Who protects annuities if the insurer fails?

[2B]

So these individual business units are sort of like the sprinkles on the donut?

I'm trying to work up some better financial analogies to explain whats going on to my wife...

If you ever succeed, let me know. I could use some pointers.

 

[cute fuzzy bunny]

It helps to identify the problem source. She pointed to the talking heads on cnbc yesterday and said "Those guys said xxx, and they're economists, right?".

"Hmm well lets see...the guy on the left got a bachelors degree in english studies, and the two guys on the right got degrees in journalism..."

It was fun watching cnbc for half a day yesterday after not watching it in years. I can see why some people get worked up over a bunch of nothing.

 

[al_bundy]

Trying not to think about the possibility of AIG going down. I've always despised the company and the people who run it, but if they go poof it will make Lehman look like peanuts and popcorn.

As for the annuities and other policyholder claims, your counterparty is the regulated insurance company, not the holding company. Insurance entities must hold assets to back claims plus put up lots of capital on top of that. I would not run for the hills as a policyholder, assuming you ignored my suggestions over the years and did business with these people. If the holdco goes BK, the insurance entities won't be going with it. Yes, the holdco is getting to borrow from the insurance entities, but I believe it is on a secured basis which means that the holdco won't be allowed to just rape and pillage policyholders.

As for hurricane claims, generally speaking property casualty business (homeowners, business insurance and other stuff that would be hurricane exposed) is written out of different subsidiaries (with their own assets, capital, etc.) than the life and annuity business. So even if AIG absorbed a catastrophic blow from Ike that rendered is P&C entities insolvent (very unlikely, IMO), the life and annuity companies should be OK.

My guess is that AIG gets bridge loans now at punitive cost and then sells assets over time to pay it down. What Berkshire was interested in was one of two things: either offering very expensive financing to AIG, or offering to buy a unit or a block of policies at firesale prices. Even if you think AIG as a whole is a donut, thereare lots of individual businesses that would be very, very attractive to a number of buyers.

who owns the lehman and fannie stocks and bonds? the holding company or the subs? i'm reading that these will mean bad things for insurance companies

 

[2B]

I always remember that the engineering majors that flunked out usually went into the business school where they became instant straight A students. These are the geniuses now running the big financial companies.

I took 21 credits in economics and business. I stopped taking classes when I realized they were never going to get to something that was worth sitting through the classes.

 

[Nords]

I stopped taking classes when I realized they were never going to get to something that was worth sitting through the classes.

They call that a "diploma"...

I wonder if Mick Jagger has his economics degree framed on a wall somewhere-- next to all his gold records and the shrunken heads of the first three Keith Richards?

 

[2B]

They call that a "diploma"...

I got mine with "College of Engineering" on it. I had enough credits to get a legitimate minor in business if I had been in any other college other than engineering. They didn't believe in those things.

 

[brewer12345]

So these individual business units are sort of like the sprinkles on the donut?

I'm trying to work up some better financial analogies to explain whats going on to my wife...

AIG, like most financial companies, can be thought of as a lot of individual boxes. Each box is a specific legal entity (American Insurance Company of Nowheresville, Inc.), with its own business, assets, liabilities, capital, etc. Some boxes own the others, generally ending up with a single holding company at the top. Very often there are contracts and business arrangements between boxes (Diddlysquat Life Insurance pays the holdco for investment management and administrative services), but in the case of regulated entities (insurance companies, banks, etc.), these arrangements are limited and subject to regulator scrutiny and approval.

So if the problem is at AIG's holding company, the insurance company legal entities should have the benefit of regulatory protections and their own capital. They also would be viable sale candidates as distinct entities from the troubled holding company.

 

[clifp]

AIG, like most financial companies, can be thought of as a lot of individual boxes. Each box is a specific legal entity (American Insurance Company of Nowheresville, Inc.), with its own business, assets, liabilities, capital, etc. Some boxes own the others, generally ending up with a single holding company at the top. Very often there are contracts and business arrangements between boxes (Diddlysquat Life Insurance pays the holdco for investment management and administrative services), but in the case of regulated entities (insurance companies, banks, etc.), these arrangements are limited and subject to regulator scrutiny and approval.

So if the problem is at AIG's holding company, the insurance company legal entities should have the benefit of regulatory protections and their own capital. They also would be viable sale candidates as distinct entities from the troubled holding company.

.

Ok more questions for the professional. Let's assume that the liabilities of AIG holding company exceed the assets. Who gets paid? I am pretty sure that the shareholders more than likely end up with diddly squat.

Now presumably if the assets of a particular AIG subsidiary say AIG Marine Insurance exceed the liability than all the folks who insured their boats/ship get their claims paid, premium partially refunded etc.

However, it does not take a lot of imagination to guess the smart folks at AIG managed in a few cases to transfers cash/profits, from say AIG Life Insurance Inc with respect to EIA or VA policies back to the main holding company, despite the not so diligent oversight of overstretched STATE insurance regulators . So it is entirely possiblity that liabilities of an AIG subsidary exceed the assets by a decent margin.

In this situation aren't individual annuity holders just another creditor? Do you know where they rank on the priority scheme?

Which leads me to the important question. If you have an AIG annuity and it has a surrender value might you be better trying to get your money out of before AIG files for bankruptcy?

 

[brewer12345]

.

Ok more questions for the professional. Let's assume that the liabilities of AIG holding company exceed the assets. Who gets paid? I am pretty sure that the shareholders more than likely end up with diddly squat.

Now presumably if the assets of a particular AIG subsidiary say AIG Marine Insurance exceed the liability than all the folks who insured their boats/ship get their claims paid, premium partially refunded etc.

However, it does not take a lot of imagination to guess the smart folks at AIG managed in a few cases to transfers cash/profits, from say AIG Life Insurance Inc with respect to EIA or VA policies back to the main holding company, despite the not so diligent oversight of overstretched STATE insurance regulators . So it is entirely possiblity that liabilities of an AIG subsidary exceed the assets by a decent margin.

In this situation aren't individual annuity holders just another creditor? Do you know where they rank on the priority scheme?

Which leads me to the important question. If you have an AIG annuity and it has a surrender value might you be better trying to get your money out of before AIG files for bankruptcy?

#1: holdco shareholders would get teh cornhole.

#2: it is highly unlikely that AIG's insurance company entities would become insolvent as a result of the holdco's troubles. Not only are the state regulators there, there are lots of statutes that protect against this. Plus one of AIG's main regulators is NY state, which is widely regarded to be at least the equal of the SEC and FDIC, probably considerably nastier. And if you run afoul of these regs, you go to federal pound-me-in-the-ass penitentiary. In the event of an insurance insolvency, policyholders rank ahead of just about everyone, including any and all senior unsecured creditors.

#3: The type of annuity and its size would influence my actions. If you had lost your mind and bought a variable annuity from them, I would do nothing. If you have a SPIA with them, you are SOL. If you have afixed or equity indexed -X) annuity with them, I would leave it alone unless it was more than, say, 20% of my net worth.

 

[ziggy29]

Plus one of AIG's main regulators is NY state, which is widely regarded to be at least the equal of the SEC and FDIC, probably considerably nastier.

At least until their main watchdog started paying $3,000 an hour for hookers, anyway.

 

[cute fuzzy bunny]

I'll bet she knows the answers...

 

[brewer12345]

At least until their main watchdog started paying $3,000 an hour for hookers, anyway.

There is a world of difference between the NYS Insurance Department and the attorney general. There is onlyone state insurance dept I would ever consider working for. Guess which one that is?

 

[cute fuzzy bunny]

I'm not sure, but I'm quite certain I dont want to see any pictures of THEIR hookers...

 

[chinaco]

AIG is in a cash crunch. IT has happened to many insurers over the years where a long-term asset is temporarily illiquid. In the case of the Mortgage Backed Securities... the question is: what are they worth? I am not sure anyone knows.

If I had an AIG P&C Policy... I would replace it.

As for Life insurance... I would research it. You may be stuck if you are not healthy or the cost is high. But I would consider replacing it... IMHO only use Triple A (conservative) Insurance Companies. NW Mutual would be my pick... there are a couple of others that are (Triple A rated across 3 or more rating agencies)

Regarding annuities that have not been annuitized. I would consider doing a 1099 rollover.

I am sure that insurance state commissioners will revise their RBC levels (for Mortgage backed securities) for Statutory reporting to the NAIC. WHile they are at it, they probably need to put an RBC provision in that limits holdings of any newly created securities that are not well understood. I am sure those $h!theads on Wallstreet will dream up another nightmare that will entice fools and bring out the opportunist... leaving everyone else holding the bag.

Hey didn't insurance companies expereince a Real Estate shock back in the early 90's from owning too much real estate. Mortgage Backed Securities would seem to have some similarities in risk. They are more liquid than owning the real estate... but if the asset values melt-down (the actual property)... then the results are similar.

 

[2B]

This whole thing is somewhat absurd. AIG is covered up with assets but the "mark to market" rule is hammering them. It's like your next door neighbor loses his job, gets divorced and has his house repossessed. Now, your mortgage company sees that the sale of your former neighbor's house is at 50% of its prior assumed value.

Here we take the tack that your mortgage is like the terms AIG and the other financial companies live under. It then demands that you pay off your $300,000 mortgage in 24 hours or it will take immediate possession of your home. You don't have time to sell your stocks or bonds and have the proceeds available. You don't have $300,000 in your checking account. Bang. You're bankrupt.

 

[ChrisC]

The process in which insurance companies get liquidated and how creditors claims get paid is complicated and perhaps a convoluted process, dependent on the vagaries of state law and a state apparatus that is seldom, if ever, tested. My wife's professional malpractice insurance carrier went into liquidation/receivership and it was not a pretty picture. Who knows what type of cross-guaranty liability a family of insurance companies under one holding company might have against each other under state law -- the so-called "corporate shell" is not all that protective in this environment. Lawyers will think of creative ways to pierce corporate shells.

Looks like McCarran-Ferguson, the Federal law which permits the States to essentially regulate all aspects of the insurance business, might be turned on its head after this infusion of Federal funds into AIG. The state insurance departments appear to have been sleeping at the switch, which is quite different than OFHEO, the Federal entity that regulates Fannie and Freddie, which was a toothless regulator.

Chinaco, you seem to know a bit here. How do the state insurance regulators treat GICs or similar credit support instruments underwritten by insurance companies? According to the NY Times article today, a major reason for treating AIG's potential failure as a systemic risk to the economy is that it is heavily involved in esoteric credit support instruments in these mbs transactions. Is there a mechanism, like bank examiners, where they would classify the asset or investment risk and then adjust capital levels? Just curious.

 

[brewer12345]

How do the state insurance regulators treat GICs or similar credit support instruments underwritten by insurance companies? According to the NY Times article today, a major reason for treating AIG's potential failure as a systemic risk to the economy is that it is heavily involved in esoteric credit support instruments in these mbs transactions. Is there a mechanism, like bank examiners, where they would classify the asset or investment risk and then adjust capital levels? Just curious.

It depends on which entity wrote the GICs. If it is an insurance company obligation, the GIC has policyholder status in a liquidation, although state guaranty fund support is usually quite limited ($300k or so IIRC) if there isn't enough at the Insurer to cover claims.

But I believe that the bulk of the problematic transactions were not at the insurance company level.

 

[2B]

But I believe that the bulk of the problematic transactions were not at the insurance company level.

That's been their story all along but we've been misled before.