Antitrust cartels… benchmarking common goals?
Antitrust Cartels in the insurance industry…
Usually antitrust cartels can often be found where a common interest brings competitive groups together. Real estate investing can provide an investor profits when other investments fail… history has proven that fact. But how you invest in real estate plays a significant role in the success of the investment. Real estate investment trusts do exist that are profitable, including those offered through a 401(k) plan.
There are several types of real estate investing. As a Plan Provider, insurance companies sell a commercial real estate separate account through a variable annuity or group annuity to employer sponsored 401(k) plans. These investments are owned by the insurance companies, as are all plan assets, but the acquisition protocol used in the purchase of these investments can be a serious issue.
The National Council of Real Estate Investment Fiduciaries…
The success of commercial property investing is often measured against an industry “benchmark.” The NCREIF Property Index is a quarterly time series composite total rate of return measure of investment performance of a very large pool of individual commercial real estate properties acquired in the private market for investment purposes only. All properties in the NPI have been acquired, at least in part, on behalf of tax-exempt institutional investors – the great majority being pension funds. As such, all properties are held in a fiduciary environment.
The NFI-ODCE, short for NCREIF Fund Index – Open End Diversified Core Equity, is the first of the NCREIF Fund Database products and is an index of investment returns reporting on both a historical and current basis the results of open-end commingled funds pursuing a core investment strategy, some of which have performance histories dating back to the 1970s. The NFI-ODCE Index is capitalization-weighted and is reported gross of fees. Measurement is time-weighted. NCREIF will calculate the overall aggregated Index return.
For institutional owned commercial real estate purchases, insurance companies will usually use the NFI-ODCE. On July 31, 2017, the NFI-ODCE consisted of 24 funds, totaling $224.1 billion of gross real estate assets and $180.0 billion of net real estate assets, all of which were offered by insurance companies through an annuity to investors. The 24 funds mentioned above just happen to be offered to employer sponsored 401(k) accounts by insurance companies. Those same companies are required by law to own all of your plan assets, valued each year by senior management. No public markets determine these values, but rather NCREIF members whose valuations are eventually merged as “quarterly results.” to be published in the quarterly reports offered to investors to show their investments somehow “meet or exceed” some benchmark.
If you review the July 31, 2017, NFI-ODCE quarterly report, it reports as follows:
“Quarterly total NFI-ODCE returns gross of fees was relatively steady through mid-year, at 1.70% in the second quarter 2017, compared to 1.77% last quarter. The income return has been essentially flat for three consecutive quarters and was 1.08% in the second quarter. Meanwhile, quarterly appreciation continued its steady downward trend, falling to 0.61% in the second quarter from 0.71% last quarter and 1.01% a year ago.”
Based on the above report, your investment has had a flat income return for three consecutive quarters. Not that it matters, since your investment is based only on the Gross Market Value (GMV) of the commercial properties involved… the insurance company keeps the net income as retained earnings. Quarterly appreciation has been crumbling as well… still appreciating, but at a much lower rate. These values are based solely upon the opinion of senior management in 24 different insurance companies that offered 24 different real estate funds to their clients. These corporate managers representing 24 insurance companies just happened to convene to compare numbers and their values are reborn as a benchmark.
The very existence of these benchmarks support a predication that insurance companies selling commercial real estate to their clients are doing so as an antitrust cartel. To understand why this a fact, you must first understand the state regulations relating to insurance companies and separate accounts. Iowa’s Code 508A describes the “requirements” related to Variable Annuities, the rules under which all insurance company products are sold to 401(k) plans:
1. The income, gains and losses, realized or unrealized, from assets allocated to a separate account shall be credited to or charged against the account, without regard to other income, gains or losses of the company.
2. Except as may be provided with respect to reserves for guaranteed benefits and funds referred to in subsection 3: a. Amounts allocated to any separate account and accumulations thereon may be invested and reinvested without regard to any requirements or limitations prescribed by the laws of this state governing the investments of such life insurance companies; and b. The investments in such separate account or accounts shall not be taken into account in applying the investment limitations otherwise applicable to the investments of such company.
3. Except with the approval of the commissioner of insurance and under such conditions as to investments and other matters as the commissioner may prescribe, which shall recognize the guaranteed nature of the benefits provided, reserves for benefits guaranteed as to dollar amount and duration and funds guaranteed as to principal amount or stated rate of interest shall not be maintained in a separate account.
4. Unless otherwise approved by the commissioner of insurance, assets allocated to a separate account shall be valued at their market value on the date of valuation, or if there is no readily available market, then as provided under the terms of the contract or the rules or other written agreement applicable to such separate account; however, unless otherwise approved by the commissioner of insurance, the portion, if any, of the assets of such separate account equal to the company’s reserve liability with regard to the guaranteed benefits and funds referred to in subsection 3 shall be valued in accordance with the rules otherwise applicable to the company’s assets.
5. Amounts allocated to a separate account in the exercise of the power granted by this chapter shall be owned by the company, and the company shall not be, nor hold itself out to be, a trustee with respect to such amounts. Unless it is provided to the contrary under the applicable contracts, that portion of the assets of any such separate account equal to the reserves and other contract liabilities with respect to such account shall not be chargeable with liabilities arising out of any other business the company may conduct.
6. No sale, exchange or other transfer of assets may be made by such company between any of its separate accounts or between any other investment account and one or more of its separate accounts unless, in case of a transfer into a separate account, such transfer is made solely to establish the account or to support the operation of the contracts with respect to the separate account to which the transfer is made, and unless such transfer, whether into or from a separate account, is made by a transfer of cash, or by a transfer of securities having a readily determinable market value, provided that such transfer of securities is approved by the commissioner of insurance. The commissioner of insurance may approve other transfers among such accounts if, in the commissioner’s opinion, such transfers would not be inequitable.
7. To the extent such company deems it necessary to comply with any applicable federal or state laws, such company, with respect to any separate account, including without limitation any separate account which is a management investment company or a unit investment trust, may provide for persons having an interest therein appropriate voting and other rights and special procedures for the conduct of the business of such account, including without limitation special rights and procedures relating to investment policy, investment advisory services, selection of independent public accountants, and the selection of a committee, the members of which need not be otherwise affiliated with such company, to manage the business of such account.
8. If the assets of an insurer allocated to and accumulated in a separate account in connection with any policy, annuity, agreement, instrument, or contract, after the satisfaction of any liabilities with regard to the operation of the separate account, are insufficient to fully satisfy the insurer’s express obligations under the policy, annuity, agreement, instrument, or contract, then claims for the unsatisfied portions of the insurer’s obligations shall be class 2 claims under section 507C.42, subsection 2.
The highlighted regulations will have an impact on your investments… study the comments closely. Any insurance company can use your plan assets without restrictions attached. Rule 2 clearly states that an insurance company like Principal, domiciled in the State of Iowa, can invest indiscriminately without having to comply with any “regard to any requirements or limitations prescribed by the laws of this state.” Amounts allocated (aka plan assets) must be owned by Principal (Rule 5), but they cannot be co-mingled with other separate accounts or investments (Rule 6).
If you have followed my Blog posts, you will find hard evidence to support my accusations that Principal has violated almost every regulation prescribed by the State of Iowa. The only reason a company would conduct themselves in such a manner is because they can.. based on a simply belief that they are to big to jail. Yet, to accomplish their fraudulent goals require the help of a consortium of individuals engaged in the same activity. Principal could not have propagated these goals without the help of a cartel made up of other misfits.
Michael Volkov, a Washington D.C. attorney, publishes a Blog on Corruption, Crime, and Compliance. In a recent Blog post, Volkov described the criminal risks associated with antitrust cartels, including face-to-face meetings where the risk of cartel activity can increase. A good read, his Blog post can be found here. Principal management engage in frequent meetings with their competitors monthly; often, they team up with a competitor to sell them an owned property, or vice versa. Often, Principal will purchase a property from a competitor, and soon thereafter, that competitor will sell one of his owned properties to Principal. These activities are always “private” sales, “not yet bid to market,” to use a common phrase Principal uses in their annual reports. The broker involved is usually an affiliated person, or the same broker is used in multiple transactions.
Future blog posts will highlight activities that Principal has engaged in the past that are highly suspect of being an antitrust cartel. I will provide documentation, you can decide…