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John S. Albert, CFA Vice President John G. Russon, CFA Managing Director November 16, 2004 Annuities and Funding Agreements Discussion 7700 Bonhomme Ave., Ste. 650 St. Louis, Missouri 63105 WWW.ACGNET.COM Kevin Nelson: At the outset, I am concerned with the titles. I thought that a funding agreement is a form of an annuity, but the report suggests it is not. It appears as though you are differentiating between a structured settlement type annuity and a funding agreement. My thought is that if both are annuities, we talk about both as annuities. Kevin Nelson: At the outset, I am concerned with the titles. I thought that a funding agreement is a form of an annuity, but the report suggests it is not. It appears as though you are differentiating between a structured settlement type annuity and a funding agreement. My thought is that if both are annuities, we talk about both as annuities.
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Asset Consulting Group, Inc.1 Annuities and Funding Agreements - Fundamentals AnnuityFunding Agreement Contract offered through large life insurers that has a fixed rate of return that can be tied to a specific liability Duration is unknown at onset because there is no stated maturity Rate is based on prevailing yield curve Carries the same rating as the issuer Has a mortality component Contract offered through large life insurers that has a fixed rate of return that is not tied to specific liabilities Can match average liabilities Duration is flexible - term is predetermined Rate is based on prevailing yield curve Carries the same rating as the issuer Kevin Nelson: If we are talking about a structured settlement annuity, this makes some sense, but annuities generally are not necessarily tied to a claim. Kevin Nelson: If we are talking about a structured settlement annuity, this makes some sense, but annuities generally are not necessarily tied to a claim.
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Asset Consulting Group, Inc.2 Annuities and Funding Agreements - Limitations AnnuityFunding Agreement Treated as a receivable (therefore an admitted asset so long as not in default) No limitation on the amount Treated as an investment Maximum of 5% of total assets Utilize the “basket clause” Maximum of 1% to any one issuer ($7 million per issuer) RBC considerations (individual security and quality of issuer) Kevin Nelson: If the structured settlement type annuity is an investment, it would probably only fall under the basket clause, and thus, have the same limits. If it is not an investment, then the committee cannot invest in it. Kevin Nelson: If the structured settlement type annuity is an investment, it would probably only fall under the basket clause, and thus, have the same limits. If it is not an investment, then the committee cannot invest in it. Kevin Nelson: I had Lisa contact the Insurance Commissioner’s Office again to consider whether a non-claims based annuity may be considered a corporate obligation under 36:1614. In summary, they thought it might, but would have to review the agreement before they could come to a conclusion. I would indicate that while we recommend that we treat annuities as falling under the basket clause unless we get a determination from the IC to see if we can bring them under the 1614 provision Kevin Nelson: I had Lisa contact the Insurance Commissioner’s Office again to consider whether a non-claims based annuity may be considered a corporate obligation under 36:1614. In summary, they thought it might, but would have to review the agreement before they could come to a conclusion. I would indicate that while we recommend that we treat annuities as falling under the basket clause unless we get a determination from the IC to see if we can bring them under the 1614 provision
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Asset Consulting Group, Inc.3 Annuities and Funding Agreements – Pros/Cons AnnuityFunding Agreement Pros Precise match of liabilities Will provide for a death benefit if payments to the beneficiary is less than the “invested balance” Pays the beneficiary's claims beyond the expected life (the reserved amount) Pros Easy to implement and monitor Less costly Has the look and feel of a privately placed bond Kevin Nelson: Only match indemnity, not medical. Kevin Nelson: Only match indemnity, not medical. Kevin Nelson: Are you going to talk about why not a bond? Kevin Nelson: Are you going to talk about why not a bond?
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Asset Consulting Group, Inc.4 Annuities and Funding Agreements - Pros/Cons AnnuityFunding Agreement Cons Difficult to monitor (each beneficiary requires a “separate account”) Can be costly (Issuer will need to be compensated for the complexity) Extremely illiquid (potentially 20+ years) Normally associated with transferring of risk which CompSource cannot do Difficult to subsequently settle claim Cons Illiquid Kevin Nelson: CSO can transfer risk legally with claimant approval. Kevin Nelson: CSO can transfer risk legally with claimant approval.
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Asset Consulting Group, Inc.5 Annuities and Funding Agreements - Implementation AnnuityFunding Agreement Direct Issue an RFP to candidate insurers and provide for a list of beneficiaries, profile, benefit, gender, age, etc. Evaluate based on a implied rate of return. Indirect Issue an RFP to an intermediary to identify and monitor beneficiaries Direct Issue an RFP to insurance companies requesting information and crediting rate Subsequent fundings cannot include the same insurers (single issuer limitation) Indirect Issue an RFP to an intermediary to routinely (program) invest designated funds to candidate insurers (with discretion) Kevin Nelson: Drop monitoring of beneficiaries. Probably will be addressed in K. Kevin Nelson: Drop monitoring of beneficiaries. Probably will be addressed in K.
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