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2011 In The Making

Looking ahead to 2011, my biggest concern is the risk of continued deflationary pressure on yields. It's been a great year for our company and our industry in terms of the popularity of index annuities, so we've seen great strength in sales and earnings growth, but the rates on new investments continue to tick downward.

Despite this, I really think that the entire indexed annuity industry will continue to grow in 2011. These products are very well suited for the economic climate we are in right now. They are well suited to the growing base of people over 65 who are concerned about retirement income security. The products also address the fears of Social Security going away and the decline of defined benefit pension plans. This leads to a continued building need for products that offer security through guarantees and lifetime income benefit riders.

Therefore, we have a huge opportunity to continue growing the market. It's a market that's been primarily focused on the independent insurance agent distribution channel, a very good channel. The agents selling the product are very well trained and suitability reviews have gotten to a very good level. However, I do see an opportunity through other distribution channels such as the broker/dealer market. I foresee sales of these products through the broker/dealer channel becoming more prevalent. And I think that's probably the best opportunity in the coming year.  

Other factors that favor indexed annuities include equity market volatility, very low interest rates of competing products, some displacement among our European owned competitors and the demographics mentioned earlier. So, I would expect to see us continue the momentum that we've built in 2009 and 2010, and continue to build sales above the $4 billion level in 2011.  

Now, some producers expect to see significant changes in oversight and in how they do business because of the NAIC's new annuity suitability standard required by the Harkin Amendment. However, when speaking specifically to American Equity, there will only be small changes, not major ones. If you go back several years, our company began doing suitability reviews in 2006 on all cases, in all states, regardless of the age of the purchaser. And since that time we've continued to make enhancements in that program and continue to keep it very robust. So, even before the Harkin Amendment and the new NAIC suitability model, we felt that our suitability reviews were extremely effective. Now with the new model, there's a need for product- specific training of agents, and we've got that ready to roll out. The other issue with the passage of this new NAIC model involves the reviews of each case. Under the old law, there was the ability to delegate that task to an IMO or another third party. That discretion doesn't really exist any longer; the insurance carrier must perform the secondary review of the sales. For us, that's not a burden because we've been doing it from the beginning, but it may be a concern for other companies.  

When it comes to the impact that the federal government will have on our industry, taxation is more the issue than anything else. With state government and state insurance regulators, I think they are making great strides in terms of setting appropriate standards for our industry through insurance regulation. And, speaking specifically of the Iowa insurance department, I know that they seek to be ahead of any emerging regulatory issues as they regularly convene discussions of the groups of indexed annuity writers and other such things, which is a very good program they put in place.  

There's also been discussion about eliminating a lot of the tax benefits that are available in insurance products, such as tax deferrals of the inside build up. There is a new tax in health care reform that applies to the distribution from annuities, as well as other types of investment income, so the possibility of additional taxes and potential elimination of tax benefits is the thing that concerns me the most.  

Another big issue is whether traditional insurance producers should get a securities license to be successful. Certainly every insurance producer should consider whether it makes sense for them to get licensed as an investment advisor. There are really two categories with securities licenses: one is becoming licensed as a registered rep with a broker/dealer and the other is the separate licensing to become an RIA.  

I talk quite frequently with agents about this. Imagine a type of advisory system where there are more fiduciary duties for advisors, offering a more holistic approach. I encourage agents to think about that and to consider what additional ramifications that means for them because it is certainly a big step entailing a whole new set of responsibilities.  

Lastly, disclosure and suitability reviews are the heart and foundation of a preventative measure we can take to avoid problems and improve the perception of products in our industry. If nothing else, one thing every producer should emphasize is disclosure and suitability

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