Thursday, April 25, 2013

Insurance Agents and Companies Facing Tough Times

In my humble opinion, I believe that insurance agents and companies that sell annuities primarily, are having a rough go of things. There are four main types of annuities that are sold by insurance agents. There are also other types such as hybrid policies, but we will save that discussion for another blog article. The four main types are as follows:

  1. Fixed Annuities
  2. Indexed Annuities
  3. Variable Annuities
  4. Single Premium Immediate Annuities
Fixed annuities are where the insurance company declares a rate of interest based on current market rates and agrees to pay the annuity policyholders that rate. The problem right now is that these rates are 2% and less, so they are pretty much unappealing to consumers. The agents who normally sell these annuities are finding it very difficult to sell these, so they have gravitated to Indexed annuities.

Indexed annuities, when rates were higher, were real popular. A quick refresher on Indexed annuities is in order here. Indexed annuities, like their name implies, is based on an index such as the S&P 500® index. My dad was an insurance agent and was full of quips and jokes about insurance companies. One of my favorites of his related to when an insurance company changed the terms of their products. For example, Indexed annuities. When my dad found out that the old policies were not as favorable for his clients, he would quip..."that was the old deal. This is the new deal." You see, insurance companies have a routine. They come out with great products and push their agents to sell, sell, and sell some more. Then, after they get the policies on the books, they basically screw these customers.

For example, when Indexed annuities first came out, you could get cap rates around 10%. This means that if the S&P 500 made 10% or more, then your annuity would be credited with 10%. Sounds great, doesn't it? What the agent did not tell you was the insurance company has the right to change the cap rate anytime they please. So, after these customers bought these Indexed annuities with 10% cap rates, a scant few years later find out that their cap rates have been lowered to around 2.75%. This means that if the S&P 500 makes 15%, then you get 2.75%. As my dad would say..."that was the old deal. This is the new deal."

Of course, then we have another annuity type, the Variable annuity. Insurance companies made a major mistake with these products, too. They put all these Guaranteed Benefit riders on them and now they find themselves not being able to live up to the guaranteed part. In fact, several companies have even gone so far as to try and buy the guarantees back from their policyholders. If these insurance companies have resorted to this measure, then perhaps it might be time to take notice. Especially, if you have one of their Variable annuities.

Never mind the fact that most insurance agents have no clue how to invest these Variable annuities on your behalf. Nor never mind the fact that the expenses on these can run easily close to 3% a year, not even counting the commission that you have to pay.

Finally, we have the Single Premium Immediate Annuities. This is where you give the insurance company your money, let's say $100,000, and then they agree to pay you an income stream for life,  or one of their other payout options. In the past, when market interest rates were 6 or 7%, these were good options to consider. However, today with current interest rates so low, the SPIA's, as they are called, are only crediting you about 0.25% over the life of you annuity. Instead of getting 6% in interest on the income stream that you receive, you will only get the paltry 0.25%.

Insurance agents using a bucket approach have found themselves in a quandary. The bucket approach does not work with SPIA's right now. When rates go back up, then these will probably come back into vogue, but not right now. The bucket approach is a split annuity approach where you use a SPIA and also a deferred annuity. You combine the two to grow back to your original investment in 5 years. The problem is that the numbers do not work very well unless interest rates are high.

When you look at all of these products, it is apparent that insurance companies and their agents are running out of viable options to sell to clients. Here is why:

  1. Do you want to buy a Fixed annuity that pays 1% and you are locked into it for 10 years?
  2. Do you want to buy an Indexed annuity that while the stock market is going up over 10%, you are only getting 2.75%? Plus you would be stuck in it for 10 years?
  3. Do you want to buy a Variable annuity with guarantees only to find out that the insurance company is in financial trouble and they want to buy the guarantee away from you? Plus you would be stuck in it for 10 years knowing they might not be able to pay you at all?
  4. Do you want to put your money into a SPIA where you cannot get your money back with most payout options? A SPIA where they only give you your own money back plus a smidge in interest? Does that sound good to you?
Tough times are happening for insurance companies and their agents who sell these annuity products. These agents are crying in their beer right now. The old process of running a seminar doesn't work. These agents were okay spending $6,000 to put on a seminar when they had high interest rates, because they were selling annuities like beer on a troop train. Now however, they do not have appealing annuities to sell. They have been losing money on these seminars, because no one is buying these four products like they used to when rates were higher. Some old guard agents are trying radio and TV with ads like..."we have never lost a penny of our client's money." Sad fact is they are not making much money for their clients either and the guarantees are at risk.

If you own any of these annuities, then you may want to obtain a second opinion from an unbiased source. You may not be getting what you thought you were getting when you bought it.

Remember what my dad said. That was the old deal. This is the new deal.

A second opinion is always in order.

Monday, April 15, 2013

Look into the Future of Gold with Options

Okay. Today gold is dropping like a hot rock, but there may be a silver lining. No pun intended. I took a look at the January 17, 2015 calls for GLD and was not too surprised to see that the calls are still priced very high.

A quick refresher on Call options is appropriate here. There are two sides to options. One person is betting on the price to go up when you Buy a Call. The other side is a person who thinks the price will go down which is where you Buy a Put or Sell a Call for the income stream. Most options are 3 calendar months in duration. However, longer dated options are available that mature in January of each year.

Normally, when a security drops in price, the call options also drop in price precipitously. However, with GLD, this is not happening with longer term options. The price of Buying a 161 GLD Call maturing o January 17, 2015 is 6.00 per 100 shares.  In other words, if you thought GLD was going to hit the price of $161 per share, (it is priced at 6.00 per 100 share contract as of right now,) then you would load up on these call options. However, you would have to risk the premium of $600 that 100 shares of GLD will be over $161 per share on January 17, 2015. You only make money by what it exceeds the $161 price. Imagine if you bought 10 options at this price. You would have to put up $6,000 to get the $161 strike price. Yikes! That's expensive.

Think about this for a minute. If people really believed that GLD was going to tank and continue to go down, then the price of this 161 Call option would be cheap, cheap, cheap. The reason for this would be because investors would have to believe that there would no chance of it hitting 161 by January of 2015. If they believed there is no chance of it hitting the 161 strike price, then instead of the Call option being priced at $6.00 per 100 shares, it would be priced at less than $1.00.

So, now look at the reverse. If the price of this January 17, 2015 GLD Call option with a strike price of 161 is priced at $6.00 per 100 share contract, then this would translate into a lot of investors believe it is a good possibility that it will exceed that strike price at expiration.

If you are a long term investor who is properly diversified, then it appears that option investors believe that GLD will come back in less than two years.

In the short term, however, there is a lot of volatility for options that expire in 2013. What is going on is investors who sold Calls instead of buying calls are closing out their positions. In other words, if you SOLD a 161 GLD call and the market moved in your favor, then you close out your position by buying the 161 GLD call. This locks in the difference in price of the call.

For example, assume an investor BOUGHT a 161 GLD call that expired on April 20, 2013 for $6.00 per 100 share contract when they originally purchased it. Now, it is priced a 0.03 per 100 share contract. By closing out the position, the investor who SOLD the call would net a difference of $5.97 per 100 share contract. The investor who BOUGHT it could only get back the $0.03 per 100 share contract. Some investors win and some investors lose. In this example, the investor who bet that there was no way GLD was going to exceed 161 by April 20, 2013 was the winner.

So, now take this short term option example and notice that the price of the 100 share contract option had dropped to only $0.03. This is what happens when the market goes against the BUY side. So, to interpret this a little further, you would assume that if GLD was such a terrible investment going forward, then the January 17, 2015 Call option would also be priced really low like $0.03, but it is not. This means that there are enough investors who believe GLD will come back that the longer term premium prices for the 2015 options warrant a higher price. This further means that there is a lot of investors who believe that there is a strong "put your money where you mouth is" position for GLD coming back up in price by January 17, 2015.

I hope this makes sense.

It is never a good idea to sell on a day like today. Especially when you look into the future with options and see where the money is flowing. It is flowing to GLD coming back up in price longer term.

If the January 17, 2013 Call option was priced at $0.03, then we would have something to worry about. However, this is far from the case as of today.

Stay diversified and focused on the long term.

By the way, I am not a gold bug. I believe in prudent investment management based on a diversified strategy of passive index, low cost ETF's.

Monday, April 1, 2013

USPS Customer Service

This a rant and if you do not want to read it, then that's okay.

I ordered a package and chose the free delivery option. Little did I know that the package was being shipped by the USPS Priority Mail. If I had known that, then I would have paid for the package to be shipped. As it turns out, the package has yet to be put into my hands.

The USPS has a tracking site similar to FedEx and UPS where you put in the tracking number on their web site and it tells you the status. What this web site told me was that the package was delivered March 25th to Saint Johns, Florida. It doesn't say the street address. It doesn't say who signed for it, either. All it says is Saint Johns, FL.

Eureka moment for the USPS: Perhaps it would be a good idea to put the address and name of the person who signed for the Priority Mail package on your tracking web site!

Naturally, I dug around on the USPS's customer service web site trying to find a phone number to call. The first number that I called was an automated answering system where I put in the tracking number and it told me that the package was delivered to Saint Johns, FL on March 25th. There was no option to say..."No it was not!"

After going through all the phone prompts, I realized that I was on an endless loop where there was no options to speak with a live person. So, I hung up and tried another number.

At this new number, I finally found a live person. He asked for my tracking number and promptly went to the same web site that I did and told me that the package was delivered on March 25th, to Saint Johns, FL. I politely told him that I did not receive it. He transferred my call to some other person and this person wanted my tracking number. This person did the exact same thing. They went to their own web site and told me that the package was delivered on March 25th, to Saint Johns, FL.

By now, smoke is coming from my ears. This person told me that I needed a claim number. He got me a claim number and told me someone would call me by Monday at 5 pm. Someone did call me and left a message and I called them back first thing Monday morning.

Now, I was talking to someone in the Jacksonville post office that delivers my mail. He asked for my tracking number. I gave it to him and guess what he told me? The package was delivered on March 25th to Saint Johns, FL. I told him that I did not receive it. Do these people think that I am stupid I thought to myself? Ignoring the obvious, I told the man that I think I know why I have not received the package.

At my office, we have one of those letter boxes for the whole building where you need a key to get your mail. If you happen to get a package that is larger than your letter box, then there are some big boxes below that the postal carrier will put your package into. However, when they do this, they are supposed to put the key to the big box in your letter box. No key has been in my letter box all week and it does appear that one of the big boxes is locked. So, I told the man this is what I suspect had happened.

I was put on hold and then finally, the postal carrier for my building got on the line. She said the package was a small package and she put it in my letter box. I told her that I did not receive it. Then, she said, "you do not pick up your mail very often." I thought to myself that I pick up my mail no later than the next day and I fail to see how that is relevant. Nevertheless, I told the lady that I did not have it and I thought it was in one of the big boxes below. She said she would look for it when she comes by later today and if she finds it, then she will bring it to me.

Just for the fun of it, I went to the USPS site to see what happens when a package is lost. They have a online claim form and a process that they say takes a few weeks. The problem in my case is the package according to the USPS was delivered. It was not delivered. I cannot file a claim on a package that they say was delivered. The postal carrier is adamant that she delivered it to my letter box. This is of course, before she double checks it.

As luck would have it, I saw her drive up and she opened up the letter boxes and there it was in someone else's box. She handed it to me and apologized. I told her no problem. Not to worry.

I sure did have to go through a lot just to get my package.