Just upgraded my website (and the blog, as you can see). Future upgrades include integrating the blog into the website.
The change was pretty painful as it was done by yours truly, though I learned a great deal in the process. If you were wondering about the lack of posts, blame the site upgrade.
Would appreciate constructive criticism on the site/blog - use the comment section below or shoot me an email.
Wednesday, April 29, 2009
Underfunded Pension Plans
The number of underfunded plans in the danger zone in the US has exploded, according to IFEBP (Int'l Fdn of Employee Benefit Plans).
This is corroborated by discussions I have had with various market professionals. What if those plans "derisked" and pursued an LDI framework now? They would be locking in losses. On the other hand, imagine another 30% decline in equities...
Between a rock and a hard place.
This is corroborated by discussions I have had with various market professionals. What if those plans "derisked" and pursued an LDI framework now? They would be locking in losses. On the other hand, imagine another 30% decline in equities...
Between a rock and a hard place.
Tuesday, April 28, 2009
Metlife
From 2007 annual report:
Chairman's Letter:
"Our individual variable annuity business in the U.S. had a very strong year in 2007 with a record $16.5 billion in individual annuity premiums and deposits. We have increased our market position in this business from 11th in 2000 to 2nd at the end of 2007. Our expanding distribution reach over the past several years, as well as the introduction of new and innovative variable annuity offerings, has enabled us to achieve this significant growth."
"The growth in the Individual segment was primarily due to higher fee income from variable life and annuity and investment-type products and growth in premiums from other life products"
On exposures:
"The Company’s investments in equity securities and equity-based fixed maturity securities expose it to changes in equity prices, as do certain liabilities that involve long-term guarantees on equity performance. It manages this risk on an integrated basis with other risks through its asset/liability management strategies. The Company also manages equity market price risk through industry and issuer diversification, asset allocation techniques and the use of derivatives."
On hedging:
"Equity index options are used by the Company primarily to hedge minimum guarantees embedded in certain variable annuity products offered by the Company. To hedge against adverse changes in equity indices, the Company enters into contracts to sell the equity index
within a limited time at a contracted price."
From the 2008 report:
Chairman's Letter: (trying to remain confident about the future as well as past policies)
"This growth was driven by a significant increase in fixed annuity deposits as well as strong variable annuity deposits. Our annuity product portfolio remains competitive and, just as important, we are maintaining our pricing discipline. It is at times like these that consumers increasingly seek out the guarantees that only the insurance industry can provide, and we remain committed to delivering on the promises we make."
Business Outlook: (not as confident)
Management expects 2009 premium, fees and other revenues to be down slightly compared to 2008 results. Individual Business experienced a significant decline in asset-based fees in annuity and variable life products in the second half of 2008 due to equity market declines. This depressed level of fee revenue is expected to continue in 2009.
The economic crisis and the resulting recession have had and will continue to have an adverse effect on the financial results of companies in the financial services industry, including the Company. The declining financial markets and economic conditions have negatively impacted our investment income and the demand for and the cost and profitability of certain of our products, including variable annuities and guarantee riders.
My conclusion is that hedging certainly helped their business relative to others but the variable annuity business is a tough business these days.
Chairman's Letter:
"Our individual variable annuity business in the U.S. had a very strong year in 2007 with a record $16.5 billion in individual annuity premiums and deposits. We have increased our market position in this business from 11th in 2000 to 2nd at the end of 2007. Our expanding distribution reach over the past several years, as well as the introduction of new and innovative variable annuity offerings, has enabled us to achieve this significant growth."
"The growth in the Individual segment was primarily due to higher fee income from variable life and annuity and investment-type products and growth in premiums from other life products"
On exposures:
"The Company’s investments in equity securities and equity-based fixed maturity securities expose it to changes in equity prices, as do certain liabilities that involve long-term guarantees on equity performance. It manages this risk on an integrated basis with other risks through its asset/liability management strategies. The Company also manages equity market price risk through industry and issuer diversification, asset allocation techniques and the use of derivatives."
On hedging:
"Equity index options are used by the Company primarily to hedge minimum guarantees embedded in certain variable annuity products offered by the Company. To hedge against adverse changes in equity indices, the Company enters into contracts to sell the equity index
within a limited time at a contracted price."
From the 2008 report:
Chairman's Letter: (trying to remain confident about the future as well as past policies)
"This growth was driven by a significant increase in fixed annuity deposits as well as strong variable annuity deposits. Our annuity product portfolio remains competitive and, just as important, we are maintaining our pricing discipline. It is at times like these that consumers increasingly seek out the guarantees that only the insurance industry can provide, and we remain committed to delivering on the promises we make."
Business Outlook: (not as confident)
Management expects 2009 premium, fees and other revenues to be down slightly compared to 2008 results. Individual Business experienced a significant decline in asset-based fees in annuity and variable life products in the second half of 2008 due to equity market declines. This depressed level of fee revenue is expected to continue in 2009.
The economic crisis and the resulting recession have had and will continue to have an adverse effect on the financial results of companies in the financial services industry, including the Company. The declining financial markets and economic conditions have negatively impacted our investment income and the demand for and the cost and profitability of certain of our products, including variable annuities and guarantee riders.
My conclusion is that hedging certainly helped their business relative to others but the variable annuity business is a tough business these days.
Wednesday, April 22, 2009
Beginning of a Superfund Era?
Michael Nobrega's suggestion of a superfund is clearly self-serving: earn fees on external funds. But does it make sense?
One might argue that it does - it would give smaller funds access to the brain trusts running the big public funds, including access to certain deals and asset classes. But is that really so? Can't smaller funds access venture capital, hedge funds and infrastructure deals by investing in funds dedicated to these asset classes? Well, the respondant argues, they could now get it at a lower fee. Even if that were the case (I believe it would be), there exists the danger of conflict of interest. Unless, of course, the funds are managed in one large pool.
Which brings me to the arguments against the superfund:
One might argue that it does - it would give smaller funds access to the brain trusts running the big public funds, including access to certain deals and asset classes. But is that really so? Can't smaller funds access venture capital, hedge funds and infrastructure deals by investing in funds dedicated to these asset classes? Well, the respondant argues, they could now get it at a lower fee. Even if that were the case (I believe it would be), there exists the danger of conflict of interest. Unless, of course, the funds are managed in one large pool.
Which brings me to the arguments against the superfund:
- Asset mix- given the different nature of public vs private fund liabilities (inflation indexing), is it really appropriate to consider similar asset mixes?
- Future Contributions- corporations must be more sensitive to ongoing concern of their entity than a government or quasi-government entity, which may lead to different risk tolerance of plan sponsors
- Together We Fall - what if the "brain trust" at a superfund missteps? Recent scandals such as the ABCP blowup in Canada or Madoff in the US, which are not tied to the overall market decline, demonstrate the danger if a superfund has large exposure to a particular asset or fund. In an age where we support smaller banks in order that no single financial institution would pose significant danger economic stability, how can we advocate supersized pension funds which could just as easily wreak havoc? (Granted that it may not be as direct, since pension funds do not lend to retail, but the impact on the banking system would be substantial)
Monday, April 20, 2009
Pension Funding
Apologies for my absence - had to point out this frightening article which highlights concerns about pension plan funding even if the economy recovers. Back to skimming the annual reports later today.
Thursday, April 2, 2009
PBGC
We interrupt the life insurance variable annuity program to bring this wonderful piece of news:
Just as stocks and other risky assets began to crater the Pension Benefit Guarantee Corp (PBGC) upped its allocation to risky assets. This from a government agency whose existence becomes essential in a time of declining risk allocations.
PBGC works like this: collect premiums from pension funds so that if a pension fund sponsor goes belly up and the pension plan has an unfunded liability (its assets are less than its liabilities), the PBGC makes up the difference. Basically, it insures pension plans.
So what on earth would possess these guys to strap on the same risks as the very funds they are insuring? Talk about misunderstanding one's place in the world.
Just as stocks and other risky assets began to crater the Pension Benefit Guarantee Corp (PBGC) upped its allocation to risky assets. This from a government agency whose existence becomes essential in a time of declining risk allocations.
PBGC works like this: collect premiums from pension funds so that if a pension fund sponsor goes belly up and the pension plan has an unfunded liability (its assets are less than its liabilities), the PBGC makes up the difference. Basically, it insures pension plans.
So what on earth would possess these guys to strap on the same risks as the very funds they are insuring? Talk about misunderstanding one's place in the world.
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