I wonder how far back we'd need to go to find an insurance company that failed to pay out on its annuity contracts.
I guess the stat would be "$ of failed annuity contracts divided by $$$s of annuity contracts that paid out during the same time period".
Doing a bit of googling (and with caveat that most of this info comes from Insurance brokers websites along with Congressional testimony from 2002) I can say that the notable exception of the Executive Life that it appears in the last 20 years of the 42 life insurance companies that have failed only one companies failure resulted in loss to annuity holders and that was only for policy above 100K (which is the minimum for state guaranty associations.)
However, the Executive Life failure back in 1991 is worth discussing. California based Executive Life was one of the largest life insurance in the 80s with 300,000 policy holders 180K in California. One of the reasons that Exec Life grew so quickly was that it was offering SPIA and GIC with a 13% interest rate when most of the competitors were offering 10%. The reason
they could make such an offer is that had a large portfolio of junk bonds. The NY insurance commissioner felt this was risky and put a cap of 20% on the assets of insurance company in junk bonds. The CA insurance commissioner didn't.
In 1990, Michael Milken's junk bond firm Drexel Burnham Lambert went under taking the junk bond market with him. (See Lewis's Liar Poker for details). The collapse of the junk bonds also triggered the failure of Exec Life.
The CA insurance commissioner was under a lot of pressure from the State Guaranty Association (i.e. other insurance companies) to minimize the cost of the restructuring. So he took an offer from a new insurance company (Auroa) which was actually a shell company owned (illegally) by French bank Credit Lyonnais. As part of the deal the insurance commissioner instead of selling off the entire junk bond made a deal to allow a former Michael Milken assistant to cherry pick the best bonds (For those of you who familiar with the 2008 the same situation as happened with Goldman Sachs and mortgage backed securities) from the portfolio and give back the bonds he didn't want. So on one side of the transaction you have the lawyers from the California insurance commissioner and on the other side you have a big French bank working with junk bond experts. Any guesses who got the better deal
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Now I couldn't find much of the way of hard data, but it does appear that most Exec Life annuity holders, and structured settlement beneficiary saw a 30-50% reduction in their monthly payments after all of the lawsuits were done. In the case of disabled people (e.g. accident victims) this was typically almost all of their income.
This to me illustrates the, admittedly pretty small, dangers of a large insurance company acting stupid/greedy and failing. It doesn't account for the possibility of systemic failures in the insurance business if we continue to have a period of poor returns on capital and insurance companies find themselves lock in annuities promising 6,7,8% returns written many years ago.
Back in late 2007, early 2008, I touted BBT. At the time this conservative bank was yielding 6% had a 110 year history of paying dividends a 35 year history of raising them, had only cut dividends once by a penny during the depression. Now my assessment of BB&T as good bank was spot on. It avoided making the really stupid loans like Option ARM etc. The banks continued to make money every quarter, it has gained market share by taking over its weaker former competitors. Unlike most big banks which cut dividends to a $.05 a quarter or $.01 for BAC or Citi, BBT "only" slashed its dividend to $.15 from $.47. The stock price "only" fell from $35-40 to $20. So do pat myself on the back for picking one of the few 1/2 rotten apples out of a the barrel rotten ones? (I am not talking about the many other banks I owned during that time that performed much worse) Or do I say damn that was dumb of me to invest so heavily in one sector?
Insurance companies are financial institution much like banks. We don't even need a black swan to severely hurt the whole sector just a decade or so of sub-par par investment performance. I have no confidence that state regulators do a better job watching them than the Feds did with banks, and brokerages. Which is why I think SPIA should be treated as a fixed income, annuities should purchased from multiple companies and the total should not exceed the 25-35% of assets.
or magical).
