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Today begins what could be one of the most intense and interesting June Congressional work periods in modern history.  In the coming month, efforts will be made in the Senate Finance Committee, and perhaps the House Ways and Means Committee, to introduce and pass comprehensive healthcare reform.  The total package will likely cost more than $1 trillion.  It is in this context, that the Administration’s proposed tax increases on the life insurance industry, which included the tax on COLI and limitation on Dividends Received Deduction (click here for our Washington Report Bulletin) are being considered as revenue raisers.

The timing seems clearer in the Senate where leaders are hoping to consider and pass legislation out of the Finance Committee by the second or third week of June.  We understand that the Senate Majority leader has already reserved time in July for floor consideration.  The House’s procedural rules provide the majority with greater flexibility and it’s possible committee consideration could slip until July without endangering the White House and Congressional Democratic leadership stated goal of having bills passed out of both Houses before the August recess.

While both parties in the Senate are committed to a bi-partisan bill, significant challenges exist for this to become a reality.  There is pressure on Democrats to cover more of the uninsured and to provide a richer benefit.  There is also considerable pushback from unions on capping the employer provided healthcare deduction.  These factors increase the need for the Finance Committee to consider revenue raisers outside of the healthcare industry.  Senate Republicans appear willing to discuss revenue raisers from within the healthcare industry, but to this point, they have not shown interest in unrelated tax increases to pay for healthcare. We are actively communicating our opposition to the life insurance tax increases to key Senators—particularly those on the Finance Committee. We expect the first round of this issue to reach a conclusion in the next three weeks.

In the House, we understand there is an effort to consider one bill in all of the committees that have jurisdiction on healthcare, most notably Ways and Means and Energy and Commerce.  It is possible, if not probable, that the House leadership will have significant input into the development of this legislation.  Fortunately, key members of the Ways and Means Committee have privately and publicly expressed their opposition to the life insurance tax increases.  It seems more likely as this point that there will be a more generalized tax increase on wealthy individuals or corporations to offset the substantial cost of healthcare reform, although it is impossible to say precisely where the revenue will come from to offset the cost of healthcare reform.

There are bound to be significant twists and turns as the legislative process moves forward.  Over the next month, we will keep you informed of the specific threats that exist to your business and we may call on you to take greater action.  In addition, if you would like to be kept informed specifically on the healthcare debate, please let me know.

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On June 17, the Obama Administration plans to release its blueprint to overhaul the financial services regulatory apparatus.  Officials are keeping the plan close to the vest and it appears that a number of features and options have been considered, such as the creation of a systemic risk regulator, a 'prudential' banking regulator, a federal insurance charter, and responsibilities for consumer and investor protection. In the Congress, House leaders are scheduling hearings and aiming to write and pass a final set of regulatory changes this summer, whereas Senate leaders have indicated their intent to tackle reform in the Fall.

AALU is primarily focused on the core tax treatment of life insurance--including our commitment to defeat the 'Greenbook' proposal that would indirectly tax the inside buildup of life insurance policies owned by businesses--and the enactment of permanent estate tax reform that enhances estate planning with life insurance.  Nevertheless, we are monitoring the financial services reform debate with our regulatory reform committee and are determined to represent the interests of AALU members, your clients and the 75 million American families who rely on life insurance products.

What follows is a brief overview of the legislation in the 111th Congress that would change the way the insurance industry is regulated, and we plan to provide you with an in-depth analysis of the administration's proposals when they are released this month.

H.R. 1880, a bill to establish optional federal charter legislation, introduced by Reps. Melissa Bean (D-IL) and Ed Royce (R-CA), has been referred to committee and no further action has been taken since we last reported to you (See our Bulletin 09-58).  Our regulatory reform committee reviewed the legislation in conjunction with AALU counsel.  Our analysis indicated that the legislation included the basic structure of optional state or federal regulation by carriers and producers, and the ability to transfer back and forth between the two.  We will continue to examine a number of provisions of the proposal in conjunction with industry allies. 

Recently, Reps. David Scott (D-GA) and Randy Neugebauer (R-TX) introduced H.R. 2554.  The bill would create the National Association of Registered Agents and Brokers (NARAB), which would serve as a national licensing organization for insurance producers.  NARAB would preserve the rights of states to license, supervise, discipline, and establish licensing fees for producers, as well as allow states to continue prescribing and enforcing laws and regulations that govern insurance producers and products. This bill has 34 initial co-sponsors and similar legislation easily passed in the House last fall, but stalled in the Senate as the 110th Congress adjourned and more urgent legislative matters faced the incoming Congress in January.  This bill has been referred to committee but hearings have not yet been scheduled.

Rep. Paul Kanjorski (D-PA) recently introduced H.R. 2609, the Insurance Information Act of 2009.  The bill would establish an Office of Insurance Information (OII) within the Treasury Department and would serve as a voice for the insurance industry.  OII would also establish an advisory group consisting of state regulators, consumer groups, and industry trade groups to collaborate in informing lawmakers. H.R. 2609 has 6 co-sponsors, including Reps. Bean (D-IL) and Royce (R-CA), the co-sponsors of H.R. 1880, discussed above.  This bill has been referred to committee but hearings have not yet been scheduled.

Congress is primarily focused on health care reform and laid out an ambitious agenda to accomplish reform.  Thereafter, their intent is to address energy and education reform.  Despite the packed legislative calendar, there is still a meaningful chance that lawmakers will enact some financial services reform legislation this year.

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While AALU’s focus is on key tax issues impacting advanced life insurance planning, we are also monitoring pertinent securities-related developments.

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With just 17 working days remaining before July 4th recess, the Senate Finance and HELP Committees are working feverishly to have their plans marked up in committee this month and ready for floor consideration by mid-July. The estimated $1.2 trillion health care package will likely be funded in two ways – through new tax revenues and through new savings created from greater efficiency in the health care system. While the HELP committee released conceptual draft legislation of their plan today, the Finance Committee must wait for scores on revenue proposals from the Joint Committee on Taxation (JCT) and the Congressional Budget Office (CBO) before advancing their legislation.

Legislators are unsure about how much can be saved from within the health system. The Administration previously suggested that up to $2 trillion could be saved over a ten-year span, but the nonpartisan CBO has yet to release any of their savings estimates, which will be influential in determining the need for new tax revenues. Yesterday, Senate Finance Committee Chairman Max Baucus (D-MT) said that "new taxes could represent as much as 60% or as little as 40%" of the total cost of reform.

The JCT is charged with scoring new revenue proposals and recently released its first round of cost estimates on several health and health-related measures. Of these, two relevant proposals are alternative caps on the income exclusion of employer-provided health benefits.  According to the JCT, $418.5 billion would be raised by capping the exclusion for all taxpayers at the actuarial value of health benefits provided to federal employees, while $161.9 billion would be raised if this cap applied only to single taxpayers with AGI of $100K for single filers and $200K for joint filers. These proposals show that lawmakers are seriously considering altering the tax preferential treatment of employer provided health benefits.

The recently released JCT scores are likely to comprise a significant portion of the new tax revenue needed to fund health reform, but more will be needed, and the hunt for revenue will continue. AALU has had key contact/counsel/staff meetings with the bulk of Senate Finance offices to send a strong message not to pursue the 'Greenbook' proposals to indirectly tax the inside build up of life insurance policies owned by business or the increase taxes on the industry through further limits on carrier's dividends-received deduction. We have received positive feedback from Senate tax-writers, but more work needs to be done.

In the House, tax-writers have stated that their goal is to mark up their bill in early July. We have met with many members of the Ways & Means Committee, also gathering significant support. Rep. Ron Kind (D-WI) has drafted a letter to his colleagues urging their opposition to taxes on the life insurance industry and our products, with nine committee members having co-signed to date.

While we have made progress, we must continue our vigorous efforts to ensure that this threat is defeated. We will continue to keep you apprised of developments as they occur.

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The Office of Management and Budget released this morning the remainder of the Administration’s budget documents for the upcoming fiscal year, which included new revenue raisers on how to fund the President’s Healthcare initiative (click here for an excerpt from the Analytical Perspectives volume, which includes a chapter on receipts). 

Director of the OMB, Peter Orzag, released a statement that the budget documents reiterate President Obama's plans to create a $635 billion reserve fund as a down payment toward health care reform, but that “more savings than this will be needed to pay for comprehensive health care reform in its entirety” (click here for the release).

Revenue raisers include tightening of the estate and gift tax rules as well as provisions affecting life insurance. 

In the estate and gift tax arena, the plan would require would require consistent valuation for transfer and income tax purposes, modify rules on valuation discounts, and require a minimum term for grantor retained annuity trusts. 

In regards to life insurance, the plan would modify rules that would apply to “certain life insurance contracts” and it would modify the dividends-received deduction for life insurance company separate accounts, and expand the pro rata interest expense disallowance

These additional revenue-raising provisions will be discussed in more detail in this afternoon's release of the Greenbook.  We will provide an update as soon as these details are analyzed. 

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The revenue raising provisions of the Obama Administration's proposed budget for fiscal year 2010, as outlined by the "Greenbook" which was released today, include an attack on life insurance owned by businesses. It would repeal the exception from the pro rata interest expense disallowance rule for contracts covering employees, officers or directors, other than 20-percent owners of a business that is the owner or beneficiary of the contracts. In general, the provision would disallow otherwise deductible interest by these entities by the ratio of the value of such life insurance contracts to the business's total assets. For example, if an entity had 10 percent of its assets in life insurance, ten percent of otherwise deductible interest would be disallowed. The proposal would apply to policies issued after the date of enactment and is estimated to raise approximately $8.4 billion from 2010-2019. Click here for full text of the 'Greenbook'.  

This provision is similar to one that was first put forward in 1998 in the budget proposed by the Clinton Administration. AALU, in conjunction with the broad life insurance industry, played a key role in assuring that the proposal was defeated. Given heavy budget deficits and higher projected government spending, AALU is taking this unfair and very harmful proposal seriously and is working with industry partners on a united strategy to defeat it.  We will follow up with you on this critical issue and let you know what role you can play.

Other pertinent provisions of the Obama proposed budget are described briefly below and we will provide more detailed coverage through the Washington Report.
 
Copy of Pro-rata Interest Disallowance Proposal

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AALU and the broad life insurance industry have responded in a strong, unified way to attacks in the Treasury Department "Greenbook" that would hurt our ability to help the 75 million American families, as well as the businesses and employees who depend on the benefits we provide.

The proposal would penalize a company for investing loan proceeds in life insurance and would disallow a pro-rata portion of the interest deduction. For example, if 10% of a company’s loan proceeds were invested in life insurance to fund retirement plans for key employees, 10% of the interest deduction would be disallowed. This is essentially an attack on inside build up because it would disallow otherwise deductible interest expense for unrelated borrowing by a business.

We reached out to the Chairmen and Ranking Minority Members of the House and Senate tax-writing committees with the attached letter, asking them to oppose these provisions and communicate that opposition to members of their committees. In addition, we have met with a number of key members of the tax-writing committees and will be pursuing additional key contact meetings with other committee members soon.

Given spiraling federal budget deficits and pressures for revenue offsets to finance health care reform, AALU and the broad life insurance industry are making sure our approach is equal to the critical role played by life insurance products.

We will keep you informed of developments and let you know how you can help.

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AALU was highlighted in today's Wall Street Journal for our efforts in opposing the revenue raising proposals that would negatively impact the life insurance industry found in the Treasury Department's 'greenbook'. Since its release last week, we have worked with our industry coalition to respond with a unified message that clearly states our opposition to what is, in essence, an attack on the core tax treatment of life insurance, and one that has been previously defeated with bi-partisan support. AALU staff and counsel have worked closely with congressional offices to communicate this message and to use this as an opportunity to educate members of Congress on COLI and the multitude of benefits that these policies provide to employees and businesses.

Today, the Senate Finance Committee announced its comprehensive list of policy options to fund health care reform – which included the proposals found in the 'greenbook'. In last week's Committee hearing, Chairman Max Baucus (D-MT) and Ranking Member Charles Grassley (R-IA) indicated their preference to fund health care reform from within the health system, adding that all non-health related revenue proposals from the 'greenbook' were still included to ensure that all possible options were given consideration, even those currently viewed to be not politically viable. The Committee will have a closed door meeting on Wednesday with members and staff only to review their policy options.

AALU will continue our work in educating members of Congress on COLI, and we will emphasize that it is unwise policy to raise taxes on an industry that provides financial stability to 75 million American families.

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There is too much misunderstanding about critical uses of life insurance products for 75 million American families and very important uses to protect and secure businesses, jobs and employee benefits.

A perfect example is an article [click here for link] in today's Wall Street Journal.  Below and attached is AALU's letter setting the record straight.  Telling the facts to Congress, the major publications, and industry press about the tremendous benefits our product and industry provide is more important now than ever.

Best Regards,

David J. Stertzer, FLMI
AALU CEO

To the Editor:

The article "Banks Use Life Insurance" (May 20, 2009) has trouble "finding the forest for the trees." In discussing banks, employees, employee benefits, and life insurance, it misses the boat in five key ways:

1. Attacking deferred compensation, particularly for troubled financial institutions, makes no sense—employees are putting money they could be getting as salary at risk and aligning their interests with those of their employers. If the employer becomes insolvent, the employees would become unsecured creditors.

2. Financing employee benefits with corporate owned life insurance (COLI) makes complete sense. Expenses for the employee benefit obligations it secures, such as retiree health and supplemental retirement savings, are almost all incurred after an employee retires, much of the cost coming in the few years before a former employee's death.

3. Bank regulators—the OCC, FDIC, Federal Reserve, and the OTS—authorize and set guidelines for COLI as a prudent practice precisely because of the benefits it can provide to these financial institutions and their employees.

4. Employee consent was common practice even before safeguards were codified in 2006 by the "COLI Best Practices Act." The facts are that employers receive no tax deduction for paying COLI premiums and that employees bear no cost for COLI, yet reap substantial benefits.

5. The 2009 Treasury proposal that attacks COLI has nothing to do with deducting interest related to life insurance—which was largely eliminated in 1996 and 1997—but would disallow deductions for unrelated borrowing. A business that has 10 percent of its assets in COLI for employee benefits would lose 10 percent of its deduction for interest expense if it takes out an unrelated loan to create a new facility, invest in job training, or do research and development. This makes no sense. Maybe that is why 31 of 37 members of the House Ways and Means Committee members communicated their opposition to the same proposal in 1998 to the Committee Chairman and Ranking Minority Member.

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• Confirmation that employee consent to be covered generally remain valid for up to one year--the employer has up to a year to purchase the policies without seeking new consent by the employee.

• Multiple life insurance contracts can be bought in response to an employee consent--if the employee consents to coverage up to a maximum of $1 million, the employer can purchase two contracts, each providing coverage of $500,000.

• The IRS provided some limited ability to cure inadvertent employer failures to comply with 101(j) requirements.

• The guidance confirmed certain changes that will not be considered to be a "material change."

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Senator Blanche Lincoln (D-AR) and Senator Jon Kyl (R-AZ) plan to introduce an Estate tax amendment on the Senate’s budget. In short, the amendment would permanently increase the exemption level to $5 million, lower the top rate to 35%, reunify the lifetime credits for estate and gift taxes, and provide portability of exemption between spouses.

Every year in recent memory, when dealing with the Budget process, amendments on the estate tax are offered and this year is no different. It’s important to note the budget resolution does not carry with it the force of law, rather, it is a guideline that provides parameters on spending and tax issues that will be considered later in the year. We continue to expect estate tax legislation to be considered this year and are supporting Finance Committee Chairman Baucus’s estate tax proposal, reported on in Washington Report Bulletin 09-36. In our view, Chairman Baucus’ proposal strikes the right balance on estate tax legislation that should be made permanent.

Amendments to the Senate Budget Resolution are currently being voted on in the Senate and the Lincoln/Kyl amendment is slated to be voted on tomorrow. We will report back to you on any developments that occur with regard to this amendment.

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In broad strokes, the 122 page bill would establish guidelines for the supervision of nationally regulated producers, including granting several regulatory powers to the Presidentially-appointed Commissioner of the ONI. The bill would also establish national market conduct standards, implementing NAIC model laws, and would establish a Division of Consumer Affairs within the ONI as well as an office in each state. Furthermore, the bill would establish a national guaranty fund for national insurers and would be industry funded.

The bill would require the federal Commissioner and state insurance commissioners to provide information with a Systemic Risk Regulator, which would recommend corrective actions to these regulators to deal with any state or nationally regulated insurance company whose attempted actions would have an adverse affect on the overall financial stability of the marketplace. If insurance regulators do not act, the Systemic Risk Regulator may do so directly on an emergency basis upon approval from the Coordinating Council for Financial Regulators, which would be Chaired by the Secretary of the Treasury, and include the national Commissioner and the heads the Federal Reserve, SEC, CFTC, OTC, FDIC, OCC, and three state regulators appointed by the President.

The bill’s sponsors have clearly acknowledged that this bill is a work in progress and want to continue to seek the support of the industry as it is refined. AALU is working closely with ACLI and NAIFA to gauge the effect of the legislation on the marketplace and will work with the sponsors to ensure meaningful input is provided on your behalf.

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The US Treasury has decided to extend TARP funds to life insurers (see WSJ article). Treasury has stipulated that only companies that own federally chartered banks will qualify for aid. The article notes that "The life-insurance industry is an important piece of the U.S. financial system... Millions of Americans have entrusted their families' financial safety to these companies, so keeping them on solid footing is crucial to maintaining confidence."

The Government will now have a vested interest in life insurance companies who participate in TARP. This carries implications for both companies and executives who now must comply with the tight regulations placed on TARP participants, including potential executive compensation restrictions, such as S. 651 and H.R. 1664, which address bonuses and nonqualified deferred compensation plans.

Life insurers have been anticipating word from the Treasury for quite some time on which companies will qualify for aid and in what amounts. While these specifics have yet to be released, AALU will communicate the developments as they happen.

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Congressional Democrats have finalized their non-binding budget agreement for fiscal year 2010 and beyond; the agreement includes freezing the estate tax at 2009 levels. Over the last eight weeks, AALU has conducted more then twenty lobbying visits with Senate Finance and House Ways and Means members, three pieces of estate tax legislation have been introduced that include reunification, and with our upcoming Capitol Hill Club day on May 5th, we have an excellent opportunity to further discuss the important social policy behind reunification. 

AALU is encouraged that lawmakers are now focusing on the planning simplification features associated with reform, rather than just the rate and exemption levels.  AALU has been the primary organization encouraging Congress to make a decision in favor of permanent and sustainable reform, and to ensure reunification is a part any proposal considered by Congress.

In brief, Senate Finance Chairman Max Baucus's (D-MT) middle class tax cut bill (S.722) includes reunification, and House Ways and Means Member Jim McDermott's (D-WA) estate tax bill (H.R. 2023) also includes reunification, which the Joint Committee on Taxation (JCT) scored at a cost of only $4 billion over ten years; roughly 1.5% of the overall cost of the Freeze 2009 plan ($3.5 million/ 45% rate) included in President Obama's budget, which was scored by the CBO at $256 billion.

AALU understands the fiscal pressures associated with reform, but the low cost of reunification compared with the critical social policy of preventing the perverse incentive to hold assets until death rather than gifting those assets during life is an extremely beneficial policy for AALU members, their clients, and the general public.

We look forward to you joining us at the upcoming Annual Meeting in Washington, D.C.

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U.S. Senate Special Committee on Aging Chairman Herb Kohl (D-WI) will hold a hearing today focused on the life settlement market and stranger originated life insurance ("STOLI"). The hearing will be at 2:00 pm EDT and can be accessed from the Committee webpage. For a complete witness list and announcement of the hearing, please click here.

AALU submitted this written testimony to the Committee focusing on our stong efforts in conjunction with the broader life insurance industry to enact state laws to prevent STOLI, while protecting legitimate uses of life insurance and life settlements.

We hope the hearing will further those efforts, because we cannot allow STOLI to detract from the critical role life insurance products play for 75 million American families.

We will be covering the hearing and will provide you with a report tomorrow.

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The House voted 328-93 to approve H.R. 1586, a bill to impose a 90 percent tax on AIG bonuses. AALU will send out a Washington Report bulletin shortly.

In brief, the bill would impose a 90 percent income tax on bonuses paid after December 31, 2008 on employees with an adjusted gross income of more than $250,000 ($125,000 in the case of a married individual filing a separate return). The tax would apply to employees of any company that has received over $5 billion in TARP funds including Fannie Mae and Freddie Mac. The tax would also apply to bonuses paid by entities affiliated with these companies.

The Senate bill is different from H.R. 1586 in that it would impose a 70 percent tax on bonuses and other limits on nonqualified deferrals, yet details on that bill are still forthcoming. I wrote on the Senate’s forthcoming legislation yesterday (click here to read). 

The House bill will likely receive backlash as being unconstitutional because it is intentionally confiscatory given the 1.45 percent Medicare tax on all earnings, plus the associated state taxes. 

But given the current mood and outrage over bonuses and executive compensation, and only 93 votes against the bill, it will likely pass in some form or another. We will keep you apprised of all developments.

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Outrage over bonuses and other forms of executive compensation at AIG and other TARP recipients are coming to a head as Secretary Geithner unveiled Treasury’s plan today to address toxic assets.  Geithner’s plan will try to induce private investors to purchase troubled loans and securities with government subsidies and assumption of much of the risk. 

In addition, the Obama Administration is urging that compensation restrictions imposed on TARP recipients not apply to private investors.  

The fervor over AIG, the financial bailout and executive compensation creates a very dangerous climate.  We have made progress in our efforts—such as the fact that S. 651, in its proposals on nonqualified deferred compensation for TARP recipients, addresses some of the concerns we have raised in the past on broader proposals (see our Bulletin 09-34).

It is one thing to impose restrictions on TARP recipients.  The Obama Administration has stressed that it does not make sense to impose these restrictions on private investors.  It calls for even more care to consider compensation restrictions more broadly, because of the huge implications this can have for economic growth, employment, employee benefits and retirement savings.
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AALU is increasing its federal legislative outreach to try to assure that the decisions Congress makes are carefully considered and do not inadvertently hurt the economy, employers and employees.  Many of you are active in selling life insurance that help business to attract and retain the employees they need by financing and securing employee benefits, including broad retirement savings for upper and mid-level managers through nonqualified deferred compensation. In addition, the vast majority of businesses pursue prudent practices which are very much in the pubic interest.

However, as the levels of Congressional outrage and rhetoric in the press and the broader public continues to rise, the threat of harmful action increases substantially.  We will keep you informed of developments and our increasing efforts to protect you and your clients. 

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President Barack Obama announced today his plans to name a task force to review and overhaul the U.S. tax code (click here).  The panel will be led by Federal Reserve Board Chairman Paul Volcker and include Harvard’s Martin Feldstein; Laura D’Andrea Tyson, professor of economics at UC Berkeley; Roger Ferguson, chief executive of Teachers Insurance and Annuity Association; and William Donaldson, former chairman of the SEC.  

Reports indicate there will be two restrictions imposed on the task force: (1) there should be no increase in taxes on families earning less than $250,000 per year, and (2) taxes should not be increased in 2009 or 2010.  Obama plans to ask the panel for a package of recommendations to be on his desk by December 4th. 

Meanwhile, House Democrats unveiled a budget resolution today (click here) that would provide for expedited consideration of health care reform legislation.  The House’s budget resolution implies that Democrats are contemplating net tax cuts totaling roughly $839 billion over the next five years, including middle class tax cuts, AMT relief, and estate tax relief. Statements from Senator Kent Conrad indicate that the Senate’s budget assumes similar tax relief. 

These developments indicate that taxes will not likely increase in 2009 or 2010.  The December 4th recommendations will frame the debate for overhaul of the tax code in 2010 when Congress faces the expiring 2001 and 2003 tax cuts, and there may be tax increases beginning in 2011.  The estate tax may also be pushed, with a one year freeze of 2009 law, into 2010 and addressed with the broader tax reform debate. 

The Senate Finance Committee will hold a hearing tomorrow entitled “The Middle Income Tax Relief Question: Extend, Modify, or Expire?”  AALU will closely monitor this hearing for issues relating to the advanced producer, and we will report to you on all developments.

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Treasury Secretary Timothy Geithner testified before the House Financial Services Committee this morning to discuss financial services regulatory reform. His four-part plan calls to mitigate systemic risk, improve consumer and investor protection, eliminate gaps in the overall regulatory system, and promote international coordination among regulatory agencies. Secretary Geithner will provide a more detailed outline for each focus area in the coming weeks (Click here to view Secretary Geithner's written testimony). 

Secretary Geithner’s guidelines for executive compensation practices center on prudent risk-taking with a focus on long-term performance rather than short-term gains. AALU members work to provide nonqualified deferred compensation (NQDC) plans that enable long-term investment and help drive the success of companies. AALU will continue to advocate for the use of NQDC plans in order to maximize the success of firms, provide employees with security, and boost shareholder value.

With regard to the regulation of insurance companies, Secretary Geithner reiterated the importance of creating a single entity to be responsible for the systemic stability of the financial system, but stated that this does not mean restructuring the current state-based regulatory system. AALU is in support of an Optional Federal Charter, whereby advanced producers can opt to work with a federal regulator or individual state regulators.

Additionally, the Treasury will work to protect investors and consumers from unfair and deceptive practices. AALU will closely monitor these developments as they unfold to ensure that client/planner relationships are not placed under undue strain through excessive disclosure requirements.

AALU expects this plan to receive broad based support, although implementing a detailed framework will take some time, and while many of these proposals do not directly affect the market place, President Obama’s commitment to consumer protection may have an impact on your practice. We recognize the need to provide meaningful input, and AALU will be actively engaged as the debate plays out in the coming months.

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Consumer confidence is a hot button topic and one that affects all financial markets. The life insurance industry does not always receive favorable or accurate press. It is important that we continue to convey our message with accurate reporting on the status and strength of the industry, particularly with our clients, so that consumer confidence is correlated with the status of the industry. This communication sheds new light on the current economic outlook for the advanced markets, referencing a LIMRA study and a consumer confidence study.

The financial crisis first hit the subprime industry, followed by the equity markets, and has had an affect on the life insurance industry, but the regulation and strict reserve requirements on insurers have positioned the industry as a source of strength until the economy bounces back.

Last Fall, stock prices of some insurance companies fell as investors and stock holders attempted to sort out the companies’ exposure to the equity markets that plagued many of the other financial institutions. Those stock prices have begun to bounce back as consumers realize that the exposure to equity markets is limited to approximately 10%, and the reserves for all promised death benefits are in place to cover all future claims. Furthermore, a company’s stock price does not reflect its ability to pay promised claims because all reserves are kept in a general account and are not affected by stock price fluctuations.

That being said, consumer confidence appears to have reached an all time low, and a recent study of 650 U.S. consumers indicates that only 8% said they expect the financial services industry to help them regain wealth lost during the recent market slump. However, a recent study conducted by LIMRA shows that consumers are not acting on these negative perceptions, but are thinking through decisions and are deliberate in their actions, noting that only 1% of life insurance owners have scaled back or cancelled their coverage.

Now, more than ever, consumers are seeking honesty, information, and advice from AALU members and other life insurance and financial professionals. At a time when consumers’ investment portfolios have experienced significantly depressed values, life insurance products are often among the strongest assets. The long-term nature of life insurance products—whether for life insurance protection, estate planning or retirement security—means that there may be twenty years between planning and collecting payouts.

In the chaos of financial crisis, clients benefit from reminders of the stability and higher degree of protection provided by life insurance products.

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As all eyes focus on the stimulus, we are keeping a close watch on provisions which may affect your business.

We have reviewed the most recent draft (click here for the draft as of last night).  It does not appear the tax provisions would directly affect the advanced markets. 

In our Washington Report Bulletin (click here), we reported on a number of executive compensation developments; as of right now, it does not appear that any provisions related to executive compensation were included in the final compromise, specifically Senator McCaskill’s (D-MO) amendment that no executive could be paid more than the President ($400,000).

We take this issue seriously, not only because of its impact on producers, but its broader impact on clients, businesses, employees, and the public generally.  We are taking efforts to refine our message in light of current developments and will remain vigilant because the controversies surrounding the federal government's bailout of financial institutions could spur similar compensation limits for non-TARP companies.

To comment on executive compensation, click here. 

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On February 11, Reps. Ed Royce (R-CA) and Melissa Bean (D-IL) held a conference call with reporters to discuss their plans to introduce new insurance regulatory reform legislation, the “National Insurance Consumer Protection and Regulatory Modernization Act (NICPRMA).” 

As Congress prepares to debate regulatory reforms, Reps. Royce and Bean indicated that they have revised their previous bill, H.R. 5840 (see our Bulletin 08-64), to reflect the events of 2008 and more effectively regulate insurance, enhance consumer protections, and ensure capital markets are protected from systemic threats within the insurance sector.

The text of the NICPRMA bill, which will be introduced after President’s Day, is not yet available.  Based on available information, it appears that NICPRMA would give the new systemic risk regulator the authority to monitor insurers and establish a national system of regulation and supervision for nationally registered insurers, agencies, and producers (agents and brokers). It appears that states would still maintain responsibility for regulating state licensed insurers, agencies and producers. AALU will release a Washington Report Bulletin detailing the provisions after the bill is introduced. 

We understand that House Financial Services Committee Chairman Barney Frank also intends to introduce a bill with a systemic risk regulator.    

AALU supports the concept of optional federal charter legislation which provides life insurance producers and carriers with the ability to choose federal or state licensing and regulation. We will keep you apprised of developments on Capitol Hill in real time.

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Many members of the 111th Congress will be sworn in tomorrow.  Some races have yet to be decided, leaving the hierarchy of members in the committees up in the air.

The House Financial Services Committee will hold numerous hearings this week, likely considering the Madoff scandal, the Troubled Asset Relief Program (TARP), and mortgage foreclosure assistance programs.

President-elect Obama’s meetings today with the congressional leadership involved the possibility of delaying action on economic stimulus until February, while acting on “low-hanging fruit”—non-controversial matters—in late January.  This could include the State Children’s Health Insurance Program (SCHIP) and some 2009 appropriations bills.

A report from the Securities and Exchange Commission (SEC) indicates that mark-to-market rules should not be abandoned or suspended, but rather amended.

The National Association for Insurance Commissioners (NAIC) will hold hearings on the petition to amend certain capital requirements for life insurance companies for their 2008 statements. 

The Congressional Oversight Panel, created by the Emergency Economic Stabilization Act, will submit a special report on regulatory reform not later than January 20, 2009, analyzing the current state of the regulatory system and its effectiveness at overseeing the participants in the financial system and protecting consumers.

As always, we are keeping a close eye on all the developments as they relate to the Advanced Markets and we will provide you with breaking information.

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Last night the SEC released final rule 151A on indexed annuities which you can access by clicking here.

After AALU carefully examines the 155 page document and garners input from our Securities Regulation of Life Insurance Committee, we will provide analysis via Washington Report.

AALU provided substantial input to try to narrow the original SEC proposed rule to avoid impact on general account life insurance products and traditional fixed annuities.  The SEC release confirms that the rule only applies to contracts regulated by states as annuities and not to life insurance.  The release also describes specific ways the rule was narrowed from its original version in response to concerns expressed by AALU and other organizations.  Our forthcoming Washington Report will analyze these changes and their impact.

Despite the general statement that rule 151A does not apply to life insurance, the SEC release indicates that indexed life insurance could still be considered as a security. It specifically points out (pp. 47-8) that the securities status of indexed life will be assessed on a "facts and circumstances" basis, and that rule 151A is "relevant in analyzing indexed life insurance because indexed life insurance and annuities share certain features (e.g., securities-linked returns)."