Introducing Ohtani Life & Annuity

Shohei Ohtani recently signed the biggest contract in baseball history at 10 years for $700M. However, it wasn’t quite as big as it seemed.

He deferred most of his money for ten years which, at a 4.4% discount rate, means he will earn the equivalent of $460M over ten years. That would still be a record contract, but not as big a headline as the nominal dollars reported.

There has been a lot of debate over how to interpret this, what the proper discount rate is, whether it is a good or bad deal for the team, etc.

None of that is my concern today. What I am interested in is showing how Shohei can turn that future value of $700M into well over $1B. As you might surmise from the title, it has something to do with insurance.

Bowie Bonds

But before we get to that, let’s explore something else. You may have heard of Bowie Bonds. These are securitizations issued against future music royalties. They were first done for David Bowie to monetize his catalog in 1997.

In return for giving up future income, Bowie sacrificed the income from his future royalties. You can think of this similarly to taking a lump sum value for your pension.

Ohtani has the ability to do the same thing. He could sell the rights to the future $68M/yr payments for a lump sum today.

The bond buyers would be taking credit risk on the future of the Dodgers, though MLB requires the Dodgers to place the payments in escrow, and it is highly unlikely a baseball team would go bankrupt.

Bond buyers would probably want a coupon in the low 5s for this security. At 5.23%, the present value of 10 payments of $68M beginning in year 11 is $312M today.

So Shohei could do a $312M Bowie Bond. If he invested that at 6%, he would have $1B in 20 years. If he invested at 10%, it would grow to $2.1B and, at 12%, it would become $3B.

By contrast, if he waited to collect his deferred $ and invested them at 10%, he would “only” have $1.1B in year 20 as there is less time to compound.

In actuality, he would have far less. He has to pay taxes on the future income when he receives each $68M payment, so he would have a much lower starting base to invest with in the future which would likely cut the future value by half.

While he would still owe those future taxes with a Bowie bond, he would have a much larger net worth with which to pay them!

So doing a Bowie Bond could double or triple or even quadruple his future value! I can assure you bankers at Goldman and JP Morgan are sending his agent proposals with this math.

Ohtannuities

But how is he going to earn this 10 or 12% I’m suggesting? That entails risk obviously.

He could put it in hedge funds or venture capital. But what if there were a better way?

He can start his own total return life insurer – Ohtani Life & Annuity!

That’s right, he can take his $300M of bond proceeds and capitalize an insurance company. He could easily write $3B of fixed annuities on that capital.

He probably would want to spread that out some, so let’s say he writes $1B of FAs each year for three years. As there are surrenders in future years, or as capital grows, he can possibly write more.

In today’s interest rate environment, traditional FAs are probably earning a 12-15% ROE. However, Shohei wouldn’t want to run a vanilla FA company.

He would want to imitate Apollo, Blackstone, etc. and use a more aggressive investment strategy. This could take returns as high as 20%!

Producing Home Run Returns

Let’s play it down the middle and say he can make a 15% ROE. That would produce $47M of earnings each year.

But Shohei is getting good financial advice and realizes if he can grow the capital to $450M, 15% will yield $68M of annual earnings and cover his full bond obligation. That would mean he can keep the entire Dodgers’ payments, after tax.

To grow the capital from $312M to $450, he needs surplus to grow $14M/yr. Any earnings above this he can take out as a dividend and invest on his own.

So, in year one, he would keep $14M in surplus and pull $33M out. If he can invest this at 10% for the next 19 years, that alone is $200M of future value! However, he will have to pay 20% tax on the dividends, so cut that to $160M.

Over the ten years, he would take $422M in dividends while growing the surplus to $450M.

If we assume this $422M is invested, after it’s taxed, at 10% annually, it would grow to $1.34B by year 20. That is less than some of my earlier scenarios, but that’s because we’re not done counting!

Shohei The Money!

Shohei would use the $68M of annual earnings to pay the bondholders back in years 11-20. After that, he would have a perpetual stream of $68M annual income.

What’s that worth? If you think the risk free rate will be 5%, the present value of an annuity calculation says it’s worth 20X earnings! That would be another $1.36B. That is 3X book value which seems on the high side, so let’s cut it to 2X book, or $900M (7.5% discount rate, assuming it’s a financial buyer) and add that to our future value.

But we forgot another pile. Shohei no longer needs to use his Dodgers payments to pay off the bonds. The annuity company earnings already took care of that.

Let’s say he has poor tax planning and has to pay 1/2 of the $68M per year in taxes. Still, that $34M/yr invested from years 11-20 produces $541M in year 20 at a 10% annual return.

If you add up the $1.34B of invested annuity dividends, the $900M for selling the insurer, and the $541M from the Dodgers and you have a future value of $2.8B!

Double Play

If you refer back above, if he only did the Bowie Bond and invested at 10%/yr, it would grow to $2.1B of future value. But that was without any adjustment for taxes.

The $2.8B from the insurance strategy already incorporates a fair amount (though not all) of tax. So, I’d estimate Shohei is at least twice as well off pairing the Bowie Bond strategy with Ohtani Life & Annuity.

The Payroll Tax

Shohei would certainly have to pay the bankers a chunk of change to implement all this for him. However, the bankers would also have to pay an extra “tax” for “competitive balance”.

I am referring, of course, to the fees his bankers should send me for devising this elegant strategy to maximize his wealth. If they convince him of the merits, I expect my cut!