Is this the nail in the annuity coffin?

[pb4uski]

There are no absolutes, but it would be a difficult process to demutualize the remaining large mutuals and then you would have to try hard for decades to ruin these companies.

plus most of the remaining mutuals are so big (NML, NYL, MML, etc) that PE would have a hard time funding a takeover. I suspect that PE has learned from Cerberus' experiences with Chrysler and GMAC that mega-bets are not the way to go.

 

[ejman]

You obviously don't understand what happened at AIG (which is a common misconception BTW). The problem with AIG was NOT with ANY of their insurance businesses. The problem was with a unit of yahoos at the holding company level that wrote credit default swaps and thought they were smarter than anyone else. (BTW I doubt that Hank Greenberg would have allowed what they did on his watch so in a way you can trace the blame back to Elliott Spitzer).

The fact that they had great insurance businesses was part of their salvation as after the federal government help stabilized AIG they were able to sell many of their insurance businesses and use the proceeds to pay back the government.

I was well aware that the yahoo brigade and not the underlying insurance business was responsible at AIG. You obviously do not understand my point. It is simply that the same type of yahoos that did their deed at AIG did not magically disappear because they reflect a current cultural "lay of the land" if you will.

To expect that current insurance regulations will be sufficient and will remain as they are over many decades is naive in my view when there are powerful economic/social/political forces at work that reward the yahoos.

 

[Semiretired2008]

To expect that current insurance regulations will be sufficient and will remain as they are over many decades is naive in my view when there are powerful economic/social/political forces at work that reward the yahoos.

Yep, in this economic climate - it takes little to damage a company long term - right down to the bone and beyond...

 

[pb4uski]

I was well aware that the yahoo brigade and not the underlying insurance business was responsible at AIG. You obviously do not understand my point. It is simply that the same type of yahoos that did their deed at AIG did not magically disappear because they reflect a current cultural "lay of the land" if you will.

To expect that current insurance regulations will be sufficient and will remain as they are over many decades is naive in my view when there are powerful economic/social/political forces at work that reward the yahoos.

Guess we'll need to agree to disagree on that one. Other than AIG, which I don't consider to be an insurance company problem, insurers weathered the economic storm much better than other financial institutions. The were strained in many cases, but didn't break like the banks did. While I am loathe to praise insurance regulation, the fact remains that the regulatory framework worked well in a very difficult situation.

I don't see that changing just because the PEs want in.

 

[bubblehead]

if you believe in annuities-which i don't-take ss at 70.i took mine at 62.

 

[ejman]

Since the 'powers that be' did not let the financial industry crash in the 'great recession', they probably will not in the future, and the future funds would be OK. maybe.

Although we are taking a turn from the original poster's direction ( What fun would it be if not? ) a couple of comments:

1) There has been enormous political backlash to what the "powers that be" did to save the financial industry. Would they be able to do it again?

2) There may not be enough economic resources to absorb another slug of similar magnitude in the near-intermediate term.

So, if there is no political will or the economic means to deal with the situation I think that a replay of the steps that prevented a depression in the recent past is not a foregone conclusion.

 

[nun]

I know there aren't many annuity partisans here, but there's some evidence that fixed annuities, in particular, could play a constructive role in a portfolio -- as long as you live long enough.

There are some of us that didn't buy into the stock market/mutual fund cool aid completely and have annuities in our portfolios for diversity and to provide a foundation of income. Heck I have a TIAA-Traditional deferred annuity that this year earned 4.5%, so it's a fixed income star IMHO, and when I annuitize it the payout interest rate will be 7.75%.

It is frightening to think that greater and greater risk is now creeping into the portfolios of insurance companies, presumably so that the new owners can take the greater returns at the increased risk of defaulting on the annuity contracts.

It looks like the bigger companies like MetLife and TIAA-CREF are still too big for any idea of takeovers, but it's something to watch

 

[ejman]

Interesting discussion, and another reason to wait as long as possible to make the SPIA buying decision it seems...

I agree. I do not rule out SPIA a priory but I would not consider one until late 70's early 80's (If I get there). That's 15-20 years in the future for me - too far out for my crystal ball.

 

[Midpack]

Heck I have a TIAA-Traditional deferred annuity that this year earned 4.5%, so it's a fixed income star IMHO, and when I annuitize it the payout [-]interest[/-] rate will be 7.75%.

Did you really mean interest rate, or did you mean payout rate (interest & principal)?

 

[nun]

Did you really mean interest rate, or did you mean payout rate (interest & principal)?

Interest rate, it's all down to TIAA-CREFs use of vintages when declaring accumulation and payout interest rates. Because I paid my premiums prior to 1992 I get an interest rate that is connected to the higher interest rates back then.

Today's payout interest rate for contributions made today is 3%, the actual payout %age would be higher and would depend on the usual annuity factors of interest rate, age, sex etc.

https://www.tiaa-cref.org/public/performance/retirement/profiles/4001.html

 

[timo2]

Although we are taking a turn from the original poster's direction ( What fun would it be if not? ) a couple of comments:

1) There has been enormous political backlash to what the "powers that be" did to save the financial industry. Would they be able to do it again?

2) There may not be enough economic resources to absorb another slug of similar magnitude in the near-intermediate term.

So, if there is no political will or the economic means to deal with the situation I think that a replay of the steps that prevented a depression in the recent past is not a foregone conclusion.

+0.65
until just recently, I was 100% sure that #1 was the case. and on a country by country basis, it still might be. What's changed is my acceptance that the 'powers that be' will do anything to keep their stash. But maybe this latest annuity wrinkle is part of that (with the risk of smelling the bacon, I'll stop now)

 

[brewer12345]

Not exactly the same situation but I remember a large insurance outfit (AIG) that seemed as solid as the Rock of Gibraltar. Had it not been for Bernie Santa Claus I suspect that large solid outfit might not be here today.

Feel free to wallow in ignorance if you like. In the case of AIG, insurance regulaton worked quite well. The unregulated holding company was where all of the drunken skullduggery went on. When the holding company was about to blow up, there was tremendous political pressure to allow the insurance operating companes (which were healthy and well capitalized) to take on the liabilities of the holding company. NY State insurance commissioner Dinallo did the right thing and would not allow it to happen. Insurance policyholders were protected as they should be.

Despite their rating, I would never have bought a policy from AIG. Although it was big and well rated, the company was always leveraged, had an aggressive culture, and was not a mutual.

In the case of the large mutuals that are running around today, they all have very large blocks of participating long term policies. Even if one of the companies managed to demutualize, these policies would be put into what is referred to as a "closed block" and effectively must be made super senior within the insurance operating company's liabilities complete with extra capital and heavy regulatory scrutiny. It would be very, very difficult to ever impair the policyholder's value from one of these policies.

 

[james7]

Sorry....I didn't make the answer real clear to you....I didn't build an annuity up, I just did stocks, bonds, real estate and work. I opened the annuity after I retired with the GLWB to create a permanent lifetime income stream with the annuity.

I thank you for your explanations. I apoligize if my question seemed kind of nosey, but I am an avid reader of two sub-forums, FIRE and Money, and Stock Picking, and am always interested in ideas on how people manage money and their investments. This topic particularly interested me because I turn 60 this year and have no annuities, but have thought about buying one or two, not to annuitize, but to keep some money that I don't need now in a tax deferred vehicle for the future. So I would be doing what you are doing, not using an annuity to sock away money during my working years, but purchase at retirement to create another bucket of money, in case it was ever needed. In essence, you have given up the preferred tax treatment of dividends and capital gains that you would have had if you had invested directly in the Vanguard funds without using an annuity, and are paying an extra fee for the insurance so that if the stock market takes a tumble, your nest egg would be protected. You are wise to use this strategy to minimize risk.

I do not have the negative view of annuities that so many on this forum have. I think annuities are particularly useful if one purchases them whie working to put money away for retirement.

 

[Texas Proud]

Not exactly the same situation but I remember a large insurance outfit (AIG) that seemed as solid as the Rock of Gibraltar. Had it not been for Bernie Santa Claus I suspect that large solid outfit might not be here today.

Almost all, if not all of the life insurance companies and annuities that AIG owned were solvent... I don't know what would have happened if the parent company was not 'saved', but I do not think that checks to the annuitants would have stopped...

FWIR, it was the other big financial institutions that made out like a bandit with the AIG bailout... but then again, I could be wrong....

 

[bjorn2bwild]

Also worth mentioning - If you live in a state with a high credit rating, there is the additional security backstop of the State Guaranty Association. Just be aware of the limitations.

 

[Kimo]

To James7, No problem, I like to help on items I feel I have researched, understand and actually own so I can personally see them operate. You actually still get the dividends and capitol gains but they are not broken out like you are used to seeing, they just become part of that days increase in price when they happen, they are never mentioned though. Also, if you purchase the annuity with after tax money, as it sounds like you would do, almost all the payment is not taxed because in effect, it is your money being returned to you. You will pay a very minimal tax (probably none because of other gains in your other portions of your portfolio) Also, the payment is exact, no fees, taxes etc. are taken out of your payment, they come out of your portfolio balance. This lets you know exactly to the penny how much your annuity will pay every month. I much as I like these, I would still do what you are implying, buy them after you retire and take the GLWB at the exact time you sign up. Also, your nest isn't necessarily "protected" as they are stocks and bonds and will go up and down just as if they were not in an annuity, it is just that no matter how low they go your income will not be affected. As a side note, that portion of this makes me less inclined to want to pull the plug if the markets are plunging....just leave it in the annuity and keep collecting the same money. Hope this helps.

 

[brewer12345]

Also worth mentioning - If you live in a state with a high credit rating, there is the additional security backstop of the State Guaranty Association. Just be aware of the limitations.

Absolutely, completely wrong. No state backs the liabilities of insurers doing business in its borders. The guaranty associations have their own resources and then that is it: no state backing. More information can be found here: www.nolhga.com

 

[bjorn2bwild]

Good to know, thanks for the correction.

 

[ejman]

Feel free to wallow in ignorance if you like. In the case of AIG, insurance regulaton worked quite well. The unregulated holding company was where all of the drunken skullduggery went on. When the holding company was about to blow up, there was tremendous political pressure to allow the insurance operating companes (which were healthy and well capitalized) to take on the liabilities of the holding company. NY State insurance commissioner Dinallo did the right thing and would not allow it to happen. Insurance policyholders were protected as they should be.

Despite their rating, I would never have bought a policy from AIG. Although it was big and well rated, the company was always leveraged, had an aggressive culture, and was not a mutual.

In the case of the large mutuals that are running around today, they all have very large blocks of participating long term policies. Even if one of the companies managed to demutualize, these policies would be put into what is referred to as a "closed block" and effectively must be made super senior within the insurance operating company's liabilities complete with extra capital and heavy regulatory scrutiny. It would be very, very difficult to ever impair the policyholder's value from one of these policies.

Thank you for the clarification I'm wallowing slightly closer to the surface now as a result. But I still have a long way to go. Along those lines, do I understand you correctly that if someone less well motivated than commissioner Dinallo had been in charge of that decision then the s*** would have hit the proverbial fan?

 

[brewer12345]

Thank you for the clarification I'm wallowing slightly closer to the surface now as a result. But I still have a long way to go. Along those lines, do I understand you correctly that if someone less well motivated than commissioner Dinallo had been in charge of that decision then the s*** would have hit the proverbial fan?

Whether it would even be possible I do not know. It would likely depend upon the fine points of state insurance law and since there were monied/institutional interests at the insurance company level you can bet that it would have been contested and likely litigated if it had been attempted. Generally speaking, insurance operating companies are not allowed to take on the liabilities of their unregulated affiliates, although I am aware of one instance in which this was allowed (March McClennan). However, the one case I am aware of involved holding company debt that was nowhere near an amount that would have threatened the insurance operating companies. Clearly the AIG case was different.

 

[slaternuthink]

Absolutely, completely wrong. No state backs the liabilities of insurers doing business in its borders. The guaranty associations have their own resources and then that is it: no state backing. More information can be found here: www.nolhga.com

Do you know of any instance where a SGA limit has been breached?

 

[kmt1972]

It seems annuities are a bad deal when interest rates are low, like now. One of my future scenarios when we are in our 50s and in ER, is if interest rates rise to a high level, then buy $1 million worth of inflation adjusted annuities scattered over several vendors so we are hedged against counter party risk. Of course at that stage we will assess our investment track record in our FI assets. If we believe we can do better than what is offered by the annuities rate then we will go with ourselves.

My question for annuities experts on this board is what is your take on the relative pluses and minuses of inflation adjusted annuities versus the fixed annuities.

 

[Kimo]

Buy an annuity that allows you to get out whenever you want at no cost to you.....(see my other posts) If the rates go up, cash in and buy again, it will not cost you anything,

 

[brewer12345]

Do you know of any instance where a SGA limit has been breached?

Not off the topof my head. I know there were lots of policyholders impaired when Executive Life blew up in the 90s, but I don't know if it was just people over the guaranty limit or if the state guaranty fund was tapped out. None of the state guaranty funds are prepared for a major loss at a large insurer, IMO.

 

[slaternuthink]

[. None of the state guaranty funds are prepared for a major loss at a large insurer, IMO.[/QUOTE]


Thank you, that is the answer I was seeking.