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

 

[Gone4Good]

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]

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]

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]

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]

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]

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]

Executive Life, c. 1990

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

 

[ReadySkiDaddy]

What are some of the worst cases of the end result of past annuity issuing insurance company bankruptcies? Have people lost money after all of the white knights, the state and FDIC swooped in? If so what percentage of their money was lost? Does the $100,000 FDIC insurance level cover amount of money unpaid (lost) or total account value? So if I have $200,000 that is supposed to be left in my annuity at the time of an insolvency and only $150,000 is paid back to me, will the FDIC pay me the remaining $50,000? The reason I ask is that I'm heavily invested in two annuity contracts with the same annuity issuing company (insurance company) that has a Weiss D rating (which is the lowest rating). With our government in so much debt, times are much more perilous than before. People like Peter Schiff say that our debt cannot be paid off unless we restructure, meaning that eventually when the whole government Ponzi scheme melts down, EVERYONE is gonna get a haircut so to speak. FDIC might pay just pennies on the dollar for stuff like annuity insurance.

 

[pb4uski]

My recollection is that annuitants have not lost any principal on any insolvencies. Some accumulation phase annuities have had lowered interest crediting rates (mutual benefit Life if I recall correctly and likely others). I'm not aware of any reductions to annuity benefits for annuities in payout phase.

FDIC does not apply to annuities. An insolvent insurer's liabilities would be covered by state guaranty funds. Federal or state government debt would not influence the outcome because the guaranty fund is funded by assessments on other insurers.

Weiss is a quack. What are the issuers ratings by Moody's, S&P, Fitch and A.M. Best? Who is the issuer?

 

[ReadySkiDaddy]

Thanks for the response. The annuity is by Sun America. Weiss gave it a D rating. Only 3 other companies (with assets of 1 billion or more) got this low of a rating. I'll have to Google and read up more on state guarantee funds and where that money comes from. What do state guarantee funds do with money that sits? Invest in the stock market

 

[pb4uski]

SunAmerica is owned by AIG and has mid level A ratings from the major rating agencies. I wouldn't worry too much about them.

Like I said, Weiss is a quack.

 

[ReadySkiDaddy]

I think they USED to be. Not any more. This is from their web site.
Variable annuities are issued by SunAmerica Annuity and Life Assurance Company (SunAmerica Annuity). Products are marketed by SunAmerica, The Retirement Specialist.

I actually called them after AIG's meltdown in 2008. They explained that AIG is a separate entity.

BTW what do you think of Peter Schiff?

 

[pb4uski]

No, they still are part of AIG. This is good by the way.

See AIG Corporate Information - Customers - Additional Resources and AIG's Form 10-K.

It is true that AIG is a separate entity, but AIG owns SunAmerica Financial Group. When AIG melted down as you called it, the insurers owned by AIG were in good shape, however the credit default swaps written by AIG were the crux of the problems that AIG had.

 

[ReadySkiDaddy]

Wow. I gotta read up on that. If what you're saying is true then the people at Sun America deceived me because they tried to make it sound like they were not part of AIG and not effected by the whole meltdown. I remember them telling me that they'd been getting lots of calls from annuity holders. Kind of like Bernie Madoff telling everyone to stay the course maybe? I mean AIG got bailed out, but it could have turned out differently.

I just do not trust them. I was duped into investing in this annuity by a broker to begin with. Back then Sun America could have cared less that this broker had been churning my annuities the whole time, and that the amount that was being invested was over and above the $$ amount that the insurance fund covers. It's all about making the sale and keeping you invested. I wish that I knew then what I know now.

 

[Richard4444]

there are state guaranty funds, but they are a far cry from the FDIC because nobody stands behind the guaranty funds.

<--- considering buying a SPIA or two, and I have always believed that the state guaranty fund would step in up to their limit. Are they backed by either general obligations of the state, or other insurance companies, or something secure? Although certainly not FDIC guaranteed, I had thought they were similarly backed by the state fund. Not so ??

 

[foxfirev5]

Now I'm confused about this annuity thing. I hear many people and undertand that payouts will be better once interest rates rise. However if interest rates rise I probably won't need one as much. The risk potential associated with the carrier adds to my inclination to avoid these until I absolutely need an income for basic needs.

 

[2B]

I've known people that have had the "lifetime annuity" company go broke. In the one case I know the whole story for (Lutheran Brotherhood), they were eventually "made whole." This would have been limited by the state guarantee fund if they would have been over that limit. It took several years to get the past due money. Life's a bitch if you were planning to live on that cash.

The state funds are not backed by the states in any way - no "full faith and credit" stuff here. The funds are a mutual guarantee of companies selling that class of product within the state. Theoretically, a company can refuse to pay for another company's failure but they would lose the right to sell that product in that state.

Another thing to consider is that companies can sell your annuity to another company. You have no control over that. You might find yourself having bought a triple A annuity only to find a decade later that the new holder is single A. That's happened to my term life insurance twice. The new company always has a lower rating.

 

[Midpack]

Now I'm confused about this annuity thing. I hear many people and undertand that payouts will be better once interest rates rise. However if interest rates rise I probably won't need one as much. The risk potential associated with the carrier adds to my inclination to avoid these until I absolutely need an income for basic needs.

I'm one who wouldn't buy an annuity at present interest rates/yields, though I realize there are circumstances where others might. And while your comment on returns is understandable, they are two different things IMO.

I'd supplement my income with an annuity for the longevity insurance aspect, my portfolio may not be able to meet that need if I live to be 110. I expect to buy an annuity when my portfolio value approaches my annuitization hurdle, though if future real returns are good enough I may never annuitize at all. Hopefully I will be very old then, which also shortens the window I expose myself to "the risk potential associated with the carrier" like you. And if I annuitize, it will be with more than one source.

 

[rescueme]

...And while your comment on returns is understandable, they are two different things IMO. I'd supplement my income with an annuity for the longevity insurance aspect, my portfolio may not be able to meet that need of if I live to be 110.

Exactly.

Most folks who look at an annuity (specifically an SPIA) still look at it as an investment, rather than an income vehicle, for the rest of your life (if that is the option you take).

Can you make more "on the outside"? Sure. However, you can also lose due to investment risk.

Additionally, folks forget that over time, your own money (preimum) is returned to you to cover a portion of your current retirement expenses, every month, and the remaining amount available for investment (by the insurance company) gradually is reduced. Again, much different than an investment program.

Interest rates have less to do with SPIA payments when compared to your age (the older you are, the higher payments - since you have less time to collect, much like SS) and the options you select (such as inflation adjusted, remaining spousal coverage at 100% of current payments, just to name a couple).

It's just another tool in the retirement income toolbox and is not meant to cover all your needs, but just a "foundation" of income, as our SPIA does for us, while moving a bit of "market risk" from our remaining retirement investment portfolio.

And yes, it's not for everybody ...