Friday, December 31, 2004

New Preliminary Actuarial Education

For the first time, the Society of Actuaries and the Casualty Actuarial Society are going to require prior educational experience in particular subjects which are not going to be part of the traditional actuarial education & examination process. (I believe this experiment will turn out to be a disaster, but that's a topic for another post.) Here are the current "Validation by Educational Experience" topics and traditional actuarial examinations which are common to both societies.

Validation by Educational Experience – Applied Statistical Methods

Courses that meet this requirement may be taught in the mathematics, statistics, or economics department, or in the business school. In economics departments, this course may be called Econometrics. The material could be covered by one course or two. The mathematical sophistication of these courses will vary widely and all levels are intended to be acceptable. Most of the topics listed below should be covered:

Regression analysis
• Least square estimates of parameters
• Single linear regression
• Multiple linear regression
• Hypothesis testing and confidence intervals in linear regression models
• Testing of models, data analysis and appropriateness of models

Time series
• Linear time series models
• Moving average, autoregressive and/or ARIMA models
• Estimation, data analysis and forecasting with time series models
• Forecast errors and confidence intervals

Validation by Educational Experience – Corporate Finance

The typical corporate finance sequence in a business school consists of an introductory semester followed by an advanced semester. The advanced semester will more likely be the one that aligns with the learning objectives. The standard validation method will be completion of the second semester of a two-semester corporate finance sequence. Generally, only the second semester course grade will be evaluated unless this is a narrow course in which case both the first and second semester course grades will be evaluated. The exceptional case where the corporate finance material is covered in one course only will also be considered. Most of the topics in each category listed below should be covered:

• Definitions of key finance terms: stock company; capital structure
• Key finance concepts: financing companies; characteristics and uses of financial instruments; sources of capital; cost of capital; dividend policy; personal and corporate taxation
• Actors to be considered by a company when deciding on its capital structure and dividend policy
• Impact of financial leverage and long/short term financing policies on capital structure
• Characteristics of the principal forms of financial instruments issued or used by companies, and the ways in which they may be issued
• How a company's cost of capital relates to the investment projects the company wishes to undertake

• Key finance concepts: option pricing theory and stock valuation
• Definitions of key finance terms: financial instruments – bond, stock, basic options (calls, puts); dividends; price to earnings ratio
• Structure of a stock company and the different methods by which it may be financed
• Calculate value of stocks
• Calculate value of options
• Measures of financial performance: balance sheet; income statement; statement of cash flows; financial ratios (e.g. leverage, liquidity, profitability, market value ratios); net present value: the payback, discounted payback models; internal rate of return and profitability index models
• Assessment of financial performance using various measures: balance sheet; income statement; statement of cash flows, financial ratios (e.g. leverage, liquidity, profitability, market value ratios); net present value; the payback, discounted payback models; internal rate of return and profitability index models

Validation by Educational Experience – Economics

Typically, the VEE requirement for economics will be met if a candidate has completed two introductory economics courses, one course covering microeconomics and the other covering macroeconomics. Most of the topics listed below should be covered:

• Interaction between supply and demand in the provision of a product and the way in which equilibrium market prices are determined
• Elasticity of demand and supply and the effects on a market of different levels of elasticity
• How rational utility maximizing agents make consumption choices
• How profit-maximizing firms make short run and long run production choices
• Different types of competition, or lack of it, and the practical effect on supply and demand

• Structure of public sector finances of an industrialized economy
• GDP, GNP, and Net National Product. How these concepts are used in describing the economy and in making comparisons between countries, and their limitations
• Propensity to save or to consume by the private sector or the corporate sector and how it affects the economy
• Impact of fiscal and monetary policy and other forms of government intervention on different aspects of the economy, and in particular on financial markets
• Role of exchange rates and international trade in the economy and the meaning of the term balance of payments
• Major factors affecting the rate of inflation, the level of interest rates, the exchange rate, the level of unemployment, and the rate of economic growth in the economy of an industrialized country

SOA Exam P / CAS Exam 1 -- Probability

The examination for this material consists of 3 hours of multiple-choice questions. The purpose of this course of reading is to develop knowledge of the fundamental probability tools for quantitatively assessing risk. The application of these tools to problems encountered in actuarial science is emphasized. A thorough command of probability topics and the supporting calculus is assumed. Additionally, a very basic knowledge of insurance and risk management is assumed.

SOA Exam FM / CAS Exam 2 -- Financial Mathematics

The examination for this material consists of two hours of multiple-choice questions. The goal of the Financial Mathematics course of reading is to provide an understanding of the fundamental concepts of financial mathematics, and how those concepts are applied in calculating present and accumulated values for various streams of cash flows as a basis for future use in: reserving, valuation, pricing, duration calculation, asset/liability management, investment income, capital budgeting and valuing contingent cash flows. The following learning outcomes are presented with the understanding that candidates are allowed to use specified calculators on the exam. The education and examination of candidates should reflect that fact. In particular, such calculators eliminate the need for candidates to learn and be examined on certain mathematical methods of approximation.

SOA Exam C / CAS Exam 4 -- Construction and Evaluation of Actuarial Models

The examination for this material consists of four hours of multiple-choice questions. This material provides an introduction to modeling and covers important actuarial methods that are useful in modeling. A thorough knowledge of calculus, probability and mathematical statistics is assumed. The candidate will be required to understand the steps involved in the modeling process and how to carry out these steps in solving business problems. The candidate should be able to: 1) analyze data from an application in a business context; 2) determine a suitable model including parameter values; and 3) provide measures of confidence for decisions based upon the model. The candidate will be introduced to a variety of tools for the calibration and evaluation of the models on Exam M.

Thursday, December 30, 2004

Actuarial Outpost

The Actuarial Outpost has gotten a new domain name and a slick new interface. Check it out at

Thursday, November 18, 2004

PBGC Bleeding Red Ink

The PBGC confirmed earlier this week that its deficit, already at the highest in its history, had doubled in its last fiscal year from $11.2 billion to $23.3 billion. Much of the loss for fiscal year 2004 was a result of pension fund failures in the airline industry. The agency has now lost an average of $10 billion a year for the last three years.

Furthermore, the agency now faces $96 billion worth of risk from companies that are "reasonably possible" to default on their pension promises compared to $82 billion just one year ago.

Tuesday, November 16, 2004

Social Security

As I suggested in an earlier post, the dominant issue of GWB’s second term is very likely to be Social Security reform. The following is an extensive and incredibly insightful discussion of this issue by Michael Davlin. The article is lengthy (and in a few places makes non-trivial demands on the reader’s understanding of finance), but believe me when I say that this article will well repay careful reading. I have not yet had to time to analyze these comments sufficiently to decide if I agree with all of his recommendations, but I definitely agree with most of them. Most important of all, his words of warning regarding the perils of guaranteed minimum income proposals (Free Puts For All) must be heeded. Beyond the conclusions, the overall analysis of the issue is flawless from beginning to end and will provide an excellent introduction to Social Security to anyone who is interested. This article stands in stark contrast to the grossly inaccurate crap we hear about SS from our politicians.

Please allow me to cut through all the SSBS so we can have an intelligent discussion. Repeat three times after me: my government has no wealth; my government has no wealth; my government has no wealth. Wait a second for that to sink in ... there! Now we can proceed on firm grounds.

With the exception of tax futures (aka Treasury notes and bonds), the only marketable assets owned by your federal government are a whole lot of super valuable real estate they refuse to sell, a bunch of buildings that would make for nice commercial office space and some nifty weapons systems. When a ninny like Rep. Bob Matsui of California, top Democrat on the House Ways and Means Social Security subcommittee, says something really stupid and dishonest like "we're talking about an infusion of $2 trillion in revenues to maintain current benefits, and we don't have that money now," he's dissembling because even he is smart enough to realize that the federal government doesn't have any money for any of the currently promised benefits.

In no meaningful or honest sense is any aspect of SS funded. Every dime paid to beneficiaries will come from future taxes. SS owns no stocks; it owns no commercial bonds; it owns no income producing properties. The only real question remaining is who is going to pay those future taxes; will they be payroll or general taxes? Some of you may be thinking but, but ... SS owns a bunch Treasury script which is just like a Treasury bond, and those can be sold to raise cash. True enough. But where do you think those future coupons and maturity payments are going to come from? That's right, future general taxes! It's all going to come from taxes; either payroll or general. That's unavoidable. Come to grips with it.

Let's be honest about this program. We should just toss into the crock box enough Treasury tax futures to allow an actuary to call SS fully funded, kill the payroll tax for both employees and employers, set up the entire liability on the federal government's books, and require SS to maintain this state of being fully funded. This is no less a scam than the current system, so why not do it now and be done with it? In fact, this is no different than the way the current system functions. This move has several benefits: it's an honest accounting of the federal government's debt; any expansion of the program will trigger an immediate and full hit to the budget; and it's consistent with the Roosevelt administration's contention that SS payroll taxes are general, and not dedicated, taxes. Let the federal government fund the entire program from general taxes, not regressive payroll taxes.

The only way to lower those future taxes is to treat the benefits as what the Roosevelt administration claimed them to be when they strong armed the SCOTUS and hoodwinked the public: legally, they are gratuities from your government, and none of us has any property right to them. [This was confirmed by a 1960 SCOTUS decision. – ALD] So let's means test the benefits, and make SS strictly a welfare program instead of an intergenerational income redistribution program. Somebody's going to get screwed - that's inevitable - but we can at least ensure it will be the people who will still manage to get by afterwards with only some slight financial stiffness and soreness. Social Security has been a fraud since its inception, as was pointed out from the start by a few actuaries who were derided as Jeremiahs. It's high time people recognize its true nature, and deal with it.

The equity premium argument is a bunch of BS too, which I'll be happy to dispense with in a second post if anyone's curious.

Useful sidekick: I'm all ears. Or is it eyes?

Thank God there's at least one curious cat in the audience. For a while I was afraid I was going to have to ask me to explain this to me. I will attack the equity premium claim from four angles:
• The claim on its face.
• How an extra $2,000,000,000,000 chasing equity premia might affect them.
• How corporate capital structures and projects might change.
• How an income guarantee from SS under these proposals might affect the premia.

The Claim On Its Face

The advantage of buying debt is that you get paid before people who buy equity. Once you account for the cost of bearing the risks in owning equity that arise from having to stand at the back of the dinner line, you are ex ante no better off with equities than you are with debt. If you were, why would anyone ever be willing to sell equity or buy debt?

A lot of you younger actuaries have studied some quantitative finance (if not, get cracking). In pricing, what is the expected return on equities, and what is the expected return on debt? That's right; they both have the same expected return, the risk free rate (or, more accurately, the perceived least risky rate). That's why pension plans should discount their liabilities at the risk free rate, whether they hold asset portfolios of equities or debt.

But, but, but ... look at the historical time series. Equities beat debt over most long investment horizons. Is quantitative finance wrong then? Well, reason. QF says that, under the realistic probability distribution, equity will have an excess expected return vis a vis debt. Note that this is an expectation, not a prediction. This excess return may be realized, it may not be.

The Italian actuary and subjective probability theorist Bruno de Finetti refused to call this probabilistic measure expectation, because he felt, correctly I believe, that the everyday meaning of the word always crept into people's thoughts and created a feeling of prediction, when it is truly no such thing. He suggested the alternative of prevision, which sounds like a bad translation from Italian, but I like because it causes me to picture myself peering into a cloudy crystal ball with a bandanna on my head ... and that's probably very appropriate when it comes to discussing the things actuaries discuss. We don't predict; we can't; we're not Gods, or even gods.

There are other reasons to question the inevitability of the equity premium argument. Were observed returns carefully adjusted for taxes? Even if they were, one size fits none in that department; depending upon your tax bracket, you might be better off, risk adjusted and after tax, holding debt. And what about risk? Were after tax returns higher for equity after risk bearing is treated like the cost that it is? If not, then what's the point to the strategy?

Also, are there reasons that equity returns might have been abnormally high in the United States post World War II? America was a safe haven for the world's capital until very recently. To whom did the benefits of that flow? And the recent trend in globalization, did the benefits of that redound to domestic labor, debt, or equity? The question answers itself, doesn't it? And what about tax laws which double tax equity, pushing corporations towards leverage and, consequently, equity with higher ex ante risk premia (less equity means whatever equity there is derives its value from claims to cash much farther out in the probabilistic revenue tails)? And what about the great inflation of the 1970s, when many companies were able to increase the real value of their assets while reducing the real value of their debt, all to the benefit of equity? I believe many historically contingent and transient factors acted to produce what appear to be clockwork equity premia.

But all that is prolog; what's going to happen going forward? I could give you another list of reasons why things could go the other way. Just ask the Japanese. Finance is not quantum theory. We have no stationary, ergodic, stochastic event generators for our world, from which we can appraise the future by looking backwards, or with a faith in ergodicity by merely looking at the state of the world today. No, things are more complicated than that.

$2,000,000,000,000 Chasing Equity Premia

If people are told they should invest their now privatized 2% of income in equities because their long term returns will be higher, then that alone will have the same effect as a change in investor preferences for equities vs. debt. The price of equities will have reason to rise, the price of debt reason to fall, and conversely for their expected returns. The net effect could very well be a narrowing of ex ante equity premia. Is this not obvious, especially when we're talking about an aggregate investment in equities with twelve trailing zeroes?

Corporate Capital Structures And Projects

As I mentioned, double taxation of corporate dividends produced more highly leveraged companies with higher ex ante equity premia. With this "privatization" proposal, one of those double taxes is going to be greatly deferred, reducing its economic bite. Logically, we can expect corporations to want to shift back to more equity and less debt. Happily, this is exactly what our newly flush SS investors want them to do. The debt shifted to equity will reallocate less risky claims to revenue from existing but terminating debt to new equity. This means that both equity risk returns and debt returns should begin to decline (think about it). This means projects which were either too risky, or not sufficiently profitable, or too long term, will begin to look more feasible at the margin. Corporations will begin to invest in these previously foregone projects because their costs of capital have dropped. This is may be a good thing (longer term projects may be just dandy) or a bad thing (riskier projects haven't become less risky). It is quite possible that embarking on sufficiently risky projects could increase ex ante equity premia, if SS investors correctly perceive the new risks. But I don't view that as very likely. So, on balance, in light of the discussion in the previous section, I would expect equity premia to narrow.

Free Puts For All

Most of the privatization proposals I have reviewed involve an umbrella guarantee of income, regardless of the performance of the accumulated 2% of income in equities or other instruments. This is financially equivalent to the taxpayers, aka the Social Security System, issuing free puts on those portfolios at a strike price equal to the market value of the umbrella guarantee. You don't have to be Warren Buffett or, more appropriately, Charles Keating, to anticipate what's going to happen next. That's right, anyone who's both rational and paying attention will shift their portfolio into riskier stocks, maximizing their expected wealth and the value of the free put, as well as increasing the likelihood that the equity premium strategy will fail. The potential for abuse here dwarfs that of the piddling S&L / FSLIC / FDIC meltdown in the 1980s. When it predictably occurs, it will be labeled another instance of market failure by government intellectuals (aka economists) and everyone will promise to never again try anything risky with our sound and time-tested system of social security.

The Bottom Line

The equity premium is an ex ante mathematical tautology, not an ex post inevitable truth. Neither equity nor debt stochastically dominates the other in a choice theoretic sense. Whether equity or debt is better for you (in the sense of preferable) depends upon your appetite for downside risk. Both good timing and favorable outcomes are prerequisites for the realization of at least the expected premia. The magnitude of the investments involved will perturb the equity premia. Politically unavoidable secondary guarantees on these "privatized" portfolios will induce risk taking and fraud, undermining the odds of capturing equity premia. Many other factors - demographics, technology breakthroughs, foreign capital, exports, energy - must be as favorable as they were over the last 100 years for observed time series to remain relevant. This is unlikely. The likelihood of failure is high enough, for which blame will be shifted to the only thing that really works, markets, that these schemes pose political risks that should give proponents of markets serious cause for concern.

I'd much rather see the payroll tax obliterated, convert more of the low end earners into FIT taxpayers in order to realign their appetites for "free" government stuff, needs test the benefits, and then leave us free to invest or not invest whatever little it is we have left of our incomes as we care to, not as we're told to.

Useful sidekick: If holding a large amount of an organizations' debt is similar to a veto, I'm not sure I'd want the government release that much debt in bonds.

The feds have already issued that debt in bonds. They're owned by SS and pretty much hidden from view. But they're there, awaiting coupon and principal payments from the income taxes paid by your children and grandchildren. That's what all the excess SS revenue over benefit payments has been buying during this period where SS is supposedly "healthy." Essentially, all of us little schmoes have been forced to buy these Treasury instruments with our working incomes, and we've had to pay income taxes on those purchases to boot! This gives the federal government a reliable and captive sink for the enormous debt they float to fund all the experiments in empire that you find objectionable. With honest accounting, explicit debt, and no payroll tax, the federal government will have to make some tough choices for a change: sell even more debt to willing rather than forced domestic and foreign buyers, raise non-payroll taxes, or cut some spending. No matter which they choose, this will impede their ability to [spend]. The feds are already beginning to have problems moving the volume of bonds they're selling now, before having to also take those "sold" to SS to market as well. To dump this extra volume on voluntary rather than captive purchasers, Treasury rates will have to rise, making federal debt issuance once again less attractive relative to tax increases and spending cuts. I like it!

As for the veto worry, the worst that I think would happen is that foreign central banks would want to dump their dollar denominated securities, and the result of that would a pretty big drop in the dollar in relation to other currencies. You can view that as sort of a declaration of national bankruptcy, only less messy. We'd end up paying more for imports, but our foreign lenders would get less than they had hoped from us, our exports would become more competitive, and some of the pressure to off-shore production would abate, and even reverse in some instances. We'd clear the air, get rid of the payroll tax, stick it to foreign central banks instead of your kids, shore up domestic jobs, and, most importantly, put a tighter leash on our [spending]. What's not for you to like in that?

Monday, November 15, 2004

Did Enron Teach Us Nothing?

Among 401(k) participants invested in company stock, the average is 40.5% of holdings.

More than one out of four employees have 50% or more of their holdings in company stock.


Friday, November 12, 2004

Please Explain...

Michael Cherkasky, president and chief executive officer, told a conference call with analysts that more staff cuts may be necessary as the company seeks to "right size our business depending on our revenue."

Wait a second now. Revenue is up...
  • Revenues totaled $2.97 billion in the third quarter, up from $2.84 billion a year earlier. That's an increase of 4.6%.
  • For the first nine months of the year, revenues were $9.22 billion, up from $8.55 billion in 2003. That's an increase of 7.8%.

So, why is "rightsizing" necessary again?

Tuesday, November 09, 2004

Marsh & McLennan to Layoff 3,000 Employees

The story:

Marsh & McLennan Cos. (MMC), the financial-services titan facing accusations of bid-rigging, announced plans to cut 3,000 jobs, or about 5% of its work force. About 75% of the job cuts announced Tuesday will come from Marsh's risk and insurance services unit. The cutbacks will result in pretax charges of $325 million over the next six months and lead to annual cost savings of $400 million, the company said.

The numbers behind the story:
  • For the third quarter, Marsh reported net income of $21 million, or four cents a share, down sharply from $357 million, or 65 cents a share, a year earlier. Revenue increased 4.7% to $2.97 billion from $2.84 billion.
  • Putnam had $209 billion in assets under management at the end of last month, down from about $280 billion before the mutual fund trading scandal enveloped Putnam and several rivals last fall.

Friday, October 29, 2004

Spitzer & Cherkasky
Mike Cherkasky, the new CEO of Marsh & McLennan, gave $12,000 to New York State Attorney General Eliot Spitzer earlier this year, even though he was not running for office, according to The contribution was one of four Cherkasky has given to Spitzer since 1998 for a total of $18,500, according to the site.

He [Cherkasky] also confirmed that he and Spitzer are good friends, they play tennis together and that Spitzer contributed "a few thousand dollars" to Cherkasky's 1993 campaign for Westchster County, N.Y., district attorney.

"Eliot considers Cherkasky to be a friend and a mentor," said Marc Violette, a spokesman in Spitzer's Albany office. "They have a long-standing relationship. It's not unusual in that context for Cherkasky to contribute to Eliot's campaign." The relationship between the two men goes back to the 1980s, when Cherkasky served as Spitzer's boss in the Manhattan district attorney's office. He has since referred to Spitzer as one of the most capable prosecutors he has ever worked with, and the two men are close friends, according to a source familiar with their relationship.

Wednesday, October 27, 2004

SOA Exam 5

I took it today. Think I did OK, but don't know if well enough to pass. This exam is grueling. Grades don't come out until January 14, so I'll have tons of time to worry about it. By the time grades come out I'll actually already be studying for the next exam in May.


Saturday, October 23, 2004

SOA Education Redesign

The Society of Actuaries (and to a lesser degree the Casualty Actuarial Society) has a byzantine exam process to which I have alluded previously. The current system was implemented on 1.1.2000 and is changing again in phases over the next couple of years. Information on the new design is on the SOA website. The short version is that what's currently Exams 1-4 (preliminary education) is changing on 1.1.2005, and what's currently Exams 5&6 (Associateship education) are ending on November 2005 and May 2006, to be replaced with a series of "e-learning modules" and a "control cycle." (I think they've been talking to professors of education.) The current Fellowship education is changing somewhat less radically than the other levels and will mostly consist of two exams (design & pricing and company/sponsor perspective).

The two most recent documents on this redesign -- Preliminary Education Syllabus Annoucement and Process for Validation by Educational Experience -- were released by the SOA earlier this month.

MMC CEO not to step down?

Marsh's stock surged as much as 10% in the early afternoon after the Financial Times reported that embattled Chairman and Chief Executive Jeffrey Greenberg would resign "within hours." The newspaper's Web site also reported that Jules Kroll, 63, founder of corporate security firm Kroll Inc. and a vice chairman of insurance brokerage unit Marsh Inc., would succeed Greenberg. But Kroll quickly issued a statement denying the report as "erroneous," cooling enthusiasm for Marsh shares. The stock closed up 7.8% at $26.79 on the New York Stock Exchange.

Wednesday, October 20, 2004


One year in my current job. Not really anything to say about that, but it's been a good year.

Tuesday, October 19, 2004

Tumble in insurance sector continues

U.S. insurance probe widens as investors flee
Ace, Aon tumble again on Spitzer probe

The probe into insurance bid rigging by New York Attorney General Eliot Spitzer widened to health insurers on Tuesday and threatened to go nationwide as at least three more states (California, Connecticut and Pennsylvania) said they are looking into the matter.

MetLife, the largest U.S. life insurer, and UnumProvident, the largest disability insurer, also said they had received subpoenas from Spitzer.
  • Aetna (AET) lost 11.8%
  • Cigna (CI) lost 10.3%
  • UnumProvident (UNM) lost 9.8%
  • Aon (AOC) lost 9.7%
  • Ace (ACE) lost 6.3%
  • Marsh & McLennan (MMC) lost 5.7% (four-day decline of 48%)

Monday, October 18, 2004

Taking 401(k) Distributions

A recent study [by Hewitt Associates] reveals that 68% [!] of those who changed jobs in 1999 kept retirement plan distributions from the old job instead of transferring that cash to an IRA or a new employer's plan. (*)

This is money for your retirement. A disturbingly large number of people view such distributions as a "windfall" or "found money" and use it to buy a car or go on vacation. There is only thing to do with this money - roll it over into another tax-deferred retirement savings mechanism!

One objection which is often raised when I say this is that an employee who is laid off may need this money for day-to-day bills. Well, my first thought is that if you don't have an emergency fund set up, you shouldn't be contributing to a 401(k) in the first place. But there's no use crying over spilt beer, so let's just look at what the right thing to do is you do happen to find yourself in this unfortunate situation.

You should still roll it over into an IRA. Here's why... If you take a taxable distribution, you pay federal income tax, state income tax and the penalty tax up front and on the entire amount. If you instead roll it over and withdraw funds from the IRA only as needed, you pay the taxes only on what you end up actually needing, which could save you a substantial amount. Furthermore, you pay these taxes at the end of the year when you file your tax return. If you are in a situation dire enough that you are tapping into your retirement funds, this is not an insignificant consideration.

(*) Registration may be required. It's free, and The Motley Fool has a lot of great financial information. You can use BugMeNot to go ahead and browse their site.

Friday, October 15, 2004

Marsh axes brokerage head, Appoints Cherkasky (Kroll chief)

Marsh & McLennan removed the chief executive of its Marsh Inc. insurance brokerage unit, the day after the firm was was charged with rigging insurance transactions by New York State Attorney General Eliot Spitzer. Michael Cherkasky takes over as chief executive of Marsh Inc. immediately, the company said, replacing Ray Groves, who had been Marsh's CEO since 2003. Cherkasky was chief executive of Marsh Kroll, the company's risk consulting unit, formed earlier this year after Marsh & McLennan bought investigation and security company Kroll Inc. for about $1.9 billion.

Two AIG Executives Guilty

Two AIG executives were arrested yesterday and pleaded guilty in the case. New York-based American International was cited in the Spitzer lawsuit but not named as a defendant.

Two AIG executives pleaded guilty to participating in the illegal conduct and are expected to testify in future cases.

More on the Spitzer probe

Insurance Journal's website has several articles related to the breaking Spitzer Marsh lawsuit story.

AIG Chairman Maurice Greenberg today said he does not think the charges brought by New York Attorney General Eliot Spitzer against giant insurance broker Marsh McLennan will hurt his company's business but that they could lead to more disclosure and even changes in the way brokers are paid.

Marsh & McLennan Companies announced today that its risk and insurance services subsidiary will immediately suspend its practice of market services agreements (MSA) with insurance carriers.

Maurice "Hank" Greenberg, chairman and chief executive of American International Group, said Friday the firm will likely stop paying fees that are at the center of a growing scandal in the insurance industry.

NY Attorney General Complaint

I've uploaded the text of the actual complaint against Marsh to my website at (Adobe Acrobat Reader required).

For those who are not familiar with the insurance brokerage business involved in this lawsuit, the first few sections of this document provide a fair amount of introductory level explanation.

As far as the actual charges, the lawsuit alleges incidents such as the following...

53. An example of the operation of this system is evident in the bidding for the excess casualty insurance business of Fortune Brands, Inc., a holding company engaged in the manufacture and sale of home products, office products, golf products, and distilled spirits and wine. On December 17, 2002, an ACE assistant vice president of underwriting sent a fax to Greg Doherty, a senior vice president in Marsh Global Broking’s Excess Casualty division, quoting an annual premium of $990,000 for the policy. [ACE-INA-005754] Later that day, ACE revised its bid upward to $1,100,000. On the fax cover sheet with the revised bid, ACE’s assistant vice president wrote: "Per our conversation attached is revised confirmation. All terms & conditions remain unchanged." [ACE-INA-005755-6]. An email the next day from the assistant vice president to an ACE vice president of underwriting explained the revision as follows: "Original quote $990,000 . . . We were more competitive than AIG in price and terms. MMGB requested we increase premium to $1.1M to be less competitive, so AIG does not loose [sic] the business. . ." [ACE-INA-005757]

72. As part of its vigorous effort to steer the Greenville contract to Zurich, Marsh sought a false bid from a competing insurer and then, despite that insurer’s refusal, submitted a wholly fictitious bid on that insurer’s behalf. On December 16, 2002, Glenn R. Bosshardt, the Global Broking vice-president assigned to the project and Joan Schneider’s subordinate, contacted an assistant vice-president of underwriting at CNA, an individual with whom he had previously worked and who had already told Bosshardt that CNA had no interest in bidding on the Greenville project. In an email Bosshardt stated: "[P]er my voicemail, we need to show a CNA proposal. I will outline below the leading programs (ACE & Zurich). I want to present a CNA program that is reasonably competitive, but will not be a winner." [Marsh-NY 89930] Bosshardt proceeded to reveal the ACE and Zurich quotes on the project and then proposed numbers that CNA should quote in order to lose the bid but still appear to have been competitive. Although CNA never authorized Marsh to submit this bid, it was submitted to Institutional Resources as a legitimate competing bid. [Marsh-NY 89630-31]

Thursday, October 14, 2004

Insurers' Stocks Plunge on Spitzer Probe

Marsh & McLennan (MMC) shares plunged more than 20 percent Thursday after the giant insurance broker and several major insurers were charged by New York Attorney General Eliot Spitzer with market manipulation. Insurance giant AIG (AIG) dropped 10.4% to $60.

Others insurance brokers and insurance companies that weren't named in the lawsuit also fell. Aon (AOC) dropped 16.2% to $23.18.

Monday, October 11, 2004

PBGC Deficit Could Double

Plan terminations by United and another bankrupt carrier, US Airways Group Inc., would nearly double the PBGC's current deficit of about $9 billion. And it could get much worse.

Friday, October 08, 2004

401(k) Participation Rate Slips

The Wall Street Journal, 06-Oct-2004, Midwest ed., p. C15

Participation rates in 401(k) plans slipped last year, according to the Profit Sharing/401(k) Council of America's newest annual survey. Only 76% of eligible employees participated in their plans last year, compared to 80% in 2002. David Wray, president of PSCA, said young people may have been scared away by the stock market declines of recent years, regulatory investigations into improper mutual fund trading practices, and fund fees.
It seems with the jittery market we've been experiencing lately, people are backing off their 401(k) accounts again. Many people have told me, "Because of the market, I don't want to risk money in my 401(k); instead I'm going to [insert name of favorite investment advisor] and investing with them."

This is wrong on so many levels.

1. You're foregoing the tax benefits of before-tax 401(k) withdrawals. If you have $2,000 to invest, plopping it into your 401(k) puts $2,000 to work for you. If you take it in after-tax money, you'll have somewhere in the neighborhood of only $1400 working for you.

2. You're leaving free money on the table; if you make just $33,000 and your company matches half of the first 6% you contribute, we're talking about one thousand dollars! By not contributing into your 401(k) at least up to the level that your company matches, you are losing out on tons of money that you've earned.

3. You shouldn't really be looking at the short-term fluctuations of the market in making decisions about retirement money that you won't need for thirty years. But, in any event, if you decided that you didn't want to put the money in stocks and wanted a super-safe cash-equivalent alternative, ALL 401(k) plans have a money market fund or other cash-equivalent account in which you can invest.

4. You can invest in your 401(k) with little or no fees beyond the (often surprisingly high) fees charged by the mutual funds themselves. An investment advisor needs to charge you additional fees to cover their own expenses, often just to end up putting your money in the same types of mutual funds you could put it in yourself.

5. Often, once your particular investment needs are correctly identified, it turns out that the right thing to do is to put your money in stocks. Then your money ends up in mutual funds that are as risky as, or sometimes even riskier than, the funds in your 401(k) anyway.

So, don't let market fluctuations scare you from taking advantage of your 401(k)!

Friday, October 01, 2004

My work history

Once I decided to leave the teaching profession, I found myself in a difficult position. "I have a degree in math, don't want to teach, what can I do?" Sadly, in Miami, this question has few answers. At least my degree was relatively marketable. When I started college, I wanted to major in mathematics education. A counselor told me, "Math is usually a critical shortage area. When you apply for a job, if there's a lot of applicants they are going to hire someone with experience whether you have an education degree or not. If there aren't many applicants, they'll hire you if you have a degree in math and let you certify later." On his advice, I changed my major to math, and I've never regretted it. He was 100% right; when I applied for a math teaching position absolutely nobody cared that I wasn't certified. In fact, I received multiple offers, all of which included money and time off to complete the state certification requirements. And of course when I decided to leave teaching, I would have been absolutely screwed with a degree in education. With a degree in math, I at least had a few options. To that counselor, wherever you are, God bless you for that great advice.

I took the only job that came my way - as a programmer (I had taught myself) at a small (very small) actuarial consulting firm. That really had nowhere to go, so about a year later I moved to a mid-size firm doing the same kind of work. That firm was bought, which turned out to be good for me. Of course, the company said "No jobs will be lost, blah, blah, blah." Fortunately (as there did turn out to be substantial layoffs), I didn't listen to any of that and dusted off my resume in a hurry.

I ended up being able to make a great move as a result of this; I relocated (I had pretty much milked Miami for all it was worth) and went to work at one of the major players in the HR outsourcing area, working as a defined benefit system analyst. I worked there 2.5 years, earning a couple of promotions along the way, but always doing the same work. Basically, I studied a company's plan and did all the analysis and design for how the calculations were going to be performed. After a couple of years, I was ready for more.

I moved to another major player in the field, as a senior consultant and group manager. This work was a lot less interesting (really, anyone could do it). But there were nice plusses ... travel, client contact, supervisory responsibility, good hours, great office. I loved it! After 2 years, the bomb fell! My boss decided to reassign me to a position I did not want. I told him if he did that, I would quit. I don't know if he thought I was bluffing, or maybe he figured the economy was soft and I wouldn't be able to make good on my threat. Anyway, he reassigned me, so I found another job (had two offers within the month) and I quit.

So now I'm a calculator manager, basically doing what I did at my previous job. Not bad, but I miss the travel and client contact. Mostly, I miss my office, though. But I like what I'm doing now much better, and I'm really good at it (it's not like I had to learn the whole job in a year, since I'd done this exact job before). So hopefully, I can grow here. And they're paying me more than my last employer for a position with less responsibility, so maybe my old boss did me a favor by forcing me to quit. I've been here just under a year; I think if I play my cards right, this job has a lot more upside career potential than my last one.


My profession

As I mentioned in my last post, I work in defined benefit outsourcing area. Defined contribution plans (e.g., your 401(k) account) is pretty simple. If your balance is $60,000.13, then that's your balance and you're done. However, in defined benefit plans there are (a) a gazillion regulations from the IRS, the PBGC, ERISA, etc., etc., and (b) complicated actuarial calculations involved. That's where I (and my team) come in.

OK, so what's an actuary? The dictionary says, "someone versed in the collection and interpretation of numerical data (especially someone who uses statistics to calculate insurance premiums)." That's pretty good, but it's not quite the whole story. Actuaries are the professionals that price all manner of risk. So they work in life insurance, health insurance, property/casualty insurance and pension/annuities.

To be quite precise, I shouldn't really call myself an actuary. To be an actuary, there is a series of exams that must be completed. While you are in the process of completing the exams as I am you should more properly refer to yourself as "working in the actuarial field." But that's too long and boring.

So, we've covered my background and my field. My next post will cover my specific work history in the defined benefit outsourcing field. That will catch up all the background history and bring everything sort of up to date. Beyond that, we'll see what I add.

My background

OK, a little background on me...

I grew up in Miami, Florida. I went to my local state school (I'm Cuban-American and Cuban parents are really weird about their kids going away to college) and majored in physics and mathematics. When I graduated, I became a high school math and physics teacher. This turned out to be a really bad move on my part. I did it for six years at three different schools. I was a little slow; I didn't really like it but it still took me six years to figure out that the career just absolutely was not for me. At least I managed to get a master's degree in physics during that time, so it wasn't a complete waste of time. My concentration was theoretical physics; I wrote my thesis in intermediate energy nuclear physics. Not much call for that in my current line of work, but it at least has some "wow" factor when people see it on my resume.

Since 1996, I have worked in the actuarial, risk management and benefits consulting field. Currently, I work for a major consulting firm that does benefits outsourcing for very large corporations. What does that mean? Well, a company like (just pulling an example out of a hat) IBM wants to concentrate on making computers and providing IT services. They don't want to have to worry about calculating your pension benefits or manning a telephone center to take phone calls from retirees who want to change their address. That's where we come in; we take over some or all of the company's HR and benefits functions and IBM can get back to making computers.

Personally, I work in the defined benefit area as a manager. More on that later.

First blog post

Been spending a lot of time thinking about my career recently. Thought the idea of starting a blog to record my thoughts might be worthwhile. Still haven't decided what I'm going to put in here, though.