Category Archives: Life Insurance & Annuities

A financial services industry veteran, retired life insurance CEO and ACLI Board member’s thoughts on developments and trends in the life insurance and annuity industry. Expect candid commentary on the state of the industry, product design, regulatory, even accounting trends and issues.

Luck of the Irish

Happy St. Patrick’s Day, a day when the Luck of the Irish becomes topic for barroom discussion. One thing we all know is that a successful retirement has very little to do with luck. Beyond the possible sequence of return risk luck – good or bad – your retirement hinges far more on the effort you put into planning.

Luck of the Irish: Understand the environment in which you are investing.
Even the best plans need course correction, and understanding the environment is always a good place to start. Yes, retirement saving is long horizon, still there is room for prudence in where you invest new money. How is the economy doing? Do markets match up with macroeconomic reality? Is the Economy Doing Well?

Luck of the Irish: Leverage a combination of savings tools.
The foremost saving tool to leverage: compounding. That’s right, you do not need a government program to effectively save for retirement. You need to start early and be consistent in your saving habit. The power of compounding will repay you in spades. The Power of Compounding: A Patience Game (note that he points out the need to stay aware of the environment here)
While this comes at it from a different angle, the employer’s, it illustrates the power of the HSA. This tool is the Swiss Army Knife of saving, looking to become more powerful in Republican circles. What Clients Need to Tell Employees About HSAs

Luck of the Irish: Remain calm.
Understanding compounding, being diligent and consistent in investing you will accumulate a nice sum of money. Markets do have downturns and the key is not to panic. This article helps put this into better perspective for you. Early in the Accumulation Stage, Price Risk Can Look a Lot Different

Luck of the Irish: Focus on income in the distribution phase.
Once you retire the key is to transition your thinking to distribution of money from your savings. The distribution phase is largely about income, yet preserving principal is not a bad thing. You have the difficult balancing act of greater longevity and theoretically capped principal. That’s why we often highlight good dividend approaches and annuities as tools. Here’s an ‘income menu’ that could help retirees make their savings last Dividends Pile Up with This High-Yield Dividend ETF With Rising Rates Ahead, Stick with High-Quality Dividend Growers The right way to get the retirement income you need 4 Overlooked Tax Breaks for Retirees

Retirement Insecurity

Finally, something we can all agree on: retirement insecurity. Perhaps through persistence or saturation or simply self-awareness people are coming around to the unnerving truth. Whether driven by slow starts, low balances, Social Security, longevity risk, medical costs or something else, people are concerned. Democrats and Republicans Alike Worry About Retirement Security
Just in case you think that is all overblown, the Congressional Budget Office just released this study on Social Security. Social Security ‘broke’ by 2029: What’s not in it for you?

Retirement Insecurity: Don’t just sit there, do something about it!
We have talked many times about the QLAC (Qualified Lifetime Annuity Contract) and the potentially vital role it can play. These Government authorized ‘longevity insurance’ annuities provide you income for life within your qualified plans … when plan sponsors provide them. Seems that may be getting some traction now. Employers are trying to solve their workers’ retirement income problem It doesn’t hurt to bring it up with your employer.
We say it here virtually every installment, use all the tax advantaged tools you can when saving for retirement. Just in case you missed that, there’s this. 6 Tax-Efficient Strategies to Keep More of Your Money in Retirement

Retirement Insecurity: Save more while you are working and be smart about it.
I admit I have not heard of this before, but it is very, very interesting. If you are still working it is worth the time. Another way to measure retirement readiness: Your ‘Power Percentage’
Like most people you likely do not know how much you need to retire. There are plenty of guides, most pretty well useless. This may be, too, but it is great food for thought and might just get you motivated. The 25X Rule to Early Retirement
If you happen to subscribe to the Financial Times this might be interesting reading. If not, it says that looking through US regulatory filings shows that the most successful investors have one thing in common. They all disregard macro trends in favor of betting on individual companies and industries. You might say ‘so what’ I’m not going to do that, but wait then there is this article. Here if you are willing to invest the effort you may well join that club by doing some really interesting analytics on individual stocks, ETFs and more. If nothing else do yourself a favor and read the beginning. The Schwab US Equity Dividend ETF vs. the S&P 500 Index: A Comparative Case Study

Retirement Insecurity: Change your mind set in retirement – distribution not accumulation.
In the perfect world, you manage to get appreciation of your assets and income. That’s where dividend stocks can be helpful by throwing off income without liquidating assets. It is a fluid environment, though, and you should stay on top of your choices. Dividend Champions for March 2017
In case you have not yet figured it out, longevity risk is a giant one for your retirement. That means dealing with it explicitly is a priority. In turn that means you may need to think outside the box on how to address this risk. Life Insurance in Retirement: Who Needs It?

Retirement: Why Worry?

Some friends and associates may pass over my periodic posts here thinking they are not relevant to them, which is why I am focusing on retirement: why worry? You see, regardless your situation, well prepared or ill prepared, knowing more and acting on it with respect to your retirement is entirely relevant for each of you.

First, some context on where things stand.
Americans are astonishingly ill prepared for retirement, and Social Security is no panacea. You truly do have to invest in your retirement, and the leaner things are now, the smarter you need to be about it.
We are way behind: Ready to get serious about saving for retirement? Here’s what you need to do.
Compound interest helps: Ask a financial planner: ‘What is compound interest?’
Managing your investments does not end when you retire: 3 Reasons it’s important you continue investing long after you retire
Healthcare remains the elephant in the room: These 5 charts predict what retirees will pay for healthcare over the next 10 years Near retirees can expect $400K in health care costs
We continue to live longer, so the old rules no longer apply: We’re living longer – get ready to pay for it 4% Retirement Rule: Why It Might Not Work for You, and What You Should Do About It Managing your retirement nest egg and making it last as long as you do

Now that you have a sense for things, what can you do about it right now?

I realize I seem to have a one track mind, retirement. That’s because it is how I best feel able to help each of you. Now, though, here are some other, thought provoking articles.
You may have read about this AI from Google beating the world class Go player. It is said to be quite a feat, and this article expands on this. Most interestingly, the article delves into the ‘what-ifs’ around AI given this one’s ability to think of things a human would not consider. Fascinating. Google just proved how unpredictable artificial intelligence can be
As you think of desirable traits for a President, predictability has to be pretty high on the list. Admittedly most campaign promises go by the boards, but you hope the candidate is truthful and sticks to their core beliefs (as outlined during the election). Incredibly, The Economist has taken a strong stand on our current election cycle. What do you think of this? ‘President Donald Trump’ in Top Ten Risk Events for Global Economy

Challenging Markets

Challenging markets are the time when you need a plan and you need to stick with it.
Even when facing challenging markets, plans need not be overly complicated. Here is an interesting analysis of a very simple plan, invest $100 a week into the S&P Index. Just look how it works. Zero Effort Retirement: 20 Years Dollar Cost Averaging Into the S&P 500
I would argue that annuities are a good component of a retirement plan – you can forget about challenging markets entirely! Just which kind is right for you, that’s a specific question for you and your advisor. What we do know is that the vast majority of Americans have a pretty decent chance of running out of savings in retirement. That is why I am a big fan of Deferred Income Annuities, or QLACs inside of qualified plans, because they give you a safety net beyond your comfort zone. Deferred income annuities can double payouts later in life
Now, if you are very conservative, or simply do not trust your instincts, willpower, or what have you, there is always the option to go with an Immediate Annuity. Here your income stream starts right away, and it is, in fact, comparable to an old school pension, i.e. you know what you will get for as long as you live. Interestingly enough, if you did a good job saving for retirement, you could patch together a term certain immediate annuity (that is a set payment for a set period, say 20 years) and a deferred income annuity (set to start in 20 years). You might still have some mad money left to enjoy right away. 3 Things to Know About Immediate Annuities
Just so you do not come away with the belief that dividend stocks, even dividend stars, are a panacea, this article does some back testing of that argument. The Fate of These 49 ‘Dividend Aristocrats’ of the Early 1990’s May Give You Nightmares
No matter your approach, this article is a good read because times like these present tempting ‘opportunities’ to make a quick buck. The Difference Between Investing and Speculating

I hope that provided a lot of good food for thought on your retirement. Now, let’s turn our attention to other, interesting things floating out there in the worldwide web.
Climate change, is this our fault, or does it just happen every so often? That’s the kind of conversation I avoid. I have never professed to be a climatologist, and question anyone I know who does. Still, certain datapoints make you think hard about just what is happening and what we stand to lose. If You’re Not Terrified by Climate Change, Just Consider the Great Barrier Reef
Similarly, I try not to get involved in the DOD/VA issues, but this article really got me steamed. Thousands of US veterans are sick and dying because of burning garbage


I simply cannot leave on a sour note like that, so let’s get some positive news, too.
I made the tactical error of mentioning this article when I found it on Valentine’s Day. A mining company found a 400-carat diamond and now its shares are going wild
These geniuses didn’t know when to stop. 16 Inventors who were killed by their own inventions
Everyone can use some help with their iPhone (especially the FBI, it seems). 25 Things You Didn’t Know Your iPhone Could Do

Robots and AI … Scary?

Promising, but scary, robots and AI are here to stay. Of course, I give you some retirement leads, some bad news on the economy, and some things to take your mind off all that heavy stuff.

Notice a lot of talk about robots and AI lately? Here are some interesting perspectives:
On the plus side, and really in tune with my ongoing focus on your retirement, there are the so-called Robo Advisors. Forbes tells you what to know and reviews the best of the lot … today. 7 Robo Advisors That Make Investing Effortless
Here you will read about how Ray Kurzweil, director of engineering at Google, tells us robots will be as smart as humans by 2029. That’s only 14 years from now. Rise of the robots: how long do we have until they take our jobs
Going one rather logical step further, this article looks at the notion of the human-less corporation. It is a really interesting article, worth your time. Are we ready for companies that run themselves?

Your weekly dose of retirement reading, don’t forget this:
Morningstar gives you a nice, disciplined way to give yourself a retirement check-up in five days. Mind you, their fifth step is a bit of a sales pitch. Still, a worthwhile read. Morningstar’s 5-Point Retirement Portfolio Checkup
I cannot harp on this one enough, since I started pushing to develop these products back in the early 2000’s. Longevity annuities … ones that pay you when you are starting to run out of reserves … are the most important thing to learn about. Longevity Annuities: Their Time Has Come
If you are lucky enough to worry about trusts and estates, this is a good read. 10 top trusts and estates trends for 2015

A couple of quick economic points:
Okay, don’t want to ruin your weekend, but it is a valid data point. The index that timed the 2008 crash perfectly just slumped to a 3-decade low
I have noted this anomaly here before, but another perspective on the US labor market. Beyond this point, I saw recently that Texas and North Dakota combined to create more than all the “job creation” since the downturn. Mind you, Texas and North Dakota are ground zero for the oil boom. CEO of Gallup calls jobless rate ‘big lie’ created by White House, Wall Street, media

Diversions for your weekend:
I love articles that put things into perspective, simply. This one does two things, gives you a sense for the speed of light and the distances just within our solar system. Across the solar system at the speed of light: Breathtaking video takes viewers from the Sun’s surface to Jupiter in 45 minutes
Another piece in the same vein as the last that creationists may not like, an infographic that parses time. Time is Put Into Perspective in this Infographic

Retirement’s vulnerable years

Learn about your biggest retirement risk, get some leadership tips, travel news, and diversions for Super Bowl weekend – Go Pats

Retirement, retirement, retirement, don’t lose focus:
Two articles last week focused on the timing risk in your retirement. Now someone has crafted a product targeted at this, your highest exposure. It may not be the right product, but it certainly is the right idea. Insurance for the most dangerous decade of retirement
No news here, but it is interesting to see the data. Can you believe 36% of Americans have saved less than $1,000 for retirement? 3 Reasons Americans Don’t Save Enough for Retirement
This is a bit dated, but the concept remains valid. Question is, just how much risk do you like? If you have some appetite, this is a pretty interesting way to go. Profiting from VIX Cycles

Two quick thoughts on leadership:
Staying consistent here, I find this to be a vital element of leadership. 3 superpowers of public speaking
No doubt this is true. “…Presence is ‘earned authority.’ It does not come with position; it is earned through one’s competency, credibility and yes confidence.” Presence: Your Key to Stronger and Bolder Leadership
Why can’t travel just be easy any longer?
The good news is that there is no shortage of people trying to help make it easier. The cheapest time to book a flight? New app thinks it has found the secret.
They are finally to spend some money on the coach cabins, problem is… Economy Class Gets an Upgrade… Wait, Make That a Downgrade

Plenty of conversation starters for those lulls in the big game … halftime?
Is the cratering price of oil a good thing or a bad thing? For the US? Globally? Here’s What the Oil Crash Means for the World’s Biggest Economies
Did Government intervention/incentives cause the housing boom/bust, or did the Federal surplus? The Germans are Making the Same Huge Mistake Bill Clinton Did
Does a bad January for the markets mean a bad 2015? Stocks fell in January for just the 8th time since 1929. The last seven times that happened, the rest of the year sucked.
Would you take the Trans-Siberian railroad? If it only cost $1,000? If it takes a month? One Month on the World’s Longest Train Ride for $1,000

Understanding Longevity Risk

Understanding Longevity Risk
Then a quick note on US economic recovery and some fun things, too

Being right about your longevity is the real key to retirement planning:
Yes, I focus a lot on costs and compounding when talking retirement, but it really comes down to how long you will be living, doesn’t it? That’s your longevity risk. My focus is right because you want to get the most bang for your savings, but still, how much should you have? Plan for a Long Life When Saving for Retirement
I have mentioned these several times before, but I am not the only one thinking “longevity annuities” will be the big push in 2015 after Treasury approved them inside your 401(k) or IRA. ‘Longevity’ in annuities could be the big 2015 focus
The good news is you should expect … and push for … your retirement plan to show you just how much income you can expect from your savings. Lifetime Income Estimates Would Boost Retirement Savings Rate, Study Finds
Lest we forget, fees matter, but here is a completely different perspective, shareholder fees matter most according to this article, makes sense. The great mutual fund expense ratio lie

One interesting article about the US economy:
This helps explain the discrepancy between rosy figures on the economy and the persistent malaise at the local level. Only 2% of counties have fully recovered! Much of America Still Hasn’t Recovered from the Recession

Interesting reading from around the web:
Two articles this week on Google’s changes to Google Translate. If you head overseas this is a real win Google Translate Update May Save You a Lot of Money and even a demo Watch Google Translate decipher foreign signs in real time (could have used that once or twice!)
This one gives you an infographic on what Apple products drive revenue. Where Apple’s Money Comes From
Beware the consequences of exceeding your free bag limit on airlines. What Airlines Don’t Tell You About That Free Bag

Some Holiday Gifts

Leadership thoughts, retirement planning tips, fun for the holiday break

Some leadership ideas to consider while you’re away from the grind:
Having been on the leading edge of the quality push at GE, and taken to heart the GE values of integrity and candor, I loved this short piece: Integrity is Free
Interesting, quick tips on successful presenting skills, and an interesting blog to poke around in afterward. The 9 Biggest Mistakes When Presenting to Executives
Insightful piece on the interaction between culture and strategy. Culture Can Make or Break Strategy
You know what they say, actions speak louder than words Is It Time to Stop Saying Thank You

Timely thoughts for your retirement planning:
Great, you’ve saved a bundle in your 401(k), now what? A 401(k) Conundrum: Can You Make Your Cash Pile Last for Life?
A so called deep dive on the benefits of longevity annuities in retirement plans. A growing chorus is recognizing the value of longevity annuities
There will be a million opinions on this, here’s Morningstar’s: Now that annuities are OK in retirement plans, what strategy is best?
One of those periodic wake-up calls for you. Americans Are Not Remotely Financially Ready for Retirement

Since I hope you will have time to play around some, try these tidbits:
If you’re of a certain age, this will bring back a flood of memories. How fun that it isn’t as messy as it used to be! Nathan Friend’s Browser-Based Spirograph Emulator
I’ve harped a lot on the 100th anniversary of the Christmas Truce, but did you realize this Christmas Eve is the 200th anniversary of the last fighting between the US and Canada? Let’s Celebrate 200 Years of Peace Across the Border
There’s some pretty funny stuff in here … the longer you have been married, the more they will ring true. 30 Hilariously True Differences Between Men and Women
Bet you never heard one of these. A Guide to the Strange, Little-Known, Hard-to-Find Beatles Christmas Recordings

Focus on your retirement

Focus on your retirement
Then, learn some cool stuff, too

No better time to deliver a focus on your retirement as volatility returns to markets:
As thinking evolves toward income producing capacity in retirement, two esteemed professors advocate the use of annuities in retirement planning. Bill Sharpe on Retirement Planning and U.S. should expand Social Security and make 2 other moves to avoid retirement crisis, according to expert on 401(k)s, pensions
Ten tips from investment professionals on things you can do to optimize your 401(k) now How to Whip Your 401(k) Into Shape
Here is a nice selection of articles about all phases of your retirement planning from a good source, Morningstar.’s 5 Keys to Retirement Investing
This one is included in the above, Morningstar list, but still interesting for those near that point: What key decisions do you need to make when you begin your withdrawal phase? 2 Key Decisions for Your Retirement Withdrawal Strategy
If nothing else, this one is fun for the interactive chart, and it makes the point well. 2 Things You Have To Do With Your Retirement Investments

Now, let off some steam with some interesting, non-taxing reads:
See a truly classic, complicated watch built Seeing the world’s most complicated watch get built is pretty incredible
Do you think there is hidden meaning in logos? There often is, read this to learn more 40 Brand Logos With Hidden Messages, Starting With the Most Famous One

The Fallacy of Cost of Capital continued

Friday I teed up the frequent breakdown in implementation of cost of capital constructs. Today I will give an example illustrating the downstream cost of this oversight. While this is, by no means, limited to the life & annuity space – the lessons are broadly applicable; I will continue the life & annuity company example, assuming a few things:

  • Indexed annuity product with a target/expected 12% ROE
  • $3 billion of annual production
  • 10% total compensation paid at issuance
  • Nominal cost of capital of 8%
  • 10 year amortization schedule (straight line for simplicity sake)

Today, with generally flush capital structures, there is little concern about layering in new business in this product. The horns of the dilemma are that in leaner times, say 2009, it would be difficult to authorize more volume despite returns beating corporate targets. A fully executed cost of capital construct would ‘charge’ the business 8% for invested capital, incentivizing the business to find a more efficient capital structure, releasing capital for redeployment (business development, shareholder returns, capital investment, etc.) and easing capital strain.

Here is a comparison of acquisition costs with and without the cost of capital (CoC) charge:

with CoC without CoC Variance V%
Required Capital/Cash (Issue Year) $300.0 $300.0 $0.0 0.0%
Est. GAAP Expense (Issue Year) 43.0 30.0 (13.0) (43.3%)
Total Capital Cost (Over 10 Years) 410.2 300.0 (110.2) (36.7%)

Not applying an explicit cost of capital charge obscures the true cost of running this business, by understating issue year GAAP expense by 43% and total cost by 37%. This is true for any business, not just life & annuity, for any capital cost.

Since alternative solutions do have a cost, not explicitly applying the cost of capital stymies business unit motivation to be more capital efficient. Since we embed our program costs, there is little difference, with or without the cost of capital charge:

with CoC without CoC Variance V%
Required Capital and Cash (Issue Year) $26.4 $26.4 $0.0 0.0%
Est. GAAP Expense (Issue Year) 27.5 26.4 (1.1) (4.2%)
Total Capital Cost 397.2 390.1 (7.1) (1.8%)

Viewed together, you see the economic value of an explicit cost of capital charge:

with CoC without CoC
with Program without Program Variance V% with Program without Program Variance V%
Required Capital and Cash (Issue Year) $26.4 $300.0 ($273.6) (91.2%) $26.4 $300.0 ($273.6) (91.2%)
Est. GAAP Expense (Issue Year) 27.5 43.0 ($15.5) (36.0%) 26.4 20.0 $6.4 32.0%
Total Capital Cost 397.2 410.2 ($13.0) (3.2%) 390.1 300.0 $90.1 30.0%

Only inception costs remain constant, as others, which play out over time, rise. Failing to account for carrying cost masks parent level benefits obtained by seeking alternative capital structures. Here you see that the parent gets the most efficient use of capital by reflecting the cost of capital in business unit financials and incentivizing innovation. The business unit sees lower cash and capital demand in the issue year, lower GAAP expense in the issue year and lower total GAAP expense over the amortization period, all likely forgone without that explicit recognition of the cost of capital.

Call or email me to discuss this interesting insight, learn how it may inadvertently hamstring your growth and to talk about our innovative solutions.