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Buyer Manipulation 1/06
The Wharton School did a study last year on manipulating behavior [“Feeling and Believing: The Influence of Emotion on Trust” by Jennifer R. Dunn and Maurice E. Schweitzer]. What they found was a person’s emotional state influences how they make decisions of trust about unrelated things. As an example, say the next person coming in your door wants your approval on something. How you respond to their pitch is dramatically affected by whether you just received a call telling you A) your car was sideswiped in the parking lot or B) you won the office Superbowl pool. The pitch will more likely be accepted if you won the pool, even though it is unrelated to the request. The study found that happy participants were more trusting than sad participants, and that sad participants were more trusting than angry participants.

This part of the study is not surprising. We are all aware that having a good day or a bad one affects our decisions in general. What the study showed was how easy it is to put people in a more trusting frame of mind and how easy it is to counteract the manipulation.

By sharing a positive story or telling an uplifting tale the listener becomes more trusting. Good salespeople intuitively know this and often open with a joke or humorous story, and the study shows it works. A sale may result not based on the merits of the solution offered, but because the “trust judgment” has been altered.

But we can neuter the manipulation if we are aware of it. If we hear a funny story, our judgment will not be affected if we consciously think “I’m being told this story to make me more receptive”. If we recognize or anticipate the manipulation its power melts away.

What this means is one needs to recognize the emotional state of the other party. If they seem angry or sad the best choice is to delay forcing their decision until another time. If that cannot be done, then the alternative is to make them aware of the real reason they are angry or sad, because this will help to separate the emotion from the decision.

But don’t try this with your spouse. The study found this emotional manipulation only worked with people we don’t know very well, because when people know the real you they’ve already formed a trust judgment.

2006 – Uneasy Year 1/06
MMV was not a pretty year. A rivulet of lawsuits hit a few index annuity carriers. The Massachusetts Secretary decided that since he didn’t personally like fixed annuities that a bit of distortion was in order. NASD realized that they were missing million of dollars in fees and fines by not regulating fixed annuities. And the media decided to write about the negatives of fixed annuities without bothering to learn the facts or provide proper balance. All of this came on top of a year wherein the SEC decided to reexamine the index annuity question, CD rates steadily rose while fixed annuity rates were flat, and the indexes ended the year just about where they began. And it will all get worse before it gets better.

Unless the SEC rules that all index-linked annuities are not and cannot be securities, NASD and their supervised B/Ds will be a growing factor in how index annuities are distributed. This will be beneficial for some insurers, but cause a major disruption in the marketing channels for most others involved.

Interest rates, the stock market and the economy will experience a jagged year and see whether a 5th year of growth is possible. And suitability and producer conduct issues will come to the forefront with tighter controls on agents resulting. 2006 will be an unsettled time.

The Eight Minute Performance 2/06
My wife and I spent a weekend at Indiana University in Bloomington. Our daughter, the youngest of our three children, was participating in “IU Sing”. IU Sing is a big tradition with a long history of putting on quality musical productions. Here’s what they do and how it works. First, a fraternity and sorority are paired together. They are to develop an eight minute musical using the theme provided to them by the university. They write the script, write the music, develop a band, choreograph the production, get the costumes, and get ready to compete against thirty different acts. This program spreads over Friday and Saturday evening.

Well, there were about seventy people in my daughter’s group! They rehearsed for five weeks! (This is a really big deal!) They probably had twenty hours per week in practice – that’s over one hundred hours of preparation for this eight minute performance! The acts were amazing. Some looked like Broadway shows. Their task was daunting. They had to accomplish the following: 

*  Immediately engage the audience
*  Get the audience to like them
*  Present themselves in a way that “explodes” in the audience’s mind
*  Make sure that each part of the performance was perfectly timed
*  Build up to a crescendoPerform their closing number
*  Ask for the audience’s approval (their votes)

As I said, it was quite a daunting task. I couldn’t help but relate their act to our business. We are trying to do the same thing in our sales presentation. We try to engage our prospect, build trust, perform along the way, provide an idea that explodes in their minds, close, and hope they buy.

Some of us have been doing this for so long that it has become old hat. But, I have a couple questions for you – Are we spending enough time in “rehearsal”? Are we putting on our best performance? I remember someone telling me that “All business is show business”.

Take a few minutes to review your script. Make sure you know when to sing and when to listen. Prepare the build-up and then provide the most convincing rationale for doing business with you. Don’t delay. You won’t have all day. Remember, it’s just an Eight Minute Performance.

Reprinted with permission from Ray Ohlson’s new book “Until Next Time...Good Selling!” Mr. Ohlson may be reached at The Ohlson Group in Indianapolis at 877-844-0900.

Advantage Survey Hints That Half Of Registered Producers Impacted By NASD 2/06 
Advantage Compendium conducted a survey the week of 9 January that was sent to the 106 index annuity producers in our data base that had said they were Series 6 or Series 7 registered when asked on previous surveys. Results were obtained from 64 producers.

Our previous survey work showed that 55% of index annuity producers were Series 6 or 7 registered. The purpose of the survey was to see whether NASD Notice 05-50 was impacting the way that index annuities were being sold by securities registered insurance agents and how producers and their broker/dealers were reacting. Unfortunately, because only 64 subjects answered the survey I do not consider it to be statistically valid, but rather should be viewed as an indication or hint of what may be going on. I have tabulated the responses and listed the comments of the producers.

20% said that within the last six months they had ended their relationship with their B/D, gone inactive, surrendered their security license, or in some way suspended or terminated their active Series 6 or Series 7 registration

42% said their broker/dealer established or announced intent to establish an “approved list” of index annuity products

39% said their broker/dealer now requires all index annuity applications to go through the broker/dealer or an “approved affiliate”

28% said their broker/dealer is taking a piece of their index annuity commission

21% said they are looking for a new broker/dealer?

Complete survey results are in the February Index Compendium issue.

A Series 6 Does Not Qualify You To Sell Index Annuities 2/06
There are those folks that have said one should have Series 6 securities registration before you can sell index annuities. They say the Series 6 prepares producers with education on suitability, financial theory and how the indices work. But what does passing a Series 6 exam really teach you?

I reviewed four different training manuals designed to teach one how to pass the Series 6 exam. Here’s what I found.

On providing a broad overview on the economic factors affecting all investing, the typical course had two paragraphs on what the Gross Domestic Product is, 12 lines describing the business cycles that create bull and bear markets, and 115 words on inflation. All told, a one-page article on economics in any issue of Business Week probably provides more depth than all of the economic knowledge needed to pass the Series 6.

What about providing a foundation for understanding the indices linked to the index annuity? In the main text there were only 11 words, “a S&P 500 index fund’s performance tracks the underlying index’s performance”. However, if you went to the Glossary in the back of the study materials you find a more in-depth explanation:

Index – A comparison of current prices to some baseline, such as prices on a particular date. Indexes are frequently used in technical analysis.

A Series 6 does not qualify you to present index annuities (but neither does a life license)

By contrast, there was more teaching on the topic of suitability, the average training text devoted six pages to the topic. However, there was a bit of a bias on what was defined as “suitable”.

I looked at three different practice final tests designed to prepare the student for what they will find on the actual Series 6 exam. The first practice test had 6 questions out of a hundred on the topic of suitability, the second had 9 questions, and the third again had 6 questions out of a hundred that related to suitability. However, in anywhere from a third to half of these questions that asked what was suitable, the only available answers were mutual funds.

The only mention of fixed annuities in any of the study books was “annuities and bank CDs are considered illiquid”. What is suitable if a client’s objective is preservation of capital and safety? The books say to buy government securities and Ginnie Mae backed investments. The training manuals do discuss asking about a customer’s age, employment and risk tolerance – but they never suggest to ask whether the customer has adequate life, health or disability insurance. The bottom line is passing a Series 6 test in no way, shape, or form prepares you to sell index annuities. But neither does passing a state life insurance exam.

I also reviewed two training manuals designed to help you pass your life insurance/annuity state examination. I believe I counted two questions on each courses’ sample tests that related to index annuities. A life insurance license does not qualify you to sell index annuities either.

In point of fact, the passing of mandated testing in any area does not create immediate competence. A newly licensed doctor, lawyer or insurance agent may have met the minimal requirements to practice, but I would not want my gallbladder removed, to be defended in court, or have a buy-sell agreement funded by any of these neophytes.

The difference in any profession between proficient and barely competent is additional training. Instead of requiring the passage of a specific state test on index annuities before folks can sell the products, state insurance departments should mandate that producers must demonstrate adequate knowledge of fixed index products before they may sell a carrier’s products. This “attainment of adequacy” could be accomplished by ensuring producers take additional coursework or classes in index annuities and the burden will be placed on the carrier to ensure that producers have successfully completed the training.

A Series 6 does not qualify you to present index annuities, but neither does a life license. Training, not exams, creates proficiency.

4th Quarter Index Annuity Sales Slip, But Year Sets Record  3/06
The Advantage Index Sales & Market Report shows fourth quarter 2005 index annuity sales were $6493 million compared with sales of $6895 million for the previous quarter. Fourth quarter sales were down 6% when compared with third quarter sales; down 4% compared with the same period one year ago. Index annuity sales of $27.26 billion set a record for the eleventh consecutive year whilst index life premiums of $186 million were nearly double those of only two year ago

Indexed universal life was the real story in 2005. Indexed universal life (IUL) premium of $186 million increased 50% over the previous year and doubled from 2003. Although IUL is still a small island in the wide world of fixed universal life premium it is interesting to note that 4th quarter 2005 premium alone exceeded annual premium for any year in the previous decade.

Annuity Regulatory Changes In The Wind 4/06
The meeting on 5 March in Orlando began with NAIC Life Insurance and Annuities “A” Committee dropping the word “senior” from The Senior Protection in Annuity Transactions Model Regulation. The new Suitability in Annuity Transactions Model Regulation is designed to cover all annuity consumers and not just those over age 65. The session went on to include a presentation from the Iowa Insurance Division stating that NAIC must act now on a number of annuity issues including requiring additional index annuity training, more accountability on what constitutes a suitable replacement, tighter advertising guidelines, and greater oversight of index annuities. Who is behind this push for greater regulation? The major index annuity carriers are the ones asking the states for more rules.

Much Smoke, Little Fire
The desire for greater state insurance department index annuity regulation is not due to a flood of consumer complaints. I tracked index annuity complaints in the NAIC database for 2004 and there were far fewer complaints, by any measure you wish to use, than for other annuity and insurance products. And although there were a number of lawsuits filed in the last eighteen months that mentioned index annuities, not one of the suits allege that the index annuity did not perform as expected or that the concept is bad for the consumer. The push behind greater state insurance regulation is to deter the power grab for regulatory turf by NASD.

NASD Turf War
NASD does little to disguise their goal of becoming the one regulatory authority for all financial products. Although out of one side of their mouth NASD will say they have no desire to regulate fixed products, as recently as 23 March NASD Chairman Glauber said, “The three annuity types [meaning VA, index and fixed] are really three versions of the same product” and went on to imply NASD regulated disclosure and protection were better for consumers.

Glauber deliberately ignored the fact that there are only two types of annuities – fixed and variable – and that index annuities materials provide significant disclosure to consumers as well as greater protection than NASD regulated investments. Continuing with the pattern of doubletalk, in a speech only six days later to the Senate Committee on Aging NASD Executive Vice President Elisse Walter told the committee NASD is urging broker/dealers to treat fixed insurance products as security products.

 “The three annuity types are really three versions of the same product”

-NASD Chairman Glauber

NASD responded to a Minnesota Department initiative and will hold an annuity roundtable on 5 May in Washington to discuss suitability and regulatory concerns. However, the participants in the roundtable appear to be strongly tilted towards variable annuity, investment firms and security regulators, all of whom may feel they have lost revenues due to index annuity sales and may not provide an unbiased perspective. I am afraid the roundtable may reenact a version of the Revolutionary Tribunal with only the guillotine missing for those supporting index annuities.

Iowa Leads The Way
The Iowa Insurance Division is leading the movement to improve the index annuity world, and it begins with the name. Iowa would drop the term "equity-indexed annuity" and require the phrase "fixed index annuity" to be used in all advertising and marketing materials. In addition, four hours of index annuity specific training will be required before a producer may begin, or continue to sell, index annuities. Iowa is also working to establish a regulator education program to train state departments on the workings of the products, and is working with IMSA to explore developing sales and marketing standards for index products.

Focus On Exchanges
A specific area of concern is index annuity exchanges. NASD recently commenced a dragnet focusing on cases in which a variable annuity was exchanged for an index annuity, and then deciding whether the decision to use an index annuity was suitable. I am also hearing state regulators question whether it is in the consumer’s best interest to exchange one annuity for another annuity paying a premium bonus, if the first annuity still has surrender charges. Both producers and carriers will need to go to greater lengths to prove suitability and adequate disclosure when transfers are involved.

 The regulatory world for the annuity producer will change in the near future with greater required training, more disclosure, agent fingerprints on file, and more bad agents will be thrown out for good. The only real question is whether it will be an insurance department or NASD world.

Better Rates Ahead For Fixed Annuities 4/06
Historically, there has been an interest rate pattern. When rates begin to fall, usually due to an economic downturn, short-term rates fall faster than long-term rates. This means bank rates fall faster and farther than bond rates. And since bonds are the main insurer investment, this further means fixed annuity rates hang on the high side while certificate of deposit rates plummet. This was the situation in 2002 and much of 2003 and it made annuity producers very happy.

 The flip side is when the cycle turns short-term rates rise more quickly than long-term rates and you have a period when CDs get more and more competitive against fixed annuity rates. But not to worry, the long-term bond rates also trend up and fixed annuities regain their rate advantage…or do they.

 The Federal Reserve began raising interest rates and CD rates trended up. The average 1-year CD rate of 1.12% on April 2004 was 2.64% by April 2005 and 3.35% by Halloween. However, the yield on the 10-year Treasury was 4.53% in April 2004, 4.15% by April 2005 and only just back to 4.56% by last Halloween – good trick, bad treat.

Last autumn you could find 1-year CDs yielding as much as some bonus rate fixed annuities, and multi-year CDs were trumping multi-year guarantee annuities. It was a tough time for fixed annuity producers, but it appears the yield worm has finally turned.

 Since the first of the year 10-year Treasury Yields has moved up half a percent, but the average one-year CD has increased a third of a percent and five-year rates have barely moved. Barring any number of unforeseen calamities that could upset this prognostication, it appears fixed annuity rates should become increasing competitive as the year progresses.

Bully About Life 05/06
I’ve had those rare days when I feel sorry for myself because I think things are going against me, and because I’m going through a rough patch I start to think maybe I should simply give up on whatever I'm doing. And then I remember Teddy Roosevelt.

The Theodore Roosevelt I think of is not the one that charged up San Juan Hill and was one of our greatest president. I’m thinking of the  Teddy that was so weak as a baby his father would race his carriage through the streets and hold Teddy into wind so that the air would be forced into his lungs so he would breathe through another night.

The young boy Teddy that would alternate between lifting weights and climbing hills, and being bedridden with asthma, and then each time return to challenge himself even more.

The young man Teddy that was told by his doctor that unless he spent his days as an invalid that his heart would stop, and instead Teddy spent the next 40 years going nonstop from ranching to the hard scrabble world of politics, always working at full speed, with unlimited confidence, and with the knowledge that each day might be his last, but never, ever giving up or slowing down. I remember all the adversity Teddy faced, take a fresh look at my suddenly smaller problem and give it another go.

NASD Fixed Annuity Regulatory Power Grab Based On One Case 05/06
An Advantage Compendium review of the 1,415 cases listing individuals fined, barred or suspended from the NASD in 2004 and 2005 Notices to Members, as well as an analysis of the 214 NASD initiated complaints for the same period, found only one case alleging inappropriate suitability wherein a fixed annuity was recommended to replace a security (NASD Case #C11040048).

 It appears that NASD concerns of possible sales practice abuses in the use of index annuities are not supported by their own records, and NASD public comments that they need to regulate all fixed annuity sales to protect consumers have no basis in fact. It should be noted the NASD did manage to collect $12,500 in fines from representatives that were selling fixed annuities and had not given their B/D written notice of their activity.

Index Annuity Complaints Up Sharply 05/06
The National Association of Insurance Commissioners (NAIC) gathers data on customer complaints from all of the state insurance departments. This information is available on the Consumer Information Source (CIS) part of their web site http://www.naic.org/cis/index.do on a company by company basis. I reviewed and totaled the number of closed customer complaints for 2005 relating to index annuities and variable annuities for the entire universe of all of the index annuity writers and the 25 largest sellers of variable annuities. I was able to find individual complaint statistics on each company.

 Although VA complaints are higher the sales are much higher than for index annuities. Variable annuity 2005 premium was $128 billion ¹ for the top 25 carriers. Index annuity top 25 carrier premium was $27 billion. To put the data in perspective it is necessary to examine the number of complaints for each dollar of premium collected.

In 2005 there were 176 closed customer complaints specifically reported on variable annuities or one complaint for every $729 million of premium. This was better than the 181 closed customer complaints reported in 2004 and the one complaint for every $676 million.

In 2005 there were 104 closed customer complaints specifically reported on index annuities or 1 complaint for every $259 million of premium.

To look at this another way, in 2004 the number of complaints for both index and variable annuities were roughly equal – 1 complaint for each $614-$676 million of sales. However, in 2005 there was one complaint for each $259 million of index annuity premium and one complaint for each $729 million of VA sales. Looking at the same amount of sales the index annuity reported three complaints for every one variable annuity complaint.

Even though they are still lower than for many other insurance products, by any measurement index annuity consumer complaints have increased. Whether the spike last year was an aberration or a trend remains to be seen.  

Index Annuities Paying Competitive Rates 05/06
Every month I track the actual first year interest rate credited on index annuities purchased one year previously. For policies issued on and around 1 May 2005 the owners received any where from just under 5% to just over 12% for their first year of index annuity ownership, depending on the annuity selected. The majority of policies credited interest in the 7% to 8% range. Contrast these returns with the 2.64% interest earned in the average one year CD and the 2.20% return produced by the average taxable bond fund (according to the 1 May Wall Street Journal).

1st Quarter Index Annuity Sales Dip 06/06
The Advantage Index Sales & Market Report shows first quarter 2006 index annuity sales were $6304 million compared with sales of $6493 million for the previous quarter. First quarter sales were down 3% when compared with fourth quarter sales; down 2% compared with the same period one year ago.   The top ten carriers for the first quarter:  

Allianz Life	$ 2,224,265,000		Old Mutual	428,060,000
ING	574,283,981		EquiTrust	232,986,638
American Equity	539,743,693		Sun Life	217,082,954
AmerUs Group	479,885,499		Jackson National Life	212,465,868
Midland National Life	449,000,000		Jefferson-Pilot	169,501,766

Average Fixed vs. Average Index Premium  
The average index annuity sales premium reported was $49,579; average premium ranged from $12,066 to $77,000. 

Average Commission
The index annuity commission received by the agent averaged 8.26% of premium. Average weighted commission paid by carriers ranged from 3.80% to 11.33% of premium.  
 

(In) Competence  06/06
Whenever I begin to feel that I truly understand some topic and might even feel a little cocky about my supposed knowledge on the subject, I am reminded of a study conducted a few years ago that found incompetent people might also wrongly feel that they too mastered the same topic, but they’re too incompetent to realize that they didn’t.

Back in 1999 Justin Kruger and David Dunning of Cornell University did studies on logical reasoning by testing individuals. They then asked these individuals how they felt they did on the tests. Although people scoring average or above average had a pretty good idea of where they ranked, by and large the folks that scored around the 10^th percentile felt they scored well above average. In other words, even though the incompetent ones did worse than 90% of everyone else they generally felt they had performed better than 70% of their peers.

When the incompetent were asked to grade the tests of the top scorers – thus providing an example of competent knowledge – they failed to recognize their own mistakes. Not only did the incompetent remain incompetent, but they were too incompetent to realize they were incompetent.

The good news is when the low scorers were given negative and accurate feedback about their skills and knowledge, most of them were able to improve and become more competent, but some refused to accept the criticism and remained incompetent. Which always makes me wonder whether I really know anything or ...  

A Wee Spike In Fear 06/06
The five-day rolling average of the CBOE’s S&P 500 Implied Option Volatility Index (VIX) closed above 16 for the final seven days of May, a level of volatility not seen since August 2004.

Overconfidence 07/06
 We’ve all known people that think they’re right about everything. I envy them, because I feel that any truth I rationally come to believe will eventually be proved wrong. A wise guy named Herbert Simon wrote almost 60 years ago that it is impossible for any person to be fully rational in any decision reached because “the number of alternatives he must explore is so great, the information he would need to evaluate them so vast that even an approximation of objective rationality is hard to conceive.” I’m never sure I’m right about anything which I guess is why I keep doing research.

 Many investors think they’re right about their investment views. That people are overconfident in their financial skills is not surprising; it is well documented that we tend to think we’re always better than average regardless of the personal attribute being measured. This leads to overconfidence and sometimes problems for the financial counselor.

 An overconfident investor is less likely to take advice from a counselor. One solution to this is for the counselor to diplomatically puncture the investor’s confidence by showing them where they are wrong without embarrassing them.  In test groups I’ve had people take a short financial knowledge quiz that they grade themselves. I find folks tend to be more receptive to what I’m saying after they take the quiz.

 Are some people more overconfident than others? According to recent studies the answer is yes. A couple of professors surveyed 2000 pension plan participants on their knowledge and confidence level. Three findings jump out of their research:

 ▪ Although the investment knowledge of men and women was similar, men were a third more likely to be overconfident in their investment abilities.

 ▪ The investment knowledge of high school grads and college grads was similar, college grads weren’t any smarter about financial matters than those that stopped at high school (although they thought they were).

 ▪ The investment knowledge of active investors was highest but their overconfidence was the lowest, the active investors knew enough to know they didn’t know everything.

 What this might mean is that it will be helpful for a financial counselor to find out the sex, formal education and investment experience of the consumer because that may determine whether the counselor can immediately begin to teach the consumer about the solution being offered, or whether they will need to show the consumer what the consumer doesn’t know so they can begin to taught to be right about something. 

Safety – Bank & Annuity Reality 07/06 
Over the years I have seen annuity purveyors try to compare the safety of their fixed annuity offering with the bank. I’ve often heard agents talk about the “legal reserve system” and say that annuities have much higher reserves backing them than do bank accounts. I’ve heard agents tell consumers that “the bank only has $1.02 behind each savings account dollar while insurance carriers have $1.04 to $1.06 in reserves backing each annuity dollar”. However, from my conversations with actuaries and others it appears that this talk results from taking a part of an explanation someone created years ago to try to explain policy surplus and reserves and it has now become a kind of bastardized condensed urban legend that many agents use to try to compare banks and insurance companies.

Legal Reserves
The states require that an insurance company must keep enough money to cover the current and future obligations of the policies issued, plus a little bit extra. This money is referred to as policy reserves, statutory reserves or legal reserves. On an individual policy basis what the carrier does is look at the greatest present value of all possible benefit streams, but never less than the cash surrender value of the annuity. On a statutory reserve or legal reserve basis this could translate into insurer reserves equaling anywhere from 100% to 106% or more of cash value. However, the concept of calculated reserves for the bulk of liabilities is possibly unique to the insurance industry. You cannot make an apples to apples comparison between insurers and banks because banks view their liabilities on an account value basis and not by reserve valuation.

Capital & Surplus
Because banks do not provide policy benefits another form of comparison would be to look at the capital & surplus of the insurer as a percentage of assets and compare this number with the capital & retained earnings of the bank as a percentage of bank assets.

 I looked at the assets and capital surplus for 2005 of the twenty largest sellers of index annuities and computed their Capital Surplus Ratio. I used the NAIC definition of Capital & Surplus which is “the outstanding capital stock, preferred stock, paid in capital and unassigned funds held for policyholders (assets minus liabilities)” and divided this by the total assets.

 The median capital surplus ratio for the twenty largest sellers was 5.9%. Ratios for the twenty carriers ranged from 3.5% to 16.2% (however if you drop off the two outliers on the ends the range drops to 3.8% to 10.6%).

 The capital required for a bank is determined by statute and regulator guidelines. Tier 1 capital is the core measure of a bank's financial strength from a regulator's point of view. It consists of the most reliable and liquid types of financial capital  primarily shareholders' equity. Examples of Tier 1 capital are common stock, irredeemable preferred stock and retained earnings.

 The capital ratio is the percentage of a bank's capital to its assets and would be a kindred measurement to the capital surplus ratio. To be well-capitalized under federal bank regulatory agency definitions, a bank must have a Tier 1 capital ratio of at least 6%. For 2005 the average capital ratio for all banks was 10.1%.

 In 2005 the largest annuity carriers had capital ratios of 5.9% vs. 10.1% for the average bank

 If you compare these index annuity carriers with the average bank the typical annuity carrier has 5.9 cents behind each dollar of assets and the average bank has 10.1 cents behind each dollar of assets. This ratio is on the high side based on bank history. For example, in 2002 there were between 6 and 7 cents backing each bank dollar.

 Safety
The typical bank has a higher percentage of capital backing their depositors than an insurer does backing its policyowners. But the real question is not which is safer, it is “are fixed annuities also safe?”

 From 1994 through 2005 there were 66 bank failures. Bank deposits within federal deposit insurance limits were protected, but the same did not hold true for account balances over the insurance limits in many of these banks and not every uninsured account was made whole.

 During the same period there were only three failed carriers that did not provide all of the fixed annuity value for all of their annuity customers; owners of annuities issued by London Pacific Life, National American Life Insurance Company of Pennsylvania and Summit National Life Insurance did receive up to guaranty limits but account amounts above those limits may never be fully paid. There may be other carriers out there that have not returned a hundred cents on the annuity dollar, but I can’t find them (by the way, no index annuity owner has ever lost money because the insurer failed). A fixed annuity should be presented as simply another safe money place.

 3 Tips To Correct Phone Messaging  07/06

 1. Give your phone number immediately after saying your name and speak slooowly.

 2. Figure out why you’re calling before you call

 3. If the purpose of the call is to ask a question,  ask the question when you leave a message. 
     Or if you’re calling with the answer – leave the answer.  

Financial Math  08/06
I believe the reasons why so many people seem to be intimidated by math were too many poor math teachers (ones that were good at solving math problems but not necessarily good at teaching) and a lack of essay questions on math tests (meaning students couldn’t bluff through the math answers and actually needed to study hard). The problem with not understanding math is others with a little more math savvy may then use math to deceive you. What I’m going to try to do is talk about financial math, how it can create a false impression, and the additional information you might need to find out the facts.

Mean (Average)
We all know how to figure out the Average or Mean of a bunch of numbers. You simply add up the numbers, divide the total you get by how many numbers there were, and the result is the average. With the exception of golf scores and the rate of inflation higher averages are usually a good thing.

Say that you were looking at two financial instruments. Instrument A had an average past return of 5% and Instrument B had an average past return of 6.5%. If you believe the past will repeat, which one would you pick? The obvious answer is B.

The average return of A was 5%. From an odds or probability standpoint you have a equal chance of earning 4%, 5%, or 6%, so regardless you’re going to be within one percent of hitting that average.

The average return of B was 6.5% and your real return won’t even be close to the average. You could zoom right past it and get 10% or 25%, but B has a 67% probability you will earn 1%.

 Averages can often be misleading because a couple of very high or very low numbers can distort the picture. 
You need to go beyond averages.

Does this mean B is worse than A? No. B still offers a 1/3 possibility of earning 2 to 6 times more than you’d earn in A next year and over time should produce a higher overall return than A based on the data we have. However, if your main concern was never earning less than 4% A would be the better choice – and you’d never know this if you were only told the average.

Standard Deviation  
The Standard Deviation shows how widely the returns differ (deviate) from the Average. I’m not going to show how it’s calculated (you can find it in any statistics book) but I want to discuss what it means. In a normally distributed population 68% of the results will be within one standard deviation of the mean, 95% will be within two and essentially all results will be within three standard deviations of the Average. Here’s what that means in our examples:  

1 SD contains 68% of the possible returns
2 SD contains 95% of the possible returns

The Standard Deviation (SD) of the population for Instrument A is 0.89. What that means is roughly two-thirds of the returns fall between Average 5% plus or minus 0.9 (or between 4.1% and 5.9%), and 95% fall between Average 5% ± 0.9 + 0.9 (or between 3.2% and 6.8%) according to the Standard Deviation Theory.

The Standard Deviation of the population for Instrument B is 9.0. What that means is roughly two-thirds of the returns fall between Average 6.5% plus or minus 9 (or between -2.5% and 15.5%), and 95% fall between Average 5% ± 9 + 9 (or between -11.5% and 24.5%).

By knowing only the standard deviation we can conclude there is a very strong chance (95%) that A would earn somewhere between 3.2% and 6.8%; a pretty tight band of returns around that 5% Average. Based on B’s Standard Deviation, we have a 95% chance of losing up to 11.5% or earning up to 24.5%; a 36% return swing from worst to best with each end a long way from B’s 6.5% Average.

Note: The Standard Deviation Theory says B returns could easily be as low as a negative 24.5%. However, we know the worst we can earn based on real numbers is a positive 1%. This is an excellent example of how a mathematical correct theory may not reflect the real world and cause one to make a bad decision (a worst case of making 1% is a whole lot better than possibly losing 24%) . 

The returns of Instrument B are a lot more volatile than those of Instrument A. With A you’re almost certainly going to earn at least 3%; B is much more of a crapshoot. Does this suggest that a low standard deviation is automatically better than a high one? No.

 A higher Standard Deviation means more volatility, not better or worse

Suppose a new Instrument C has an Average Return of 4.5% and a standard deviation of only 0.05. This would mean mathematically a 95% shot of earning between 4.4% and 4.6% with C. But we know Instrument A has a two-third chance of returning either 5% or 6%, and the worst we could do is earn 4%, which isn’t all that much lower than the best possible Instrument C return.

To Sum Up
A lot of folks look only at the average and assume that is pretty much what they’re going to earn – and that could be true if the standard deviation is low. By comparing the Average and the Standard Deviation, you can get an idea of the range of the returns. If the Standard Deviation is large you may want to look at the actual returns and get an idea of the real top and bottom. A larger standard deviation means more volatility, but it’s not an issue of good or bad. A person may pick B over A because of the chance of earning 25%, and another person may pick C over A because they feel they’ll at least earn 4.4%.

The final comment is all of this analysis only holds true if the past repeats and your model works. Consider if we’d used degrees on the thermometer instead of percentages and the data represented temperatures during a Minnesota winter. All of this data would be fine if we're trying to predict next January's temperatures, but it is ka-ka if we were trying to use it to predict next summer’s temperatures in Duluth.

2nd Quarter Index Annuity Sales Flat  9/06
The Advantage Index Sales & Market Report shows second quarter 2006 index annuity sales were $6373 million compared with sales of $6332 million for the previous quarter. Second quarter sales were up 0.6% when compared with first quarter sales; down 14.2% compared with the same period one year ago. S ales for the first six months of the year were $12705 million. Total annualized index life premium was $85,508,059 .

The top ten carriers for the second quarter:

Top Carriers By Channel  

Agency	Bank	Broker/Dealer
Allianz	Jackson National	Jackson National
ING	Jefferson-Pilot	Sun Life
Old Mutual	ING	ING

Average Fixed vs. Average Index Premium  
The average index annuity sales premium reported was $47,662; average premium ranged from $14,292 to $83,148. 

Average Commission
The index annuity commission received by the agent averaged 8.08% of premium. Average weighted commission paid by carriers ranged from 3.28% to 11.29% of premium.  

A Lower Commission Isn’t Stopping The Sale 9/06  
A recent survey of corporate buyers on the business-to-business sales side found only 2% said the salesperson lost the deal because of price. The biggest reasons for not getting the sale were because the salesperson didn’t follow the buyer’s buying process (26%), didn’t listen (18%) and didn’t follow-up (17%). In the annuity world this would suggest that the commission paid has much less impact on a producer’s choice of a carrier than other variables. If a carrier makes it easy to do business with them, pays attention to producer suggestions and concerns, and completes promises made, the carrier will not lose business because their commission isn’t the highest on the street.

However, regardless of the industry they are in, all salesmen say fresh leads are the most important factor in their success.

 Source: Atkinson & Koprowski (2006), Sales Reps’ Biggest Mistakes, Harvard Business Review, 84, 7/8; p.20

Sagging Bond Yields Put Pressure On Index Annuity Rates  10/06
Since the end of June the yield on the 10-Year Treasury has fallen nearly three quarters of a percent and is back to the same territory it covered a year ago. Lower bond rates give the carrier less money to use to buy index options, and this is why caps and participation rate are going down. The good news is option prices have come down a bit since the summer, but there isn’t much room to maneuver if these prices should again spike. 

MOs Are Feeling Effects Of NASD 05-50  10/06
Last November I wrote “Marketing Organizations (MOs) deriving a significant portion of their revenues from index annuity sales could conceivable see their revenues fall by a third to half”. A short-term reason for my dire prediction was that CD rates were rising and fixed annuity sales suffer when CD rates get to the 5% range, but the major reason for my gloom was the two-headed regulatory environment advance.

 There was a small but growing trend for state insurance departments to adopt a desk-drawer rule calling for fixed annuity surrender charges to have a maximum length of 10 years and a maximum first year surrender charge of 10%. Although commissions were not specifically addressed a carrier would be hard pressed to pay out a 12% commission when the maximum that could be recaptured from a surrendered policy would be 10%. The net effect of “10-10” was to drop agent commissions and the overrides paid to MOs in the affected states.

 The other head of this Hydra was the NASD Notice 05-50. Ignoring the legal and ethical issues of the notice the NASD action affected the 55% of producers selling index annuities that were affiliated with broker/dealers (percentage according to an Advantage Compendium survey) because it interjected a third party, the B/D, into the MO-producer relationship.

 When I spoke of all this to MOs last year many were dismissive. The “10-10” states were then few in number. And they felt either that their producers were not affiliated with B/Ds or that the producer’s loyalty to the MO would prevail. In any event, I was often told the carrier would protect the producer-MO relationship and that the carrier would not jump ship to sail off with the B/D, leaving the MO marooned.

 When Notice 05-50 was proclaimed some MOs were very proactive and began talking to B/Ds about being approved to provide support for index annuity producers, these MOs struck up relationships that sometimes resulted in their being the exclusive MO permitted between the producer and the carrier. Some broker/dealers told carriers they did not want a MO between their B/D and the producer. And some B/Ds decided not to allow index annuities sales, which meant reps with occasional index annuity sales simply quit selling them. 

 What is the result? MOs have lost producers – and their override – to the producer’s B/D or the B/D’s chosen MO. And on top of losing producers, several B/Ds I’ve spoken with have made the state 10-10 guidelines a part of their index annuity approval process. So, even when an MO preserves a B/D relationship the producer may be limited to lower commission products with lower overrides. 

 The problem will not go away. Unless the SEC specifically says all index annuities are not securities the B/Ds can still use NASD 05-50 to justify their role with the producer, and it will be the B/D that chooses the marketing company the producer uses. In addition, the general product trend is toward shorter surrender periods with lower commissions. The business model for MOs has irrevocably changed.  

5 Year Index Annuity Returns  11/06
The annualized yield for indexed annuities reporting returns for the last five years ranged from around 2¼% to 6¼%. Not great returns if your benchmark was the average stock mutual fund (which averaged 8.36% a year), but at least some index annuities beat the average taxable bond fund return (5.00% a year), and all but a couple bested the average CD yield (2.30%). Although the annualized S&P 500 gain was only 5% for the five years, applying an annual reset structure to the index realized gross annualized gains of 7% (if averaged) to 10% (if annual pt-to-pt).

Actual credited interest information was provided on polices from 11 different carriers and I deeply appreciate the effort and time it took to gather and send this data. Since return data was provided by fewer than half of the carriers I will not publish specific individual annuity returns.

Term End Point
For the first since 2001 a five-year S&P 500 period finished higher than where it started. At the close of September 2001 the index stood at 1040.94 and five years later it reached 1335.85 – a 28% gain. The final point was also the highest point for the period. Total returns for term end point and term high point annuities ranged 9.91% to 15.93%.

Annual Reset
An annual reset structure recognized a total return of 64% if an annual point-to-point approach was used and 40% if daily or monthly averaging was the method. Annual point-to-point products did report higher total interest for the period with a median total return of 32%. By contrast the median total return for averaging annuities was 24%. The average 1-year CD credited 12% total interest for the 5 years. The average index annuity reported a total return roughly double that of the CD and was approximately 85% of the actual S&P 500 return for the period. As a percentage, actual reported index annuity returns ranged from 35% to 132% of the S&P 500 index gain of 28.3%.

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 10/3/06, Federal Reserve Board.

A Lack Of Moral(s) 11/06
     By the late 1500s Spain dominated the world. American colonies, along with their control of the profitable south sea trading routes to the Orient, made Spain the richest nation on earth. In England a “B” list adventurer named Martin Frobisher asked the queen to advance money for an expedition to discover a Northwest Passage that would allow English traders to sail to the Orient over the top of Canada since the southern routes were closed to them. The discovery of a Northwest Passage would permit English trade to steadily grow and provide long-term wealth for the nation.

     In 1576 Frobisher sailed north of Canada and made progress towards his goal; however, supplies were getting low so he decided to turn back and try again later. He brought back to England some souvenirs consisting of arctic flora, some trade-goods from the local Inuits, and a black rock chosen because it was heavy and pretty. Frobisher returned to modest acclaim and his souvenirs were examined with interest. The black rock was tested by three geologists who each concluded it was a pretty, but worthless, piece of rock.

    An investment broker attempted to raise money for Frobisher to make a second try to find the Northwest Passage, but was having difficulty. The broker took the stone to a fourth geologist, with the proviso that the geologist wouldn’t get paid unless it was determined that black rock contained gold.

    Lo and behold, this geologist determined there was $20,000 per ton (in today’s dollars) of gold in the black rock and published an analyst report revealing these “facts”. Investors stepped up to invest in this Arctic gold mine, the investment broker took his commission, and hundreds of miners traveled to upper Canada and collected 160 tons of black rocks. When this expedition returned to England, the rocks were immediately stored under guard and the willing geologist issued a new report saying these black rocks contained not $20,000 but $30,000 of gold per ton, and he had found some red rocks that contained $240,000 of gold per ton!

    Needless to say the investment broker used these reports to sell more shares and collect commissions in a third expedition that was quickly oversubscribed. Once again the miners returned with more tons of black and red rocks that were also stored away from public eyes. But then the original geologists were interviewed by a newspaper saying their analysis had found no gold. The investors became alarmed and demanded a Royal Commission investigate this matter.

    You can probably guess the rest. The black and red rocks contained no gold, only iron pyrite, and the investors lost all their money. What happened to the investment broker? He skedaddled over to Holland with his profits intact and Frobisher was thereafter ridiculed as a patsy.

    You might expect the moral of the story to be something like “when you’re on course for your financial passage don’t be sidetracked by tales of gold mines”, which is probably good advice, but Frobisher’s original goal of a usable Northwest Passage over the top of Canada was never achieved by anyone – there’s too much ice up north to make it a viable sea-trade route, but on the other side of Canada 300 years later a Klondike Gold Rush created countless millionaires. You might say the point is “don’t trust analysts”, but three out of the four analysts were honest, and trusting them would have protected you. England eventually did achieve substantial wealth by doing many things from building new colonies, to expanding trade, to discovering new technologies, to even finding a few gold mines. So perhaps the ultimate lesson learned is since you never know where real success will come from it makes sense to diversify both assets and efforts.

3rd Quarter Index Annuity Sales Flat  12/06
The Advantage Index Sales & Market Report shows third quarter 2006 index annuity sales were $6501 million compared with sales of $6444 million for the previous quarter. Third quarter sales were up 1% when compared with 2nd quarter sales; down 7% compared with the same period one year ago. The top ten carriers for the third quarter:

Sales for the first nine months of the year were $19248 million.

Average Fixed vs. Average Index Premium
The average index annuity sales premium reported was $49,651; average premium ranged from $14,785 to $82,142. 

Average Commission
The index annuity commission received by the agent averaged 8.13% of premium. Average weighted commission paid by carriers ranged from 3.14% to 11.74% of premium.

A behavioral quirk in most of us means we are more likely to complete a task we’ve already begun rather than start a new task. If the annuity is presented as a part of process already started – a secure retirement – rather than as a new task – now we buy an annuity – it will more likely be done. So, maybe Step 1 is checking on Social Security benefits, Step 2 maximize 401(k) contributions, Step 3 obtain fixed annuity, Step 4 buy house by the lake...A secure retirement is simply a matter of following the steps.

Copyright 1998-2012 Jack Marrion, Advantage Compendium Ltd., St. Louis, MO (314) 255-6531. webmaster at indexannuity.org. All information is for illustrative purposes only, does not provide investment or tax advice. No index sponsors, promotes, or makes any representation regarding any index product. Information is from sources believed accurate but is not warranted. Advantage Compendium neither markets nor endorses any financial product.