Is this the nail in the annuity coffin?

[brewer12345]

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

Thank you, that is the answer I was seeking.[/QUOTE]

Well, remember: opinions are like buttholes, everyone has one and most of them stink.

What I think the lack of a believable third party backstop means is that you should be very selective as to which insurers you give your money to, especially if you don't have the right to get it back at your convenience. For me, this means I only do business with larger, highly rated mutuals, although I make exceptions for particularly strong mid-sized companies.

 

[pb4uski]

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?

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

I don't think it would have been possible for the holding company liabilities to be transferred to the operating companies to any extent that it would have helped the situation, as such a transfer would be deemed a substantive distribution from the operating companies to the holding company and there are limits on the amount of such distributions. The more likely scenario would be that the holding company would start trying to draw distributions from the operating companies to raise cash to help settle the holdco obligations. Same difference at the end of the day. There are limits on such distributions without regulatory approval (generally the lesser of last year's net income or 10% of surplus IIRC, but it varies by state). IMO no commissioner in their right mind would approve distributions if it would reduce the operating company RBC too much - they would protect the operating company and let the holding company go down.

On the second question, I know that in past insolvencies that some policyholders have had their interest reduced to the minimum rate (they didn't get the high rate in the contract or that was being credited at the time the stuff hit the fan) but to the best of my knowledge no customer has ever lost a dime of principal - at least that is what I kept hearing when I was in the industry and to the best of my knowledge it is true (or it may be some urban legend in the industry for all I know). I was fairly involved in one major insolvency when I was in the industry (we were one of the reinsurers in the workout) and I know in that case the policyholders got the contractual minimums (so they would have received their promised payments in the case of a SPIA).

 

[Brooks Saddle]

Kimo, what you are describing is a variable annuity while the thread started out discussing SPIAs. While I think there is a place for both depending upon one's situation, they are not one and the same.

 

[Kimo]

Hello Brooks,
Yes, he referred to SPIA's and when I read the link he provided he appeared concerned having his money tied up with an insurance company. I was merely offering him a way to have annuities without giving his principle to an insurance company....he could still end up with either or none, I was offering the idea there are more annuities than just SPIA's.
Aloha,
Paul

 

[Midpack]

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.

Now is a tough time to buy annuities with yields/income payouts at historic lows, but some people are comfortable buying them now for their own valid reasons.

Finding quotes for inflation adjusted annuities is harder to begin with, but most I have seen are based on a fixed rate of inflation (ie 3%). I doubt any insurer would offer one that floated with CPI for the lifetime of a participant, and I know some insurers have even stopped offering fixed inflation rate SPIAs. Here's a reasonably timely article by a far, far better, arguably conservative, source than me. Retirement Researcher Blog: Efficient Frontiers: Inflation Assumptions, Fixed SPIAs, & Inflation-Adjusted SPIAs

An important point to note is that the initial retirement date payout is 51% larger for the fixed SPIA than the inflation-adjusted SPIA ((5.84-3.875) / 3.875). After retiring, the fixed SPIA amount will always stay at the same nominal amount, whereas the nominal amount of the real SPIA increases along with the sequence of inflation experienced after retirement. For my simulations, I did have inflation fluctuate randomly around an average inflation rate of 2.1%, which represented the breakeven inflation rate expected by the markets as determined by comparing Treasury yields with TIPS yields.

If inflation is fixed at 2.1%, the table shows that the actual income amount provided by the real SPIA would not start to exceed the fixed SPIA amount until the 20th year of retirement. That’s a long time to wait. Granted, after 20 years, the real SPIA will continue providing a larger amount of income forever, but it is a long time to wait for that to happen. That is the fundamental intuition about why fixed SPIAs beat real SPIAs in my simulations.

 

[Independent]

Now is a tough time to buy annuities with yields/income payouts at historic lows, but some people are comfortable buying them now for their own valid reasons.

Finding quotes for inflation adjusted annuities is harder to begin with, but most I have seen are based on a fixed rate of inflation (ie 3%). I doubt any insurer would offer one that floated with CPI for the lifetime of a participant, and I know some insurers have even stopped offering fixed inflation rate SPIAs.

American General has one (I got there thru Vanguard).
Monthly, straight life payout for a 65 year old male:

$537 Fixed
$386 Scheduled 3% increases
$372 CPI indexed

Companies can cover the CPI risk by investing the premiums in TIPS. They can probably invest in other bonds than swap into the TIPS inflation protection, but I'm no expert on swaps.

I can remember a day in the late 1990's when I read an article about this new Treasury bond and immediately walked over to my boss's office and said that it was now possible to write CPI indexed SPIAs. It took at least 5 years before that company had a product on the market. They may have pulled it by now because bond yields are generally low, but not because they can't cover the CPI risk.

 

[Midpack]

American General has one (I got there thru Vanguard).
Monthly, straight life payout for a 65 year old male:

$537 Fixed
$386 Scheduled 3% increases
$372 CPI indexed

Good info thanks. May be just me, but I don't see straight comparisons like this often enough. Initial payouts for 3% annual increase version are over 30% lower. That matches up with other actual quotes I've seen where initial purchase price of 3% annual increase annuity was 40% higher for same first year payout. I'm too lazy (at the moment) to figure out the break even point, but the Pfau quote above gives me pause. Here again:

If inflation is fixed at 2.1%, the table shows that the actual income amount provided by the real SPIA would not start to exceed the fixed SPIA amount until the 20th year of retirement. That’s a long time to wait. Granted, after 20 years, the real SPIA will continue providing a larger amount of income forever, but it is a long time to wait for that to happen. That is the fundamental intuition about why fixed SPIAs beat real SPIAs in my simulations.

 

[Independent]

Good info thanks. May be just me, but I don't see straight comparisons like this often enough. Initial payouts for 3% annual increase version are over 30% lower. That matches up with other actual quotes I've seen where initial purchase price of 3% annual increase annuity was 40% higher for same first year payout. I'm too lazy (at the moment) to figure out the break even point, but the Pfau quote above gives me pause. Here again:

Yep. The AG quote shows that the CPI indexed pays just a little less than a fixed 3% increase. So presumably inflation has to be just over 3% to make those two equivalent.

I'm guessing that the company gives up a little spread to get into CPI indexed bonds. Corporates are 100-200 basis points above treasuries. Some of that is anticipated defaults, the company loses some to capital requirements, they may be able to pick up some with a swap, but there's still a residual difference.

 

[nun]

Now is a tough time to buy annuities with yields/income payouts at historic lows, but some people are comfortable buying them now for their own valid reasons.

Maybe smaller fixed period annuities is a way to get some exposure to rising interest rates. But what about just putting the money into a Stable Value fund you have access to one in your retirement account. You'd have access to principal if you needed it, you'd get a similar return to an annuity but the rate would reflect going interest rates and you'd have insurance backing for your principal. You wouldn't have the lifetime guarantee though.