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Advantage Compendium - An Index Annuity Resource |
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2000 Year In Review 1/01
Return to Library Index
The S&P 500 began the year at a level of 1469.25 and ended the year at 1320.28. The highest point was reached on 24 March when the index hit 1527.46; the lowest point was 1264.74 on 20 December. The index closed lower that its starting point on 187 days and higher on 65 days. From a high of 6.75% last January the 30 year US Treasury bond yield trended down - with the exception of a second quarter burp, ending the year at 5.46%. Option volatility was nasty with the option volatility (VIX) index averaging 25.947 during the year. Volatility was exceptionally high last April reaching an average value of 31 during the technology stock rumbles, falling back to under 20 by the dog days of Summer, and then closing the year at levels that brought back memories of the Asian crisis of 1998. Sales Success Story of the year - Midland National Life Product Innovation of the year - Conseco Annuity Assurance’s Simple Index The players stayed pretty much the same. BMA, Life Investors and Monumental entered the market and SAFECO came back. Pekin Life left the arena. Two trends developed in 2000. A minor trend was carriers adding absolute or annual point-to-point crediting products to their portfolios of averaging structured offerings. A more significant trend was a number of carriers adding products with multiple indexes. The most significant sales success story of the year was Midland National Life. Midland National began selling index annuities in the fourth quarter of last year and was one of the top five sellers of product by the second quarter of this year. Conseco Annuity Assurance had the most significant product innovation with the introduction of their Conseco Simple Index annuity. 2000 began with a record $1.5 billion in first quarter index annuity sales. Sales dropped in the second and third quarters, and will undoubtedly be down in the fourth quarter resulting in estimated sales of around $5 billion for the year - in line with 1999. The decrease in sales was primarily due to very competitive fixed annuity rates coupled with an extremely volatile stock market. With the exception of a few bond indexed products, and one monthly averaged Russell 2000 product, index annuity returns were zero for the calendar year. If you had purchased an index annuity in 1999 and ended your first contract year in 2000 your credited rate ranged from zero to as high as 15.48% depending upon the date you bought. A consensus forecast of the nation’s leading economists, reported in Fortune’s 12/18/00 issue, said that short term interest rates will remain basically flat for most of the year and begin rising in the fourth quarter as growth increases. My crystal ball sees rates softening through the second quarter. Index annuity sales are not going to increase until fixed rates retreat under 6%. Agents are correctly perceiving that fixed interest rates are very attractive from a historical perspective and are selling traditional fixed annuities. Although it would help index annuity sales if the stock market resumed an upward course, even this effect would be minimal as long as rates remain high. The 2000 stock market should open the eyes of many investors and make them more aware of the risk of stock investments. After the stock shock has dissipated, and fixed rate alternatives are less attractive, these people may decide that an equity linked vehicle that protects their principal from market risk makes sense. However, index annuity sales will not advance until fixed rates go down a point from their high and I see this happening in the Spring of the year. Annual Reset Index Annuities Reset
Annually 1/01 Return to
Library Index The index annuity locks in the annual gain. The gain cannot be lost even if the index subsequently goes down. This is a very important feature. Equity investments have produced significantly higher returns over time than fixed rate vehicles. Based on the past performance of equity investments why doesn’t everyone buy stocks? The reason is that stocks can go down and you can lose money. Index annuities are designed to give the potential for higher returns than other savings vehicles, but without the market risk to principal associated with stocks. In today’s financial markets annual reset index annuities are crediting effective net rates of around 50% to 60% of the actual index gain. At first glance, participating in only around half of an index yearly gain seems low and unappealing - especially when compared to pure equity investments. However, you need to remember that these annuities ignore the bad years. Suppose we had a five year period where the index acted like this:
Suppose during this same period the index annuity was only able to participate in 50% of the index gains for the first four years and then was able to offer a 100% effective participation rate in the fifth year. The credited rates would look like the Annuity Gains posted above: If we placed $10,000 in the index and $10,000 in the index annuity, here is what the accumulated values would be at the end of five years:
Even though the annuity only offered a 100% rate in one year it still performed comparably. The reason is because the index investment fully participated in the fourth year loss; the index annuity was not affected. My example was designed to show comparable results. In reality, equity investments should produce higher returns over time than index annuities because in today’s markets an annual reset index annuity cannot provide full index participation, but the difference in performance between the two might be closer than we would think because of the “no market loss” feature of index annuities. In 1999 the S&P 500 generated a 19.53% gain. In 1999 annual reset index annuities produced returns of 8.11% to 12.43% depending upon the crediting method. In 2000 the S&P 500 lost 10.14% producing a total gain of 7.41% for the two year period. The index nnuities retained their 8.11% to 12.43% gains for the same period. Another amazing feature of these annuities is that they reset. The S&P 500 fell from 1469.25 at the end of 1999 to 1320.28 at the end of 2000. If you had purchased the index a year ago you would need it to increase 11.3% simply to be back where you started. But, the index annuity uses the lower ending value as a new beginning. Instead of merely struggling back to ground zero the index annuity is sharing in the increase. I’ve read articles from a few doomsayers stating that we’re in a long term bear market and any future gains will be from short lived bear rallies rather than long term bull forces. Annual reset index annuities can capitalize on choppy markets by using slides to their advantage. At the end of 1972 the S&P 500 closed at 118 - a year end index level it would not again reach until 1980. If you could have purchased the index in 1972 you were under water for the rest of the ‘70s. However, an annual reset structure over the same period would have recognized a 77.9% gain. Index annuities are an extremely powerful financial tool. Index annuities provide the protection of other fixed rate vehicles, but with potential for significantly higher returns. Although they are not designed to compete with equity investments index annuities may, over time, provide more competitive returns than expected and with a lot less stress to the nerves. Day In Not Time In Determined 2000
Returns 1/01 Return to
Library Index Last year the anniversary date of your index annuity was more important than the crediting method in determining whether you had a good or bad return. As an example, if you bought the annuity on the “best” day each month in 1999 your returns in 2000 averaged 6% to 9% depending upon the index annuity you purchased. However, if you picked the “worst” day each month in 1999 to buy the same annuity your return averaged 2% to 4% last year. And even though the peaks were moderate the market was still extremely volatile, so averaging formulas didn’t have a lot of high days to offset the low ones. The best performing structures were those with higher participation rates and lower caps followed by annuities using lower participation rates and high cap point-to-point structures. Yield spread or asset fee structures tended to be hardest hit because the gross gains weren’t that high to begin with. The chart at the bottom of the page assumes that you had purchased different index annuities on every day of last year and shows what your return would have been on the 2000 contract anniversary date. One line is a monthly averaging structure with a 100% participation rate and the other is a point-to-point structure that also has 100% participation rate, but with a 10% cap. Even though the capped version would have struck out for the final six weeks of the year and delivered zero returns, the capped Mean return was 7.5% versus 5.5% for the averaging product. Even with a troubled year index annuities in general have a very strong story to tell. During a time when many equity investments lost money the typical index annuity produced a return that was at least in the same vicinity as CD rates. Many index annuity owners also earned a zero return. But you know, if the worst news you ever have to tell your client is that they didn’t lose any money, maybe an index annuity is all right.
A Winter Opportunity 2/01
Return to Index If you stepped in after the crash in October of 1987 and bought when the index was 248 you missed the lower point of 233, but you were ahead of those that waited until January to buy at 261. If you moved when the S&P 500 was at 311 in September of 1990 you missed the 295 low in October, but you were well ahead of those folks buying at the 330 level in December. Now, I don’t know if this is the bottom of the market. However, I do believe that the market will continue to advance in the years to come well pass last year’s high point. Locking in an index value today means your starting point for calculating future gains is on the low end and you’re getting a head start on the next move upward. Sure, you may miss the absolute bottom but you should still be ahead of the game when all is said and done. Participation Rates Will Be Heading Down 2/01
Return to Library Index All index annuities promise an accumulated value at least equal to the
original principal by the end of the When interest rates go down it takes more bonds to guarantee the minimum rate leaving less money to buy the options. Therefore participation rates go down or/and yields spread go up or/and caps get lower. While interest rates were falling option prices were rising. The option volatility or VIX index is a way to check general option volatility, although it reflects the S&P 100 and not the S&P 500. The VIX averaged a value of 26 last year and in January skirted over 30. To give that some perspective, VIX values were around 16 to 18 in 1996 and 1997. Higher volatility means higher prices and index option volatility is higher than it has been. The combination of falling rates and higher option prices means a double whammy for index annuity rates. Index annuity rates will slide. However, falling interest rates should help the stock market find its legs again so stock prices and stock index values will head up. Which leads me to the fire sale thinking. The stock market could be near a bottom. Index annuity rates - even after a couple of chops, will still be competitive. So, there’s an opportunity to lock in a low index starting value at a competitive participation rate. At some point participation rates will stabilize and start increasing again - even with low interest rates, because option prices will decline due to lower volatility resulting from renewed optimism about the direction of the market. However, by the time participation rates starting heading back up the market could be a lot higher than it is today. Which means this is probably a good time to lock in long rate guarantee products. The Rule of 72-50-2 2/01
Return to Library Index Rule of 72 - 72 / 6% = 12 Years The Rule of 72-50-2 says that if you can increase the return 50% you’ll wind up with twice as much by the end of the second lower rate term. Let’s say that a fixed annuity is paying 6% and we put in $10,000 today. Using the Rule of 72 our $10,000 would grow to $20,000 in 12 years and $40,000 in 24 years. $10,000 becomes $20,000 in 12 years Now let’s say that we believe the index annuity will average a 9% annual return - 50% more than the traditional fixed annuity. Again using the Rule of 72 our $10,000 grows to $20,000 in 8 years, to $40,000 in 16 years, and to $80,000 in 24 years - double the total return of the other annuity. $10,000 becomes $20,000 in 8 years, Even though the index annuity only earned 3% more than the fixed rate instrument we wound up with double the money.
The Rule of 72-50-2 illustrates that even a modest increase in your return can reap big rewards over time. A corollary to the Rule of 72-50-2 is the Rule of 72-1/2-2/3. It again talks about increasing the return 50% (the 1/2 figure), but says that when we increase the rate of return by one half we can achieve the same final goal of the lower return vehicle in two thirds of the time. Our goal is $40,000 and we have $10,000 today. If we can earn 8% the Rule of 72 says our money will double every 9 years and we’ll reach our goal in 18 years. $10,000 becomes $20,000 in 9 years and $40,000 in 18 years However, if we can increase our return by 1/2 it takes less time for the money to double. 8% times 1 1/2 = 12% and we reach the same goal in two thirds of the time.
The Rule of 72-1/3-1/2 is useful for showing the power of tax deferral. Say that you’re earning 6%. If you’re in a combined 33% federal and state tax bracket it takes 50% longer for your money to double if it isn’t tax-deferred. Rule of 72-1/2-2/3 72/6% = 12 Years The Rule of 72 is a powerful financial tool. It gives us the ability to illustrate many of the benefits of index annuities simply and shows that if you can earn just a little bit more your goals will be reached faster. Tomorrow I Will Begin To...
2/01 Return to
Library Index 2. Review 10 client files a day to see if changes should be made and set an appointment with the client. 3. Ask for 2 referrals a day. 4. Schedule a “How To Cope With Falling Interest Rates” seminar. Use a local library or school, notify the newspaper of this service event and call existing clients and prospects. 5. Schedule a “Supercharge Your IRA” meeting with prospects, clients and their guests. Talk about IRA strategies in a turbulent market and how the new rules on distribution will affect them. 6. Plan a campaign. Pick a product you really like, learn all about it, and tell everyone you meet about the product for the next 30 days. 7. Schedule a 2 hour weekly planning appointment. Sit down and determine the 10 things you most want to accomplish for the week. 8. Start a newsletter. There are several sources that provide customer newsletters that can be personalized. Send them to your clients and prospects each quarter. They’re an effective prospecting tool. 9. Send a handwritten note to each client that purchased a fixed annuity from you last year. Tell them that they’re doing well and current interest rates are still holding at X%. 10. Send handwritten letters to prospects that didn’t buy from you last year. Thank them for their consideration and tell them you hope you may be of service at some time. 11. Call your tax-free municipal bond mutual fund clients. Congratulate them on choosing an investment that pays tax-free dividends (and probably generated a gain in value as well). 12. Join an organization that will expand your horizons. It could be a professional association to increase your knowledge or a business club to increase your centers of influence. 13. Ask your best clients “If there was just one thing you could change about doing business with me what would it be?” Your clients will help you improve your business if you ask them for input. 14. Read or reread “The Sale Begins When The Customer Says NO” by Elmer Leterman and “How I Raised Myself From Failure to Success in Selling” by Frank Bettger. 15. Give time or money to a charity you’ve always wanted to help. Economic Superlatives Of The Last Half Century 2/01 Return to Library Index
Index Annuity Superlatives 2/01 Return to Library Index
2000 Index Annuity Sales Set New Record
(Barely) 3/01
Return to Library Index 1. Allianz Life Sales hit $1.5 billion in the first quarter of 2000, dropped to $1.4 billion in the second quarter, dropped another 7% to $1.2 billion for the third quarter, and remained in that territory for the fourth quarter. The increase in traditional fixed annuity sales directly challenged index annuity sales. Traditional fixed annuity sales increased due to historically high interest rates pushing first year rates over 8% and longer term guaranteed rates over 7%. Nineteen out of twenty index annuity sales are made by independent insurance agents. Fixed annuities offered returns 1% to 3% higher than bank instruments; the stock market story was scary; agents returned to selling traditional fixed products. In spite of attractive interest rates on other vehicles and a rocky stock market, fourth quarter sales held their own. Several companies, led by Allianz Life, posted strong gains in sales when compared with the previous quarter. The players stayed pretty much the same. BMA, Aegon and Monumental entered the market and SAFECO returned. Pekin Life left the arena. Two trends developed in 2000. A minor trend was carriers adding absolute or annual point-to-point crediting products to their portfolios of averaging structured offerings. A more significant trend was a number of carriers adding products with multiple indexes. Although the top five carriers have always been responsible for at least half of total sales, it’s a very fluid group. Allianz was the top selling index provider for 2000, Jackson National was number one in 1999, Conseco in 1998, Keyport in ‘96 and ‘97. Midland National was not even in the market with an index product in the Summer of 1999 and yet became the fourth highest seller in 2000. A comprehensive analysis of fourth quarter and calendar year 2000 index product sales is available in the Advantage 2000 Equity Index Sales & Market Report. The report includes information on all index annuity and index life products currently available as well as data on the typical index annuity buyer and sources of premium. It’s Not A Surrender Charge It’s A
Liquidity Cost 3/01 Return to
Library Index Using this definition certificates of deposit would be a defined liquidity cash vehicle. CDs protect principal from market risk and liquidity is generally available. CDs charge penalties for early withdrawal, but the amount of the penalty is known from the onset. The penalty could dip into the principal in the early part of the holding period, but again the maximum cost is known to provide the liquidity. Bonds, on the other hand, are not a cash vehicle because the cost of future liquidity is an unknown. If one holds a bond until maturity the owner receives the stated par value. However, if one wishes to liquidate the bond prior to maturity the value received is dependent upon undefined external factors - including the interest rate environment. Bonds are very liquid, but their value is not protected from market risk. Stocks and other equity instruments would also not qualify as cash vehicles because although they generally are liquid at some price that price cannot be forecasted with certainty. Traditional fixed and fixed indexed annuities can meet the cash definition if they don’t use some type of market value adjustment feature or require annuitization, but simply deduct a measurable cost if liquidated. Fixed annuities are liquid. Although they usually have contract provisions that enable the carrier to delay payment at their discretion this maximum period is also defined, and in the past it has taken calamities for insurers to materially delay payment. Over time, equity investments have generated higher returns than bond investments and bond investments have generated higher returns than cash investments. The reasons we shouldn’t keep all of our money in only stocks, or only stocks and bonds, are due to the risks mentioned previously. An advantage of defined liquidity instruments is that they tend to pay higher returns than pure cash instruments while offering protection from market risk . If we adjust our cash needs to reflect the liquidity costs of these defined liquidity instruments our cash returns dramatically increase. Pure cash instruments would include savings and money market accounts. These have historically produced lower returns than other vessels and currently yield in the 2% to 5%. As I write this, you can find certificates of deposit yielding 5% to 6% and fixed annuities paying 6% to almost 7%. Say that a fixed annuity had a liquidity cost of 7% for the first seven years and also an interest rate of 7%. If you had to liquidate the annuity at the end of the first year the interest earned would roughly offset the liquidity cost and you’d merely get back your original principal. However, let’s say the cash instrument alternative is earning 3%. Defined Liquidity vs. Cash - Net Returns
Your true liquidity cost isn’t 7% - the amount assessed by the annuity contract, but 3% - the difference between what you would have earned in the cash vehicle and would earn if you liquidated the annuity. At the end of the second year the return from your cash instrument would be about 6%, but even after paying the annuity’s liquidity cost the annuity would have a higher net return. The true liquidity cost of the fixed annuity is not 7%. It’s 3% at the first anniversary and 0% by the second anniversary. The cost of liquidity - be it a surrender charge or a early withdrawal penalty or a “b” fee - isn’t the nominal charge, but the net return after the cost when compared with the alternative instrument. The ultimate liquidity cost isn’t as easy to predict with an indexed annuity because future earnings beyond the minimum guarantee are unknown; instead we’re comparing finite liquidity costs with probabilities of higher earnings. However, the worse case actual costs can be computed and at some point the indexed annuity will make the owner whole. The defined liquidity aspects of term end point-to-point indexed annuities which measure index movement over a period of several years may be more appealing to the risk averse investor than a direct investment in an indexed fund. Granted, an index annuity owner doesn’t participate in the reinvested dividends as with an indexed fund nor does one currently receive all of the upside, but the index annuity owner knows that principal cannot be lost if the annuity is held to the end of the measuring period. In addition, the owner always knows the annuity’s liquidity cost and may liquidate the annuity if a better opportunity presented itself. As an example, suppose you purchased an index annuity today with an initial liquidity cost of 7% and the index dropped 20% over the next few months. The indexed fund investor is down 20% and can either wait and hope for future growth or liquidate and receive 80 cents on the dollar. The indexed annuity owner has the option of staying put and waiting for the index to climb again, the minimum guarantee to make him whole, or liquidating the annuity and receiving 93 cents on the dollar. Liquidating the annuity and taking the loss may seem extreme, but this example illustrates that the annuity owner always knows the maximum liquidity cost of the vehicle. There were individuals at the end of 1999 that purchased NASDAQ 100 indexed funds and NASDAQ 100 based indexed annuities. If the most the indexed annuity owner can lose is 7%, today, which would you have rather owned? People keep too many dollars in cash instruments because they want liquidity. Unfortunately, cash instruments offer lower yields than most financial vehicles. Over time these people may drown in a sea of liquidity because their returns haven’t kept them afloat with the rising tide of inflation. Vehicles with defined liquidity have higher returns than these cash instruments. The main difference is the higher returns come with a known cost. People should determine their cash needs and then allocate these directed dollars within the time and cost constraints of the defined liquidity vehicles to increase their overall returns. Annuities Have Temporary Liquidity Costs A fixed annuity typically deducts a surrender charge if the contract is liquidated prior to the end of a predetermined period. However, it may be more accurate to replace the term “surrender charge” with temporary and voluntary liquidity cost. Surrender charge implies an ongoing expense and has resulted in agents referring to annuity products as having a “seven year term” or being a “ten year product “ with the stated years representing the period during which liquidity costs are assessed. In fact, the expense associated with liquidating the contract usually disappears after an agreed upon duration and the “term” of an annuity is from date of purchase until the maturity date. Indeed, a forty year old owner’s annuity may have a fifty year “term” and may also have a seven percent cost, but only if the contract is voluntarily liquidated in the next eight years. There are indexed annuities that measure index movement over a multiple of years whose ending point coincides with the last year of the temporary liquidity cost, but the annuities typically don’t require the annuity balance to be distributed at this measuring point. Quotations for the Insurance Industry 3/01 Return to Library Index
New IRA Minimum Distribution
Guidelines 3/01 Return to
Library Index The Old Way The IRS recognized this and explains in the new regulations that “In general, the need to make decisions at age 70 1/2, which under the 1987 proposed regulations would bind an individual in future years during which financial circumstances could change significantly, was perceived as unreasonably restrictive. In addition, the determination of life expectancy and designated beneficiary and the resulting required minimum distribution calculation for individual accounts were viewed as too complex.” New Proposal Normally, your required minimum distribution calculation will be unaffected by the selection of beneficiary. With one exception, all calculations will be based on the account owner’s age less ten years as published in the IRS tables. An exception is made for a spousal beneficiary that is more than ten years younger than the account owner - the couple can use a joint life expectancy table that uses the younger age. Upon death of the account owner non-spousal beneficiaries will be required to take the required minimum distribution over their life expectancy. The new rules let the surviving spouse keep the proceeds and rollover the IRA to their own IRA or disclaim the IRA to their children or others. Kind & Simple No longer will most distribution amounts need to be calculated on the age of the account owner and beneficiary. The recalculation/no recalculation decision is eliminated. No longer can the death of a beneficiary after the RBD cause an acceleration of taxes. The need to satisfy the separate incidental death benefit rule is eliminated. The IRS predicts that minimum distributions for most people will be reduced.
Beneficiary All in all, the proposals are a win for taxpayers and will enable people to pass along a greater portion of their qualified plans to family and others. The freedom to change beneficiaries at anytime is a great benefit. Information obtained from sources believed accurate but not
warranted and is not tax or legal advice. Prepare For A Nasty Spring 4/01 Return to Library Index
Newton’s Fourth Law - A Prospect At Rest Will Stay That Way Unless Shoved Index annuities offer the potential for higher returns than other savings vehicles without stock market risk to principal and credited earnings. They are ideal for consumers that do not have the temperament or time horizon for pure equity investments and are an alternative for savers that have seen interest rates drop 1% to 2% in the last year. But, people are in denial. I’ve heard from investors that can’t bring themselves to admit their losses. I’ve heard from savers who have cash sitting in low interest money market accounts because they didn’t lock in the higher rates of a few months ago. Consumers are traumatized and it will take time for them to heal and be receptive. In the meantime, when faced with an unpleasant reality many people choose to do nothing. Index annuity sales will take off as confidence about an upward direction of the market builds and low interest rates force people towards alternatives, but it could take a while until the economy, media and psyches are all in alignment. Renewal Rate Integrity 4/01
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Library Index We asked indexed annuity carriers to provide us with their renewal rates. To date, four carriers have furnished us with their renewal rate histories. As we anticipated, market conditions at certain renewal periods forced some caps to be lowered or yield spreads to be increased. However, all four insurers have at some point in time improved renewal rates, by either raising the participation rate or lowering the yield spread or raising the cap, when compared with their initial contract rates. Carriers That Have Raised Renewal Rates The integrity of the insurance company is more important than the crediting method used in determining which index annuities ultimately credit the most interest to their contracts. Our analysis has found that although the nominal or stated rate of index annuities is quite broad, the net effective participation in index movements is tightly grouped - everyone is buying options in the same market. Even though index annuity returns will not be identical because products have different loads and other variables, the treatment of customers at renewal is of supreme importance. The listing of these carriers doesn’t mean that the other insurers offering indexed annuities haven’t raised renewal rates. We’ve only received renewal rate histories from these four companies and everyone of them had gone back to at least some of the time to their policy owners with a better deal at renewal. Why Stocks Go Up & Down
4/01 Return to
Library Index At the end of the first year, after paying all operating expenses and taxes, Mary’s Ice Cream, Inc. has $2,000 left over in profits. The investors decide to pay out $1,000 in dividends to shareholders and retain $1,000 in the business to spend on a new freezer. Corporations issue stock in the form of certificates in exchange for money, property or services. Each certificate represents a share in the ownership of the corporation. In the investment world total profits (or losses) are divided by the numbers of shares of ownership to reflect the proportionate financial interest of the investors. To determine the income or loss that each share represents the net income ($2,000) is divided by the outstanding number of shares (10) which produces a number known as the earnings per share ($200). A corporation may also pay out some of the profits as dividends to the shareholders. To determine the dividend that each share receives the total dividend ($1,000) is divided by the number of shares (10) and thus is known the dividend per share ($100).
The Price/Earnings or P/E Ratio tells us how many year’s worth of earnings a share of stock is selling for. The investors paid $1,000 for a share. The earnings per share are $200. If we divide the share price by the earnings per share we see that a share of stock sold at five times earnings. Another way to say this is that the P/E Ratio is 5.
The higher the P/E Ratio, the more confident or bullish investors are that earnings will continue to grow; the lower the ratio, the more pessimistic investors are about future earnings growth. P/E Ratios indicate optimism about future earnings growth. A high P/E Ratio says investors are very confident that earnings will increase A high or low P/E Ratio by itself doesn’t mean a stock is better or worse than another. You need to compare the stock against other stocks in the same industry. Mary’s Ice Cream, Inc has a P/E Ratio of 5. To get an idea as to whether the current share price reflects the true value of the company we’d need to compare this stock with the shares of other ice cream companies. Dividends represent a portion of the total return that you get from stock ownership, but they are not automatically paid when a company has a profit. Companies in mature industries - utilities would be an example, tend to pay out more of their earnings in dividends.
Mary’s Ice Cream, Inc. continues to do well. By the end of the fifth year the corporation’s earnings per share are $800 and the dividend is $400. One of the investors wants to sell his share. What is a share of stock in Mary’s Ice Cream, Inc. worth?
The price of a share of stock depends upon what someone is willing to sell it at and another is willing to pay. The price is based on the current and potential earnings of the company. Day-to-Day stock prices are affected by emotions and changes in assumptions of future earnings. The long term performance of individual stocks, and the stock market overall, is based on actual earnings. If earnings continue to grow the price of a stock - or value of a stock index, will trend upward reflecting the economic facts. However, on any given day the price of the stock may be higher or lower than its long term value based on emotions and assumptions. What would happen to the share price if I told you that a new municipal swimming pool is being built right across the street from Mary’s Ice Cream, Inc. Hundreds of hot, hungry, thirsty children will cross the sidewalk in front of the store every day. An investor might pay a little more for a share of the corporation because their assumptions about future earnings would have increased. What if I told you that another ice cream shop was thinking of opening up right next door to Mary’s. An investor might offer a little less for a share of stock than they normally would have because if the rumor’s true, future earnings could be harmed. But, if the rumor wasn’t true the price of the stock would return to near its long term value. The daily movements of the stock market react the same way. A rumor or announcement of events that could increase earnings - like the possibility of lower interest rates on business loans, causes stock prices to move up. Negative rumors or events - like recession fears, cause stock prices to move down. In the final analysis, stock prices and returns are based on actual earnings over time. If the earnings of a company grows over time the price of the company’s shares will grow. If you believe that the nation’s economy will continue to expand, stock indexes will increase in value. Quarterly Index Annuity Sales 4/01 Return to Library Index
Bear Markets - It’s Now or Later
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Library Index Interest in equity index annuities is increasing due to the protection from market risk benefit. Consumers realize that an index annuity will provide at least a minimum guaranteed return, but minimizing loss is only one consideration in financial planning. The other half of the equation is maximizing gain. Unfortunately, the market doesn’t announce its low point
I went back and looked at the last three S&P 500 bear markets. The question I asked was what would the ultimate gain be if we could have purchased the index on the day the S&P 500 dropped 20% from its previous high, if we held the index until nine years after that point. Or, what would have happened if we bought the index six months after it reached the low point of that particular bear market and held it to the end of the same nine year point. Bear #1 The low point was set on August 12, 1982 when the index closed at 102.42. To be certain that the bear market was over we would have waited until Lincoln’s birthday in 1983 to get in. At the market close on March 3, 1991 we would have been up 151% Bear #2 Bear #3 In these instances you would have been far ahead if you had simply decided to ignore intuition, hunches and market experts and bought the index when it first closed 20% below the previous high. Waiting until everyone was sure that the bear market was over reduced ultimate returns. S&P 500 Bear Markets - Buy or Wait?
Since 1956 the S&P 500 has experienced nine periods when values declined more than 20% - or very close to it, from a previous high. The following graph shows values of the index at each previous high and bear market low, the values when the index first declined 20% from the previous high, the value six months after the market low, and the final index gain or loss using an end point nine years after the day of the 20% decline The buy on the 20% decline strategy versus waiting 6 months would have produced higher returns in seven of the nine markets. Even after including the horrendous 1973-1974 bear market, the buy on the decline method resulted in a 28% higher average return than if you waited six months after the ultimate low to enter. In all but one of the bear markets the buy on the 20% decline method means you would have watched the index sink further before it bottomed out, but in all but two corrections buying early generated higher gains than waiting until the next bull market had been formally announced. A year from now we will know when the next bull market began and the bear market ended. Perhaps it’s already happened, or maybe it’s yet to be. This bear market has lasted over thirteen months which is near the median length of previous hibernations. By the way, the S&P 500 first closed 20% below its previous high in March. All information is for illustrative purposes only and is not investment advice. "S&P 500" is a trademark of The McGraw-Hill Companies Inc., and must be licensed for use. S&P Index-linked products are not sponsored, endorsed, sold or promoted by Standard & Poor's and Standard & Poor's makes no representation regarding the advisability of purchasing these Products. Information is from sources believed accurate but is not warranted. Most Company Web Sites Have Uninviting
Front Doors Return to
Library Index I recently revisited the sites of the insurance companies offering index annuities. Almost every site requires agents to obtain password access to gain deeper entry into the portal. Many of the carriers provided me with a password and let me explore.
However, if you don’t have a password the first impression of almost every index annuity carrier web site is that of a six inch thick steel door with a sign posted above the doorbell that says “entry denied”. The front page of a typical company site has a couple of general “who we are” paragraphs, an agent login button and links to a few generic pages that offer information like “we’re an insurance company and we sell insurance”. If you click the products link the site will usually connect you to a page that may list a few products and provide extremely brief summaries; although there was one site that regardless of the page linked to always responded with ”call us for details”. In short, most company web sites convey absolutely no marketing or recruiting value. Web sites are 24 hour marketing portals. A prospective agent may hear about a company and in this browser based age their first look at the company will be through the carrier’s web site. However, most of the time the web site won’t provide any useful information about the company or the products. There are a few exceptions. The sites for ING USG Annuity and Integrity Life provide “demo rides” showing the kind of web information agents will receive after they are appointed. Conseco, Jackson National and SunAmerica also provide a hint of the treasures that await new agents. But, the best first impression is made by the web site of Standard Life of Indiana. The Web Site with the best front door is www.standardagents.com StandardAgents.com provides complete product descriptions, sales ideas, product interest rates, real industry news, financial market information, and forms and supplies, all without requiring a password. It is an inviting site with useful information. The site made me want to talk with Standard Life of Indiana to see what else they offered. Take a look, it shows how a first impression should be made. The Bear Market Ended April 4, 2001
Return to
Library Index If we are now in the next bull market, what did the millennium bear ultimately look like? 2000-2001 Millennium Bear Market
The bear market was terrible for the NASDAQ, moderate for the Dow Jones Industrial Average and typical for the Standard & Poor’s 500. This is the tenth bear market for the S&P 500 in the last fifty years. If early April was the end, the millennium bear had a duration of almost thirteen months placing it in fifth place on the list. The decline from the previous high was 27.77% making it the sixth hardest bear market. All in all, the millennium bear didn’t cause the long term pain felt with the bear markets of the ‘70s and early ‘80s, nor was it as gentle as the 1990 expanded correction. The Millennium Bull If we ignore the awe inspiring 73-74 bear market which took 90 months before the level of the previous high was regained, previous markets averaged twelve months after the low to enter record territory with recovery time ranging from three to twenty one months. If past times are any indication, the S&P 500 could be back over 1500 as early as this Fall and probably not later than next May. Most Index Annuities Posting Zero Returns
Return to
Library Index Annual reset structures using averaging are faring a little better with some contracts eking out 2%, 3% and even 4% returns for brief periods in February. But, the bear has proved too powerful and these structures have also been smitten. Term end point annuities have seen any paper gains achieved since late 1998 - early 1999 erased. It won’t get any better very soon. The S&P 500 has increased from 1103 at the start of April to around 1250 by the end of the month. However, even if this rally continues the index was at the 1400 to 1500 level last year pretty much through December. At best, some index annuity structures may hit passbook savings or money market equivalent rates this year even if we are now entering the next bull market. Where’s The Pony? This market highlighted the principal protection benefit of index annuities. A zero return doesn’t sound quite as bad when compared with the alternative of a 27% or 67% loss. Consumers now understand the concept of market loss and may not want to continue using the postman as their financial advisor. In tough times people look for guidance, safety and a hand to hold. This is an excellent time for agents to tell the index annuity story.
1st Quarter EIA Sales
Level Return to
Library Index First quarter sales were $1258 million compared with sales of $1258 million in the fourth quarter of 2000. Sales were down sharply when contrasted with the record $1500 million sold in the first quarter of 2000. The EIA Sales Leader for the first quarter was once again Allianz.
The quarter was marked by the departure of one of the pioneers in the arena when GE Capital withdrew their index annuity from the market. American General also pulled their index annuity off the shelf. These departures were balanced with the entry of Oxford Life onto the field and the reentry of Delta Life. Bonus products were introduced by LSW and Midland National; Clarica added an averaging product. ING USG quit the Choice Index. Jackson National added a seven year version of their ELITE 90 annuity and is closing the ten year product. ReliaStar pulled the Series I version of their EIA. In the first quarter products with a surrender period of more than ten years represented over half of the market. Index annuities with surrender periods of ten years or longer represented 76% of first quarter sales versus 64% for the same period last year. There were more sales of annuities with surrender periods of twelve years or longer than all annuities with surrender periods of less than ten years combined. In the previous two quarters products with an agent commission of 11% or more represented over 40% of sales, but in the first quarter this segment dropped to 31% of total sales. One year ago 42% of the annuities sold had an agent commission of under 8%; in the first quarter only 25% of the policies sold paid a commission of under 8%. Insurance agents continue to dominate distribution. capturing over 96% of index annuity sales. Annual reset methodologies represented 86% of total sales and crediting structures using some type of averaging have similar market penetration. Although ten carriers have introduced multiple index products, the S&P 500 is still the index used for 96% of index annuity sales. The average index annuity sales premium reported was $33,116; average premium ranged from $11,306 to $53,7000. The average fixed annuity premium was $33,452; average premium ranged from $10,675 to $52,116. The average index sales premium was similar to that reported in the previous quarter. Source: Advantage 2001 Equity Index Sales & Market Report Equity Index Life
Insurance Return to
Library Index We identified twelve companies that offer equity index life insurance. The current companies and life products are:
Equity Index Universal Life is for people that need life insurance and desire permanent protection. They want greater flexibility and greater control than is available with traditional insurance. In addition EIUL owners: Like the opportunity for higher potential interest with equity linked returns; Don’t like the volatility and risks of VUL; Want the certainty of knowing they’ll earn at least a minimum return in both good times and bad. EIUL is available as a flexible premium personal insurance plan with premiums paid monthly, quarterly or yearly. EIUL is available for estate planning purposes as survivorship life and as a single premium insurance instrument CDs Also Have Bearish
Moments Return to
Library Index Every time a bear appears in the stock market CD buyers come out and smile and smugly remark that “while they may not earn as much in their bank accounts at least they’re protected from that nasty volatility affecting stocks.” Although it is true that certificate of deposit principal is protected from market risk the interest earnings can wildly fluctuate. Since 1970 there have been eight times when CD interest rates fell more than 20% from the previous high in the cycle. On average, the lowest rate in these cycles was 50% of the previous high.
If you’d been retired and using CD interest to help pay the bills you saw your income cut in half on eight separate occasions - once as early as by the time of next renewal. Bank instruments do provide stability of principal, but the trade-off is return volatility. From 1991-2000 the S&P 500 annual gain was 14.86%; CDs averaged a 5.26% return Equity index annuities provide protection of principal from market risk. Because the additional interest beyond the minimum guarantee is linked to the movements of a stock index, index annuity returns also fluctuate. However, over time equity markets have produced significantly higher average returns than fixed rate instruments. In the ‘90s the S&P 500 index had an annual return of 14.86% - and this includes the 150 point drop in the final year of the decade. During the ‘90s six month certificate of deposit rates averaged 5.26%. - the interest rate on the final CD at the end of the decade was 24% less than the rate earned on the first. Today, CD interest rates are 4% to 5% and the stock market is lower than its been in over a year. Both bank instruments and equity instruments will continue to be volatile. However, it may make sense to have volatility work for you over the long term while protecting the principal with an index annuity. Overall Index Annuity Returns Are
Strong Return to
Library Index
You can see that the interest credited to these annuities is all over the board. In general, actual credited interest was in the double digit area when the index was heading up and at or near zero during the millennium bear market. What is interesting is that if you add up all of the returns and average them out you find that these index annuities delivered actual annual first year interest of 7.3% to about 9.5%. Depending upon the point-to-point annual reset annuity you owned, and whether it had a maximum cap on interest and what that cap may have been, your mean first year returns ranged from 7.50% to 9.35% for the period. Depending upon which annual reset annuity you bought and the averaging method and rate used, your mean first year returns ranged from 7.32% to 9.45%. If you had consistently picked the worst performing index annuities month after month - and the names of the annuities with the lowest returns changed depending on the month you’re looking at, you still received an average interest rate significantly higher than certificates of deposit yielded over the same period. Point-to-Point Returns Ranged From 7.50% to 9.35% Another point is that these returns are after the effects of the worst bear market in a generation. For the final six months of the chart the stock indices produced negative annual returns, and yet overall, annual reset index annuities still credited interest that was, on average, 50% to almost 100% higher than other traditional savings vehicles. A final point is even though some crediting methods didn’t average values and may have had caps, and others averaged index values, the end result is that the range of first year returns during an extremely volatile market period is the same for both point-to-point and averaging methods. Selected Highlights Of The 2001 Tax Act C ontaining a mind numbing 444 pages of tax law changes and explanations the Economic Growth and Tax Relief Reconciliation Act of 2001 (HR 1836) was passed by Congress May 26, 2001 and signed by President Bush June 7, 2001. The Act greatly increases the ability of Americans to save for retirement by increasing contribution limits on qualified plans, eliminates the estate tax, and provides significant financial incentives for education. However, most of the individual tax breaks aren’t fully realized for a few years.This summary addresses a few of the highlights of the Act. It is not intended to be comprehensive in any subject area and although the information is believed to be accurate as far as it goes, it is not guaranteed or warranted. One should always contact their tax advisor for their individual situation. Christmas in September
Even if your taxable income was a million dollars last year the most you’re going to get is $300, $500, or $600, depending on your filing status. If you made under these amounts last year your check is reduced by 5% for every dollar below the thresholds. You won’t get anything if you didn’t have a taxable income last year or if you were claimed as a dependent on someone else’s return. The tax credit is not taxable; you will not report the check on your Form 1040 as taxable income. Of course, if you live in a state that gives you a deduction for federal taxes paid they will probably want an adjustment on this tax rebate. Income Tax Bracket Changes
The new 10% bracket applies to the first $6,000 of income for single taxpayers and $12,000 for joint filers. All of the rate tables are adjusted for inflation (the 10% table won’t be adjusted for inflation until 2009). The bottom line is the Act means sizable tax reduction for big income earners and big tax payers; modest benefits for the little people. No Change In Capital Gain Tax One effect of the Act is the old argument that “mutual funds
are better from a tax viewpoint Now, not only do variable annuities permit you to enjoy realized portfolio gains without generating an end of year Form 1099, and permit you to sell, buy, and adjust portfolio positions without fear of immediate tax consequences, and watch money inside the annuity grow on a tax-deferred basis, but the ordinary income taxation of these variable annuity benefits has been reduced. Annuities & Life Insurance What didn’t happen - taxation of the insi | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
surrender period. To provide this minimum guaranteed return the insurance
company invests in bonds or other instruments. After paying expenses and
ensuring that the guaranteed value is protected any remaining funds are used to
buy options which provide the potential for additional interest from index
gains.
