Fundraising ~ Corporate Social Engagement ~ Interactive Services Brave New World of Planned Giving:...

Fundraising ~ Corporate Social Engagement ~ Interactive Services

Brave New World of Planned Giving: Assessing the Damage and Rethinking Planned Giving Policies

Jonathan H. Gudema, Esq.Managing Director, Changing Our World, Inc.

Alan Berkowitz, Planned Giving DirectorJuvenile Diabetes Research Foundation

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ChangingOurWorld.com2

Do our gift annuity programs resemble ponzi schemes?




CGA declining principal exampleDonor age 65, current ACGA rate 5.3%, $10,000 CGA

Age 66

Age 68

Age 70

Age 72

Age 74

Age 76

Age 78

Age 80

Age 82

Age 84

Age 86

Age 88

Age 90

Age 92

Age 94

Age 96

Age 98

Age 100

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

Age 66

Age 68

Age 70

Age 72

Age 74

Age 76

Age 78

Age 80

Age 82

Age 84

Age 86

Age 88

Age 90

Age 92

Age 94

Age 96

Age 98

Age 100

($8,000)

($6,000)

($4,000)

($2,000)

$0

$2,000

$4,000

$6,000

$8,000

$10,000

4% flat return 4% flat return, 30% drop in yr 10

LE

LE

LE = Life expectancy




• Risk #1 – CGAs are general obligations of the charity– CGA concept predicated on:

• Consistent positive investment returns• Life expectancy tables

– Significant numbers of annuitants will likely confirm tables– CGA donors who die before life expectancy will cover for those

who live past life expectancy– There is real risk with any CGA – the larger the CGA, the larger risk

• Risk #2 – Tangling with departments of insurance– Obligations in NY are to file for license, maintain reserves (even add to

reserves on occasion) and file annual reports– New York isn’t the only state with regulations – must meet requirements

of state where donor resides

Charitable gift annuities (CGAs)




• Risk #1 – Trusts are legal documents– Trustees are fiduciaries – are held to a high standard– Conflicts of interest can haunt a charity

• Who is paying an attorney to draft a CRT?• Has the donor’s attorney reviewed and signed off on the trust

document?• Does the donor fully understand the arrangement?

– A CRT exhausting its assets is probably just the beginning of an organization’s problem, not the end

• Risk #2 – Entanglement in complex arrangements– Not every piece of real estate in Montana is worth taking into a CRT– A charity may expend time, money and effort for little or no return– Know when to say no

Charitable remainder trusts (CRTs)




• Minimum/maximum ages• Minimum/maximum amounts• Remainders from gift annuities• Including other organizations for remainder portion• Required forms • Written policies• When to consider reinsurance

Gift acceptance policies




Ages when single life CGAs exhaust

Age at Exhaustion

Age at Inception

Investment Assumptions

All payout rates are from the 2/1/09 ACGA tables




Ages when joint life CGAs exhaust

Age of Survivor at Exhaustion

Ages at Inception






Does using deferred CGAs lesson risk of exhaustion?

Age at Exhaustion

Age at Inception






• Minimum/maximum ages

• Minimum/maximum amounts• Remainders from gift annuities• Including other organizations for remainder portion• Required forms • Written policies• When to consider reinsurance




ChangingOurWorld.com

Example of failing annuity

11

194%

141%

Three 2-life CGAs (donors now age 84 and 93) created in 2002, 2003 and 2005 Annuity: $23,000, Total Contributed: $300,000, Remaining Principal: $170,000




• Minimum/maximum ages• Minimum/maximum amounts

• Remainders from gift annuities• Including other organizations for remainder portion• Required forms • Written policies• When to consider reinsurance





• Minimum/maximum ages• Minimum/maximum amounts• Remainders from gift annuities• Including other organizations for remainder portion

• Required forms • Written policies• When to consider reinsurance





• Minimum/maximum ages• Minimum/maximum amounts• Remainders from gift annuities• Including other organizations for remainder portion• Required forms • Written policies• When to consider reinsurance





• The concept of a gift annuity – 50% at end of life expectancy• Reinsurance as an option?

– New York State – reinsurance treaty issue– Required reserves for self-insuring

• At what point does reinsurance outperform self-insurance?

Rethinking gift annuities




At what point does reinsurance outperform self-insuring?Age When Reinsurance

Outperforms Self-Insurance

Age at Inception



Life Expectancy

A Presentation for

FOR INSTITUTIONAL INVESTOR USE ONLY. NOT FOR USE WITH THE GENERAL PUBLIC.

Charitable Gift Annuity Programs:

Reinsurance Overview & Case Study

May 20, 2009

Planned Giving GroupOf Greater New York

20

Reinsurance Overview

21

Discussion Topics

The Basics

– What is reinsurance?

– Reinsurance vs. self-insurance

– What risks does reinsurance address?

Operations

– Reinsurance in action

– Reinsurance by the numbers

– New York reinsurance regulations

– Other things to note

22

What Is Reinsurance?

An agreement by which a charity transfers all or part of its

risk under a contract to an insurer. In essence, the

charity uses the assets from the donated gift(s) to

purchase a “commercial annuity” as an investment to pay

the donor. The difference between the original gift and

the reinsured annuity is known as the “residuum”.

An agreement by which a charity transfers all or part of its

risk under a contract to an insurer. In essence, the

charity uses the assets from the donated gift(s) to

purchase a “commercial annuity” as an investment to pay

the donor. The difference between the original gift and

the reinsured annuity is known as the “residuum”.

• Leverage insurers’ experience and scale • Financially strong insurer important• Donor transparency consideration• Charity still responsible for liability

Items toNote:

23

Investing Your Gift

Charitable GiftAnnuities

Charitable GiftAnnuities

Pros

Cons

• Immediate access to residuum• Minimize all risks• Reserve relief

• Bear insurer solvency risk• Relinquish control• Relinquish potential for higher returns

Pros

Cons

• Potential for higher returns• Pool investible assets• Greater equity usage

• Bears significant annuity risk• Delayed access to residuum• Conservative state reserve requirements

Reinsurance

Self-insurance

TwoApproaches

Charity usesACGA rates

to provideannuity to donor

24

Minimize Program Risks

I N V E S T M E N T

L O N G E V I T Y

A D M I N I S T R A T I V E

Asset / liability mismatches, earnings volatility, inadequate returns

Lack of scale can expose charity to significant volatility

Annuities are not primary to charity’s objective

Reinsurance can mitigate these risks

25

Reinsurance In Action

Charity

Retains $19,950

Charity

Retains $19,950

InsuranceCompany

InsuranceCompany

$50,000 Gift

$30,050 Annuity Premium

Promise of annuity payments using ACGA rates*

Insurer guarantees to pay $2,850/yr. or $237.50/mo.

to charity

Insurer Assumes: Investment risk Longevity risk Administrative risk

* Standard annuity rates developed and provided by the American Council on Gift Annuities (ACGA) as of2/1/09 for use by charities that offer gift annuities. The rates are designed so that at the annuitant’s expectedmortality date, a significant amount of money (a residuum) will be left over as a gift to the charity.* Annuity pricing as of March 2009.

Donor

Male, Age 70Life Expectancy: 16.6

yrs

If directed by charity, insurer can pay donors directly

26

Reinsurance by the Numbers

DonorMale, Age 70

Life Expectancy: 16.6 yrs $50,000Gift

$50,000Gift

$25,000Residuum

$25,000Residuum

Higher if:• Donor dies sooner• Charity earns more

Lower if:• Donor lives longer• Charity earns less

Self Insured Scenario

Reinsurance Scenario

Upfront Residuum

EarnedRate

Balance at Life Expectancy

$19,950 1.36% $25,000

$19,950 3.00% $32,500

$19,950 6.00% $52,504

Reinvest Residuumwith balance atlife expectancy

27

New York Reinsurance Regulations

ReinsuranceTreaty

Reserve reduction for reinsured CGAs

Three Keys:

Must reinsure with NY authorized life company

Valid reinsurance agreement only -Not typical annuity contract

WithoutReinsurance

WITHReinsurance

RequiredReserves

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Last Things to Note

Structure Flexibility– Selective reinsurance (gift size, gender, age)– Existing versus future on-going purchases

Administration– Bulk payment arrangements– Tax Reporting

Participant disclosure– Not legally required, but recommended

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Summary

Leverages an insurer’s asset/liability management expertise

Allows charity to take advantage of insurer’s mortality pooling

Transfers longevity, investment and administrative risk

Improves charity’s cash flow

Charity can focus more resources on its key objectives

Charity Perspective




• Founded in 1970 JDRF is a leading non-profit funder world of

diabetes research

• Mission to find a cure for diabetes and its complications

• Chapter-based organization - nationwide

• We will put ourselves out of business

• Do not have an endowment

• Investment assets of approximately $110 million

• Matched against current and future liabilities

Juvenile Diabetes Research Foundation




• Established in 1996

• Have issued 152 annuities

• 25 annuities have “matured”

• Transferred $407K out of pool - - 66% of initial gift value

• 127 annuities in force

• Market through newsletters, website, magazine, board

presentations

• Annuity program key outreach tool – additional gifts and

bequests

Charitable gift annuity program




• Three pools

• Outside administrator/investment committee

• Current mix: 31% fixed income, 7% real estate, 62% equities

• Added funds to meet NYC reserve requirement

• Current market value of pool – approximately $1.9 million

Gift annuity investments




• Significant deterioration in value of pools in a short period of time

• CGA program as a contributor - - not a detractor

• Worst case scenarios

• Possible shutdown of program (premature)

Planned giving officer concerns




• Slowly navigating

• Approached regarding reinsurance

• Complex issues

• Balance: compelled to act/avoid knee jerk reaction

• Not marketing aggressively

• Investment committee

Current status

36

Case Study

37

JDRF Annuitant Data

Number of donors = 90 Wide distribution of ages More than 50% of premium for donors now over age 80 Low concentration of gifts with few donors

– Highest donor is 10% of pool– Next highest is 5%

Ages # of Gifts ReinsurancePremium

Under 75 29 $ 312,897

75-80 21 $ 361,304

80-85 43 $ 846,928

Over 85 34 $ 411,740

Totals 127 $1,952,869

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Reinsurance: After The Fact vs. At Inception

Why is reinsurance not generating a residuum?

– Asset levels are depressed

– Interest rates are relatively low

– Mortality experience is better than predicted

– Better than average lifestyle of donors

Time of Purchase

Assets Cost of Reinsurance

Residuum

After the Fact $1.9 M $1.9 M ----

39

Mortality / Longevity Issues to Consider

Older ages more volatile funding / greater risk Older ages higher yields required on investments Older ages need for increased fixed income Mortality improvement is outpacing predictions

$100

$150

$200

$250

$300

$350

$400

$450

$500

80 81 82 83 84 85 86 87 88 89 90

Reserve Development for a $1,000 Gift*

Assumes expected mortality

Assumes no mortality

130%Higher

* Assumptions: Current ACGA Rates; donor is an 80 year old male

Contradictory

40

Summary

In deciding whether to reinsure, it is important to understand program risks

– Investment, mortality, concentration risks

Once you understand these risks, you have two choices

– Transfer the risk – eliminate it

– Manage it yourself

You don’t want to have to take money from your endowment fund to address

deficiencies in your CGA pool

What are the reinsurance possibilities?

41

Important Disclosure

“The Hartford” is The Hartford Financial Services Group, Inc. and its subsidiaries, including the issuing company, Hartford Life Insurance Company.

The benefits described in this presentation are provided through a reinsurance agreement in the states of AR, CA, FL, MD, NJ, NY, OR, WA and WI.In other states, the benefits are provided through a group, fixed annuity contract issued by Hartford Life Insurance Company under the nationwide form number HL-19202 for block purchases and HL-17393 or HL-15290 for ongoing purchases for individual annuitants. Not available in all states.

References to "Guarantees" within the description of this product are based on the claims-paying

ability of Hartford Life Insurance Company.

This information is written in connection with the promotion or marketing of the matter(s) addressed in this material. The information cannot be used or relied upon for the purpose of avoiding IRS penalties. These materials are not intended to provide tax, accounting or legal advice. As with all matters of a tax or legal nature, you should consult your own tax or legal counsel for advice.

Fundraising ~ Corporate Social Engagement ~ Interactive Services Brave New World of Planned Giving:...

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