest Credited: The consumer wants to know if index annuity returns are for real, so show the actual interest credited by the carrier on their index annuities. Index annuities have been around for almost ten years and carriers can and have produced materials showing what their index annuities have credited.

Show Actual Interest Credited (Two): If the producer has offered index annuities for over a year copies of current client statements are showing very competitive credited interest. These statements, with personal data discreetly airbrushed out, demonstrate both a truth of the returns and the fact that other people trust the producer with their money.

It Takes A Village: Show consumers the steady growth in the amount of index annuities purchased quarter after quarter. There have been $60 billion of annuities purchased since 1995 and every year has been a new record. All of those index annuity buyers can’t be wrong?

Shoot Yourself First: Consumers expect to be lied to and misled...so the producer doesn’t do that. Instead, the producer shows all the warts of the product and why it is still the right solution.

If the producer thinks the surrender charge period will be an issue then the solution is to bring out the annuity disclosure form showing the surrender charges and then educating the consumer on why the annuity is still appropriate. What if the producer can’t overcome a surrender charge objection? Then obviously this was not the right index annuity for this consumer.

Producer Passion: If one believes strongly in their truth then others are likely to believe as well. If the producer honestly believes in the index annuity, and its appropriateness as a solution, the consumer will often also believe.

For a sale to result the consumer needs a rational benefit to justify the decision, an emotional benefit to be spurred to action, and because they have been burned in the past a reason to believe they are hearing the truth. Supply that reason.

2nd Quarter FIA Sales Set Record  9/04 
Sales for the second quarter of 2004 were $5277 million compared with sales of $3718 million for the second quarter of 2004. Second quarter index sales were up 26% when compared with first quarter index sales; up 42% when compared with the same period one year ago. Sales for the first six months of the year were $9464 million. The top selling index annuity carriers were:

Second quarter index life premium was a record $33,261,269 with AmerUs Group in first place accounting for most EIUL sales.

This is the twenty-eighth quarterly index sales survey conducted by Advantage Compendium. In all, 97% of the active index product companies accounting for over 99% of sales are represented.

There are 34 carriers offering equity index annuities. If you separate available products by features, there are:

153 Index Annuities - By Surrender Period & Methodology

158 Index Annuities - Previous Plus Bonuses, Cap Options

209 Index Annuities - Previous Plus Other Available Indices

Nine of the carriers offer a single product, 25 of the carriers offer multiple surrender period products, different crediting options or additional indices.

New products are AIGA Constellation and HorizonIndex, Allianz MasterDex, Allianz InCommandDex, American Equity Rewards Gold, Equitrust MarketValue Index and Allstate’s registered MarketSmart Annuity. The new player and product is Principal Performance Annuity.

A Marketing Fable  9/04 

Most people are aware that Henry Ford’s production of the Model T exploded a hundred years ago and they became the largest automaker in the world. Against the advice of the marketing department Henry Ford promoted his car as simply “Model T, dependable automobile, $695 FOB”. The car was pretty basic, lacking many refinements, but it performed as advertised and was a good value.

What many people have forgotten is that another car company also introduced a car during the same period and it was better than the Model T. The automobile, produced by Maidens Prayer Car Company, had a larger engine, power brakes, power steering, and a rudimentary On-Star^â navigation system whereby an operator would transmit in Morse Code to the receiver in your dashboard broadcasting which roads were impassable in your area.

It was a better car and the price was $595, a hundred dollars less than the Model T. However, the reason you have never heard of this automaker is because Maidens Prayer Car Company listened to their marketing department. The following is a text copy of the first advertisement produced by that marketing department and in parentheses the fine print at the bottom of the ad.

Because consumers never read the fine print – a fact marketing people depend upon – buyers of the Maidens Prayer car were universally disappointed due to unrealistic expectations based on what they had been told. The combination of negative press, lack of repeat sales, and lawsuits forced Maidens Prayer into bankruptcy and out of the car business, even though they actually offered the best value for the consumer.

Moral: When you sell unrealistic expectations you don’t have a prayer of long term success.

Allianz InCommandDex Is Product Innovation Of The Year 9/04 
The InCommandDex is an indexed income annuity with flexibility and consumer friendly features. This immediate annuity offers a life income linked to the performance of equity indices. Allianz is the only carrier offering indexed income annuities.

What makes InCommandDex innovative is the flexibility. Money may be allocated between two equity and one fixed account on each policy anniversary. The consumer may select a guaranteed income floor below which future income will never go regardless of how the indices perform. The consumer may partially annuitize the contract. And the consumer can cash in the immediate annuity during the first ten years and receive the cash surrender value of the policy.

Carriers say there needs to be a revolution in the immediate annuity world to produce products that meet the needs of future retirees because today’s income annuities don’t work well. Allianz has fired one of the first shots by developing an annuity where income is not solely dependent on interest rates and where the consumer has liquidity and choices. Advantage Compendium names Allianz InCommandDex the product innovation of the year.

Postmarked  9/04

My Child,
You have graduated from college (finally) and are entering the real world. Whatever your parents, teachers, friends, government did or did not do for you in your growing years is in the past; your future success and happiness now depends entirely on you. However, as ready as you think you may be for the challenge there are a few things you still need to know.

Take An Etiquette Class – Nothing will kill your career advancement faster than social gaffes. Although I taught you to chew with your mouth closed and that the salad fork is the outer one on the left, I am afraid I missed many of the nuances demanded in polite society. Regardless of how talented you are at your work you will never reach the upper levels if you are socially impaired and an etiquette class will polish you. You may think this is petty and silly, it is, but it is still the way the real world works.

Set Aside “Forget You” Money – You know the phrase I really mean. There will be times in your life when you will be asked by your boss to do something that you feel is morally wrong. If you don’t have enough cash set aside to quit your job and walk away, you will feel pressured to bend and demean yourself. With this money you can tell your boss “No”. It doesn’t have to be a lot – five or ten thousand will keep you going until the next job – and it will keep your soul and pride intact.

Keep Your Word – Ethically challenged people write binding contracts to keep their word and then hire lawyers to find loopholes so they can break them. When you make a promise to someone, keep it. This means you should only give your word when you know you can follow through. If you suspect you can’t, then don’t make the promise. And when it comes to keeping your word there is no difference between little and big promises. A person of honor always keeps their word.

Be Polite – Every old generation says the new one is discourteous, stand out by being polite. It does not cost anything to say “please” and “thank you” and to treat everyone with respect.

Develop A Passion – I’m not talking about becoming passionate about work or love or family. This passion is nurtured from your heart and helps you maintain perspective by giving you at least one thing in your life that is totally within your control. It could be collecting stamps or jogging or volunteer work, but it is something that is yours and yours alone, and when the world becomes too big or too bad you can retreat into your passion for awhile.

You Are Not Your Job – The personal identity of too many people is directly tied to their job. A problem arises when the job goes away – and it always does at least once in a lifetime – and the person is left with a void where their self should be. You are an individual. You have skills and traits and intelligence that are yours and can be applied to a thousand different jobs. You aren’t a plumber, doctor, mechanic; you are a unique being that currently works as a plumber, doctor or mechanic.

I am proud of you and everything you have become. I know you will face life’s challenges with the same enthusiasm and curiosity that has carried you thus far. I will leave you with one last thought: problems, regardless of severity, are always temporary.

All my love,

Dad

Compendium Facts  10/04
This all facts issue of Index Compendium talks about annuities in the IRA market, charts of effective total and annualized minimum guaranteed returns at various rates, senior demographics, renewal rates and annuity safety. Let’s begin with some index market superlatives derived from Advantage Compendium research:

Oldest Index Annuity Carrier (based on date of first sale):  Keyport (Sun Life)

Newest Index Annuity Carrier (based on date of first sale):  Principal Financial

Greatest Total Index Annuity Premium: Allianz

Greatest Total Index Life: Premium: AmerUs Life

Greatest Number of Available Index Annuity Indices: 5 – Midland National & North American

Longest Published Renewal History: 8 years – Lincoln Benefit Life

Amount of Index Annuity Premium Lost due to Failed Insurer? Zero

Number of fixed index annuities approved in New York: One (ING)

2004 World Series Champion: Boston Red Sox

Full Disclosure Carriers – Renewal Rates   Updated 12/10
A carrier’s renewal rate history and their treatment of policyholders is an important element in determining whether one should do business with the carrier. I asked the index carriers if they would agree to provide renewal data – renewal caps, participation rates, and/or fees – for currently offered index annuity products going back the lesser of 5 years or product launch, to anyone that asks ("anyone" does not include insurance company employees attempting to spy on competitors).

The following carriers have agreed to provide index annuity renewal information upon request.

The list of Full Disclosure Carriers is not intended to rate or judge any carrier's renewal rates, it simply lists the companies that have agreed to be open about their index annuity renewals. It should be noted that a quarter of the carriers offering index annuities will let you know how they are treating current annuityowners.

Senior Stats (Source: U.S. Census)  10/04

Fixed Annuity Safety Update 10/04
In 2002 I began researching the question of fixed annuity losses because I had heard unsupported claims for years that annuity owners had either lost principal due to carrier failures, or, conversely, that no annuity owners had ever lost money, and I personally wanted to see if there was any truth out there. After four months of reviewing court records, state insurance department filings, news stories and talking to people that had been in the business for years I was unable to document any instance where an annuity owner received back less than 100 cents on the dollar of principal because of the failure of the insurance company. In 2003 I even offered a bounty on failed insurer data, and out of the nine leads received I was able to determine that two carriers did not return 100 cents on every dollar.

Those two troubled carriers were Inter-American Companies, an employee benefits carrier with some annuities that got into trouble in the ‘80s and liquidated in 1991, and National American Life Insurance Company of Pennsylvania.

Since then I have found two more carriers where annuityowners with values over state guaranty fund limits did not receive 100 cents on the dollar. Research by Advantage Compendium indicates owners of annuities issued by London Pacific Life and Summit National Life Insurance did receive up to guaranty limits but account amounts above those limits may never be fully paid. It appears that holders of annuity contracts received a little over 90 cents on the dollar on account values in excess of state guaranty limits in three of the cases – I was unable to determine precise numbers for Inter-American – but that in all cases amounts up to state guaranty fund limits were protected. There may be other carriers out there that have not returned a hundred cents on the annuity dollar, but I sure can’t find them. I can still affirm that no index annuity owner has ever lost a dime due to company failure.

During the period when 4 annuity carriers failed to return 100 cents on the dollar there were dozens of bank failures where accounts over FDIC limits failed to receive 100 cents on the excess dollars. But in every instance bank deposits within federal deposit insurance limits were protected [source: www.fdic.gov]. And in every instance annuity values within guaranty fund limits were protected [source: www.nolhga.com].

Even though there have been bank and annuity customers that have lost money due to company failure the reality is this:

Will a consumer lose money due to bank failure with their CD? Almost certainty not.

Will a consumer lose money in their fixed annuity due to an insurer failure? Almost certainly not.

Where The IRA Money Is 10/04
An Investment Company Institute report estimates total retirement assets (qualified plans, pension plans and non-qualified annuities) to be $12.1 trillion at the close of 2003, an 18% increase over the previous year, which I presume was mostly due to the start of the current bull market. Of this amount approximately $3 trillion is in IRAs. During the ten year period IRA assets tripled.¹

In 2001 respective IRA market shares were mutual funds 44%, brokerage accounts 38%, bank accounts 11% and fixed annuities 8%. By the end of 2003 all had surrendered at least a piece of their market share to fixed annuities, even though 2003 witnessed a roaring comeback for the stock market.

There are three stories here. The first is the bull market of the ‘90s caused the amount of IRA money in mutual fund and brokerage self-directed accounts to triple from 1994 through 2000.

The second story is the failure of banks to hold on to their market share. Throughout the 1980’s banks had the plurality of IRA assets. Even in 1994 one out of every four dollars in an IRA was in the bank, but by 2003 ten out of every eleven IRA dollars was not in the vault.

The third story is the leap of fixed annuity and fixed VA account assets during the millennium bear market. Individual Retirement Annuity assets rose steadily during the 1990s, but from 2001 to 2003 fixed annuity IRA assets exploded from $210 to $315 billion – a 50% increase. I believe much of the reason for the increase is due to some IRA owners deciding the stock market was not the right place for them. What is interesting is these newly risk averse IRA owners did not return to the bank – bank assets only increased 5% during this period – but instead chose fixed annuity accounts and at least a small portion of these fixed annuity dollars flowed into index annuities. Qualified index annuity sales increased from $2.86 billion to $6.59 billion during this period.²

The ‘90s exposed millions of consumers to the return side of equity investing and they were rewarded; the millennium bear market showed the risk face of investing and frightened IRA owners. The index annuity story should play well to these owners with its combination of protection and potential.

1 Investment Company Institute, Fundamentals, Volume 13, No 2, June 2004
2 Advantage Compendium, Index Sales & Market Report,. qualified totals include 403(b) contributions

Minimum Guaranteed Returns 10/04 
Quick, what does 2.25% interest on 90% of the premium grow to in 7 years? What is the equivalent bank rate to the annualized return produced by 3% interest on 80% of premium for 12 years? This link allows you to print an Adobe pdf copy of these charts. The pdf page is free, not copyrighted, and may be reproduced.  

The Case Of The Invisible Annuity 11/04 
The 26 July 2004 issue of Business Week had a special Retirement Guide Session. The advisors interviewed all recommended a portfolio of stocks and bonds, and all agreed buying an income annuity for people in a saving mode wasn’t a good idea, but one said it might be worth looking at after retirement. What about the use of fixed deferred annuities in the saving process? The question never came up.

We all tend to be myopic when it comes to possible solutions beyond our realm but Wall Street and the financial magazines that are based near Wall Street – which are almost all of them – seem to go out of their way to not see solutions that aren’t stocks and bonds. In a segment on saving the only type of annuity mentioned was an income one, and they decided an income annuity was not a good savings vehicle, which is kind of like saying cake is not a good appetizer (in my house this may not be true, but normally cake and income annuities are both more appropriate after the main course has been digested).

What this means is when the topic of fixed rate or fixed index annuities is brought before the client it must be assumed that the client’s annuity preconceptions are probably wrong and education will be required.

Competitive In A Nasty 5-Year Period  11/04  
My lead story in the September 1999 Index Compendium was titled Take Some Money Off The Table. One of the points made stated over the previous 30 years roughly one in five 5-year stock market periods ended at lower levels than they began; we can include 1999-2004 as one of the lost periods. At the close of September 1999 the S&P 500 stood at 1282.71 and at September end 2004 it showed 1114.58 – 13.11% lower from whence it began.

At the close of September 1999 there were 35 carriers offering index annuities. Of these 12 are no longer in the game and 23 carriers remain on the field. I asked the 23 active players for an end of September 2004 statement for an actual customer purchasing their index annuity on or as close to 30 September 1999 as possible with the personal information blanked out. As of this writing eleven had responded.

Carriers providing information were Allianz, American Equity, AmerUs Group, Fidelity & Guaranty, ING, Jackson National Life, Jefferson-Pilot, Lincoln Benefit Life, LSW, Midland National Life, and North American. I anticipate more carrier responses and will update this article on the web site as needed.

Not surprising, the term end point designs had the worst performance crediting only minimum guaranteed interest. I calculated that available high water mark products also came in at the minimum guarantee. It is hard to excel when the index ends lower than it started and the highest anniversary was a molehill and not a mountain. Annual reset structures performed much better in this period due to participation in the three up years and keeping those gains in spite of two horrific down years.

It is interesting to note the effects of averaging during this time. Even though the actual index fell 22% in the year from 2001 to 2002 the averaging of index values generated small gains. In addition, although my past research shows averaging index values generates 53% to 56% of annual point-to-point gains over the long term, during this period the averaged annual reset index gain was 78% of annual point-to-point total gains. Because averaging methods typically offer higher caps and/or rates than APP methods this means that averaging products, in general, outperformed APP ones for this period.

For this five year period term end and high point designs generated annualized returns of 1% to 3%. Annual reset index annuities produced annualized returns of just over 4% to just under 7%.

Are these good returns? It depends on what the buyer was told back in 1999. If the index annuity story told was double-digit returns, then it failed miserably. If it was sold as an “equity investment without loss”, then it depends on the equity. Based on the category selected average equity mutual funds lost as much as 30% or gained up to 95% over the last five years, while index annuities gained 4% to 38%.

If index annuities were properly presented as another savings vehicle then the perspective is a little different. For this period average annualized one year CD returns were around 3.6% and a five-year CD purchased in September 1999 yielded around 5.7%. Against the bank the annual reset index annuity return range of 4% to 7% is quite competitive.

The last five years were a wonderful time for bonds and the average annualized taxable bond fund return ranged from 4.5% to 9.2%, a sight better than the index annuity story. Whether bonds will retain this advantage over the next five years depends whether you believe interest rates will be trending up or down.

Although the five year period included the worst bear market since the ‘30s it is not uncommon for a five year period to include a couple down years, historically 40% of five year periods have at least two declining years. And although pricing pressures resulted in lower rates and caps than in years prior, carriers were still able to maintain credible index participation.

Since index annuities were introduced they have been through stunning bull markets, terrible bear ones, times of very favorable pricing and years of high option prices or very low bond yields. The worst of these times produced annual reset returns of 4% to 6% a year and the best annualized returns were 12% over 5-year periods. Term end point designs hit strong double-digit returns when the bull charged and minimums when the bear triumphed.

As index annuities near their tenth anniversary I believe a strong case can be made that they should deliver stronger returns than CDs and bond funds in most periods, assuming renewal participation rates accurately reflect market conditions.

Ignores sales or surrender charges. Mutual fund returns include reinvested dividends; index annuity returns do not include reinvested dividends. Information believed accurate, but not warranted. Standard & Poors does not sponsor or endorse any index product. Sources: Advantage Compendium, Wall Street Journal 10/4/04, Federal Reserve Board.

Guest Commentary - CPAs are one of the best sources of new clients!  11/04 
Accountants can be powerful allies in finding prospects

Accountants get a bad rap. People call them bean counters, pencil pushers, even actuaries with a sense of humor. Once you read this tip about aligning yourself with CPAs to find new clients, you’ll be calling CPAs to thank them on a regular basis.

The first step is to write down the names of 10 CPAs. Every goal worth pursuing should be written down. It makes accomplishing it more realistic. Buy a hardbound diary or journal from the bookstore and write those CPA names on page 1. (They’re only one group of professionals that will help you clone your best clients, so it’s wise to keep these Top 10 lists in one place. We’ll go over other professionals in another column.)

Where are you going to come up with 10 names of CPAs? Go through your clients’ tax returns — start with your best ones first — and get those accountants’ names.

Why 10? I follow the law of averages. Even the goofiest-looking guy can get a date if he asks 10 pretty women. If I ask 10 CPAs for introductions, I’m sure that one or two of them will give me an introduction. Where most people fail is that they’ll try one CPA and when they get rejected, they say this system only works for Jack Keeter. You need to start with base hits like one or two names and go from there.

After giving me a name, one CPA I contacted also invited me to speak at a seminar of his. He invited 500 people and 274 showed up to a so-called client appreciation dinner. Out of 274 folks, I got 67 appointments. I spoke for 15 minutes. The point is that you have to be willing to fail like a baseball player — 7 out of 10 times gets you in the hall of fame— and you’re on your way to hitting home runs in those three times you do succeed.

CPA Script
Here’s the call I make to a CPA that works with one of my clients:

“Hi, Mr. Bean Counter (just kidding,— don’t say that). Hi, Mr. Jones. This is Jack Keeter. We have a mutual client, Mary Smith. She says you’re a good CPA and she says we ought to get together so we can work more as a team to help her as a client.Can I buy you lunch or a Starbuck’s?”

Over coffee, I ask him three questions:

1- “Who’s your ideal client? Are they just like Mary Smith?”

I need to find out if he’s working with people like Mary on a regular basis. If he’s working with business owners and I’m working with seniors, do I want to work with him? No, because he’s not helping me clone my best clients. It’s not your niche.

2- “How do you uniquely serve your clients?”

I ask these questions, because I want to find out if he’s any good but most importantly, I want him to know that I’m different than my competition.

3- “If I introduce you to my best clients, such as Mary Smith, are you going to care for them as much as we do at my firm?”

What’s the reason most CPAs and other financial professionals don’t introduce us to our clients? They think we don’t care. If you take that rug out from under their feet, they now know you do care.

You should have a second meeting with the CPA and show him pictures from your own client appreciation event. Show him how you have year-end events like this, and because you have your clients bring friends that aren’t your clients, your January and February are booked with new introductions.

This next idea is pretty radical, so use it only if you feel the relationship with a particular CPA is or will be lucrative for you: Ask him what he pays for a client appreciation event. It’s likely around $2,000-$10,000. Now, offer to pay for such an event. If you send out 500 invites and get 100 acceptances, that’s worthwhile marketing.

The CPA Survival Kit
Other than your pre-scheduled meetings with CPAs, you know the best time to visit a CPA? It’s around April15. Seriously. That is, if you come with a CPA Survival Kit. Those guys are cramming all-nighters for a month and you don’t think a care package will stick in their minds?

Send them a box with Visine, Oreos, Kleenex (for crying clients), white-out to correct returns, pens, paper clips, some Advil, Red Bull for energy and some other snacks. Not only are you making a friend of the CPA, you’re making friends with his company.

Remember the Success Rate
So, out of those 10 CPAs that you contact, you’ll only create relationships with 2 or 3 of them. Those other seven or eight? Drop them and replace their names with new CPA prospects. Send them Starbucks or small gift cards every month for as long as your relationship dictates.

That CPA may be a bean counter to most, but he’s an invaluable introduction service to you. And you should treat him as such.

Jack Keeter is the President of Pacific Sales & Marketing. His marketing and sales success earned him introduction into the Society of Senior Market Professionals Hall of Fame in 2003 and he’s one of the highest rated speakers at Senior Market Expo. To help advisors gain more knowledge, Jack is available as a sale and marketing coach for groups, also he hosts monthly teleconferences. You may contact Jack at jack@jackkeeter.com or call his office at 714-854-0554.

A Symmetry of Sentences  11/04 
When I was outside raking leaves a congress of ravens flew overhead and got me thinking about the boring way we refer to groups of people in the financial world. A carrier may talk about their team of employees or their sales support crew, and the very adventurous may describe a fellowship of underwriters, but in general these names are neither exciting nor descriptive. So, I’ve decided to offer for consideration more appropriate group names.

At first I thought of an assembly of agents, but that sounded too religious. Then I came up with a pride of producers. Not only does it tap into the similarity that as lions stalk their prey so too must producers pursue their prospects, but it just seems to fit. Consider the sentence “A pride of producers exchanged war stories at happy hour” – doesn’t that frame a complete mental picture? Speaking of pictures, wouldn’t the phrase coven of compliance officers more closely illustrate the witchcraft going on behind those closed doors that produces such contortionistly phrased disclosure statements and occasional unmarketable marketing material?

We could describe a liquidation of lawyers or an assassination of attorneys, but that might simply be wishful thinking. However, an abacus of actuaries hints at their numerological bend and a comfort of commission clerks might convey the joy produced by their vocational endeavors. Home offices may meet with a wrath of regulators, depending on the product filed, and an affliction of auditors could portray carrier sentiments in dealing with FAS 133 requirements.

Industry conferences could be the source of a new vocabulary with a wealth of wholesalers, mob of marketing companies and spray of speakers, dutifully recorded by a repartee of reporters. Although all of these new names may be more descriptive, it could result in me being associated with a charlatan of consultants or a humdrum of hacks, so perhaps I’ll simply drop the whole idea.

3rd Quarter FIA Sales Explode 12/04
Sales for the third quarter of 2004 were $7028 million compared with sales of $5278 million for the second quarter of 2004. Third quarter index sales were up 33% when compared with second quarter index sales; up 119% when compared with the same period one year ago. Sales for the first nine months of the year were $16493 million. The top selling index annuity carriers were:

The top ten selling index annuities for the 3^rd quarter are as follows: Allianz MasterDex, Allianz PowerDex Elite, Sun Life MultiPoint, ING Secure Index, American Equity Premier Gold, Fidelity & Guaranty Spectrum Rewards Bonus, EquiTrust MarketPower Bonus, Jackson National Life Elite Annual Reset, Fidelity & Guaranty Spectrum Rewards Reserve, Fidelity & Guaranty Loyalty Rewards.

Third quarter index life premium was $28,326,245 with AmerUs Group in first place accounting for most EIUL sales. This is the twenty-ninth quarterly index sales survey conducted by Advantage Compendium. 100% of the active index product companies are represented.

There are 36 carriers offering equity index annuities. If you separate available products by features, there are:

114 Index Annuities - Segmented By Product Name

138 Index Annuities - Previous Plus Other Surrender Periods

193 Index Annuities - Previous Plus Other Methodologies

Ten of the carriers offer a single product, 26 of the carriers offer multiple surrender period products, different crediting options or additional indices.

New products are Allianz MasterDex 5 and MasterDex 10, American Equity Bonus Gold and Compass Select, Conseco Liberty, Equitrust Market 7 Index, Fidelity & Guaranty Spectrum Rewards Choice 7 and Spectrum Rewards Choice 9, Midland National Veridian and Veridian Plus.

2004 Market Overview 12/04
In 1999 the industry posted index annuity sales of $5.2 billion, in 2000 the total was $5.4 billion and reached $6.5 billion in 2001. But in 2002 sales exploded to $11.7 billion, then $14.0 billion in 2003 and I estimate 2004 sales of around $22.0 billion. Why have index annuity sales tripled in 3 years?

Financial writer John Waggoner in the 30 July edition of USA Today expressed one reason for this growth when he said “EIAs are appealing because the stock market, in a word, stinks.” Although index annuities are savings vehicles and not stock market investments the millennium bear market caused many people to reconsider their feelings about risk of loss and the safety of index annuities is appealing. Index annuity sales increased because people discovered the stock market also goes down.

However, the main reason for increased index annuity sales is poor returns on other safe money instruments. Yields on fixed rate annuities and certificates of deposit plummeted. Even though the interest paid is linked to index performance and is not guaranteed the possibility of higher interest in an index annuity sounds better than the certainty of low interest paid from traditional sources.

The index annuity arena has always been a sideshow in the greater annuity carnival. Over 88% of the agents actively selling fixed rate and variable annuities have never sold an index annuity. Two years ago index annuities only represented 3% of all annuities sold and even with the record growth projected for 2004 index annuities will, at best, represent 10% of total fixed and variable annuity sales. The question for index annuities has always been is this a niche product or is it a mainstream annuity designed to compete in a long-term low interest rate environment? The answer is still not clear.

Today’s & Tomorrow’s Players
The top five players have always represented over half of index annuity sales and the top ten have always represented over three quarters of total sales, but the composition of the group is very fluid.

Nineteen out of twenty index annuity sales are and have been derived from annuity salespeople. These are independent producers that make most of their income from selling fixed annuities to one consumer at a time. Banks and stockbrokers have represented less than 4% of this market.

But this is changing. Banks, wirehouses and variable annuity carriers are entering, or preparing to enter, the index annuity arena. The new entities should not hurt sales of existing product providers because they are not targeting the 12% of the agent market that are currently selling.

There are reasons why eight years after introduction nine out of ten agents do not sell index annuities. The main ones are agents feel they can accomplish the same goals with other products or they do not believe the index annuity story. The solution is educating the market on what an index annuity actually is. An index annuity is a fixed annuity, and perhaps the fixed annuity of tomorrow.

Vanishing Safe Money Place 12/04
Stable value mutual funds invest in investment quality bonds of short maturity and then buy an insurance contract to place a risk umbrella over it all designed to keep asset values stable by offering protection against changes in interest rates. The idea is if an interest rate spike caused a nasty drop in net asset value the insurance would come into play and protect investors from loss by making up any damage.

The SEC has a taken a long hard look and appears to believe these insurance umbrellas may have been priced never to be used and has proposed rewriting the coverage requirements. The uncertainty regarding SEC intentions seems to have spooked mutual fund companies and almost all of either closed their stable value funds or converted them into non-umbrella short-term bond funds. This does not affect stable value choices in 401(k) plans that are not mutual funds.

Stable value funds were a home for many risk averse investors desiring a little higher return than paid by money market accounts. Now the choice has become lower yield money market or higher risk bond funds.

My Full Disclosure 12/04
Advantage Compendium is an independent firm and I have a little money put away so threats of “you’ll never consult in this industry again” do not bother me. This has led some to conclude I am honest; however, Diogenes would surely pass his lamp right by me because I do have many faults and I think readers deserve full disclosure about me.

I am biased towards simplicity. There is nothing wrong with complicated financial products, but they are harder for me to explain and I guess I am lazy. What I sometimes do when I think, say, an index annuity crediting method is too complicated is give the approved public product materials to a group of consumers and ask them to tell me how the index annuity actually works. If the consumer understanding is waaay off product reality I stash those products in my “future trial” file drawer. If the consumer’s understanding is a little off target I see what education is needed to help them clearly understand. Initial misconceptions do not mean a complicated product is bad, it simply means more explanation will be needed during the sales process.

I almost never “dis” products and there are three reasons for this. The noblest reason is I usually dislike a product due to some personal bias and this dislike is squishy and not factual (I like green more than red but that doesn’t mean green is better). The second reason is I was raised to be polite and I try not to say bad things. The third reason is I try not to kill my data sources by being overly nasty. My factual research may be negative regarding a product, or some aspect of a product, but I usually try to be extremely pleasant in mentioning any faults, because I don’t want to lose sources of other meaningful data.

Unless the topic is mathematics I don’t believe in binary decision trees where simply because one answer is right every other answer is wrong. My personal view is different financial tools and methods are appropriate solutions for certain needs and are inappropriate for certain needs. This is my opinion, which means it may be right or it may be wrong or it may be sorta right or kinda wrong depending on the circumstances.

I do not believe in blindly attacking everything that does not agree with your own answer. I can’t comment on the ethics of this attack approach because I don’t believe in ethics (I’ve never met anyone who admitted to being unethical), but I question the effectiveness of it. The reality is absolutes are a rarity and in the financial world risks are relative, costs are relative, and often truths are relative. One needs to attempt comparisons on relative merit in providing the best solution.

And I believe a person should reveal any personal agenda that might affect perceptions. Whether it is an annuity producer revealing they get paid a commission or earn a trip for making a sale, a consultant saying he gets paid to speak, or an attorney general revealing unannounced gubernatorial aspirations, I believe the information should be available. This is my full disclosure.

Top