INDEX COMPENDIUM June 2005

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1 INDEX COMPENDIUM June 2005 First Quarter Index Annuity Sales Dip The Advantage Index Sales & Market Report shows first quarter sales of $6411 million. Index sales were off 5% from the previous quarter and represented the second quarterly decline in a row. First quarter sales were up 53% from the same period a year ago. Over half of the carriers reported declines. The top ten carriers for the first quarter: Allianz Life American Equity $ 2,269,369, ,261,954 Sun Life 301,170,478 Midland National Life 279,100,000 Old Mutual 542,178,794 Jackson National Life 211,180,214 AmerUs Group 502,485,000 Jefferson-Pilot 192,093,000 ING 370,027,789 EquiTrust 167,039,472 Allianz continues domination of the market with a 35% market share. To put that in perspective, Allianz sales equal those of the smallest 29 carriers in a market of 35 companies. Sales of the top three carriers continues to account for over half of all sales and the top ten make up 85% of sales. Annual reset designs dominate representing roughly nine out of every ten sales, and insurance agents continue to be the catalyst behind nineteen out of every twenty annuities sold. The new players are Aviva with Progressive Indexed, Great American with the American Icon, Legend and Valor annuities, and West Coast Life with Index Advantage. Two additional carriers are scheduled to launch index products within 30 days. New products include American National s ValueLock 7 and 10, Jefferson-Pilot s Pro 7 and Pro 13, and Midland National Veridian 7. The Advantage Index Product Sales Report is now available. Can Index Annuities and Variable Annuities Complement Each Other? by Rich Tucker, Vice President Ruark Insurance Advisors Proponents of index annuities and variable annuities are typically mutually exclusive. Strongly held beliefs are found among distributors of each camp and these beliefs tend to migrate upwards to the insurance company manufacturers. The results are insurers that focus only on their particular world of variable annuities or carriers seeing only their own universe of index annuities. However, a look at possible synergies from a broad

2 perspective and joint management of index annuities and variable annuities can create cost savings. On the one side you have carriers creating variable annuities. Variable annuities are being enhanced to offer additional guaranteed benefits such as guaranteed minimum death benefits, guaranteed minimum income benefits, and guaranteed minimum withdrawal benefits. All of these guaranteed benefits are put-based benefits, meaning they produce value if the underlying funds decline. Insurance companies typically use reinsurance or hedging strategies to manage the financial risks of these variable annuity guaranteed benefits. On the other side you have insurance companies manufacturing index annuities using call-based derivatives to manage the index participation formula. Call-based means they produce value if the index increases. I did some calculations of the expected cash flow to the insurance company of a putbased variable annuity guaranteed benefit, in this case a guaranteed minimum withdrawal benefit. The insurance company makes money through 95% of the stochastic scenarios generated, but can lose significant money ($30 million for each $1 billion of sales) the remaining 5% of the time. Index annuities, being call-based, have the opposite effect. Benefit costs to the insurance company arise when the underlying index increases. When I calculated the expected cash flow to the insurance company with the index annuity under the same stochastic scenarios used previously the shape of the curve is reversed, indicating that indexed annuity participation is high when variable annuity benefits are low, and vice versa.

3 When VA and Index Annuity Hedging Strategies were combined the probability of a loss fell by 80%! What happens if an insurance company can combine the index annuity call-based participation formula and the variable annuity put-based guaranteed benefits? When I combined $5 billion of GMWB with $1 billion of index annuity the probability of a loss decreased by four-fifths, from 5% in in the GMWB only scenario to only 1% in the GMWB-Index Annuity combination. The worst case loss has declined 86%, from $350 million to only $50 million. An insurance company that can create this type of combination should be able to significantly reduce hedging costs. Although there are not many companies that currently have significant blocks of both index annuities and variable annuities, this may change over time if companies evolve to create balanced product offerings of indexed annuities,

4 variable annuities, and fixed annuities. Reinsurance can be a mechanism to create this balance immediately. Companies with a heavy concentration in indexed annuities could assume reinsurance of variable annuity benefits, or companies with a heavy concentration in variable annuities could assume reinsurance of index annuities. I have found that this powerful risk management technique is not being utilized by the insurance industry today and could provide a winwin scenario for both variable and index annuity manufacturers. I heard Mr. Tucker present this elegant and usable concept and asked him if he would allow me to share it with my readers. I encourage those involved in hedging on both sides of the annuity aisle to contact Rich Tucker at or Jack Marrion Do You Like Me? A recent article 1 divides our possible work partners into four categories. Everyone wants to work with lovable stars that are both competent and likeable, and incompetent jerks are usually quickly fired. That leaves the two middle categories of lovable fools folks that are less bright but they are fun to be around, and incompetent jerks folks that know their stuff but can be, well, you know, jerks. Being likeable could offset a competitor s rate advantage We tell ourselves that given the two middle categories that we will usually take the incompetent jerk. After all, the point is getting the job at hand done and if the person working with us is likeable too, that is an added plus. However, the story says people don t use jerks, regardless of how much they know, because they are jerks. A finding that means I will need to work harder on my interpersonal skills, and one that reinforces an old business adage people do business with people they like. Psychology 101 taught that we like people who are similar to us and have an attractive personality. In a sales world it translates into consumers working with producers that are likeable. The article seems to hint that although we respect knowledge we would rather work with a likeable barely competent producer than a brilliant jerk. It may also mean being likeable could trump a competitor s advantages if the competitor is perceived as less likable. Increasing likeability can mean both increasing sales and decreasing costs Multi-year fixed rate annuities and certificates of deposit are to a large part commodity, spreadsheet products. If two CDs or two fixed multi-year annuities have similar terms, but one has a higher rate than the other the one with the higher rate often wins. However, a recent study indicates that being likeable could be more important that rate. Likeability versus Rates Another article reported results of a study where a bank had increased assets fivefold in

5 five years and they did it while offering among the lowest rates on savings in their market. 2 How? By positioning themselves as the most convenient bank and doing things like being open seven days a week, and holding an umbrella over you and walking you to your car when it rains. The bank opened 1.1 million new customer accounts in 2004 while offering less competitive rates. Although the article used a different term, I think the reason for this bank s success is it comes across as more likeable than other banks. What are the implications for producers? How you relate to others is more important than product knowledge, and if you are competing against a better rate you may still triumph by being more likeable. Consumers want to buy from people they are comfortable with, and knowing you are reachable and going to be there for them if they need you may well be worth more than a competitor s extra half percentage of yield. What defines a more likeable carrier? Perhaps making it possible to talk to humans instead of phone trees when one calls for help or creating easy to understand customer account statements. Or if you are a marketing company you might increase your likeability by telling producers they will never have to deal with the poor service of a jerky insurer because one of the marketing company s people will handle all of their needs. None of this means that one can succeed on likes alone. The producer, carrier, marketing company or bank still needs to meet the requirements of their job; incompetence will eventually run you out of business regardless of how nice you are. However, increasing likeability can mean both increasing sales and decreasing costs, and everyone likes that. 1. Casciaro, T. & Sousa Lobo, M. (June 2005) Competent Jerks, Lovable Fools, and the Formation of Social Networks, Harvard Business Review (pp 92-99) 2. Youngme Moon (May 2005) Break Free From The Product Life Cycle, Harvard Business Review (pp 87-94) Autobiography (sung to the tune of When I Was A Lad from H.M.S. Pinafore a/k/a Captain Crunch Theme) When I was a lad I served a term As stockbroker at an investment firm. I dialed cold calls and touted daily stocks, And I always heeded the researcher s talks. But I sold so little, they rewarded me By making me consultant to the industry. CHORUS He sold so little, they rewarded he

6 By making him consultant to the industry. From stockbroker I went into management Where I told brokers where money should be sent. The firm announced what needed to be sold, And I taught my brokers what needed to be told. I taught so poorly they rewarded me By making me consultant to the industry. CHORUS He taught so poorly, they rewarded he By making him consultant to the industry. A bear market caused a change in plans And as annuity wholesaler I then began. What producers really needed, I never could grasp So my regional territory always finished last. My manager proposed a new career path for me By suggesting my consulting to the industry. CHORUS His manager proposed a new career path for he By suggesting his consulting to the industry. An investment dealer I then did own Where I directed the company from atop my throne. As the employees did the work my profits grew Until my income was great though my working days were few. I worked so little, a buyout rewarded me, And I became consultant to the industry. CHORUS He worked so little, a buyout rewarded he, And made him a consultant to the industry. And now I sit at the top of the pile Dispensing bits of wisdom with smugness and a smile. My speaking schedule s full and my books are selling, If a consultant life s your goal then heed the words I m telling. Make sure you sell very little and a poor teacher be And you may become consultant to the industry. CHORUS Make sure you sell very little and a poor teacher be And you may become consultant to the industry. Advantage Compendium

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