TIAA-CREF ... An oasis in a desert of due negligence

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TIAA-CREF ... An oasis in a desert of due negligence

Postby 4th&Goal » Fri Dec 26, 2008 8:59 am

Interesting article in Forbes. Always good to see investor friendly companies like Vanguard and TIAA-CREF recognized in the media.
http://www.forbes.com/opinions/2008/12/ ... tiger.html
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Postby Levett » Fri Dec 26, 2008 10:33 am

TIAA has certainly been an oasis in our household for umpteen years. Ditto for VG. The two are an unbeatable combo. Bob U.
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Postby Valuethinker » Fri Dec 26, 2008 10:47 am

bob u. wrote:TIAA has certainly been an oasis in our household for umpteen years. Ditto for VG. The two are an unbeatable combo. Bob U.


The danger with TIAA is that it has become more 'commercial' down the years: particularly under Herb Allison (who is now running Freddie Mac for the US government?) the former CFO of Merrill Lynch.

From what I read, this has led to:

- increases in management fees

I also understand that at least some have had significant issues with their customer service.

I have a couple of other reservations, purely from what I have read. In particular their 'annuity' product (referred to in the linked article) has produced 'guaranteed' returns for many years in the region of 5-8%.

Given stock and bond returns for the past 10 years, that could only have been achieved by 'robbing the kitty' ie living off past accumulated profits.

The UK equivalent of this, which was an exceptional company offering low cost investments and far and away the largest pension provider in the UK, was The Equitable Life, also the oldest mutual assurance company in England.

Something like 1/4 Members of Parliament had a pension with the Equitable Life-- gives you a feel.

What they were doing was paying out all the profits of the 'with profits' fund (the equivalent of TIAA's annuity fund) each year.

When they received an adverse court settlement (having to do with 'Guaranteed Annuities' ie guaranteed rates of return promised to earlier pension investors) they had, in effect, no capital reserve.

The result is The Equitable Life swung towards insolvency. The impact on policyholder returns was devastating: they placed a 20% redemption charge on anyone trying to get their money out, and in some cases prohibited it.

There were something over 2 million policyholders caught in this (this would be like 8 million in the US).

The scandal rolls on, nearly 10 years later-- maybe the government will have to pay compensation for failing to properly surpervise the Equitable LIfe.

I can't tell you who was on the Board: the Great and the Good, shades of Bernie Madoff's client list. Very senior business and financial people.

I don't say TIAA-CREF is the same situation, probably it is not. But the recipe has some similarities. How accountable is TIAA-CREF for its investment policies and how transparent are they?
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Postby alec » Fri Dec 26, 2008 11:15 am

VT,

You can find the historical TIAA interest rates in the pdf at this page [see page 3].
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Postby Levett » Fri Dec 26, 2008 11:34 am

No, VT, you don't say such and such but it doesn't take a genius to see what you imply using the Equitable comparison.

Tell you what. Why not address your questions/commentary/observations to Erik Dinalo, the New York State Insurance Commissioner who has supervision of TIAA?

And here's a link to governance information, including annual reports and how you can contact TIAA to pose any questions on your mind. http://www.tiaa-cref.org/about/governance/index.html

If you find "dirt," I'm sure the Wall Street Journal and the New York Times, as well as any folks like myself, will be interested in any hard facts you develop. Bob U.
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Postby Valuethinker » Fri Dec 26, 2008 12:15 pm

bob u. wrote:No, VT, you don't say such and such but it doesn't take a genius to see what you imply using the Equitable comparison.

Tell you what. Why not address your questions/commentary/observations to Erik Dinalo, the New York State Insurance Commissioner who has supervision of TIAA?

And here's a link to governance information, including annual reports and how you can contact TIAA to pose any questions on your mind. http://www.tiaa-cref.org/about/governance/index.html

If you find "dirt," I'm sure the Wall Street Journal and the New York Times, as well as any folks like myself, will be interested in any hard facts you develop. Bob U.


Bob

It doesn't have any meaningful personal impact to me. A couple of friends who work (ed) for US colleges, that's all.

So I'm not going to do that digging. It's a bit like Madoff: if I had committed significant resources to Madoff, I would have done the due diligence (I would have hoped ;)) and smelt something fishy (hopefully ;-)).

I can show you some investments where I didn't do my homework and have taken some real poundings (70-80% down) but also ones where I have and have only lost 25% which is pretty good in this market environment, and where I still have confidence in the upside.

And I was being very careful not to suggest that someone panic on the basis of my thinkings. Everyone has to do his or her own due diligence.

I've explained to you where the danger zone is (that you cannot, given past financial performance of various asset classes, have a sustained performance of 5-8% without drawing down on some past profits pool*).

Now if someone is dependent on that 'guaranteed' return, I am hoping that they are doing that kind of due diligence.

It's like the US housing bubble, or the UK one. I've been like a broken record for 7-8 years on both those. I'm right now, but one could have lost rather a large upside if one had heard me first in 2001. That said, I expect UK housing prices at least could well go back to 2001 levels (ie down c. 40% from the peak). So I shall be right, but not over a time horizon that many would find useful.

I've been saying the same thing about the Big 3 carmakers for 3-4 years at least by the way: I could point you to places on the internet where I told people that I thought they would seek Chapter 11.

I don't have any extraordinary powers of divination. What I do have is the advantage of perspective, of a (possibly) analogous case here (The Equitable Life), and the advantage of being able to line up the facts in a straight line.

I've applied the same principles, as you know, to the TIAA RE annuity fund. Noting that they cannot defy the law of gravity, any more than any other investor.



* without having taken on a lot more risk than say a 50/50 bond/equity split, US treasuries and S&P500, would imply.
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Postby Valuethinker » Fri Dec 26, 2008 12:18 pm

bob u. wrote:No, VT, you don't say such and such but it doesn't take a genius to see what you imply using the Equitable comparison.

Tell you what. Why not address your questions/commentary/observations to Erik Dinalo, the New York State Insurance Commissioner who has supervision of TIAA?

And here's a link to governance information, including annual reports and how you can contact TIAA to pose any questions on your mind. http://www.tiaa-cref.org/about/governance/index.html

If you find "dirt," I'm sure the Wall Street Journal and the New York Times, as well as any folks like myself, will be interested in any hard facts you develop. Bob U.


This was in response to what I wrote:

I don't say TIAA-CREF is the same situation, probably it is not. But the recipe has some similarities. How accountable is TIAA-CREF for its investment policies and how transparent are they?


'probably it is not'

So the question really is back in the reader's court:

- how accountable?
- how transparent?

Does the reader, therefore, understand how TIAA is generating that return, and what the downside risk is?

I'm not a prosecuting attorney here or in real life. I'm not playing with the heads of the jury via insinuation. I am stating an analogy, and that leads me to lodge certain questions.

Hopefully in all investing, and certainly in an anonymous on-line forum, we each take our own counsel from what we read.
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Postby sscritic » Fri Dec 26, 2008 12:53 pm

How much investigating of a life insurance company can you do before you buy a life insurance policy? At some point, you have to trust the rating agencies (harder to do these days) and the state insurance commissioner.

TIAA is a life insurance company. It ability to pay the benefits of its traditional annuity and the death benefits of its life insurance policies come from the same source, its general fund. In essence, TIAA borrows money from its participants at a guaranteed rate of 3%. Yes, it declares greater dividends when possible, but there is no "robbing the kitty" as far as I can tell because it doesn't need to. I am no expert, but a life insurance policy and a fixed annuity seem very similar; you give money to a company and expect to get some return in the future, either when you die or you decide to retire. The difference is that the variance in the life insurance policy is much greater: you can collect a lot relative to your payments if you die early and the reverse if you live for many years. With the annuity, there is no windfall with an early death nor loss from living long.

My gut is that a life insurance company should be able to make a 3% annual return over a thirty or forty year period, especially a non-profit life insurance company with thousands of eyes watching it.
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Postby Valuethinker » Fri Dec 26, 2008 2:16 pm

sscritic wrote:How much investigating of a life insurance company can you do before you buy a life insurance policy? At some point, you have to trust the rating agencies (harder to do these days) and the state insurance commissioner.

TIAA is a life insurance company. It ability to pay the benefits of its traditional annuity and the death benefits of its life insurance policies come from the same source, its general fund. In essence, TIAA borrows money from its participants at a guaranteed rate of 3%. Yes, it declares greater dividends when possible, but there is no "robbing the kitty" as far as I can tell because it doesn't need to. I am no expert, but a life insurance policy and a fixed annuity seem very similar; you give money to a company and expect to get some return in the future, either when you die or you decide to retire. The difference is that the variance in the life insurance policy is much greater: you can collect a lot relative to your payments if you die early and the reverse if you live for many years. With the annuity, there is no windfall with an early death nor loss from living long.

My gut is that a life insurance company should be able to make a 3% annual return over a thirty or forty year period, especially a non-profit life insurance company with thousands of eyes watching it.



Sscritic:

- if 3% pa then I agree that's a reasonable target *in the long run*

- however from what I read in the article, it has been paying 5 - 8%

Where is that return coming from? Because asset returns the last 10 years have not been 5-8%.

What are their plans going forward? What happens if their return was, say, -20% the last 12 months: which would put them ahead of, say, 90% of investors.

Can they ask for the money back? Is there some form of 'clawback' clause?

The problem is 'with profits' or 'smoothed' policies are 'black boxes' potentially, and since there are no magics in investing (as Madoff's clients have cause to know, but more generally investors in a whole host of 'total return' products in the last 3 years) they have taken that performance out of somewhere.

I'll reiterate: I doubt this is another Equitable Life, but it would be nice to know how they have achieved a 'guaranteed' return, when we all know you cannot guarantee a financial return above the equilibrium long term government bond yield (and even then.... if interest rates fall to all-time lows, the interest rate risk is significant unless you were entirely in strips).
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Postby alec » Fri Dec 26, 2008 2:38 pm

however from what I read in the article, it has been paying 5 - 8%


The article says 5-6% year return, not 5-8%:

In general, employers contribute about 5% to 8% of salary to a person's fund and the individual kicks in about 5%. Because there are no commissions and profits, the operating costs of the program are decisively lower than the rest of the market, a difference which produces an enormous cumulative advantage over the years.

The bond and other guaranteed funds generate about 5% to 6% per year. The capital supporting this payout is in that famous lock box. The various equities funds have suffered like nearly all others during this disastrous autumn. But while they have not in an interesting way surpassed the market, they have not disappeared either and each client of the firm receives a detailed accounting of what each fund owns.


If you want to see what the ratings agencies have to say, TIAA has posted some of the recent reports on their website:

Fitch

Moody's

Standard & Poors

Because asset returns the last 10 years have not been 5-8%


Yes, bond returns have been in the 5-6% range for the last 10 years. Per Vanguard's website, 10 year returns:

GNMA fund (VFIIX)- 5.63%
Lt Treas (VUSTX) - 6.90%
Int treas (VFICX) - 6.18%
LT Bond index (VBLTX) - 5.52%
Int Bond index (VBIIX) - 5.29%
TBM index (VBMFX) - 5.06%

Per the links from the rating agencies, TIAA invests most of its money in corporate bonds and mortgage bonds.

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Postby Levett » Fri Dec 26, 2008 2:50 pm

I have previously provided a link that would have taken any interested party to the December 31, 2007 Audited Statutory-Basis Financial Statement that is free (e.g., transparent). Even this former English major can understand it.

More importantly, in this age of investigative reporting experts in forensic accounting can comb through the audit to their heart's delight.

In addition, and in keeping with its long-term practice of transparency, TIAA also published for all to see a lengthy pdf entitled "TIAA Traditional Annuity" (August 2008) which you can access through Google if you use the title of the pdf.

I understand that we're in the midst of Madoff Mania, but having now read the Penrose Report (posted at the BBC site) and looked at Equitable's amazing shenanigans (I just love the Equitable's technique of peak to peak smoothing) I find no compelling parallel. Indeed, it's difficult (but required by circumstances) to utter the names of the two companies in the same sentence.

I promise to move on to meatier matter (wherever it may be). Cheers. Bob U.
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Postby alec » Fri Dec 26, 2008 3:24 pm

bob u. wrote:In addition, and in keeping with its long-term practice of transparency, TIAA also published for all to see a lengthy pdf entitled "TIAA Traditional Annuity" (August 2008) which you can access through Google if you use the title of the pdf.


see TIAA Traditional Annuity.
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Postby Valuethinker » Fri Dec 26, 2008 5:27 pm

alec wrote:
bob u. wrote:In addition, and in keeping with its long-term practice of transparency, TIAA also published for all to see a lengthy pdf entitled "TIAA Traditional Annuity" (August 2008) which you can access through Google if you use the title of the pdf.


see TIAA Traditional Annuity.


From that link:

- 4 ratings agencies give high credit ratings to the TIAA General Fund-- fortunately, ratings agencies have an excellent record of anticipating future credit problems.... ;-).

- 71.4 bn of bonds, including 8 bn of government bonds. So the rest is safe, right?

- 64.9bn of 'structured products'. So that would be like CDOs, right? Indeed the document talks about 'tranches' of the highest security. As UBS had- -$40bn or so of them? Of that:

- 35bn MBS (presumably residential) - no problems in that sector of the economy?
- 6.9bn ABS so that's student loans, credit cards, car loans - again, no credit worries there
- 22.6bn of Commercial MBS -- ah, good, there are no issues with the valuation of, or loans to, US commercial buildings at this time? Right?

And that's really good because there are 19.8bn of further commercial mortgages (ie not CMBS). Good thing no one is worried about US CRE valuations, least of all the stock market.

- $6.9bn of PE and other LP investments - again, no issues there then? Nothing University of Virginia Endowment should be worried about? No? Good.

Hopefully you've caught my tone of irony. The irony is *on the face of that data* things are much *worse* than I would have thought. Because you are talking about all the sectors that are *now* coming into question, ie that haven't been hit yet.

And you've seen the speculation about commercial life insurance companies and the need to raise capital because of the fall in valuation of commercial RE and the extent of their loans to same?

I take the point and it's a fair one that past performance was sustained by the performance of US Treasury securities. Except that isn't what they were invested in: they were invested in securities with higher yields, which have, in the last 12 months or so, turned out to be considerably riskier (cue thread about university endowments: should these be marked to market?).

I don't think that this is another Equitable Life-- I've said that 3 times now. Hopefully the directors of TIAA-CREF have been much more prudent in their provisioning. What killed The Equitable was a desire to maintain with profits bonuses, so to attract more investments by clients. They didn't have enough fat stored away when the Guaranteed Annuity thing hit.

But if one is discussing TIAA CREF it seems reasonable to me to:

- consider apparent changes in the goals of the organisation and charging structure

- consider the risks to investments of what looks to me like a conventional with profits life co structure, and of 'smoothing' of investment returns in one of their main funds.

In light of what we know about financial markets generally of late, and the performance of almost all investments other than gilt-edged US government securities.

Over to you as an investor. It's your call, not mine.
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Postby nisiprius » Fri Dec 26, 2008 6:06 pm

At one point I downloaded a PDF that listed the detailed contents of the General Fund. It was about two hundred pages long. I've misplaced both the file and the URL and I'd like to find it again. Can anyone point me at it? It's probably the one Bob U. refers to:
bob u. wrote:I have previously provided a link that would have taken any interested party to the December 31, 2007 Audited Statutory-Basis Financial Statement
but I wasn't able to find it either by googling on the Bogleheads' site or TIAA's.

My wife and I were discussing l'affaire Madoff, which is fascinating because of the number of apparently prudent and respectable entities that were, somehow, taken in by it. The list of respectable charitable organizations that placed funds with Madoff seems to be lengthening every day.

So, she was asking me, not seriously but not entirely joking either, whether TIAA had any money invested with Madoff. I said that even if all of the money invested with Madoff was from TIAA, TIAA was so humongous that it could take a $50 billion hit without even flinching. And, anyway, I said, I couldn't believe they had a penny invested with Madoff.

She said, "Yes, and I wouldn't have believed a big European bank had two billion invested with Madoff, either. So, no, I can't believe TIAA has a penny invested with Madoff... but do you think you could check, anyway?"
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Postby Paladin » Fri Dec 26, 2008 6:17 pm

nisiprius wrote:At one point I downloaded a PDF that listed the detailed contents of the General Fund. It was about two hundred pages long. I've misplaced both the file and the URL and I'd like to find it again. Can anyone point me at it? It's probably the one Bob U. refers to:
bob u. wrote:I have previously provided a link that would have taken any interested party to the December 31, 2007 Audited Statutory-Basis Financial Statement
but I wasn't able to find it either by googling on the Bogleheads' site or TIAA's.

My wife and I were discussing l'affaire Madoff, which is fascinating because of the number of apparently prudent and respectable entities that were, somehow, taken in by it. The list of respectable charitable organizations that placed funds with Madoff seems to be lengthening every day.

So, she was asking me, not seriously but not entirely joking either, whether TIAA had any money invested with Madoff. I said that even if all of the money invested with Madoff was from TIAA, TIAA was so humongous that it could take a $50 billion hit without even flinching. And, anyway, I said, I couldn't believe they had a penny invested with Madoff.

She said, "Yes, and I wouldn't have believed a big European bank had two billion invested with Madoff, either. So, no, I can't believe TIAA has a penny invested with Madoff... but do you think you could check, anyway?"


I googled for the makeup of the Berkshire annuities as a comparison to TIAA-CREF but could not find a similar document.

Putting aside recent events for a minute the TIAA Annuity seems poorly diversified.
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Postby Levett » Fri Dec 26, 2008 6:26 pm

Hi Nisiprius,

The same question occurred to me because on the day after the SEC filed its complaint (SEC complaint against Madoff filed on 12/11) the TIAA Real Estate Account had its largest drop ever (-2%).

So I started hunting around and shared the coincidence (to date) with my TIAA compatriots at the Morningstar site. So far, I haven't been able to find anything, including looking again at Moody's July '08 analysis of the TIAA general account.

However, there was one indirect possibility that appeared in the Wall Street Journal, and that is that some major commerical real estate investors (possibly owners of projects to whom TIAA has underwritten loans?) were, indeed, invested with Madoff.

The TIAA Real Estate Account has subsequently made 3 separate filings with the SEC (dated 12/24), but none mentions or alludes to Mr. Madoff or his investors.

That's where my efforts stand to date. Let me know if you find anything. Bob U.
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Postby subrosa » Fri Dec 26, 2008 6:38 pm

This is an interesting thread but as of the march 2008 statement from TIAA (excluding CREF) it looks like they laid claim to $183 billion in assets, held $150 billion in resevves, and anticipated paying $2.5 billion out to retirees in dividends for the coming year (as far as I can tell adding in dividends not yet apportioned to those already accounted).

Can anyone confirm this? I apologize for the sloppiness.

http://www.tiaa-cref.org/pdf/reports/ti ... rly_2q.pdf

I am looking only at TIAA and not the combined TIAA CREF entity (since the concern seem to be over the general account of TIAA.

If so this payout ratio seems exceedingly comforting.

Perhaps TIAA should start rating the insurance agencies?

Valuethinker wrote:
Hopefully you've caught my tone of irony. The irony is *on the face of that data* things are much *worse* than I would have thought. Because you are talking about all the sectors that are *now* coming into question, ie that haven't been hit yet.


Actually owners of US Gov debt (or for that matter US dollar denominated assets) essentially actually now own all of those sectors whether or not they realize it or choose to acknowledge it...
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Postby Levett » Fri Dec 26, 2008 6:39 pm

Hi Paladin,

Here are the latest ratings on the TIAA account in question.

A.M. Best A++ [9/08]

Fitch AAA [8/08]

Moody's AAA [7/08]

S & P AAA [8/08]

Weiss A+ [11/08]

Can they all be wrong? :) Bob U.
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Postby stratton » Fri Dec 26, 2008 6:53 pm

bob u. wrote:Weiss A+ [11/08]

I believe Weiss is a notorious pessimist about their ratings. This is one case where paying attention to the ratings companies giving TIAA-Cref the lowest rating might make for interesting reading.

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Postby Levett » Fri Dec 26, 2008 7:01 pm

Yes, Weiss is a well-known skeptic, and yet TIAA has its highest rating--in agreement with the other ratings agencies.

I'm not sure I understand your last sentence, Stratton. Bob U.
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TIAA quarterly report

Postby raywax » Fri Dec 26, 2008 7:37 pm

[quote="subrosa"]

http://www.tiaa-cref.org/pdf/reports/ti ... rly_2q.pdf

I looked for a report at the NYS Department of Insurance and could not find one. Could you tell me where on the TIAA-CREF web site you found this one?

It will take me a while to go through it!

Ray

A PS. I printed out the first six pages that includes Assets, Liabilities and Summary of Operations but I regret to say that even with my glasses it is to fine a print for me to read! Old age is a bitch :cry: !
Last edited by raywax on Fri Dec 26, 2008 7:52 pm, edited 2 times in total.
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Postby beardsworth » Fri Dec 26, 2008 7:44 pm

bob u. wrote:I'm not sure I understand your last sentence, Stratton. Bob U.


Not sure I understand either, Bob. Unless I'm mistaken, A+ is Weiss's highest rating. At any rate, Weiss rates TIAA tops among all annuity insurers.

The following is on "The Street" Web site, but the ratings are from Weiss:

http://www.thestreetratings.com/HL_annuity.asp

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Postby Levett » Fri Dec 26, 2008 8:42 pm

Hi Marc,

Yep. A+ is the highest rating from Weiss.

By the way, the Street bought Weiss ratings a couple of years ago, as I recall. Bob U.

P.S. Like Ray, I tried to make my way through the New York State Insurance Commissioner filing, but I don't have an electron microscope handy. :wink:
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Postby grok87 » Fri Dec 26, 2008 9:17 pm

Valuethinker wrote:
alec wrote:
bob u. wrote:In addition, and in keeping with its long-term practice of transparency, TIAA also published for all to see a lengthy pdf entitled "TIAA Traditional Annuity" (August 2008) which you can access through Google if you use the title of the pdf.


see TIAA Traditional Annuity.


From that link:

- 4 ratings agencies give high credit ratings to the TIAA General Fund-- fortunately, ratings agencies have an excellent record of anticipating future credit problems.... ;-).

- 71.4 bn of bonds, including 8 bn of government bonds. So the rest is safe, right?

- 64.9bn of 'structured products'. So that would be like CDOs, right? Indeed the document talks about 'tranches' of the highest security. As UBS had- -$40bn or so of them? Of that:

- 35bn MBS (presumably residential) - no problems in that sector of the economy?
- 6.9bn ABS so that's student loans, credit cards, car loans - again, no credit worries there
- 22.6bn of Commercial MBS -- ah, good, there are no issues with the valuation of, or loans to, US commercial buildings at this time? Right?

And that's really good because there are 19.8bn of further commercial mortgages (ie not CMBS). Good thing no one is worried about US CRE valuations, least of all the stock market.

- $6.9bn of PE and other LP investments - again, no issues there then? Nothing University of Virginia Endowment should be worried about? No? Good.

Hopefully you've caught my tone of irony. The irony is *on the face of that data* things are much *worse* than I would have thought. Because you are talking about all the sectors that are *now* coming into question, ie that haven't been hit yet.

And you've seen the speculation about commercial life insurance companies and the need to raise capital because of the fall in valuation of commercial RE and the extent of their loans to same?

I take the point and it's a fair one that past performance was sustained by the performance of US Treasury securities. Except that isn't what they were invested in: they were invested in securities with higher yields, which have, in the last 12 months or so, turned out to be considerably riskier (cue thread about university endowments: should these be marked to market?).

I don't think that this is another Equitable Life-- I've said that 3 times now. Hopefully the directors of TIAA-CREF have been much more prudent in their provisioning. What killed The Equitable was a desire to maintain with profits bonuses, so to attract more investments by clients. They didn't have enough fat stored away when the Guaranteed Annuity thing hit.

But if one is discussing TIAA CREF it seems reasonable to me to:

- consider apparent changes in the goals of the organisation and charging structure

- consider the risks to investments of what looks to me like a conventional with profits life co structure, and of 'smoothing' of investment returns in one of their main funds.

In light of what we know about financial markets generally of late, and the performance of almost all investments other than gilt-edged US government securities.

Over to you as an investor. It's your call, not mine.

I think Valuethinker's points are excellent ones. Not to single out TIAA CREF but all Life Insurance companies (pretty much) had these sorts of investment strategies and have gotten crushed in the current crisis. See for example this chart for Met Life which used to be a mutual company sort of like TIAA CREF until recently.
http://finance.yahoo.com/echarts?s=MET# ... =undefined
Arguably mutual and nonprofit companies should have a more conservative investment strategy than stock companies because they don't have recourse to capital markets to raise capital. But I don't think there is any evidence TIAA CREF behaved in this way. They have to compete with the stock companies and offer competitive yields to their policyholders so they ended up in these structured products, CDO's, CMBS, etc. These products were "created" to offer these extra yields to yield hungry investors like life insurance companies but of course had all sort of hidden risks that have now emerged.

Bottom line I don't think we should be under any illusions that TIAA CREF is somehow immune from the crisis affecting the life insurance industry. If it were a stock company and its stock were publicly traded it would no doubt be down by half or more ytd.

cheers,
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Postby nisiprius » Fri Dec 26, 2008 10:25 pm

Valuethinker wrote:I have a couple of other reservations, purely from what I have read. In particular their 'annuity' product (referred to in the linked article) has produced 'guaranteed' returns for many years in the region of 5-8%.
I think you and the article are confused about this. I assume the product that's being discussed is TIAA's "bread-and-butter" offering, the TIAA Traditional Annuity. This is the only annuity product I know of that includes a "guarantee."

During the accumulation phase, my Traditional account has indeed earned a pretty steady 5% per year. Not a Madoff-like impossible 10-12% per year. Nothing about it has ever been guaranteed. Indeed, the contributions made at different times are referred to as being of different "vintages" and earn at different rates, so the Traditional accounts of different TIAA participants earns at different rates, depending on how much they put in when.

At some point, you generally annuitize--convert a portion of your account to an SPIA-like lifetime payout contract. In my case, I opted for a "graded" payout, which increases over time but is not indexed to inflation (and in fact does not keep up with inflation). These contracts do specify a rather small guaranteed "contractual rate," but pay out considerably more. In my contract, the guaranteed "effective annual interest rate" is 2.5%.

The actual amount that is paid out is variable and consists of a "contractual payment" plus an "additional amount." In other words, it is a variable annuity based on a very stable, conservative investment. The additional amount depends on the fluctuating performance of the "Traditional" fund. In my case, that additional amount is about 36% of the guaranteed amount. Thus, the current "effective interest rate" is 3.41%.

As with all annuities, the payout is a higher percentage than the underlying interest rate, not because of investment magic but because it's a life annuity. In my case, the actual annual payout (not an "interest" rate) is about 6% of the amount that was annuitized. Some of that 6% is just my own principal being handed back to me, and some comes from the principal of annuitants who died younger than me.

All of these numbers are very much in line with those of commercial annuity products. If I plug in the closest approximation I can make to a similar annuity from Vanguard (AIG)--a fixed, fully guaranteed-payout annuity, with the payout increase by 1% per year compounded to simulate the TIAA "graded" payout--the monthly payout is, in fact, higher than TIAA's, nearly ten percent higher in fact.

In other words, there's nothing "too good to be true" about the performance of the TIAA Traditional account during accumulation, or when annuitized.
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Postby subrosa » Fri Dec 26, 2008 11:57 pm

Hello grok
Arguably mutual and nonprofit companies should have a more conservative investment strategy than stock companies because they don't have recourse to capital markets to raise capital.But I don't think there is any evidence TIAA CREF behaved in this way. They have to compete with the stock companies and offer competitive yields to their policyholders so they ended up in these structured products, CDO's, CMBS, etc. These products were "created" to offer these extra yields to yield hungry investors like life insurance companies but of course had all sort of hidden risks that have now emerged.


Really?

http://www.tiaa-cref.org/support/news/a ... 3_112.html
TIAA General Account: Please note that no investor can invest in the TIAA General Account. Our current holdings in the sub-prime area are generally of high quality (largely AAA and AA rated) and represent a very small percentage (approximately 2%- 3%) of the General Account’s holdings. More importantly, the General Account has extremely limited exposure to ABS CDOs; this consists of only two positions, which are
not meaningful given the size of the General Account. Sub-prime-related downgrades have affected 57 securities with a total value of $275 million (less than one – fifth of 1% of assets). These downgrades have been balanced to some extent by upgrades of 51 sub- prime securities with a total value of $221 million.


My opinion isn't worth much but I suspect TIAA suffered a flight from investors during the run-up to the tech bubble when stocks for the long run was the mentality and a guarenteed principle plus 3% seemed bland.
http://www.tiaa-crefinstitute.org/resea ... 28b03.html

Another shift in the overall population from
1986 to 1997 was marked by the increased
prevalence of the equity class instead of the
guaranteed asset class as a predominant destination
for new contributions. In 1986, only 3%
chose 100% equity, while nearly one-fourth of
participants chose the 100% guaranteed contribution
allocation. About 17% allocated most
but not all of their contributions to the guaranteed
asset class and about 10% allocated to
mostly equity. Eleven years later, in 1997, the
100% guaranteed and 100% equity pattern had
essentially reversed, as only 8.6% of participants
allocated contributions on a 100% guaranteed
basis and 23.5% did so on a 100% equity
basis.

Now that stockholders and corporate bondholders are seeing terrible losses in their 401k and 403b and 529 and VA and VUL accounts I expect they will suddenly regain interest in 3%+ principle + dividend and the TIAA general account will see an influx of folks effectively willing to hand their stocks and bonds over to TIAA, now, after huge losses have substantially improved valuations...as TIAA will essentially hold those same assets, this will amount to TIAA buying large amounts of now much more reasonably valued assets with the only requirement seeming to me to be that they will return principle + 3% + profits. This seems like a winning bet. I have no idea if I am right but certainly TIAA seems to be "suffering" from an opportunity of confidence now:
http://www.tiaa-cref.org/about/press/ab ... se265.html

I really don't see a huge downside risk to TIAA after all the handwaving but if someone can point one out in the data I would be interested.
Last edited by subrosa on Sat Dec 27, 2008 12:17 am, edited 1 time in total.
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Postby subrosa » Sat Dec 27, 2008 12:12 am

Hello nisiprius

I think you and the article are confused about this. I assume the product that's being discussed is TIAA's "bread-and-butter" offering, the TIAA Traditional Annuity. This is the only annuity product I know of that includes a "guarantee."


According to the website (and iirc):
TIAA-CREF offers unique products to help clients diversify their portfolios. For example, the TIAA Traditional annuity provides guaranteed principal2; a guaranteed minimum rate of interest, with the opportunity to receive additional amounts in excess of the guaranteed rate (paid every year since 1948)3; and guaranteed lifetime annuity income through a variety of flexible income options at retirement.2


And from this site:
http://www.tiaa-cref.org/performance/re ... owth082508
Interest credited to TIAA Traditional Annuity accumulations includes a guaranteed rate, plus additional amounts that are established on a year-by-year basis*. The guaranteed annual interest rate is 3% for all premiums remitted since 1979 under all TIAA Traditional Annuity accumulating contracts, except that for Retirement Choice Annuities the guaranteed rate is between 1% and 3%, as specified in the contract. The additional amounts, when declared, remain in effect through the "declaration year," which begins each March 1.
(emphasis mine)

I know there are all sort of convoluted vintage issues but I think the basic confusion lies in what is promised (principle + 3%) versus what has been delivered.

What has been delivered has been principle + "dividends" which have been >3% and generated the idea or assumption of " 'guaranteed' returns for many years in the region of 5-8%" being discussed here.

From:
http://www.tiaa-cref.org/pdf/reports/ti ... rly_2q.pdf
page 3 footnote:
*Note for line 6.1: Because TIAA operates without profit to the corporation or its stockholders, excess earnings which exceeded the amount contained on line 6.1 of prior year's statements were credited to policyholders as Additional Amounts during the year. Additional Amounts are referred to as policyholder's dividends throughout this statement.


As such and again I don't see any red flags in what is promised. If excess earnings evaporate, so do excess dividends. This comes from a "not very much for profit" (to avoid devolving into a discussion on its exact status) company, as such from my limited perspective:
-comparisons to for profit companies are really irrelevant*
-there is no obvious incentive to cook the books

If a balanced portfolio of stocks and bonds invested conservatively, starting at today's valuations, and starting out with a 20 billion surplus and paying out 10 billion (all told) yearly, cannot generate 3% + principle then TIAA will go under... probably a decade or two after what, just about every other company and several countries do?

*except in as much as one could assume the actual historical TIAA traditional returns -3%, + the TIAA captial cusion, is a proxy for how much money profit oriented insurance companies take from their policyholders.
Last edited by subrosa on Sat Dec 27, 2008 12:26 am, edited 5 times in total.
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Postby subrosa » Sat Dec 27, 2008 12:17 am

Hello raywax

I looked for a report at the NYS Department of Insurance and could not find one. Could you tell me where on the TIAA-CREF web site you found this one?


I cannot remember how I originally found it but I did once... since I knew it existed I searched their site for "annual report"

This is an easier link:
http://www.tiaa-cref.org/about/governan ... ports.html

The problem is I cannot really read these things. As you probably can, could you humor me and let me know if you find anything interesting or troubling, and also, who and what determines the aggregate reserve for life contracts, and how are investments so labelled "marked to market"?
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Postby subrosa » Sat Dec 27, 2008 1:38 am

Hello Paladin

Detailed data for guardian, the parent of berkshire if I am not mistaken ( http://www.guardianlife.com/company_inf ... aries.html ), is available through writing but with a broad brush:
http://www.guardianlife.com/company_inf ... report.pdf
Admitted assets
Bonds $ 17,284 $ 16,478
Unaffi liated common and preferred stocks 2,120 1,955
Investments in affi liates 845 797
Mortgage loans 3,111 2,741
Real estate 138 128
Policy loans 2,070 1,866
Other invested assets 583 494
Cash and short-term investments 328 330

Guardian’s overall investment portfolio performed well in 2007. Our
public equity portfolio returned approximately 12%, outperforming
the S&P 5001 by 6%. Guardian’s public fi xed income portfolio
outperformed its benchmark and generated a return that came close
to matching the return of the S&P 500. We were successful in
identifying over $1.6 billion in investment opportunities in the private
debt and commercial loan markets at very attractive yields. We also
identifi ed approximately $300 million of attractive real estate and
private equity investments, which we expect will enhance future
policyholder dividends.


Listed above is 2007/2006. So total assets for say 2007= $ 28,328, with $ 17,284 respresented by bonds.

Putting aside recent events for a minute the TIAA Annuity seems poorly diversified.


Really? It seems reasonably diversified across and within classes to me:

http://www.tiaa-cref.org/support/news/a ... 2_152.html
To help lower risk, the TIAA General Account, which backs the returns of the TIAA Traditional Annuity, has a highly diversified portfolio with less than 1% of total assets in any single investment. The portfolio includes bonds, commercial mortgages, private stock and directly owned real estate. 2
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Postby Gregory » Sat Dec 27, 2008 1:52 am

From the document:

"To help lower risk, the TIAA General Account, which backs the returns of the TIAA Traditional Annuity, has a highly diversified portfolio with less than 1% of total assets in any single investment. The portfolio includes bonds, commercial mortgages, private stock and directly owned real estate."
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Postby grok87 » Sat Dec 27, 2008 10:11 am

subrosa wrote:Hello Paladin

Detailed data for guardian, the parent of berkshire if I am not mistaken ( http://www.guardianlife.com/company_inf ... aries.html ), is available through writing but with a broad brush:
http://www.guardianlife.com/company_inf ... report.pdf
Admitted assets
Bonds $ 17,284 $ 16,478
Unaffi liated common and preferred stocks 2,120 1,955
Investments in affi liates 845 797
Mortgage loans 3,111 2,741
Real estate 138 128
Policy loans 2,070 1,866
Other invested assets 583 494
Cash and short-term investments 328 330

Guardian’s overall investment portfolio performed well in 2007. Our
public equity portfolio returned approximately 12%, outperforming
the S&P 5001 by 6%. Guardian’s public fi xed income portfolio
outperformed its benchmark and generated a return that came close
to matching the return of the S&P 500. We were successful in
identifying over $1.6 billion in investment opportunities in the private
debt and commercial loan markets at very attractive yields. We also
identifi ed approximately $300 million of attractive real estate and
private equity investments, which we expect will enhance future
policyholder dividends.


Listed above is 2007/2006. So total assets for say 2007= $ 28,328, with $ 17,284 respresented by bonds.

Putting aside recent events for a minute the TIAA Annuity seems poorly diversified.


Really? It seems reasonably diversified across and within classes to me:

http://www.tiaa-cref.org/support/news/a ... 2_152.html
To help lower risk, the TIAA General Account, which backs the returns of the TIAA Traditional Annuity, has a highly diversified portfolio with less than 1% of total assets in any single investment. The portfolio includes bonds, commercial mortgages, private stock and directly owned real estate. 2

I think you are missing the point here on diversification. The 1% refers to individual bond issues- valuable in a case like Enron, not so valuable in our current subprime crisis.
Real diversification in bonds would be having say 25% of your bonds in treasuries, 25% in TIPs, 25% in corporates and 25% in structured products/MBS, etc. TIAA apparently was more like 10% in Treasuries and 90% in structured products/MBS. Not untypical for a life insurer which is why they are all in some trouble.
cheers,
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TIAA annual reports

Postby raywax » Sat Dec 27, 2008 10:22 am

subrosa wrote:Hello raywax

I looked for a report at the NYS Department of Insurance and could not find one. Could you tell me where on the TIAA-CREF web site you found this one?


I cannot remember how I originally found it but I did once... since I knew it existed I searched their site for "annual report"

This is an easier link:
http://www.tiaa-cref.org/about/governan ... ports.html

The problem is I cannot really read these things. As you probably can, could you humor me and let me know if you find anything interesting or troubling, and also, who and what determines the aggregate reserve for life contracts, and how are investments so labelled "marked to market"?


Thanks for the easy link! I have the same problems but if I need the info I can beg my wife to read it. She can't see worth a damm for distance without her glasses but she can read the fine print well!

Ray
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Postby subrosa » Sat Dec 27, 2008 3:41 pm

Hello grok

I think you are missing the point here on diversification. The 1% refers to individual bond issues- valuable in a case like Enron, not so valuable in our current subprime crisis.


No, really I am not. Yes, the 1% refers to individual issues, an impressive accomplishment when one considers they are diversifying $183 billion dollars.

It remains to be seen if it is "not so valuable in our current subprime crisis".

Example: Holders of Vanguard's TIPS fund VIPSX (entirely clean of subprime malpractice!) were down -7.8% for the 12 months ending 9/30/08 --- if they had to sell then. If they did not, they are now up 0.11% per m* 1 year return data.

So this worry about the crisis has much to do with liquidity- as I am certain you are already well aware of and mean no disrespect- just that this leads me into why TIAA, or Guardian, might not be in as much trouble as other insurers.

As mentioned earlier, as of June 2008 TIAA traditional pays about $2.5 billion in cash yearly and has about $3.6 billion in cash on hand. Even in a worst case scenario it would seem they won't have to sell a thing for another year... and that assumes no cash inflow (they took in 1/2 billion in new funds in Sept 2008 ) and no cut to the extra dividends (which we absolutely know they will do if profits fall).

Mind you this is just cash on hand in this account, and ignores short term investments also held as cash equivelents which would roughly double the margin.

Even then their actual subprime holdings are miniscule:
As a result, our current holdings in the sub-prime area are generally of high quality (largely AAA and AA rated) and represent a very small percentage (approximately 2%-3%) of the General Account's holdings.

http://www.tiaa-cref.org/support/news/a ... 2_104.html

So we are talking a lot of what ifs and little hard facts at this point.

The one hard fact we know:
http://www.tiaa-cref.org/about/press/ab ... se264.html
New York, December 11, 2008 --
TIAA-CREF, the leading provider of retirement services in the academic, medical and cultural fields, today announced that during 2009 all annuitants with TIAA Traditional lifetime income will receive at least as much total income (guaranteed income plus additional amounts) as they received in 2008, and some annuitants will see modest increases.[1]
The company’s ability to offer products that deliver steadfast returns despite unprecedented market volatility reflects TIAA-CREF’s legacy of – and longstanding commitment to – providing lifetime financial security to the customers it serves.


This does not sound like a company at all worried about its current bond holdings.

In 2007 they sounded positively excited by the buying opportunities, barring a recession (which we now know we are in):
http://www.tiaa-cref.org//about/press/p ... _09_10.pdf
In sum, if the financial gyrations now underway are confined
to risk re-pricing, sector distress in housing and residential
mortgage related areas, and a transitory credit crunch,
TIAA may potentially benefit. However, if recession cannot
be avoided, the benefits will be offset by credit quality
and investment performance pressures on the portfolio.
Our strong capital resources and long history of weathering
recessions will be called into service in this eventuality. On a
day-to-day basis, investing continues without interruption and
with special focus on seeking benefit from troubled times.


I gather from the 2008 press release about not cutting benefits and even modestly raising them that their optimism was founded.

Real diversification in bonds would be having say 25% of your bonds in treasuries, 25% in TIPs, 25% in corporates and 25% in structured products/MBS, etc. TIAA apparently was more like 10% in Treasuries and 90% in structured products/MBS. Not untypical for a life insurer which is why they are all in some trouble.
cheers,


Well, I agree to a large extent with your suggestion for small time outfits but its not realistic for TIAA to try to capture 10% of the total outstanding TIPS debt market- they would shoot themselves in the foot trying.

But more importantly like all endowments TIAA has to leverage its size and self imposed contraints on withdrawls in order to exploit the liquidity premium. The more they lean towards treasuries, the more they give up the liquidity premium, and the less relevant they are for their investors who can buy treasuries on their own. In TIAA's case there is no profit motive and so one assumes they are hopefully conciously and carefully levering their massive size to offer their customers increased returns.

http://www.tiaa-cref.org/about/press/pu ... _08_27.pdf

In other words, investors can get an even safer portfolio than you propose with the same general characteristics TIAA traditional offers (return of principle, basement annual % returns, some chance for higher returns) by just buying and holding TIPS. Don't bother with TIAA and the extra fees at all.

TIAA offers a bit higher return (1-2% over TIPS if the last 5 years are a clue) with a higher risk- its quantifying this latter part that is vexing me.

I think the problem I have is that while there are a lot of assumptions that TIAA is going to take a big hit, their behavior indicated all is well.

I cannot see a good reason why they would lie, and I doubt they are just
incompetent... but if they are in real danger, I would want to know.
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Postby alec » Sat Dec 27, 2008 4:46 pm

FWIW - you can get annual and quarterly reports for TIAA, or most other insurance companies at the NAIC's website [the first 5 downloads are free].

As of 9/30/08 TIAA had about $200,000,000,000 in assets and $18,500,000,000 [that's billion] in surplus.

- Alec
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Postby stratton » Sat Dec 27, 2008 5:30 pm

bob u. wrote:Yes, Weiss is a well-known skeptic, and yet TIAA has its highest rating--in agreement with the other ratings agencies.

I'm not sure I understand your last sentence, Stratton.

Weiss is likely to have the most damning report which will give you information to check.

The problem is it may still not say much.

Fidelity gives account holders access to stock research reports and I've never seen so many pages that say "nothing" and empty of content.

Paul
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Postby grok87 » Sat Dec 27, 2008 11:06 pm

alec wrote:FWIW - you can get annual and quarterly reports for TIAA, or most other insurance companies at the NAIC's website [the first 5 downloads are free].

As of 9/30/08 TIAA had about $200,000,000,000 in assets and $18,500,000,000 [that's billion] in surplus.

- Alec

Personally I don't find those numbers comforting. Let's say assets decline in value 10%. That would wipe out surplus- i.e. surplus would be -1.5 BN.
Not saying this is what has happened but it just reinforces my point that life insurers are highly leveraged (those numbers show >10:1) and many are in trouble these days. We should not be deluded that TIAA is somehow immune.
cheers,
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Postby subrosa » Sun Dec 28, 2008 1:13 am

Hello grok

Personally I don't find those numbers comforting. Let's say assets decline in value 10%. That would wipe out surplus- i.e. surplus would be -1.5 BN.
Not saying this is what has happened but it just reinforces my point that life insurers are highly leveraged (those numbers show >10:1) and many are in trouble these days. We should not be deluded that TIAA is somehow immune.
cheers,


I'll certainly defer to you if indeed that is how leverage is defined for insurance companies but I would say that on the surface what you are saying makes no sense to me. If assets decline 10% and surplus is wiped out then assets equal liabilities... where is the leverage?

It sounds like you are implying TIAA would have to own one dollar in assets and one dollar in surplus for every dollar in liability to have no leverage (assuming assets can deline in value to zero)?

Here is what S&P said last year (from the end of the report):
http://www.tiaa-cref.org/pdf/sandp.pdf
Financial Flexibility: Strong, With Ample Capital To Cover Potential Needs
TIAA’s financial flexibility is strong even though its access to capital markets is currently limited by its
private status. In the past, internally generated capital growth has more than covered the company’s
capital needs. Any unforeseeable needs could readily be met by current surplus, ample earnings, or a
temporary reduction in policyholder dividends.
The company has no debt outstanding and zero financial leverage.


(emphasis mine)

I confess I don't really know the diff between financial leverage or operating leverage; according to the S&P report from last year I assume you are talking about the latter? If so could you expound?

As a counter, here is S&P on AIG- in 2006:
http://www2.standardandpoors.com/portal ... html#ID735
Rationale
The counterparty credit rating on American International Group Inc. (AIG) reflects its modest financial leverage, extremely strong interest coverage, consistent track record of very strong operating performance, very strong liquidity position, and excellent franchise breadth, which positions it well to optimize on current market conditions.

Adjusted financial leverage remains on track. In the rating evaluation, Standard & Poor's Ratings Services eliminates the nonguaranteed debt, guaranteed investment agreements, and other match-funded debt because it is considered operational leverage resulting from financial intermediation. Financial intermediation is the process by which insurance companies and their financial product subsidiaries offer various types of investment vehicles specifically to provide funding for financial assets as a business opportunity. Financial intermediation creates spread income by allowing companies to take advantage of investment rates that exceed their funding costs. Consequently, financial leverage (debt plus hybrid to total capital) as of Sept. 30, 2006, drops dramatically to 13.1% (debt leverage is 11.9%) from about 58% on an unadjusted basis. On a tangible equity basis, financial leverage rises minimally to 14.2% (debt leverage is 12.9%) and does not raise any rating concerns.


(emphasis mine)

Now even leaving the monday morning quarterbacking aside, even a novice like me can see a world of difference between the leverage pronouncements S&P was making about AIG in 2006 versus TIAA in 07.
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Postby grok87 » Sun Dec 28, 2008 8:33 pm

subrosa wrote:Hello grok

Personally I don't find those numbers comforting. Let's say assets decline in value 10%. That would wipe out surplus- i.e. surplus would be -1.5 BN.
Not saying this is what has happened but it just reinforces my point that life insurers are highly leveraged (those numbers show >10:1) and many are in trouble these days. We should not be deluded that TIAA is somehow immune.
cheers,


I'll certainly defer to you if indeed that is how leverage is defined for insurance companies but I would say that on the surface what you are saying makes no sense to me. If assets decline 10% and surplus is wiped out then assets equal liabilities... where is the leverage?

It sounds like you are implying TIAA would have to own one dollar in assets and one dollar in surplus for every dollar in liability to have no leverage (assuming assets can deline in value to zero)?


Well I agree my example is probably too simplistic. I'm not sure how they account for variable annuities etc. where the assets and liabilities are matched. So maybe the true leverage is 5:1...

Here's a simple explanation of leverage and a life insurance company.

a) Company has $100 of life insurance payments due in 10 years. A 10 year zero coupon treasury bond is yielding 3%, trading at 74. The company buys $74 worth of that bond. Now the company has perfectly matched the liability and the asset. If interest rates go up 1%, the value of the bonds will go down, but so does the discounted value of the liabilities so there is no financial hit and no surplus is destroyed.

b) Company has $100 of life insurance payments due in 10 years. A 10 year zero coupon corporate bond is yielding 5% trading at 61. The company buys $61 worth of that bond. Now the company is taking on some risk and the asset and liability are no longer perfectly matched. Now say the bond loses value not due to higher interest rates but because everyone is worried about bond defaults. Let's say the bond declines to $50- i.e. loses about 20% Now the liability has the same value (the discount rate has not changed) but the asset is worth less. Surplus is by definition assets minus liabilities so $11 worth of surplus has been destroyed.

It is the second situation we are in today. Life insurance companies are seeing good chunks of their surplus destroyed. Due to statutory accounting, where assets are not marked to market, this will not be very visible for companies like TIAA CREF that don't use GAAP. But for the stock companies like Met Life it is easier to see what is going on. Met Life is only AA so TIAA CREF is definitely stronger. But I think most life insurance companies had similar investment strategies involving heavy reliance on structured securities like MBS, CMBS, ABS. No one should kid themselves that TIAA is immune from these issues.

cheers,
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Met Life

Postby grok87 » Sun Dec 28, 2008 10:15 pm

Here's a link to Met Life's financials showing book value of equity declined by 16% during hte 3rd quarter. I'm guessing the decline for the 4th quarter will be more like 30%.
http://finance.yahoo.com/q/bs?s=MET
cheers,
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Postby subrosa » Mon Dec 29, 2008 12:08 am

Its hard to compare apples to apples with different accounting rules being used.

That said, it looks at first blush (unless I am reading it wrong- a real possibility) that TIAA reports more total assets, more total cash, and perhaps most importantly a rising surplus compared to 12/31 prior year on their Sept 30 quarterly:
http://www.tiaa-cref.org/pdf/reports/ti ... rly_3q.pdf

This is quite a different trend than MetLife is showing.

New York is pretty strict with insurance companies, used to be the most strict, which is why TIAA is there. So I am sure accounting differences can hide things, but 180 degree differences might be too much. Still, its been a bruising 3 months and I think TIAA recognizes some losses after 12 months so I suppose we will know for certain next year.

No one should kid themselves that TIAA is immune from these issues.


I think TIAA has been effectively financially crippled (whether this was actually realized or just impending) a few times in its history because of these issues and so your point it well taken that it could happen (it has- but they had Carnegie to lean on/bail them out).

But, and I am not picking nits here, is there any evidence it is or has yet this year? Certainly by not cutting dividends (a decision they must live with for 12 months, and one in which which they are free to slice to 3% at whim) TIAA seems to be behaving as if all is going well for them.

Maybe they have learned enough from their previous mistakes to navigate even these waters?

In any case thanks for the responses/discussion.
@-->-->-- | | Please note: this and all posts by me are for entertainment value only & not as medical / legal / tax / financial or other investment advice. Consult your professional in all matters.
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Re: Met Life

Postby alec » Mon Dec 29, 2008 5:15 pm

grok87 wrote:Here's a link to Met Life's financials showing book value of equity declined by 16% during hte 3rd quarter. I'm guessing the decline for the 4th quarter will be more like 30%.
http://finance.yahoo.com/q/bs?s=MET
cheers,


grok,

Just curious how did you calculate that 16%? Was it just the decrease in Total Stockholder Equity?
"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair
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Re: Met Life

Postby grok87 » Mon Dec 29, 2008 7:50 pm

alec wrote:
grok87 wrote:Here's a link to Met Life's financials showing book value of equity declined by 16% during hte 3rd quarter. I'm guessing the decline for the 4th quarter will be more like 30%.
http://finance.yahoo.com/q/bs?s=MET
cheers,


grok,

Just curious how did you calculate that 16%? Was it just the decrease in Total Stockholder Equity?

yep that's the one...
grok, CFA | "You can only convince people who think they can benefit from being convinced."- Taleb
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Re: Met Life

Postby alec » Mon Dec 29, 2008 9:13 pm

grok87 wrote:
alec wrote:
grok87 wrote:Here's a link to Met Life's financials showing book value of equity declined by 16% during hte 3rd quarter. I'm guessing the decline for the 4th quarter will be more like 30%.
http://finance.yahoo.com/q/bs?s=MET
cheers,


grok,

Just curious how did you calculate that 16%? Was it just the decrease in Total Stockholder Equity?

yep that's the one...


Okay, cool, because I did a similar thing with TIAA using Total Assets - Total Liabilities and came up with a change of -0.53% for the 3rd Q and +4.19% for the 9 months ending 9/30/08. I just wanted to make sure I was doing it correctly.

I did a similar Assets - Liabilities for the Met Life link you posted and came up with -12.74% for the 3Q and -18.89% for the 9 months ending 9/30/08.

- Alec
"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair
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Re: Met Life

Postby grok87 » Mon Dec 29, 2008 9:25 pm

alec wrote:
grok87 wrote:
alec wrote:
grok87 wrote:Here's a link to Met Life's financials showing book value of equity declined by 16% during hte 3rd quarter. I'm guessing the decline for the 4th quarter will be more like 30%.
http://finance.yahoo.com/q/bs?s=MET
cheers,


grok,

Just curious how did you calculate that 16%? Was it just the decrease in Total Stockholder Equity?

yep that's the one...


Okay, cool, because I did a similar thing with TIAA using Total Assets - Total Liabilities and came up with a change of -0.53% for the 3rd Q and +4.19% for the 9 months ending 9/30/08. I just wanted to make sure I was doing it correctly.

I did a similar Assets - Liabilities for the Met Life link you posted and came up with -12.74% for the 3Q and -18.89% for the 9 months ending 9/30/08.

- Alec

Alec,
Well I'd be cautious because Metlife is a stock company and uses GAAP accounting while TIAA is a non-profit that uses statutory accounting. Under GAAP accounting assets are marked to market while under statutory accounting they are not but are held at amortized cost. I suspect the true GAAP change in TIAA's equity is closer to that of MetLife.
cheers,
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Postby alec » Mon Dec 29, 2008 9:26 pm

crapola, I knew there would be a catch. :?
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TIAA CREF- bond spreads

Postby grok87 » Tue Dec 30, 2008 11:39 pm

As discussed above it is a bit difficult to gauge TIAA's current riskiness for the following reasons:

1) Credit Rating is AAA but let's face it S&P and the rest are clueless.
2) TIAA does not use GAAP accounting so we cannot easily see the market value of its assets (MBS, CMBS, etc.)
3) TIAA is not publicly traded (it is a non-profit) so we can't see the market's view of its riskiness expressed in it's stock price.

So today I checked out its bonds on Bloomberg. Bond spreads are another metric that show the market's assessment of risk. I looked at 3 bonds all due in about 3-4 years: TIAA, MetLife, and Berkshire Hathaway. At the end of September all 3 bonds were trading at spreads of about 200 bps over treasuries (give or take a few basis points). As of today here are the spreads:

TIAA: 400 bps
Met Life: 600 bps
Berkshire: 200 bps

So basically Berkshire's spreads have remained flat. TIAA's spread has doubled and Met Life's have tripled. So the market views TIAA's as riskier than Berkshire but not as risky as Met Life.

Now perhaps this is all somewhat obvious, but it is always nice to have confirmation of the "obvious".

cheers,
grok, CFA | "You can only convince people who think they can benefit from being convinced."- Taleb
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Postby Levett » Wed Dec 31, 2008 7:58 am

I appreciate your efforts, Grok. That's useful information. Bob U.
There are some things that count that can't be counted, and some things that can be counted that don't count.
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Postby Valuethinker » Wed Dec 31, 2008 8:42 am

bob u. wrote:I appreciate your efforts, Grok. That's useful information. Bob U.


I should also thank Grok for his research and insights which are very valuable.

Bob, if you are not a significant investor in the 'Traditional' product then I believe you are OK. If by some mischance TIAA were to get into trouble then as what I would call a 'unit linked' holder of investments with TIAA you have born the full risk of those investments, and accordingly you also have no risk-- the notional pool of assets is segregated for your account.

What I don't understand is whether the 'General' balance sheet we have been talking about and the 'Traditional' TIAA annuity product are operating off the same balance sheet, in an analogy to the 'with profits' type of insurance policy or pension.

What I think is more likely is that TIAA 'Traditional' will simply reduce its rate of distribution (profit accumulation or discretionary bonus in with profits life terminology). We know after the annibulus horriblis of this year, that investor returns for every asset but cash or US Treasury Securities are near negative on a 10 year basis (riskier forms of debt like Commercial MBS because of the decline in the price of those securities).

This is the nub of the commercial life insurance industry problem-- the downward shock in Commercial RE markets is spilling over into their 'safe' investments in Commercial RE loans and mortgages.

Whether TIAA 'Traditional' could legally restrict redemptions and/or cut its accumulation rate below 3% I don't know. But it is eating into historic reserves to keep accumulating profits at any rate above 0 right now. The 'smoothing' that life insurers do as a normal part of their business doesn't work if there is a serious, sustained negative return from virtually all asset markets simultaneously.

My other concern with TIAA-CREF was, from general reading, a sense that it was becoming less 'Vanguard-like' (emphasis on passive indexation products, low costs, benefits to members) and more 'commercial' and 'Merrill Lynch like' (which is where Herb Allison spent 30 years of his career) ie emphasis on active products, on higher fees etc.

That's a sense, not a statement of facts.
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Postby beardsworth » Wed Dec 31, 2008 10:13 am

Been following this conversation with interest, checking back as the number of posts continues to grow, but find myself somewhat lost by the "technical" course the conversation has taken.

Unfortunately, I don't speak Accounting, and back in college days––knowing how my own brain works, and not wishing to destroy my grade average––I deliberately avoided math and statistics courses.

Perhaps the knowledgeable folks here could just answer briefly the core question forming in my mind as I read the posts above: Although TIAA may, for self-protective reasons, have to reduce the interest rates on its Traditional annuity for both accumulators and retirees, does anyone here think there is actually a serious possibility that TIAA will default on its "guarantee" of principal invested in this product?

Thanks.

Marc
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Re: TIAA CREF- bond spreads

Postby peter71 » Wed Dec 31, 2008 10:40 am

grok87 wrote:As discussed above it is a bit difficult to gauge TIAA's current riskiness for the following reasons:

1) Credit Rating is AAA but let's face it S&P and the rest are clueless.
2) TIAA does not use GAAP accounting so we cannot easily see the market value of its assets (MBS, CMBS, etc.)
3) TIAA is not publicly traded (it is a non-profit) so we can't see the market's view of its riskiness expressed in it's stock price.

So today I checked out its bonds on Bloomberg. Bond spreads are another metric that show the market's assessment of risk. I looked at 3 bonds all due in about 3-4 years: TIAA, MetLife, and Berkshire Hathaway. At the end of September all 3 bonds were trading at spreads of about 200 bps over treasuries (give or take a few basis points). As of today here are the spreads:

TIAA: 400 bps
Met Life: 600 bps
Berkshire: 200 bps

So basically Berkshire's spreads have remained flat. TIAA's spread has doubled and Met Life's have tripled. So the market views TIAA's as riskier than Berkshire but not as risky as Met Life.

Now perhaps this is all somewhat obvious, but it is always nice to have confirmation of the "obvious".

cheers,


Hi Grok,

This is interesting and worth keeping an eye on, but can you explain where you got the data and any other relevant details of the bonds. You mention that they're all due in "about" 3 to 4 years, but are they all the same type of non-callable bonds, etc.?

All best,
Pete
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