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Week in Review

Insured Bond Funds Quietly Outperform

DALLAS-As the subprime mortgage crisis unfolded in the latter part of 2007 and took its toll on the municipal market- specifically the bond insurance industry-one sector of tax-exempt mutual funds was quietly outperforming all other categories.

In the fourth quarter, in all of 2007, and even in two-year trailing returns, insured municipal debt funds performed better than all other categories, according to Lipper. These funds are also benefiting from better inflows when compared to other muni fund categories, according to AMG Data Services.

Lipper reports that in the fourth quarter of 2007, cumulative total reinvested performance for the 53 insured muni funds with $11.2 billion of assets under management was 0.57%. For general muni debt funds-Lipper tracks 248 funds with $82.3 billion of assets under management for this category-the return was 0.07%. For the 105 high-yield funds with $46.9 billion, the return was negative 2.51%.

With solid performance compared to other categories, insured funds had better flows. AMG reported on Jan. 10 that the four-week moving average of inflows for insured municipal mutual funds was $4.8 million. The four-week moving average for all muni funds was an outflow of $593.7 million. On Dec. 5, the four-week moving average for insured funds was positive $9.2 million, whereas the same average for all funds was negative $156.5 million.

Sickly Adoption of HSAs

Despite bankers' best efforts, a report finds that health savings account adoption is falling short of expectations.

Companies like UMB Financial have been trying to breathe life into adoption of HSAs by improving their educational materials and making technology associated with the accounts easier to use.

Dennis Triplett, president of UMB's healthcare services unit, said its recent drive to create posters, sample e-mails, postcards and other materials to be distributed to employees on disks about the accounts has been a critical tool in the race to gain scale in the still-young business line.

The confusing nature of the accounts and the accompanying high-deductible insurance plans have emerged as two central impediments, Triplett said.

"I don't think there's been enough emphasis on education" at banks, insurers and distributors, he said. "It could be the most critical piece."

UMB's health savings accounts grew 53% last year, but most large providers have found the early results disappointing.

The report, released early this month by Celent, argues that adoption rates have badly lagged expectations because would-be users are unfamiliar with and intimidated by HSAs.

But Triplett said that the $8.2 billion-asset UMB, which has 136 branches in Arizona, Colorado, Illinois, Kanasas, Missouri and Nebraska, has been skeptical of the bolder predictions floating around, and that the $100 million of health savings account deposits that the company had accumulated by the end of last year is a figure he had expected.

Kirk Hoewisch, president of HSA Bank, a Sheboygan, Wis., subsidiary of Webster Financial Corp. in Waterbury, Conn., said adoption at his bank has fallen 50% short of early projections.

The consulting firms upon which banks and others relied to gauge the industry's potential turned out to have been too optimistic, Hoewisch said.

"Based on predictions a few years ago, I think everybody thought HSAs would be more commonplace than they are today," said Hoewisch, whose bank, with more than 200,000 of the accounts and $429 million in HSA deposits, is one of the most successful providers.

Alenka Grealish, author of the Celent report, said several major banking players she researched are halfway to their original projections, at best.

Hoewisch said HSA Bank is incrementally improving its webinars and other educational materials. But the bank and its insurance partners are working intently on improving technology issues that are another key impediment to adoption, Hoewisch said.

The improvements would, for instance, allow a single online sign-on for both insurance plans and health savings accounts and would speed up payment to healthcare providers. Such improvements should open the door for HSA Bank to land the more demanding large corporate clients, Hoewisch said.

"Once we get the infrastructure to where the carrier can work with the bank, we will do a lot more volume," he said.

Grealish said that education and technology will help determine which companies will create the scale to dominate the industry several years from now.

"They know it's a race for scale," she said, citing the low margins associated with the accounts. "Unit costs have to be pushed down in order to push yourself into the black."

The emergence of several dominant players will lead to price competition that will trim margins further and reward scale, Grealish believes. Account opening fees, for instance, are "likely to go the way of the credit card annual fee."