Annuity question and How do Amerprise agents sleep at night

[RockOn]

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Originally Posted by cute fuzzy bunny Finally a little accuracy.

Ok, whatever.

[RockOn]

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Originally Posted by Gumby If I may interject, this is not really true. In a bankruptcy, preferred stockholders are lower in priority than all creditors -- secured or unsecured. Preferreds rank ahead of common stockholders, but that is all.

Thanks for a little sanity.

[2B]

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Originally Posted by Nords No, as you raise the return you're going to raise the volatility. Your attempt to eliminate the volatility raises a whole 'nother crop of problems. If you feel that annuities will solve your volatility problem then that's what you should do. I think we're done here.

RockOn,

I'll take Nords' lead and leave you to your annuity. Buying one will certainly eliminate any volatility. The second you sign on the dotted line the resale value of your annuity becomes zero and remains there. Buyers regret is common from my experience.

We all buy our own ticket and take our chances. Go with your plan. It's clear you are fully committed.

[cute fuzzy bunny]

Shhh...dont tell him but the black helicopter down the street just picked up his transmission and will increase their fudging of the CPI by another two percent the minute he buys the annuity.

[2B]

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Originally Posted by Gumby If I may interject, this is not really true. In a bankruptcy, preferred stockholders are lower in priority than all creditors -- secured or unsecured. Preferreds rank ahead of common stockholders, but that is all.

What you say is technically true. What I didn't repeat from a previous post to RockOn was the observation that insurance companies always (at least the ones I've seen) issue their annuities through a subsidiary. That means the sub will almost certainly go belly up before the parent company. If both go down together, there is a legal separation between them that will probably keep the unsecured debt of the bankrupt annuity holding company from being considered before the preferreds of the parent. I might be wrong but I would suspect that in a total collapse it wouldn't matter. Everyone would get zip.

The other illusion of security is the "state insurance." I'm not an expert on the individual states' plans but I've heard they were seriously underfunded in the event of a serious or a series of failures.

Another risk is the possibility that mega-prime annuity company sells the contract to a "slightly" lower rated company. Actually, the original annuity company would pay the other company to take on the financial responsibility but then they are free of the obligation. These are contracts so unless there is a "no transfer" clause (which I've never seen) in the contract they are simply finacial assets. I don't know how common this is but I suspect that it does happen. I mentioned to RockOn in a prior post that I've had my term life policy sold twice in the last 9 years. Amazingly, the new company has always been just a little lower in their credit rating.

RockOn has jumped in or started several threads trumpeting the benefits of annuities. Since the same subject is being beaten to death repeatedly, I've not made my posts as detailed as I probably should. My prior post will be my last direct comment back to him on the subject.

[2B]

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Originally Posted by cute fuzzy bunny Shhh...dont tell him but the black helicopter down the street just picked up his transmission and will increase their fudging of the CPI by another two percent the minute he buys the annuity.

Actually, to calculate the NPV of an annuity or it's equivalent IRR, you'd need to tie the calcs into the annuity table. There is a finite chance that a person will die in any given year between the day the annuity is purchased and infinitity. The tables used by the annuity companies are almost certainly broken down by the month.

The NPV would be what the sum of all of those possibilities are at a specified interest rate. You could even use different interest rates for the different periods but that's really getting messy. There may be a 2% chance that a 60 year old will die in the following year (purely hypothetical because I'm too lazy to look it up). The NPV to the insurance company would be massive but the probability is low. There my also be a 2% chance that a 60 year old will live to be 100. This gives a terrible NPV to the insurance company but, again, the probability is low. Add up all the possibilities, throw in your deduct for the agent's commission and the annuity has been priced!

The equivalent pseudo-IRR would turn it around and ask what interest rate would I need to have to obtain a NPV equal to the annuity cost.

This linkage to the actuarial tables is why the payout on a minimum guaranteed term annuity falls.

[cute fuzzy bunny]

NPV is a better tool, certainly more useful than IRR.

You need to have a couple of other factors to produce a reasonably accurate figure for either one. Death data, bankruptcy rate, and adherence of the annuitants personal rate of inflation over 20-40 years to the CPI (in the case of a CPI adjusted annuity) are all, unfortunately, unknowable and cant even be guessed at.

Guessing at future rates of return of various investment asset classes based on 30-100+ years of past performance or guessing at 3 things...two of which have no reasonable historic data or basis for a good guess...?

Tough call...

[brewer12345]

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Originally Posted by 2B What you say is technically true. What I didn't repeat from a previous post to RockOn was the observation that insurance companies always (at least the ones I've seen) issue their annuities through a subsidiary. That means the sub will almost certainly go belly up before the parent company. If both go down together, there is a legal separation between them that will probably keep the unsecured debt of the bankrupt annuity holding company from being considered before the preferreds of the parent. I might be wrong but I would suspect that in a total collapse it wouldn't matter. Everyone would get zip.

Bzzzt! Wrong.

Usually, the way insurance companies are set up is that a holding company (with little in the way of actual assets) owns one or more insurance operating company subsidiaries. The holding company issues debt, preferred, common equity, etc. and uses the proceeds to capitalize the insurance subsidiary, pay dividends, interest, buy other companies, etc. Over time, the holding company meets its obligations by taking dividends from the regulated insurance operating subsidiary.

Most of the time, when you buy a bond or preferred issued by an insurer you are buying an obligation of the holding company. Aside from owning the operaing company, the holdco usually has little in the way of assets. If the operating subsidiary starts getting in trouble, the regulator steps in and takes over the operating subsidiary where all the cash, assets, capital, etc. are. The regulator then decides what to do, possibly including liquidating the operating company and distributing the proceeds to the policyholders. Under that scenario, creditors of the holding company are left buck naked with their balls blowing in the breeze, since they get zip unless and until all the obligations of the operating subsidiary are taken care of. Usually, there is little or nothing left by the time the regulators are done, but the policyholders are usually made whole.

[2B]

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Originally Posted by brewer12345 Bzzzt! Wrong.

Thanks for the correction.

[brewer12345]

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Originally Posted by 2B Thanks for the correction.

Yeah, but keep up the good work beating back the hordes of sleazy annuity promoters.

RockOn, if you want an annuity, buy one. Don't waste your time trying to convince the rest of us its a good idea.

[Gumby]

My understanding of the capital structure of insurance companies is generally the same as Brewer's, although I am not certain as to whether the regulated insurer issues the annuity or another subsidiary of the holding company.

Corporate structure has been a hot topic of discussion in the context of the monoline bond insurers. The creditors and equity holders of the holding company want the (profitable) municipal bond insurance sub and the proposed (unprofitable) CDO insurance sub to be sister companies just below the holding company, so the holding company will continue to have access to the dividend from the muni insurance business. The CDO insurance policy holders call foul, because they want access to the muni bond insurance dividend before it gets up to the holding company. Accordingly, they argue that the muni insurance company should be a subsidiary of the CDO insurance company. It's all about who is closest to the valuable assets

In any event, I really have no dog in this fight. I'm sure that for the right people, in the right circumstances, for the right reasons, an annuity might be appropriate. However, I have determined that I am not among that group.

Rather, my point was more generally directed to those who invest in preferred stock of any company. In my opinion, the yield on a preferred stock issue rarely compensates for the fact that you will likely recover squat in a bankruptcy.

[brewer12345]

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Originally Posted by Gumby My understanding of the capital structure of insurance companies is generally the same as Brewer's, although I am not certain as to whether the regulated insurer issues the annuity or another subsidiary of the holding company.

Regulated insurer always issues the annuity. Otherwise the insurance regulators come shut you down.

[2B]

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Originally Posted by cute fuzzy bunny NPV is a better tool, certainly more useful than IRR. You need to have a couple of other factors to produce a reasonably accurate figure for either one. Death data, bankruptcy rate, and adherence of the annuitants personal rate of inflation over 20-40 years to the CPI (in the case of a CPI adjusted annuity) are all, unfortunately, unknowable and cant even be guessed at. Guessing at future rates of return of various investment asset classes based on 30-100+ years of past performance or guessing at 3 things...two of which have no reasonable historic data or basis for a good guess...? Tough call...

I'm pretty much assuming a SPIA which would only need the mortality tables and the bankruptcy rate which I must admit is small. There is a real risk even with the state insurance but annuities still aren't T-Bills. The, hopefully, very long duration of the payout makes credit risk a factor and highlights the need for diversification.

The CPI adjustments I've seen or heard about are always capped and usually are not the "inflation rate." The sales people have great explanations for this since "retirees don't see the full impact of inflation the way the government calculates it."

My biggest hangup with annuities is that your money is gone. Number 2 is that the payments you receive is marginal return on your money with no hope of doing better. The third concern is that over the next 40 years or more (we can dream) is that your annuity company turns out to be the finacial equivalent of Enron. Then you are back to Number 1.

[2B]

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Originally Posted by Gumby Rather, my point was more generally directed to those who invest in preferred stock of any company. In my opinion, the yield on a preferred stock issue rarely compensates for the fact that you will likely recover squat in a bankruptcy.

My limited experience is that bond holders also generally receive squat. Just before the collapse upper management manages to issue super-debentures that are senior to everything else. Supposedly, this is to make one last effort to save the company but it generally goes to management's severence package. Any residual assets then go to the recently issued super-bonds giving them a nice profit while everyone else goes home.

[Gumby]

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Originally Posted by 2B My limited experience is that bond holders also generally receive squat. Just before the collapse upper management manages to issue super-debentures that are senior to everything else. Supposedly, this is to make one last effort to save the company but it generally goes to management's severence package. Any residual assets then go to the recently issued super-bonds giving them a nice profit while everyone else goes home.

It all depends on the covenants in the existing bonds. If they have anti-layering provisions, "equal and rateable" clauses, cross-stream or upstream guarantees, and/or strict limits on additional indebtedness, the scenario you have described may be avoided. This is why distressed debt investors spend hours upon hours reading bond indentures.

[brewer12345]

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Originally Posted by Gumby This is why distressed debt investors spend hours upon hours reading bond indentures.

I can confirm this is the case.

Generally speaking, bondholders have the least protection against these kinds of shenanigans when the bonds were issued as investment grade. If the company was always a junk-rated issuer, they usually have a lot more restrictions on what they can do.

[clifp]

Moving somewhat back to the original topic.
Who typical insures Amerprise's annuities?
It seems to me that a variable annuity the man protection is the underlying value of the sub-accounts? is that true and if so are VA safer?


Finally, Bill has another annuity with Amerprise I believe is worth roughly $150K it is almost 4 year old and the surrender charges are about 7K. I'm not going to press him to do anything but when he comes out to visit me at the summer, I may start nudging him to do something else.

In general, should you wait to move until the surrender fees go away? Also if you make an exchange from one annuity to another to you still have to pay the surrender fees?

[brewer12345]

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Originally Posted by clifp Moving somewhat back to the original topic. Who typical insures Amerprise's annuities? It seems to me that a variable annuity the man protection is the underlying value of the sub-accounts? is that true and if so are VA safer? Finally, Bill has another annuity with Amerprise I believe is worth roughly $150K it is almost 4 year old and the surrender charges are about 7K. I'm not going to press him to do anything but when he comes out to visit me at the summer, I may start nudging him to do something else. In general, should you wait to move until the surrender fees go away? Also if you make an exchange from one annuity to another to you still have to pay the surrender fees?

Ameriprise has its own in-house insurance companies that write this business. IIRC, they are rated Aa3 for insurance obligations, which is a pretty high rating. The main protection is in fact the value of teh separate account, but much of what is sold as a VA has guarantees from the insurer. The guarantees would produce lots of credit exposure if they came into the money (like when the equity market plunges).

The decision on when to surrender and how much of a beating its worth taking depends on the expense ratio of the annuity. So if the expense ratio of this $150k annuity is, say, 3.25% and your alternative is a Vanguard fund that costs .25%, you would make up your $7k surrender fee in about a year and a half. More modelling would be indicated before making a decision, but you get the general idea.

[2B]

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Originally Posted by clifp Moving somewhat back to the original topic. Who typical insures Amerprise's annuities? It seems to me that a variable annuity the man protection is the underlying value of the sub-accounts? is that true and if so are VA safer? Finally, Bill has another annuity with Amerprise I believe is worth roughly $150K it is almost 4 year old and the surrender charges are about 7K. I'm not going to press him to do anything but when he comes out to visit me at the summer, I may start nudging him to do something else. In general, should you wait to move until the surrender fees go away? Also if you make an exchange from one annuity to another to you still have to pay the surrender fees?

I don't know anything about Amerprise's annuity products. I know a little about how VA's are constructed and they vary widely.

If you have an "index" annuity, the company is probably funding it out of a general pools of their investments and the payment is calculated. It's not really a separate account (it's more like our SS "lockbox").

Some accounts let you pick real mutual funds. Here the VA is more like a brokerage account that extracts fees Blackbeard the pirate would have envied. Frequently, these are also tied up with various insurance products to "protect principle" and other features.

I'm sure FinanceDude will pop in with a better recap.

As for cashing in, the fee is really just prepaid commission the insurance company would lose if someone takes their money out too soon. They want to be "made whole" for this commission and probably turn a little extra profit. I suggest you look at how much the annuity is draining in management fees both for the annuity itself and any of the funds inside the annuity. You can then see how long it would take to "break even" with an early withdrawl.

The other consideration is the quality of the funds inside the annuity. If the funds are seriously underperforming their index that provides an extra incentive to get out quickly.

I don't know about transfers but I suspect they would want their pound of flesh. My gut instinct is always to get out ASAP.

EDIT: Brewer beat me to the punch

[Texas Proud]

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Originally Posted by Gumby It all depends on the covenants in the existing bonds. If they have anti-layering provisions, "equal and rateable" clauses, cross-stream or upstream guarantees, and/or strict limits on additional indebtedness, the scenario you have described may be avoided. This is why distressed debt investors spend hours upon hours reading bond indentures.

And you should see what a bond trustee has to do on one of these...

I had one where I owned EVERYTHING of the company (as the trustee)... every car, truck, building, gas well, etc. etc... they could not do anything without my signature... it made it tough for me...

It also had language on how much they could sell, and how much other debt they could take on... and they kept trying to get around the limitations... took a lot of my time saying 'no'... and a lot of lawyer fees..

I was happy when the refinanced and we refused to be the trustee... but I had to sign like 3,000 to 4,000 car titles over to the new trustee