Cost-Benefit Analysis

Lighthouse Financial Services Company — The capital strain schedule, return summary and non-financial case behind the Beacon Index Advantage business case, maintained independently of any single gate package. The Gate 1 Business Case Package is the decision record as it went to the Board, with its dissents and vote; this document is the analytical backup a program finance function keeps current between gates.

1. Purpose & Relationship to the Gate 1 Business Case

This document exists so the numbers behind the business case have a home that is not itself a gate package. It restates nothing about the recycle, the dissents, or the vote — that record belongs solely to the Gate 1 Business Case Package and the Gate 1 Recycle Memorandum. What it adds is the arithmetic: the capital strain schedule derived line by line from the premium forecast, and a scenario record that keeps the superseded, base and downside figures next to each other rather than scattered across several documents.

2. Investment Summary — Two Different Kinds of Money

Two figures both describe "what this program costs," and conflating them is the most common misreading of a stage-gate business case.

The $27,904,000 authorized in the Program Budget pays for building, filing and launching the product — people, platform configuration, filing fees, distribution enablement. The $78,750,000 here is a different thing entirely: statutory reserve capital the product consumes as new business is written, released back over time as policies run off. A product can be built for $27,904,000 and still be a poor use of capital if the $78,750,000 it strains does not earn its hurdle rate — which is exactly the question §4 answers.

3. Five-Year Premium & Capital Strain Schedule

Capital strain is a constant 4.2% of new premium in each year of the forecast. Because Year 1 is a partial year from the 06 March 2028 launch date, its premium — and therefore its strain — is smaller than Years 2 through 5.

Strain concentrates in Years 3–5 as the product ramps past its partial first year and the IMO channel matures — which is also where the $17,000,000 Year 1 distribution gap (Gate Conditions Register, GC-04 efficacy finding) matters most: a channel that under-delivers Year 1 does not just cost Year 1 premium, it pushes the strain curve later and compounds against a hurdle rate measured over the full five years.

4. Return Summary

The base case returns 13.4% against an 11.0% hurdle, an NPV at the hurdle rate of $11,009,118, and undiscounted payback in Year 9 of the fifteen-year projection. These are computed, not carried: §5 sets out the model and §6 the cash flows it produces.

5. The Model Behind These Figures

Investment here is not the program build cost — it is the statutory capital the product ties up. Required capital is held against account value rather than merely strained at issue:

Shareholder cash flow in each year is the net product margin earned on average account value, plus investment income on the capital held, less the fixed annual run cost, less the increase in required capital — which becomes a release once the block runs off. The program's authorized build cost is the year-zero outflow.

Two calibrated parameters, three reproduced facts

Every other input is a stated assumption: interest credited 3.5%, investment income on capital 4.0%, and a lapse curve running 4.0% rising through the seven-year surrender-charge period to a 18% shock at year eight. Account value peaks at $1,729,249,363, against peak required capital of $72,628,473.

6. Projected Cash Flows

7. Scenario & Sensitivity Record

8. What the Recycle Actually Cost — the Capital Error, Quantified

The first Gate 1 convening carried an IRR of 14.6% on a capital charge later found to be understated. That figure was withdrawn, not carried forward. Running the model backward — solving for the capital ratio that would have produced 14.6% on otherwise identical assumptions — recovers what the error actually was:

9. Non-Financial Benefits

• Distribution relationship value. A refreshed shelf gives the wholesaler and IMO channel a current product to sell, protecting shelf space that a stale lineup would eventually lose to competitors regardless of this program's own IRR.
• In-house hedging capability. Building GLWB hedging capability in-house (Decision D-08) is a capability the carrier keeps for future rider-bearing products, not a cost that disappears at this product's launch.
• Regulatory filing infrastructure. The Compact-first filing approach and the non-Compact state playbook built for this launch (Decision D-06) reduce the marginal cost of the next product's filing.
• A tested gate process. The recycle was expensive in the moment but cheap relative to what an uncorrected capital charge would have cost carried all the way to launch — the Governance Model and Gate Decision Framework both exist because this benefit is real and hard to put a dollar figure on.

10. Risks to the Business Case

11. Governance of This Analysis

Maintained by the Program Finance Manager and re-tested at every gate, per Program Charter §4 (Objective 2: clear the 11.0% hurdle rate through the life of the forecast, re-tested at every gate). The IRR figures in §4–5 are supplied by Actuarial — this document reproduces them from an explicit cash-flow model (§5) that refuses to load if it cannot recover every locked figure to within half a basis point. The model does not replace the actuarial pricing basis; it is a PM-level reconstruction whose only job is to make the approved numbers auditable by someone who is not an actuary — and to fail loudly if they stop tying.

12. Document Control & Related Documents

Related documents: Gate 1 Business Case Package · Program Budget · Gate Conditions Register · RAIDD Log.

Maintained by B. Trombley, Program Finance Manager, under the authority of C. Tyrrell, NPD Program Manager and Chair of the Gate Review Board.