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Old 11-18-2013, 05:22 PM   #41
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I don't agree. Almost all the life insurance companies suffered huge losses in 2008, and 2009. While common stock holders and even many preferred shareholder suffered almost complete losses in hundreds of failed banks, senior debt holder of failed banks for the most part were unaffected. This was because of many factor including the existence of the FDIC fund,and TARP, plus fed actions.
Some of the biggest holders of bank senior debt are in insurance companies portfolio. Insurance companies losses would have been even worse but for those actions.

The bull market of the last 4.5 years has bailed out a lot of portfolio including both mine and the insurance companies.

The failure of a single large insurance company Executive Life in the 1991 stressed the state guaranty fund system to the limits. It resulted in many policy holder losing 20% of their money in California. Perhaps even more problematic for retiree was seeing their payments reduced and/or suspend while the court system worked out the details of the bankruptcy.

There is a reason that most (perhaps all states) prohibit insurance companies from a making any mention of the guaranty fund in their marketing literature. It provides adequate protection for a single insurance company going bust due to incompetent or reckless behavior by management. It does nothing to cushion the consequences of systemic failure in the industry.

I figure the insurance industry is one black swan event away from some deep dodo.
Yes. Bottom line is annuities have more risk than a CD.

The irony is that the big market crash that annuities are supposed to protect you from is the same market crash that might crash the state insurance guarantee fund. So what good is that guarantee?
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Old 11-18-2013, 07:03 PM   #42
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Originally Posted by clifp View Post
I don't agree. Almost all the life insurance companies suffered huge losses in 2008, and 2009. While common stock holders and even many preferred shareholder suffered almost complete losses in hundreds of failed banks, senior debt holder of failed banks for the most part were unaffected. This was because of many factor including the existence of the FDIC fund,and TARP, plus fed actions.
Some of the biggest holders of bank senior debt are in insurance companies portfolio. Insurance companies losses would have been even worse but for those actions.

The bull market of the last 4.5 years has bailed out a lot of portfolio including both mine and the insurance companies.

The failure of a single large insurance company Executive Life in the 1991 stressed the state guaranty fund system to the limits. It resulted in many policy holder losing 20% of their money in California. Perhaps even more problematic for retiree was seeing their payments reduced and/or suspend while the court system worked out the details of the bankruptcy.

There is a reason that most (perhaps all states) prohibit insurance companies from a making any mention of the guaranty fund in their marketing literature. It provides adequate protection for a single insurance company going bust due to incompetent or reckless behavior by management. It does nothing to cushion the consequences of systemic failure in the industry.

I figure the insurance industry is one black swan event away from some deep dodo.
I guess we'll have to agree to disagree.

2008 and 2009 were indeed stressful days for the industry, and some players reported huge losses. The losses were probably a bit exaggerated in that, like many other public companies, once you know you're going to be reporting a big loss you really clean out the closets - if you're going to take a bath it is best to take a big bath and get it over with.

I concede that insurers are big investors in corporate bonds and financial sector corporate bonds in particular so the taxpayer bailout of the banks was helpful, but it was also helpful to pension plans, university endowments and other entities that have heavy bond investments. If the stuff hits the fan and corporate America defaults on its debt obligations, there will be an adverse affect on insurers - AND on all corporate bond investors. If that were to happen then insurer insolvencies would only be a sizeable piece of a cataclysmic pie.

The bull market helps but not much because life insurer general accounts are not typically big common stock investors, in part because of the impact of investing in common stock on RBC and required surplus.

Executive Life (and Mutual Benefit Life and other insolvencies) led to significant reforms in the solvency monitoring approach in the 1990s, notably RBC requirements, which have greatly improved solvency monitoring by regulators.

[Interesting, and true story on Executive Life. Our mutual company was going through a ratings review with one of the major rating agencies and the people from the rating agency were questioning the conservativeness of our investment portfolio and questioning how we could be competitive if we weren't more aggressive (ie; buy junkier bonds). Our CMO got a bit heated and pounded on the table and told them that we would be around long after Executive Life went belly up. EL went belly up a few years later.]

Could there be a calamity that hurts the economy so much that the investments backing insurance liabilities default and the insurers are unable to pay on their obligations and the guaranty associations go belly up as well? I guess anything is possible. But it seems equally probable that Martians will land in my driveway tonight.
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Old 11-18-2013, 07:10 PM   #43
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Yes. Bottom line is annuities have more risk than a CD.

The irony is that the big market crash that annuities are supposed to protect you from is the same market crash that might crash the state insurance guarantee fund. So what good is that guarantee?
1. Perceptive glimpse of the obvious - congratulations!
2. Where did anyone in this thread suggest that annuities are less risky than CDs?
3. A stock market crash would stress, but not break, insurers and guaranty funds since their common stock investments are relatively modest unless the causes of the stock market crash significantly impacted the debt markets.
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Old 11-19-2013, 01:01 AM   #44
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1. Perceptive glimpse of the obvious - congratulations!
2. Where did anyone in this thread suggest that annuities are less risky
than CDs?
3. A stock market crash would stress, but not break, insurers and guaranty funds since their common stock investments are relatively modest unless the causes of the stock market crash significantly impacted the debt markets.
Well it is fair to assess the relative risks of 3% interest rate of the OPs annuity vs 2% CD backed by the FDIC. Personally I'd rather have the 1% more income, cause I think the risk is minimal that the 3% annuity doesn't get paid by an insurance company. There also is a tiny tiny risk that CD doesn't get paid also in the event of a another major crisis and the FDIC fund goes broke.

But if the difference was between 2% CD and 2.05% annuity I'd take the CD.


I should also add to my previous posts, that I personally wouldn't lose sleep over an SPIA, unless it was one of the super high yield ones like Executive Life use to offer. But if if were talking about Equity Index Annuity, or some of the more exotic products, than a lot diligence more than almost all people are capable of doing (You and Brewer, probably not myself.)

Your anecdote is interesting but also scary.

Imagine if your CMO was more foolish, or less conservative and had taken the idiotic regulators advice. Your company competes with Executive Life for marketshare by offering higher interest rates on annuities. Other insurance companies urged by regulators to be more competitive do the same. The insurance companies of course need to invest in those "not-very-risky" junk bonds to pay the higher interest rates. The junk bond market crashes and in addition to taking down Executive Life also takes down their competitors. Even more stress on guarantee funds and even higher losses to individual annuity holders.

This seems a bit more likely than a Martian invasion or am I missing something?
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Old 11-19-2013, 05:46 AM   #45
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I should also add to my previous posts, that I personally wouldn't lose sleep over an SPIA, unless it was one of the super high yield ones like Executive Life use to offer. But if if were talking about Equity Index Annuity, or some of the more exotic products, than a lot diligence more than almost all people are capable of doing (You and Brewer, probably not myself.)
All of the fancy riders that get slapped on EIAs are not covered by the guarantee fund.

The OP indicated that their nominal $30,000 annuity is a very small portion of their assets. Given the whopping difference of $300 per year in phantom income between 2% and 3%, it seems that life would be made simpler by eliminating this small account. That interest difference is also probably temporary. Longer term CD rates will probably rise above the annuity rate once the current interest rate manipulation ends.
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Old 11-19-2013, 07:51 AM   #46
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....Your anecdote is interesting but also scary.

Imagine if your CMO was more foolish, or less conservative and had taken the idiotic regulators advice. Your company competes with Executive Life for marketshare by offering higher interest rates on annuities. Other insurance companies urged by regulators to be more competitive do the same. The insurance companies of course need to invest in those "not-very-risky" junk bonds to pay the higher interest rates. The junk bond market crashes and in addition to taking down Executive Life also takes down their competitors. Even more stress on guarantee funds and even higher losses to individual annuity holders. ......
Our company was almost conservative to a fault so there is no way that would have ever happened - and based on my interaction with other mutuals and the more conservative stock companies I think the same could be said for them. There were many in the industry at the time who were very skeptical of EL's overweighting of junk bonds. Note that it was NOT regulators urging us - it was ONE of the rating agencies and I think to some extent they weren't necessarily encouraging us to be less conservative but were just interested in our response as to how we expected to be able to compete with those yahoos at EL. Our company culture was very conservative, as were most other mutuals I interacted with and also most of the big name stock companies, though I concede that the players are all probably less conservative today than back in the 80s and 90s (other than perhaps NML).

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.........Given the whopping difference of $300 per year in phantom income between 2% and 3%, it seems that life would be made simpler by eliminating this small account. That interest difference is also probably temporary. Longer term CD rates will probably rise above the annuity rate once the current interest rate manipulation ends.
I don't think it is likely that medium term CDs will ever pay more than the FPDA. The 3% is only the minimum guaranteed rate, as interest rates rise the crediting rate would likely rise as well and I would think that the crediting rate would generally always be higher than 3-5 year CD rates. FPDA issuers realize that CDs are a substitute product that they have to compete with. The minimum guaranteed rate is a feature of annuities that CDs don't have and have been very beneficial to policyholders during the financial crisis. All of that said, I'm not a fan of annuities and don't own any, but if I owned one that was paying 3% I'd be keeping it unless I was really keen to minimize the number of different accounts that i had.
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Old 11-19-2013, 10:04 AM   #47
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Fascinating discussion... Thanks...
If it's not too far off the topic... Thoughts on the positives and negatives of IBonds...
1. On the older ones.. from early 2000's
2. On buying today vs annuities... CD's
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