Tuesday, October 16, 2012
Jersey Benefits Advisors Investor's Newsletter Fall 2012
Market Watch
With the revised release of second quarter GDP, which was a paltry 1.3%, the Federal Reserve sprang into action and announced plans to buy $40 billion dollars worth of agency mortgage backed securities a month, until the economy begins to grow at a faster pace. The plan has been dubbed Quantitative Easing 3, or QE3. Keeping in line with the Fed’s dual mandate of maintaining stable prices and stable employment, Chairman Bernanke announced the latest round of easing because an economy growing at 1.3% can’t produce enough jobs to lower unemployment, which stands at 7.8% as of September 2012. This move was greeted almost simultaneously with cheers and boos, but the market generally seemed to approve.
At the end of the third quarter, the Dow Jones Industrial Average (DJIA*) stood at 13,437.13. This represented a 4.32% gain for the quarter and a 9.98% gain for the year. The S&P 500* added 5.76% for the quarter to reach the 1,440.67 point level. The index has increased by 14.56% year to date. The NASDAQ* closed at 3,116.23, which gave the technology heavy index a 6.96% gain for the quarter and brought its year to date return to 19.62%. These were attractive gains for the quarter, and these returns would be considered respectable for an entire year. Let’s hope the final quarter manages to maintain or add to these levels.
As we have discussed for quite some time, the market has been climbing a wall of worry, due to concerns about recession in Europe, apprehension about the Fed’s loose monetary policy leading to inflation, unease about the effect of a slowdown in China and other emerging markets on the global economy and the looming fiscal cliff. Bernanke has stated on more than one occasion that the Fed would not have to continue monetary easing if the Congress and Administration would act in a more responsible way to address fiscal policy. Between now and the election, there will more than likely be no meaningful outcomes for fiscal policy, and so we will have to listen to the drama concerning the fiscal cliff right up to the end of the current quarter.
With that said, look for an eleventh hour agreement before the end of the year whereby Congress addresses fiscal matters and attempts to come up with a plan for handling the threatening consequences of sequestration, or the blunt, automatic across-the-board budget cuts enacted by law by the Budget Control Act of 2011, a consequence of Congress’s failure to agree on a bipartisan deficit reduction plan.
As a result, the first installment of cuts goes into effect January 1st of 2013, cutting $2.4 trillion from federal debt over ten years. Over the same ten year period, $1.2 trillion is slated to be cut from discretionary spending, which doesn’t even address entitlement spending. The sequestration in conjunction with the expiring Bush Era tax cuts threatens to undermine the current, lackluster expansion and shave anywhere from 2% - 3.6% from GDP, depending on whose forecasts you cite.
With GDP currently growing at 1.3%, it is a very real possibility that without an agreement to mute the effects of the of the budget cuts and tax increases, we could be looking at a possible recession in 2013.
As I have stated before, this expansion is one of the weakest expansions this country has ever experienced, coming out of a recession. With that said, it suffices to say the last recession was the worst since the Great Depression. If an agreement can be reached on budget cuts and tax increases, the expansion may continue.
More Parents Are Saving For College
According to a survey conducted by the College Savings Foundation, the number of parents who have saved at least $5000 for their children’s college years has increased from 40% to 45% since 2009. The number of families saving has steadily increased since the 2009 survey, when less than a third of all families had saved that much. “Coming out of 2008 and early 2009, many families sat on the sidelines and said they wouldn’t make a decision about saving for college until things turned around,” said Roger Michaud, chairman of the College Savings Foundation and a senior vice president at Franklin Templeton Investments. Considering the cost of a four year college education can run as high as $250,000, families need to save more. Call me for information on 529 Plans.
Family & friends gathered for a Labor Day luau to celebrate my 60th birthday. Thanks, Margie for the surprise of a lifetime. $%! %& You really got me this time!
Annual Mutual fund Winners From Kiplinger’s
The September issue of Kiplinger’s Personal Finance Magazine conducted an analysis of various mutual funds and their performance over a 1 year, 3 year, 5 year, 10 year and 20 year period. Since I take the long term approach to investing, I was particularly interested in the 10 and 20 year periods. Quite a few of the funds, which have been in my clients portfolios for many years, received mention. Funds cited in the top ten for 20 year performance were Calamos Growth, Franklin Flex Cap Growth, Invesco Van Kampen Equity Income, Oppenheimer Global, American Funds New Perspective, Fidelity Advisor Real Estate, Columbia Seligman Communications & Information, Eaton Vance Worldwide Health Sciences and Calamos Market Neutral.
Another analysis of mutual funds in the September issue was conducted on the 353 biggest and best performing mutual funds. While the study looked at returns for a 1year, 3 year, 5 year and 10 year period, as well as down market performance, volatility, rank within style, expense ratio and maximum load, I was particularly interested in funds whose annual average return for a ten year period was above 6%. Again, several funds which have been in my client portfolios for at least 10 years were mentioned. Those funds included Growth Fund of America, Income Fund of America, Blackrock Equity Dividend, Calamos Growth, MFS Growth, American Funds New Perspective, Delaware Emerging Markets, Oppenheimer Global, Columbia Seligman Communications & Information, Calamos Market Neutral and MFS Utilities. The reason I was interested in the 10 year period, was because it encompassed the precipitous drop during the market lows of 2008–09.
The performance periods cited in both studies were through June 30, 2012. It should also be noted that past performance is not an indication of future results. However, it is nice to see the funds, which make up a basis of many client portfolios, receive some recognition in a national publication.
One reason I was particularly pleased to see this study look at funds over a 10 and 20 year period, was because there seems to be so much focus in many publications on funds that did well for a quarter, or another short term period. While it is important to monitor performance in the short term, I think it can be detrimental to a portfolio to make adjustments based on performance of less than five years. There are so many factors which can lead to a fund doing well for one quarter, or one year, but long term performance gives a better indication of how a fund executes its strategy through various market cycles.
If you want to discuss your portfolio in more detail, please don’t hesitate to contact me.
* The S&P 500, the DJIA and the NASDAQ are unmanaged indexes that are widely used as indicators of Market Trends. Past performance does not guarantee future results. The performance of these indexes does not reflect fees and charges associated with investing. It is not possible to invest directly in an index.
Dollar Cost Averaging through a systematic savings plan is an excellent way to build an account without a sizeable initial investment. Saving a portion of our pay each month is very important. Company sponsored pension plans are one method to save and should be used for retirement. Other systematic investment accounts, SUCH AS ROTH IRA’S, TRADITIONAL IRA’S, COVERDELL ACCOUNTS, 529 PLANS, BROKERAGE ACCOUNTS AND ANNUITIES can also be opened, and debited directly from your checking or savings account. For more information, just call to set up an appointment. REFERRALS ARE ALWAYS WELCOME.
John H. Kaighn
Company Information:
Investment Advisory Services offered through:
Jersey Benefits Advisors
P.O. Box 1406
Ocean City, N.J. 08226
Phone: 609 827 0194
Fax: 609 861 9257
Email: kaighn@jerseybenefits.com
Securities offered through:
Transamerica Financial Advisors, Inc.
A registered Broker/Dealer
570 Carillon Parkway
St. Petersburg, FL 33758-9053
800-245-8250
Member FINRA & SIPC
Transamerica Financial Advisors, Inc. is
not affiliated with Jersey Benefits Advi-
sors.
Third Party Administration and Insurance
Services offered through:
Jersey Benefits Group, Inc
P.O. Box 1406
Ocean City, N.J. 08226
Phone: 609 827 0194
Fax: 609 861 9257
Email: kaighn@jerseybenefits.com
All opinions expressed in this newsletter are
solely those of John Kaighn & Jersey Benefits
Advisors.
LD 42655 - 10/12
Thursday, October 4, 2012
John H. Kaighn Becomes a Member of the Financial Services Institute
FSI Advocates for Main Street Americans’ Access to Independent, Affordable Financial Advice
Woodbine, NJ – Local financial advisor John H. Kaighn, of Transamerica Financial Advisors, Inc., today announced he has become a member of the Financial Services Institute (FSI) in Washington, D.C. FSI advocates for Main Street Americans’ access to unbiased, affordable financial advice, delivered by a growing network of over 35,000 independent financial advisor members.
Wednesday, September 19, 2012
What's Not To Like?
The scripted political conventions are now history, the Federal Reserve has announced a plan to buy $40 billion a month of agency mortgage-backed securities (QE3), oil prices are on the rise, and the market has been rising steadily throughout the year. One could ask, "what's not to like?" The messages are quite mixed and are emblematic of the debate the country is having with itself.
The advent of QE3 certainly looks political in nature, because it could be construed to help the current administration, except when you factor in the fact that Ben Bernanke is a Republican. Of course, since Romney wants to replace Ben if he wins the election, perhaps it is just a case of Ben seeking job security. One would hope the Fed's motivations are not quite that transparent.
The election is being framed as a contrast between Big Government vs Limited Government, yet I still can't quite understand how Romney is going to create jobs, since that is what private industry does, unless of course he plans to add government jobs. Oh yeah, that's right, it is the conditions which have to be altered to stimulate the Great American Jobs Machine. So, what he is really going to do is cut down on regulation and limit the agencies which are creating laws and regulations which are chocking us. At least I hope I understand that to be the case.
The President likes to remind us daily how his administration has created 4 million new private sector jobs, which sounds good as a sound bite, until you realize the economy lost 8 million jobs during the recession. Of course, we all know that is George Bush's fault, because he gave all those millionaires tax cuts and sank the economy. Hey, but don't worry, Dodd and Frank have given us a brand new set of regulations designed to stop any of those Wall Street types from "rolling the dice" on home ownership in the US. Oops, I think those were Barney's words, right????
So, I heard a guest on CNBC use a football analogy to describe the election, just after the left released a video recording which would have you believe Romney insulted 1/2 the US population as not being responsible for themselves. He said that right now there are 2 minutes left in the 4th quarter, with Romney down 10 points and Sanchez as the quarterback for Team Romney. I wonder what odds the fantasy football fans give Romney? The media is calling it dead even, but I really think I should contact Rachel Maddow and get her take on things. I am sure she will be as spot on with an analysis of the election, as she was with her analysis of Chris Christie's speech ar the RNC.
The Republic will survive, whatever the outcome of this election, but it is hard to say whether there will be a clear mandate for either party to do anything. Perhaps the mandate will be to compromise. After all, once the election is over, the stock market won't have a wall of worry with which to contend, but rather investors will be concerned with sailing right over the fiscal cliff we've all heard so much about. Oh well, that's another day!
The advent of QE3 certainly looks political in nature, because it could be construed to help the current administration, except when you factor in the fact that Ben Bernanke is a Republican. Of course, since Romney wants to replace Ben if he wins the election, perhaps it is just a case of Ben seeking job security. One would hope the Fed's motivations are not quite that transparent.
The election is being framed as a contrast between Big Government vs Limited Government, yet I still can't quite understand how Romney is going to create jobs, since that is what private industry does, unless of course he plans to add government jobs. Oh yeah, that's right, it is the conditions which have to be altered to stimulate the Great American Jobs Machine. So, what he is really going to do is cut down on regulation and limit the agencies which are creating laws and regulations which are chocking us. At least I hope I understand that to be the case.
The President likes to remind us daily how his administration has created 4 million new private sector jobs, which sounds good as a sound bite, until you realize the economy lost 8 million jobs during the recession. Of course, we all know that is George Bush's fault, because he gave all those millionaires tax cuts and sank the economy. Hey, but don't worry, Dodd and Frank have given us a brand new set of regulations designed to stop any of those Wall Street types from "rolling the dice" on home ownership in the US. Oops, I think those were Barney's words, right????
So, I heard a guest on CNBC use a football analogy to describe the election, just after the left released a video recording which would have you believe Romney insulted 1/2 the US population as not being responsible for themselves. He said that right now there are 2 minutes left in the 4th quarter, with Romney down 10 points and Sanchez as the quarterback for Team Romney. I wonder what odds the fantasy football fans give Romney? The media is calling it dead even, but I really think I should contact Rachel Maddow and get her take on things. I am sure she will be as spot on with an analysis of the election, as she was with her analysis of Chris Christie's speech ar the RNC.
The Republic will survive, whatever the outcome of this election, but it is hard to say whether there will be a clear mandate for either party to do anything. Perhaps the mandate will be to compromise. After all, once the election is over, the stock market won't have a wall of worry with which to contend, but rather investors will be concerned with sailing right over the fiscal cliff we've all heard so much about. Oh well, that's another day!
Monday, August 27, 2012
Which Simple Rule for Monetary Policy?
Monday, August 27, 2012
By John B Taylor
Economics One Blog
The discussion of "Simple Rules for Monetary Policy" at last week’s FOMC meeting is a promising sign of a desire by some to return to a more rules-based policy. As described in the FOMC minutes, the discussion was about many of the questions raised in recent public speeches by FOMC members Janet Yellen and Bill Dudley. A big question is which simple rule?
Yellen and Dudley discussed two rules. Using Yellen’s notation these are
R = 2 + π + 0.5(π - 2) + 0.5Y
R = 2 + π + 0.5(π - 2) + 1.0Y
where R is the federal funds rate, π is the inflation rate, and Y is the GDP gap. Yellen and Dudley refer to the first equation as the Taylor 1993 Rule and the second equation as the Taylor 1999 Rule, though the second equation was only examined along with other rules, not proposed or endorsed, in a paper I published in 1999.
The two rules are similar in many ways. Both have the interest rate as the instrument of policy, rather than the money supply. Both are simple, having two and only two variables affecting policy decisions. Both have a positive weight on output. Both have a weight on inflation greater than one. Both have a target rate of inflation of 2 percent. Both have an equilibrium real interest rate of 2 percent.
The two rules differ substantially, however, in their interest rate recommendations as this amazing chart constructed last April by Bob DiClementi of Citigroup illustrates. The chart shows two rules along with historical and projected values of the federal funds rate. The rule labeled “Taylor” by DiClementi is the rule I proposed. The other rule is labeled “Yellen” by DiClementi because it corresponds to the rule apparently favored by Yellen. The projected values are the views of FOMC members.
Observe that the first rule never gets much below zero, while the second rule drops way below zero during the recent recession and delayed recovery. The difference continues though it gets smaller into the future. Note that the projected interest rates by FOMC members span the two rules.
This big difference between the two rules in the graph can be traced to two factors: (1) The second rule has a much larger GDP gap, at least as used by Yellen. (2) The second rule has a much bigger coefficient on the GDP gap.
In my view, a smaller value of the GDP gap and a smaller coefficient are more appropriate. This view is based on a survey of estimated gaps by the San Francisco Fed and simulations of models over the years. But given the striking differences in DiClememti's chart, more research on the issue by people in and out of the Fed would certainly be very useful.
Yellen and Dudley discussed two rules. Using Yellen’s notation these are
R = 2 + π + 0.5(π - 2) + 0.5Y
R = 2 + π + 0.5(π - 2) + 1.0Y
where R is the federal funds rate, π is the inflation rate, and Y is the GDP gap. Yellen and Dudley refer to the first equation as the Taylor 1993 Rule and the second equation as the Taylor 1999 Rule, though the second equation was only examined along with other rules, not proposed or endorsed, in a paper I published in 1999.
The two rules are similar in many ways. Both have the interest rate as the instrument of policy, rather than the money supply. Both are simple, having two and only two variables affecting policy decisions. Both have a positive weight on output. Both have a weight on inflation greater than one. Both have a target rate of inflation of 2 percent. Both have an equilibrium real interest rate of 2 percent.
The two rules differ substantially, however, in their interest rate recommendations as this amazing chart constructed last April by Bob DiClementi of Citigroup illustrates. The chart shows two rules along with historical and projected values of the federal funds rate. The rule labeled “Taylor” by DiClementi is the rule I proposed. The other rule is labeled “Yellen” by DiClementi because it corresponds to the rule apparently favored by Yellen. The projected values are the views of FOMC members.
This big difference between the two rules in the graph can be traced to two factors: (1) The second rule has a much larger GDP gap, at least as used by Yellen. (2) The second rule has a much bigger coefficient on the GDP gap.
In my view, a smaller value of the GDP gap and a smaller coefficient are more appropriate. This view is based on a survey of estimated gaps by the San Francisco Fed and simulations of models over the years. But given the striking differences in DiClememti's chart, more research on the issue by people in and out of the Fed would certainly be very useful.
Monday, July 9, 2012
JERSEY BENEFITS ADVISORS CLIENT NEWSLETTER SUMMER 2012
MARKET WATCH
In my last newsletter I talked about the possibility the second quarter might be a good time to deploy some capital into the markets, especially since the first quarter was not very volatile, and the major indices had produced gains many investors would be pleased to garner for a full year. As the European crisis played out over the last three months paring the Euro 12% against the dollar, oil and gas prices declined by 12.5%, and emerging markets shed about 18% of their value. Meanwhile, US markets revisited their December 31, 2011 level, briefly, and then slowly climbed back to a point that is quite respectable for mid year.
As we closed the books on the first half of the year, the DJIA*, at 12,880.09, has gained 5.42% year to date, even though it fell 2.5% in the second quarter. The S&P 500* ended at 1,362.16 for a 8.31% gain year to date, while dropping 3.3% in the second quarter. The NASDAQ* is still sporting a double digit gain for the year at 12.66%, even though it gave back over 5% during the second quarter. Needless to say, the markets never just go up in a straight
The European Union took an unexpected step toward solving the crisis which has embroiled the Euro since 2010, by agreeing to create a banking union. Rather than having the funds flow through profligate governments, they’ve agreed to have money flow right to the banks, more than likely through a German controlled entity. Also, the Supreme Court issued a ruling on the Patient Protection and Affordable Care Act, basically upholding the mandate for all Americans to buy insurance, not on the premise of the Commerce Clause, but rather by stating the mandate is a tax, which is within the power of Congress. While neither of these events bring closure to these issues, the European summer vacation season should keep the debt issues of Spain, Italy, Portugal & Greece at bay, while it will take a Republican Presidential victory and control of both Houses of Congress to allow Mitt Romney to make good on his pledge to repeal the act. Hence, there is a good chance we could have a better market this summer, rather than revisiting the doldrums experienced during the last two summers.
Manufacturing had been a bright spot for the US economy, expanding for 34 consecutive months, until the most recent report, which showed a drop off for the month of June. The index had a reading of 49.7 down from a 53.5 reading in May. A number below 50 indicates contraction in the sector. The interconnectedness of the various markets around the world means the pain being felt in Europe translates to less exports from China and other emerging market economies being purchased by Europeans. It also means less income for the Chinese and the other emerging market economies who in turn purchase a large percentage of our exports. Another rather large percentage of our manufactured products are usually exported to Europe.
The 3rd revised GDP estimate for the first quarter remains at 1.9%. The employment report for June indicated the economy added an anemic net 80,000 jobs and the unemployment rate remained 8.2% The report will lead to calls for more stimulus. This has certainly been a less than stellar expansion, thus far. Perhaps this will be a longer than average expansion this time around.
Privacy Policy And Variable Annuity Update
At Jersey Benefits Advisors and Jersey Benefits Group, Inc. protecting your privacy is very important to us. We want you to understand what information we collect and how we use it. We collect and use information from you on applications and other forms as well as information about financial transactions with us and from non-affiliated third parties. This “nonpublic personal information” is obtained in connection with providing a financial product or service to you.
We do not disclose any nonpublic personal information about you without your express consent, except as permitted by law. We may disclose the nonpublic personal information we collect to persons or companies that perform services on our behalf.
We restrict access to your nonpublic personal information and only allow disclosures to persons and companies as permitted by law to assist in providing products or services to you.
We maintain physical, electronic and procedural safeguards to protect your nonpublic personal information at all times.
VA BENEFIT EXCHANGE
You usually know you’ve got something good when someone offers to buy out your interest. This is essentially the position in which some holders of older variable annuities with Guaranteed Minimum Income Benefits (GMIB) find themselves . While the offer might be a good deal for a client who purchased the annuity as a way to guarantee a stream of income during retirement, but has had something change, so now they need cash, most clients who purchased the annuity for retirement income will be better served remaining with their current contract.
AXA Equitable Life Insurance and Transamerica Life Insurance Company are two companies who have unveiled programs to “buy out” some existing contract holders in a move that will help reduce the companies’ liabilities. Most of the products being offered the buy out from Transamerica have GMIB’s of 6% compounded annually, and their cost for the rider is about half the cost of the current rider. “The fact that insurers are willing to offer the arrangement only emphasizes the true value of the living benefit”, said Andrew Murdoch, an advisor with Somerset Wealth Strategies, Inc.
According to Dave Paulsen, CEO of Transamerica Capital, Inc., “This offer is completely optional for our customers, and we don’t require anybody to use it. For those who will benefit by accepting the offer, there is some benefit for Transamerica, as well, as some older capital-intensive assets would be removed from our books.” Recently, VA providers have been increasing the pricing of GMIB’s due to hedging costs.
Do You Or A Family Member Have Multiple Employer Plans?
Many people have multiple retirement accounts with various employers, because they have changed jobs. One of the problems with this is the duplication of objectives within each account. Having a lot of funds, in several accounts, does not always provide the diversification we aim to achieve. It also makes it very difficult to keep track of your assets, when you have statements coming from multiple brokers and mutual fund companies.
Many employees find themselves or a family member in the situation of having multiple employer plans. Most people can consolidate these assets into one diversified IRA or ROTH IRA. Call me if you would like to consolidate your accounts. I will analyze the assets, make recommendations and help you with the paperwork.
* The S&P 500, the DJIA and the NASDAQ are unmanaged indexes that are widely used as indicators of Market Trends. Past performance does not guarantee future results. The performance of these indexes does not reflect fees and charges associated with investing. It is not possible to invest directly in an index. Dollar Cost Averaging through a systematic savings plan is an excellent way to build an account without a sizeable initial investment. Saving a portion of our pay each month is very important. Company sponsored pension plans are one method to save and should be used for retirement. Other systematic investment accounts, SUCH AS ROTH IRA’S, TRADITIONAL IRA’S, COVERDELL ACCOUNTS, 529 PLANS, BROKERAGE ACCOUNTS AND ANNUITIES can also be opened, and debited directly from your checking or savings account. For more information, just call to set up an appointment. REFERRALS ARE ALWAYS WELCOME.
Investment Advisory Services offered through:
P.O. Box 1406
Ocean City, N.J. 08226
Phone: 609 827 0194
Fax: 609 861 9257
Email: kaighn@jerseybenefits.com
Http://www.jerseybenefits.com
Securities offered through:
Transamerica Financial Advisors, Inc.
A registered Broker/Dealer
570 Carillon Parkway
St. Petersburg, FL 33758-9053
800-245-8250
Member FINRA & SIPC
Transamerica Financial Advisors, Inc. is
not affiliated with Jersey Benefits Advi-
sors.
Third Party Administration and Insurance
Services offered through:
P.O. Box 1406
Ocean City, N.J. 08226
Phone: 609 827 0194
Fax: 609 861 9257
Email: kaighn@jerseybenefits.com
Http://www.jerseybenefits.com/
All opinions expressed in this newsletter are
solely those of John Kaighn & Jersey Benefits
Advisors.
Tuesday, June 26, 2012
SEC Official Warns Insurers about VA Benefit Exchanges
Nash says switch must be in best interests of contract holders
June 26, 2012 4:26 pm ET
An official with the Securities and Exchange Commission called upon life insurers to protect their legacy variable annuity clients — and to make sure that swapped benefits are suitable.
“When a company discontinues the sale of a contract, one option is to orphan the contract, allowing investments to dwindle,” said Susan Nash, associate director for disclosure and insurance product regulation at the SEC. “I urge you to focus on the long-term interests of your existing contract owners, as well as the reputation of your company.”
She spoke Tuesday morning at the Insured Retirement Institute's Government, Legal and Regulatory Conference.
Ms. Nash also commented on a new practice among life insurers with large books of legacy variable annuity business: the offer to clients to drop accumulated living or death benefits in exchange for an incentive, such as an increase in account value.
“In some cases, incentives may be offered to contract holders when they relinquish contracts that have living benefits,” Ms. Nash said. “These exchanges may raise questions of suitability.”
She added that “there is often an easily identified class of investors for whom the switch would not be advantageous,” namely those who could expect to use their living-benefit features.
“I encourage you to closely scrutinize these exchange transactions from the investors' viewpoint what exactly is being given up,” Ms. Nash said.
Ms. Nash also called for clear disclosure to clients and advisers on variable annuity contracts. Such disclosure should “provide information to contract purchaser that helps them make informed purchase decisions,” as well as “provide information to existing contract owners to help them understand how their investment has performed and changed,” she said.
The SEC is also boosting its staff, searching for an expert on derivatives to advise the department on “novel and complex investment products, including novel variable product designs,” Ms. Nash said.
The agency recently bolstered its expertise on exchange-traded funds in January when it brought in Barry Pershkow as senior special counsel in its investment management division.
Monday, June 4, 2012
A.M. Best Affirms Ratings of AEGON N.V.’s U.S. Operations, Upgrades Ratings of Transamerica Life Canada
I came across this article on Business Wire concerning Aegon, the parent company of Transamerica. I thought it would be of interest to clients who are invested with me, as well as anyone who might be looking for an Advisor to help them with their investments. There is nothing like a 3rd party endorsement of the company through which you place your business.
OLDWICK, N.J.--()--A.M. Best Co. has affirmed the financial strength rating (FSR) of A+ (Superior) and issuer credit ratings (ICR) of “aa-” of the life/health subsidiaries of AEGON N.V.’s (AEGON) (Netherlands) [NYSE: AEG] U.S. operations. AEGON’s U.S. life/health companies are collectively referred to as AEGON USA Group (AEGON USA). In addition, A.M. Best has affirmed the debt ratings of “aa-” of the outstanding notes issued under the funding agreement-backed securities (FABS) programs sponsored byMonumental Life Insurance Company (Cedar Rapids, IA), a member of AEGON USA. The outlook for all the above ratings is stable.
A.M. Best also has upgraded the FSR to A- (Excellent) from B++ (Good) and ICR to “a-” from “bbb+” of Transamerica Life Canada (TLC) (Toronto, Ontario), an indirect, wholly owned subsidiary of AEGON. The outlook for both ratings has been revised to stable from positive.
Additionally, A.M. Best has affirmed the FSR of A (Excellent) and ICR of “a” of Canadian Premier Life Insurance Company (CPL), a subsidiary of AEGON N.V. The outlook for these ratings is stable. (See below for a detailed listing of the companies and ratings.)
The affirmation of AEGON USA’s ratings reflects its favorable earnings performance and risk-adjusted capitalization during 2011. International Financial Reporting Standards (IFRS) earnings for AEGON Americas (which includes its domestic, Canadian and Latin American operations) were $933 million for year-end 2011. Although AEGON USA recorded a 2011 U.S. statutory net loss of 2.5 billion as a result of unique statutory accounting requirements for reinsurance transactions, which dictate that recapture losses are recognized through income, surplus was not negatively impacted as reinsurance treaty gains are re-classed to surplus. The group’s risk-adjusted capitalization remained strong as its year-end 2011 regulatory capital ratio improved slightly over the previous year and is significantly higher than historical levels.
AEGON USA’s stand-alone credit profile considers its strong market position in a number of U.S. life and annuity market segments, a large multi-channel distribution platform, diversified sources of earnings and a strong positive cash flow. The organization also benefits from meaningful economies of scale, strong brand name recognition and effective asset/liability and liquidity management. AEGON USA’s ratings also recognize A.M. Best’s assessment of the financial strength and support of AEGON. As a result, the stand-alone ratings of AEGON USA receive rating enhancement in consideration of AEGON’s overall creditworthiness and the strategic and financial importance of the U.S. operations to AEGON.
A.M. Best notes that the group has taken various initiatives to de-risk its balance sheet and improve its risk profile. The quality of the investment portfolio was upgraded by reducing hedge fund holdings and increasing positions in treasuries and other short-term investments. The institutional spread-based business (primarily guaranteed interest contracts, funding agreements and funding agreement-backed securities) remains in run off to reduce exposure to credit risk, lower required capital and shift to a more balanced mix of business between spread and fee-based products. AEGON USA also reduced its exposure to equity market risk by increasing the size of the macro hedge covering its variable annuity business.
Despite this improved risk profile, A.M. Best notes the possibility of additional material credit losses within the organization’s general account investment portfolio. Although pre-tax IFRS asset impairments declined to $352 million in 2011 from $506 million in 2010, additional realized losses and impairments are likely to occur in 2012, given AEGON USA’s sizable structured asset portfolio and exposure to direct commercial real estate. In addition, the group’s substantial variable annuity portfolio exposes its earnings to volatility, as declines in the capital markets would translate to lower fee income and higher required reserves on secondary guarantees. While the additional equity hedging will serve to reduce volatility, AEGON USA’s earnings remain somewhat correlated to capital market performance.
In August 2011, AEGON closed the divestment of its life reinsurance business, Transamerica Reinsurance (TARe), to SCOR SE, a global reinsurance company. Although A.M. Best notes that the removal of the TARe earnings has resulted in a contraction of AEGON USA’s operating profile, A.M Best views positively the divestiture as it lowers the organization’s required capital, reduces the need to arrange redundant reserve (XXX/AXXX) financing and allows senior management to focus on its core businesses of life insurance and asset accumulation.
The ratings of TLC reflect the enhanced scope of its overall business profile through market positions maintained in its core business lines, its multi-channel distribution platform, reduced risk profile and adequate capitalization. In addition, A.M. Best views positively TLC’s enhanced risk management practices, including more comprehensive hedging strategies and its decision to exit portions of its segregated funds product offerings for new business. A.M. Best also notes that while TLC recorded a significant 2011 net loss on a Canadian IFRS basis, the company did produce a small net gain on a Universal IFRS basis, which is how TLC’s performance is measured by AEGON. The ratings also consider the significant historical financial support (including the 2011 CAD 200 million capital contribution) TLC received from AEGON. As a result, the stand-alone ratings of TLC receive rating enhancement in consideration of AEGON’s overall creditworthiness and the strategic and financial importance of the Canadian life operations to AEGON.
A.M. Best believes AEGON USA, TLC and CPL are well positioned at their current rating levels for the foreseeable future.
Factors that could result in negative rating actions for these entities include a significant and sustained decline in their consolidated risk-adjusted capitalizations as measured by Best’s Capital Adequacy Ratio (BCAR) model, net operating performances that do not meet A.M. Best’s expectations or a decline in the creditworthiness of AEGON, which could constrain its future financial support for these entities.
The FSR of A+ (Superior) and ICRs of “aa-” have been affirmed for the following members of AEGON USA Group:
- Transamerica Life Insurance Company
- Transamerica Financial Life Insurance Company
- Western Reserve Life Assurance Co. of Ohio
- Monumental Life Insurance Company
- Stonebridge Life Insurance Company
- Transamerica Advisors Life Insurance Company
- Transamerica Advisors Life Insurance Company of New York
The following debt ratings have been affirmed:
Monumental Global Funding Limited— “aa-” program rating
-- “aa-” on all outstanding notes issued under the program
Monumental Global Funding II—”aa-” program rating
-- “aa-” on all outstanding notes issued under the program
Monumental Global Funding III—”aa-” program rating
-- “aa-” on all outstanding notes issued under the program
The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Key criteria utilized includes: “Rating Members of Insurance Groups.” Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
Founded in 1899, A.M. Best Company is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.
Copyright © 2012 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.
Contacts
A.M. Best Co.
Robert Adams
Senior Financial Analyst
908-439-2200, ext. 5225
robert.adams@ambest.com
or
William Pargeans
Assistant Vice President
908-439-2200, ext. 5359
william.pargeans@ambest.com
or
Rachelle Morrow
Senior Manager, Public Relations
908-439-2200, ext. 5378
rachelle.morrow@ambest.com
or
Jim Peavy
Assistant Vice President, Public Relations
908-439-2200, ext. 5644
james.peavy@ambest.com
Robert Adams
Senior Financial Analyst
908-439-2200, ext. 5225
robert.adams@ambest.com
or
William Pargeans
Assistant Vice President
908-439-2200, ext. 5359
william.pargeans@ambest.com
or
Rachelle Morrow
Senior Manager, Public Relations
908-439-2200, ext. 5378
rachelle.morrow@ambest.com
or
Jim Peavy
Assistant Vice President, Public Relations
908-439-2200, ext. 5644
james.peavy@ambest.com
Recent Stories from A.M. Bes
Monday, May 21, 2012
Seven Ways to Borrow for College
Look for borrower protection, consider credit unions and apply for multiple loans.
May 21, 2012 9:54 AM
By Lynn O’Shaughnessy
As recently as the early 1990s, most students didn't require student loans, but today about two-thirds of students end up borrowing for college.
While families are increasingly relying on loans, many teenagers and their families fail to make the best loan choices.
The latest student loan year began July 1 so this is an excellent time for you and your clients to become familiar with the intricacies of college debt. Families that understand their options are more likely to make smarter decisions and ultimately cut the cost of college.
Here are seven tips to get you up to speed.
1. The best college loan for students is the Stafford Loan.
The Stafford Loan is designed exclusively for students, who must attend college at least halftime to qualify. Regardless of credit scores, all students receive the same fixed rate and protections.
There is a limit on the amount of money that students can borrow each year through the Stafford Loan program. Here are the maximum amounts:
Freshmen: $5,500
Sophomore: $6,500
Juniors: $7,500
Seniors: $7,500
There are two types of Stafford Loans—a subsidized and unsubsidized version. The subsidized loan is the more valuable one because a student with one of these will not be responsible for the interest that accrues while they are in school. The federal government covers the interest payments.
The interest rate on the unsubsidized loan is 6.8 percent. As I write this column, the subsidized interest rate was scheduled to increase from 3.4 percent to 6.8 percent though Congress has been debating whether to maintain the lower rate.
Students will learn if they qualify for a subsidized Stafford when they receive their financial aid packages. The decision depends on the financial wherewithal of the family and the cost of the institution. The greater the cost of the school, the more likely a student will qualify for the subsidized loan. Six percent of subsidized Stafford borrowers come from households with incomes in excess of $100,000 and 24 percent have family incomes between $50,000 and $100,000.
2. Look for borrower protection.
I'd argue that the most attractive feature of the Stafford is its built-in safety net, which is a plus for students who worry that they will end up underemployed or without a job and won't be able to repay their loans.
This won’t be a problem with the Stafford as long as students apply for the federal Income-Based Repayment Plan or IBRP. Essentially this program allows qualified students to repay their loan based on what they can afford not what they owe.
3. Consider parent options.
While the Stafford is a no brainer for students, parents' choices are more complicated. Parents can borrow through a home equity line, the federal PLUS Loan for Parents or cosign a private student loan for their child. Some parents also dip into their retirement accounts, which I certainly wouldn't recommend—and I'm sure you wouldn't either.
The PLUS Loan offers parents a fixed interest rate of 7.9 percent and charges a 4 percent fee on the loan amount. Parents can begin paying 60 days after the loan is disbursed or wait until six months after the child graduates, stops attending school or drops below half-time status.
Because the PLUS interest rate is high in this low interest-rate environment, using a home equity line of credit will probably be cheaper. The caveat is that none of us knows what will happen to interest rates in the future.
For those who itemize, the interest on equity lines is tax deductible. In anticipation of having to borrow to pay for my own children's degree, my husband and I took out a line of credit with Charles Schwab years ago at one percentage point below prime. My daughter has graduated from college and my son is halfway through and I haven't had to touch it yet, but that's where I would turn if I needed cash for college.
4. Check out credit unions.
Credit unions are relatively new players in the private loan niche and they are well worth taking a look at. The non-profit credit unions are routinely going to be the cheapest alternative. While rates can change, recently the rates on private loan rates through credit unions were as low as 4.7 percent. An excellent place to look for college credit union loans is cuStudentLoans.org.
5. Check school credit unions.
Some colleges and universities maintain their own credit unions to tap for student loans. Institutions with credit unions include Harvard, University of Chicago, Amherst, Mount Holyoke Smith, Princeton, MIT and the California State University system.
6. Apply for multiple loans.
Unfortunately, you won't know what private loan rate you will qualify for if you don't actually go through the process of applying. Unfortunately, many parents do not apply for multiple loans, according to Sue Kim, the chief executive officer of AllTuition, which is a private loan comparison site. She told me that shoppers look at many loans on AllTuition, but rarely apply for more than one.
If you're interested in comparing private college loans, try these three comparison sites:
Alltuition
CertifiedPrivateLoans.com
eStudentLoan
7. Don't over borrow.
That advice might seem imminently doable to follow, but when a teenager is in the midst of selecting a college it can be tough to remain financially disciplined. A parent, for instance, recently asked me about her daughter who wanted to borrow $27,000 a year for school. I told the mom that this would amount to financial suicide and recommended that the daughter find a different school. After responding to the mom’s email with my advice, I never heard back from her.
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John H. Kaighn
About Me
- John Kaighn
- Ocean City, NJ, United States
- Investment, Business, Retirement, Insurance and College Saving Advice. Securities offered by Transamerica Financial Advisors and Investment Advice offered by Jersey Benefits Advisors.
