What happens if lifetime annuity issuer goes bankrupt?

[mark]

What exactly happens to your lifetime annuity if the issuer goes bankrupt?

For example, Vanguard issues through AIG. Say 15 years from now, AIG goes belly up. Do you stand in line with the rest of AIG's creditors?

[brewer12345]

Policyholders come first, ahead of senior creditors, etc. If there isn't enough juice to cover the policyholders, there are state guaranty funds, but they are a far cry from the FDIC because nobody stands behind the guaranty funds.

[frayne]

SOL baby, SOL.

[chinaco]

Best defense is a good offense... Pick an insurer that is rate the equivalent of triple A by all major rating agencies. If they passed the inspection of all of them... they should be solid.

Northwestern Mutual would be a good choice. There are only a few!!! not sure of the exact amount... but probably about 10 insurers in this category.

I am considering NWM as the company if I purchase one. Of course, several things will need to line up for me to make that decision. The first is interest rates... The other is age. I doubt I would consider the purchase until sometime in mid 60's

[. . . Yrs to Go]

Originally Posted by chinaco

Best defense is a good offense... Pick an insurer that is rate the equivalent of triple A by all major rating agencies. If they passed the inspection of all of them... they should be solid.

According to Moody's the 20-year cumulative default rate for a Aaa rated company is something like 1.5-2%. If you're hoping to beat the insurance company by living 30-40 years, that default probability will only go up.

If I were buying an annuity of any meaningful size, I'd split my money between a handful of insurance companies just to be safe.

[chinaco]

Originally Posted by 3 Yrs to Go

According to Moody's the 20-year cumulative default rate for a Aaa rated company is something like 1.5-2%. If you're hoping to beat the insurance company by living 30-40 years, that default probability will only go up.

If I were buying an annuity of any meaningful size, I'd split my money between a handful of insurance companies just to be safe.

Not a bad idea... especially if one is investing a large amount of money.

[saluki9]

Originally Posted by frayne

SOL baby, SOL.

Please provide examples

[pedorrero]

Executive Life, c. 1990

[pedorrero]

Addenda: this topic (as insurance co's) is covered in one of the Martin Weiss books ("Safe Money" ?). Weiss (of course) has their own rating service which, they claim, spotted iffy insurance Co.'s -- some of which went ka-blooey in the late 80s, early 90s even though some were rated "A" by Best's, a rater of insurance Co.'s. Annuities must have a place in the retirement portfolio, but I've seen more cautions about them than recommendals to invest in them. If you have a pot of money, it's awfully hard to beat a sensible stock/bond portfolio, for overall safe returns.

[chinaco]

Originally Posted by pedorrero

Addenda: this topic (as insurance co's) is covered in one of the Martin Weiss books ("Safe Money" ?). Weiss (of course) has their own rating service which, they claim, spotted iffy insurance Co.'s -- some of which went ka-blooey in the late 80s, early 90s even though some were rated "A" by Best's, a rater of insurance Co.'s. Annuities must have a place in the retirement portfolio, but I've seen more cautions about them than recommendals to invest in them. If you have a pot of money, it's awfully hard to beat a sensible stock/bond portfolio, for overall safe returns.

Many of those in the 80's got too heavy into real estate and had liquidity problems. Liquidity problems can occur and still do. Some insurance company... perhaps Conseco (had problems with too many acquisitions and debt).

The NAIC imposes Statutory accounting on Insurance companies. It is different than GAAP, it is geared toward keeping the company more liquid and risk averse. There is a statement called RBC (Risk Based Capital). It has provisions about the ratio of total assets that can be invested in different securities and other investments. It is geared toward keeping the company solvent. And there are many ways for a company to become insolvent.

On you comment Weiss is a good cross check. But "A" is different that "AAA" by all major rating agencies. You definitely need to do your homework before purchasing insurance...

Right now the cream of the crop is Northwestern Mutual.... But there is no guarantee. If you are purchasing a SPIA and beginning to collect now... and the company is rated "AAA" by all agencies, then the time horizon is different than if you begin collecting in 30 years. But the Conseco fiasco show how managment can mess things up by getting too risky.

One thing to consider also is if the CEO is typically groomed internally. They tend to follow the same general (successful) path that was laid out by previous Management and less likely to make risky moves (as opposed to bringing in an outsider).

[saluki9]

Originally Posted by pedorrero

Executive Life, c. 1990

And did the policyholders not receive back substantially all of their investments from the Credit Lyonnais buyout and subsequent lawsuit and settlement?

[chinaco]

Originally Posted by saluki9

And did the policyholders not receive back substantially all of their investments from the Credit Lyonnais buyout and subsequent lawsuit and settlement?

Good point. Unless there is out and out fraud (and the company has been hollowed-out (unlikely with today's regulations)... A white knight shows up to take over the book of business, assets and brand name (sometimes to get a complementary fit with a gap in their own market coverage). Many times the problem winds up being a liquidity problem... (the assets are actually there to cover it but timing issues arise).

For example I know of one company where the regulators were stepping in because they could not meet the run on annuity 1099 transfers because they had assets tied up in securities that had certain provisions where the risks that were not apparent (i.e., liquidity problem). An Actuarial flaw in the securities backing the products and the anticipated persistence of the annuities.

In this case a white knight that has excess liquidity stepped in and could carry the company over the hump for a couple years... now the company (a subsidiary now of the white knight) is extremely profitable.

Bottom line... There are too many insurance companies today. The market is still a bit fragments. There will be much (more) M&A in that industry over the next several years. If you were to look at the number of insurance companies (individual enterprise entities) just as far back as 1990, half have disappeared mainly through M&A. Some believe there will be two categories. A few dozen (Domestic) Mega Insurance Power Houses and quite a few niche players that offer exotic products (smaller and entrepreneurial willing to take risks). Of course there will be several dozen international powerhouse insurance companies. The international borders are blurring with the international financial services conglomerates that are being put together via M&A.

[FinanceDude]

Originally Posted by pedorrero

Executive Life, c. 1990

What was their A.M Best rating before default??