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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75539  
Subject: IUL credits *include* Dividends Date: 9/23/2013 3:37 PM
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IUL credits *include* Dividends

A while back, when Synchronicity started complaining he couldn't find any insurance company literature explaining how IUL credits actually include dividends, I shot off an inquiry to the actuaries at Allianz so they could provide exactly such a statement "from the horse's mouth" as it were.

I asked;
> Dividends are not part of the index price point calculation,
> HOWEVER, dividends *ARE* part of the market valuation calculation for options.
QUESTION:
What effect would a net increase, or decrease, in the overall aggregate dividends of a market (like the S&P) have on the cost of the floor/cap spread? The spread is of course long one option strike, and short another… but I don’t think the dividends have the same effect on ATM options as they do OTM.

Would an aggregate dividend increase cause an increase in the costs of the spread (all else remaining the same,) or a decrease in the cost of the spread?

The answer, from Andy Feldman, Allianz actuary;
David,

You're right that the effect of dividends is not the same at different option strikes. The effect is stronger on an option that is more in-the-money (or less out-of-the-money), because that option is more likely to be exercised.

In the case of our annual point-to-point crediting method with a cap, an increase in aggregate dividend yield would make the hedging cheaper, which would mean we could afford to increase the cap (all else being equal).

Forward-looking expected dividend yields on the S&P 500 are historically fairly stable, so I wouldn't expect dividend yields to have a big impact on our caps from year to year.

Hope that helps,
Andy Feldman, ASA, MAAA
AIM Principal, Hedging



Now that at least 32 recs (at present count) on Synchro's last request to be "bluntly" educated (post #73164) have been satisfied, we can put this one to bed. I trust that Andy Feldman spoke plain enough English for folks here to comprehend without closed captioning, yes?

Anyone complaining that IULs credits do not include dividends can be recognized as uneducated, or willfully disingenuous.


HAVING SAID THAT...
I'll also point out it is *IRRELEVANT*!!!

If the net/net risk-adjusted returns of the S&P500 fails to beat the fixed-reset indexing calculations of bouncing tennis balls, it doesn't matter of the balls are fuzzy or bald!

Dave Donhoff
Leverage Planner
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