Monthly Archives: June 2010

The future of guarantees in Australian structured products

Investor Daily picks up on the following story out of Australia:

Structured product providers are likely to develop products that offer the same level of capital protection as products with an investment guarantee, but at a much lower cost.

They would be able to do this by not actually guaranteeing a minimum investment amount, but by giving investors access to the same hedging strategies that have traditionally been used by investment banks to make guaranteed products viable.

“In the short term, there will certainly be a shift towards these non-guaranteed structured products,” Milliman financial risk management practice leader Wade Matterson said.

These types of products are not yet available in the Australian market, but Milliman runs financial risk management strategies for providers of these types of structured products overseas.

“We are currently in discussions with an institution about bringing these products to the Australian market,” Matterson said.

Pension Relief Act signed by president

The president this morning signed into law the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (H.R. 3962), which provides pension funding relief for single employer and multiemployer plans and a 2.2% increase for Medicare physician payments through the end of November.

Here is coverage from Pensions and Investments (registration required).

In pursuit of a guarantee

Registered Rep looks at the growing demand for lifetime income products. Here is an excerpt:

Noel Abkemeier, actuary at Milliman Inc., Williamsburg, VA…suggests that you might also see structured mutual fund withdrawal programs that pay out 4 percent annually or a deferred start income annuity. This type of annuity, with a current premium, provides a guaranteed income that starts at a specified later date. This could facilitate a smooth transition from accumulation to income if purchases are made over a specified period.

“For persons who are serious about guaranteeing an income, the single premium immediate annuity could be attractive because it provides the largest income,” he says. “The variable annuity and mutual fund approaches may be less attractive than they would have been three years ago since confidence in the stock market is shaken and the income guarantee is far less than what a (Single Premium Immediate Annuity) offers.”

Despite the benefits of turning defined contribution assets into lifetime income, Abkemeier believes plan sponsors are hesitant to use insurance products. “Plan sponsors historically have been reluctant to get involved in product issues unless forced,” Abkemeier says. “They may feel that their fiduciary responsibilities deter them from appearing to endorse any product. This may make it difficult to get products inside plans. It may also deter involvement at the time of retirement.”

Protecting assets over growth

This must be the season of surveys—MetLife has just released its own showing that advisors and clients agree that protecting assets trumps seeking market gains.

“Nearly three-fourths (72%) of financial advisors surveyed by MetLife in its new Lessons Learned Advisor Poll say the recent financial crisis has made their Boomer clients more risk-averse, and 70% say interest among clients in guaranteed products has increased.”

It’s that last bit—interest in guaranteed products—that marks a real shift in investing attitudes. It wasn’t that long ago that savvy individual investors measured their worth against the stock market. Well, we all know what’s happened in the past two years.

Now, it seems, keeping what you got (rather than surfing to higher levels) is all the rage.

Is there an annuity in your future?

Owning up

Now that the heat of the mortgage crisis has passed, Kyle Mrotek and Kenneth Bjurstrom of Milliman’s Milwaukee office think it’s time to confront the question of who ends up with the bad assets, and how much of them.

That’s the issue at the center of their article “Anybody know who owns the loans?”

Sorting through the debris of the recent financial crisis is going to take some time, especially given the complexity of the underlying financial instruments that were invented to spread the risk. Calling it a “veritable game of hot potato,” Mrotek and Bjurstrom point out that different participants face different risks, and different needs:

“Lenders are facing repurchase requests on mortgages underlying securities sold to investors. Mortgage guaranty insurers are going back over the loans they insured and rescinding coverage due to alleged fraud and misrepresentations. Financial guaranty insurers are trying to identify loans underlying wrapped securities with breaches or misrepresentations and requesting the mortgage-backed security transaction sponsor to repurchase, cure, or substitute the underlying suspect mortgages.”

At heart, the situation raises issues of counterparty risk and complicates how all the players can resolve their particular problems in the context of an interconnected financial system.

The solution according to Mrotek and Bjurstrom, which their article goes on to detail?

“Those who use the best methods to optimally navigate decision making will be better off than those who resort to guesswork.”

Well, yeah

Further proof of the profound changes in personal financial behavior wrought by the global financial crisis, in research done by Northwestern Mutual.

  • 75% of people with financial goals thinks it will take longer to achieve them.
  • Nearly three out of four favor seek lower-risk, stable, and steady financial strategies rather than higher risk and aggressive growth.
  • Everyone seems to want financial security—but only 20% of us think we’ve found it.

The report concludes:  “There appears to be something of a fundamental shift in mindset taking hold in how Americans view and manage their finances.”