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Annuities providers continue their campaign for new tax breaks and angle to play a role in any privatization of Social Security. Post-September 11, they're doing it sotto voce.

By Eric Laursen
December 2001
Institutional Investor Magazine

Philmore Anderson has never worked as a teacher, but in the wake of September's terrorist attacks, the senior lobbyist for the American Council of Life Insurers has spent much of his time giving tutorials. His students: members of Congress and White House officials who need a quick course in Life Insurance 101.

On September 12, for example, Anderson took a call from House Ways and Means Committee chairman Bill Thomas, a Republican from California, who he had run into at a private social function two nights before. Thomas wanted to know how the industry would handle claims: Would life insurers make it easier for victims' families to file death benefits claims? Would they invoke policy exclusions that release them from paying benefits in the event of war or terrorist attacks?

"We're keeping our promises," Anderson assured him. "There will be no exclusions, and we're aggressively seeking at the state level to assure that claims will go out as fast as possible."

Anderson repeated that refrain again and again - to House Financial Services Committee chairman Michael Oxley, a Republican from Ohio, and to White House officials, among others - in a weeklong whirl of phone calls and meetings. The assurances were echoed by the 12 CEOs who met with the president on September 21 (among them: Hartford Financial Service Group's Ramani Ayer, American International Group's Maurice (Hank) Greenberg, Chubb Corp.'s Dean O'Hare and Robert O'Connell of Massmutual Financial Group). Insurers would waive war and terrorism restrictions. And in New York, life insurers worked with state regulators to create a simple affidavit that family members of people killed at the World Trade Center could submit instead of death certificates, which were difficult to obtain in the first few weeks after the attacks.

Yet despite the catastrophe, life insurers should emerge in relatively strong shape. They will be liable for some $4 billion in payouts to victims' survivors - a significant sum, but peanuts compared with the $40 billion to $45 billion in losses faced by insurers of property loss and business interruption. Further, the hit to life insurers' capital base should be marginal, in the neighborhood of 0.6 percent to 1.1 percent. Property/casualty insurers, by contrast, face a hit to their capital base at least ten times that magnitude, says Colin Devine, a life insurance analyst with Salomon Smith Barney.

A bill in Congress to set up a backstop fund for insurers in case of future terrorist attacks would require insurers, mostly property/casualty firms, to pay the first $1 billion in damages from any terrorist attack. Then the government would pay 90 percent of damages up to $20 billion, subject to eventual repayment.

Life insurers are pushing for relief, too, but their goals are far more modest than those of the property/casualty companies. Life insurance firms hope to persuade Congress to include in the bailout bill funding to study when it might be appropriate for life insurers to seek federal government assistance as a result of terrorist attacks. The group has also revived a series of tax relief proposals.

The real damage to the life business will come as the weakening economy and soggy stock market further depress sales of variable annuities, one of the industry's most lucrative products. In the third and fourth quarters, estimates Morgan Stanley analyst Nigel Dally, variable annuity sales will total $26.3 billion and $24.4 billion, respectively, representing declines of 26.5 percent and 20 percent over the previous year. Third-quarter profits for life insurers declined an average 13 percent, to some $2.6 billion, says Salomon's Devine.

After September 11, life insurers knew they faced a setback in their recent ambitious campaign to expand the use of annuities. Along with leading annuities providers like TIAA-CREF, life insurers have for the past several years been aggressively lobbying to push deferred annuities, which pay out upon retirement, as savings vehicles while peddling immediate annuities, which pay out at once, as income-generating vehicles for retired workers.

Traditionally less aggressive lobbyists than their counterparts in the property/casualty business, annuities providers turned up the volume in recent years. With impressive organization but not a lot of media attention, they have amassed a formidable power base. They secured a place for annuities in Florida's new public employee defined contribution plan and staved off three major revenue-raising attempts by the Clinton Treasury Department to gut the main tax advantages of fixed and variable annuities.

They scored their most dramatic success in June. With the passage of President George W. Bush's tax cut package, legislation to liberalize retirement savings regulations finally became law after five years in Congress. The bill, known for its House sponsors, Ohio Republican Rob Portman and Maryland Democrat Benjamin Cardin, gradually raises the cap on annual contributions to 401(k)s from $10,500 to $15,000 and on IRA contributions from $2,000 to $5,000; it also makes it easier for employees to take their 401(k)s with them when they change jobs. Annuities providers hope these changes will spark a new burst of savings, which should eventually increase the total pool of assets available for annuitization when employees start to retire.

"Life insurers have raised their profile," says Portman, a key congressional advocate of reform. "In so doing, they have played a very constructive role in educating members of Congress about the issue of retirement savings."

They certainly wield a lot of financial clout. Today annuities providers control $1.78 trillion in privately managed pension and retirement assets, 20 percent of the total and three times as much as they managed ten years ago, according to the ACLI. It's a highly concentrated industry: The top ten firms control just over half the cash flow in variable annuities, the industry's most popular retirement product, according to Info-One Service.

With 60 million to 70 million baby boomers expected to hang up their boots over the next 30 years, the annuities industry is angling to position itself as a guarantor of "retirement security," says Joseph Gasper, president and COO of Nationwide Financial. Adds Gasper, who became chairman of the ACLI this fall, "As an industry we're going to have to continue to educate Congress about how annuities work, their benefits to individuals."

As their current big initiative, annuities providers want to persuade lawmakers to change the tax status of earnings on annuity payouts from ordinary income to capital gains, which the majority of retiring workers would prefer. Their proposal is dubbed LAP, for lifetime annuity payout. Representatives Phil English, a Pennsylvania Republican, and Karen Thurman, a Florida Democrat, introduced a LAP bill in the House last month. The suggested new tax status - which money managers will vehemently oppose - would give annuities a leg up on mutual funds, whose 401(k) payouts are taxed as ordinary income. Now that LAP has a sponsor, lobbyists at the ACLI believe they can persuade lawmakers to turn their attention to that bill early next year.

With lawmakers focused on the fallout from September 11, annuities providers will be lobbying sotto voce for some time to come. On the insurance front the problems of property/casualty insurers took center stage as Congress raced last month to set up a government backstop for terrorism coverage. More broadly, the economic stimulus package still being hammered out aims to spark new consumer spending - not to promote retirement savings.

Life insurers have had great success in amassing retirement assets, but they still lag behind their rivals in selling the two most popular types of retirement savings accounts - 401(k)s and IRAs. Annuities now claim just $242 billion of the $1.8 trillion in 401(k) assets and $245 billion of the $2.5 trillion in IRAs.

For years, investors have overwhelmingly preferred deferred variable annuities, which are invested like mutual funds and are not taxed until payouts begin at retirement, to immediate annuities, which provide a stream of income upon purchase. But immediate annuities represent an attractive product for an investor who is retiring and is looking for either a steady, guaranteed income stream or a guaranteed minimum income with some upside potential.

Insurers have been eager to push these immediate annuities, in part because sales of deferred variable annuities have declined as stock values have fallen. New contracts totaled $45.3 billion last year, down from $64 billion in 1999. In 1999, according to the ACLI, fewer than 2.7 million people held immediate annuity contracts, versus 68 million-plus holding deferred annuities. Less than 2 percent of annuities providers' assets under management are currently in immediate-payout products, says Bob Stein, head of Ernst & Young's global financial services practice.

Behind the scenes, insurance lobbyists are maneuvering to help define the debate over Social Security reform to assure that their products win a prominent role if a system of private accounts is adopted. The presidential commission on the issue, chaired by former New York senator Daniel Moynihan and AOL Time Warner co-chief operating officer Richard Parsons, has not yet presented its report, but it will likely consist of a series of possible frameworks for a privatization plan.

Until 1990 life insurers were pretty quiet in Washington. Then the government levied a new tax on the deferred acquisition costs - commissions and other business expenses - that insurers incur with the sale of each new insurance policy or annuity contract. The new tax woke the insurers up.

To stave off further setbacks, the industry began some serious lobbying. Life insurers found a strong champion in Carroll Campbell Jr., whom the ACLI hired as its president and CEO in 1995, at a salary of $1 million a year. The former Republican governor of South Carolina had already built a formidable set of connections during four terms in the House, serving on the Ways and Means, Appropriations and Banking Committees. (Campbell announced his retirement in October after learning that he had Alzheimer's disease.)
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