Annuity concerns with Bermuda reinsurance

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cvn74n2
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Annuity concerns with Bermuda reinsurance

Post by cvn74n2 »

In today's Washington Post is an article discussing reinsurance of retirement and structured settlement annuities by companies based in Bermuda https://www.washingtonpost.com/opinions ... e-bermuda/ along with the potential pitfalls of investment issues underpinning the annuities using 777 Re as the example (i.e. soccer teams) https://substack.news-items.com/p/a-huge-trend.

What I find troubling besides the investing component is the ability of companies to offload pension benefit risk to insurance companies who in turn offload risk to the non-US based reinsurance companies that avoid ERISA protections.

State insurance commissions are "supposed" to look out and guard against systemic risks; but, at least in the case of Sentinel Security Life (Utah) and Atlantic Coast (South Carolina), I suspect they are understaffed to follow the money. A.M. Best may be the last line of defense when it re-rates life insurers to alert the commissions (and annuitants) of the risk(s).

Unless some additional regulatory oversight is established or legal framework to prevent off-shoring of annuity reinsurance, I would advise thinking long and hard about working with insurance companies who do this.

Does anyone (especially Stinky) know if there is a list of insurance companies beyond the ones cited who regularly off-shore annuity reinsurance?
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Re: Annuity concerns with Bermuda reinsurance

Post by Stinky »

cvn74n2 wrote: Fri Apr 12, 2024 4:48 pm In today's Washington Post is an article discussing reinsurance of retirement and structured settlement annuities by companies based in Bermuda https://www.washingtonpost.com/opinions ... e-bermuda/ along with the potential pitfalls of investment issues underpinning the annuities using 777 Re as the example (i.e. soccer teams) https://substack.news-items.com/p/a-huge-trend.

What I find troubling besides the investing component is the ability of companies to offload pension benefit risk to insurance companies who in turn offload risk to the non-US based reinsurance companies that avoid ERISA protections.

State insurance commissions are "supposed" to look out and guard against systemic risks; but, at least in the case of Sentinel Security Life (Utah) and Atlantic Coast (South Carolina), I suspect they are understaffed to follow the money. A.M. Best may be the last line of defense when it re-rates life insurers to alert the commissions (and annuitants) of the risk(s).

Unless some additional regulatory oversight is established or legal framework to prevent off-shoring of annuity reinsurance, I would advise thinking long and hard about working with insurance companies who do this.

Does anyone (especially Stinky) know if there is a list of insurance companies beyond the ones cited who regularly off-shore annuity reinsurance?
I agree that offshore reinsurance of annuity liabilities is practiced by many companies.

The two companies mentioned in the article, Sentinel Security and Atlantic Coast, have ratings of B++ from AM Best. Their ratings have been placed “under review” for possible downgrade, pending review of year end 2023 financials and surveys, due to issues with reinsurance.

Another insurer, SILAC, has also been placed under review by Best, and I believe that also relates to reinsurance with 777. SILAC’s rating is already a low B+.

I believe that many of the life insurers operating in the MYGA and indexed annuity markets, especially those who entered the space within the last decade, are using offshore reinsurance. But I am not aware of a list of all companies that reinsure offshore.

I know that the state insurance regulators, operating through the NAIC, are monitoring the situation. But I’m not familiar with any major steps taken by the regulators as of this time to strengthen reinsurance regulation.

It’s all got an uncomfortable feeling to it…..
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SPIA Safety Concerns

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[Merged into existing discussion - moderator oldcomputerguy]

An opinion piece in WAPO on 4/12/24 by investigative financial journalist Mary Williams Walsh raises safety concerns about retirement annuities bought from life insurance companies (and about defined benefit pension plans that have been sold to insurance companies). https://www.washingtonpost.com/opinions ... e-bermuda/

From the article: "Countless Americans now depend on the skill and dedication of the Bermuda Monetary Authority, and they don’t even know it...It’s not just pensions. Life insurers are also reinsuring the annuities they’ve sold to retirees directly. They package the contracts into “blocks,” then reinsure the blocks, often in Bermuda...Reinsuring offshore adds leverage that the annuitants know nothing about. The reinsurers can remove some of the capital that life insurers in the United States are required by their state insurance commissioners to hold. There are also big tax advantages. And, offshore, asset managers don’t have to load up on conservative bonds; they can make complex custom securities, such as collateralized loan obligations...In Bermuda, the investments are secret...When a reinsurer is in trouble, the problem can spread. Its life-insurer counterparties can’t very well leave their blocks of business there, so they take them back — if they can without being swamped. If they are swamped, a state insurance regulator can close them."

For those of you who have bought, or are considering buying, a SPIA, do you have safety concerns? What, if anything, can you do to lessen the risk that even a high-rated insurer could exacerbate risk through reinsurance? I'm uneasy about purchasing one of these products if there's no way to look under the hood.
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Re: SPIA Safety Concerns

Post by Stinky »

Rocinante Rider wrote: Sat Apr 13, 2024 10:31 am For those of you who have bought, or are considering buying, a SPIA, do you have safety concerns? What, if anything, can you do to lessen the risk that even a high-rated insurer could exacerbate risk through reinsurance? I'm uneasy about purchasing one of these products if there's no way to look under the hood.
If I was to buy a SPIA, I’d probably stick with an extremely highly rated mutual company like New York Life or Mass Mutual.

I think that companies like those are least likely to do the Bermuda reinsurance shenanigans.
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Re: SPIA Safety Concerns

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Stinky wrote: Sat Apr 13, 2024 12:51 pm
Rocinante Rider wrote: Sat Apr 13, 2024 10:31 am For those of you who have bought, or are considering buying, a SPIA, do you have safety concerns? What, if anything, can you do to lessen the risk that even a high-rated insurer could exacerbate risk through reinsurance? I'm uneasy about purchasing one of these products if there's no way to look under the hood.
If I was to buy a SPIA, I’d probably stick with an extremely highly rated mutual company like New York Life or Mass Mutual.

I think that companies like those are least likely to do the Bermuda reinsurance shenanigans.
Thanks for your response - much appreciated.

If I recall correctly, AIG had a AAA rating prior to its implosion in 2008. As you imply, one can lessen but not eliminate risk, and it sounds like there's no reliable way to know whether an otherwise top-rated insurer is engaging in risky forms of reinsurance. Fortunately, my wife and I can continue to self-insure against longevity so that's what we'll continue to do. I hope that regulatory shortcomings don't result in a financial crisis for millions of less fortunate/more vulnerable retirees. But then I have a state pension in a system that like most states uses private equity to manage a chunk of assets, and that's a whole different underappreciated risk. Our pension system likes to tout its superior returns, some of which may be illusions.
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Re: SPIA Safety Concerns

Post by Stinky »

Rocinante Rider wrote: Sat Apr 13, 2024 1:29 pm If I recall correctly, AIG had a AAA rating prior to its implosion in 2008.
Just to be clear, the AIG life insurance companies were not the problem in 2008. Rather, the problem was with the entities writing the credit default swaps.

See this recent thread for information about the AIG situation in 2008.

viewtopic.php?t=428829
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Re: Annuity concerns with Bermuda reinsurance

Post by cvn74n2 »

I think the 777 Re / 777 Partners situation is more akin to Lindberg's Bankers Life / Colorado Bankers Life where the principals are using the insurance companies as a cash cow to fund other activities (i.e. speculative activities in the former and a fraudulent lifestyle in the latter) under the radar of regulators.

I agree with Stinky in avoiding low rated insurance companies for any product; but, I think there will come a time when many folks' pensions will be at risk due to speculative losses and be outside the PBGC purview.

In another thread, I mentioned the Lanclos v US lawsuit (https://cafc.uscourts.gov/opinions-orde ... 978437.pdf that held the original purchaser of the annuity was liable to make up shortfalls should the insurance company (Executive Life in this case) default. That precedent may be an interesting backstop for Bermuda shenanigans which many businesses are not taking into account.
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Re: Annuity concerns with Bermuda reinsurance

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cvn74n2 wrote: Sat Apr 13, 2024 4:26 pm I think the 777 Re / 777 Partners situation is more akin to Lindberg's Bankers Life / Colorado Bankers Life where the principals are using the insurance companies as a cash cow to fund other activities (i.e. speculative activities in the former and a fraudulent lifestyle in the latter) under the radar of regulators.
I’m not an insider, but it sure seems to me that the 777 Re and Lindburg situations are two different things.

In 777 Re, the malfeasance appears to have happened in the Bermuda company. I wouldn’t know if the US ceding companies were in on the scheme, but the fact that two different US company groups (A-Cap and SILAC) were “victims” makes me think that the Bermuda company was the problem.

Lindburg is entirely different. He absconded with company funds, and is an accused felon. He’s also prolonged the agony for his company’s policyholders by engaging in protracted litigation to slow down the rehabilitation process. It sure looks like he’s the villain here.
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Re: SPIA Safety Concerns

Post by PrudentInvestor »

Stinky wrote: Sat Apr 13, 2024 12:51 pm
Rocinante Rider wrote: Sat Apr 13, 2024 10:31 am For those of you who have bought, or are considering buying, a SPIA, do you have safety concerns? What, if anything, can you do to lessen the risk that even a high-rated insurer could exacerbate risk through reinsurance? I'm uneasy about purchasing one of these products if there's no way to look under the hood.
If I was to buy a SPIA, I’d probably stick with an extremely highly rated mutual company like New York Life or Mass Mutual.

I think that companies like those are least likely to do the Bermuda reinsurance shenanigans.
MassMutual have been passing their annuity policies to Bermuda for years. You’ll struggle to find an annuity provider that DOESN’T send their business to Bermuda in some way.

I think there’s a lot of misunderstanding of what insurers are using Bermuda for though. It’s not necessarily making your policy any less safe than it would be if it remained onshore.

Take MassMutual for example. There’s probably demand in the market for $100b of annuities a year right now. Can MassMutual cover that demand alone? Consider that to sell $100b in annuities, you need to inject $10b of your own money to meet regulatory requirements. The regulator makes you set aside ~10% of the premium to ensure you have enough to pay your polocyholder in an adverse scenario. Do MassMutual have $10b sitting around that they can’t find a use for? No. So should they just let the demand go unfilled and leave profit on the table?

What MassMutual did 2 years ago is set up a new company (Martello Re), and together with a bunch of other investors, injected $1.5billion into it. They put in ~500m of their own money and got the investors to put in $1b. MassMutual therefore own ~30% and third party investors own the rest. This new company now had the capacity to reinsure $15b of annuity business.

MassMutual then write business through their annuity selling pipeline in the US, and reinsure their business to Martello. They can now write an additional $15b a year, even though they only get to keep 1/3 of the profits of the business they give away, and the other investors get 2/3 (but Martello will be charging them a fee to manage it). They also free up some of their capital to use on other things.

This model has been followed by many. Athene, Global Atlantic, MassMutual, Prudential, AIG, RGA are some big name examples.

Now if you’re one of these third party investors, being approached to set up a new reinsurer, where do you want to set it up? There are various things you want to consider, taxes, regulations, politics are three big ones. If you’re a Middle Eastern sovereign wealth fund, do you want to set up a company in the US and voluntarily pay US tax? Or do you set up in a more tax efficient jurisdiction? If you want low tax, do you go for somewhere like Cayman, BVI? Or do you choose somewhere that has a robust regulatory framework and a thriving reinsurance market? This is where Bermuda comes in.

You set up in Bermuda, you have a strong pragmatic regulator who can get you your licence in the space of a few months. You have easy access to the talent needed to run your new company. You have the ability to write policies in the US, Europe and Asia, and the regulatory framework is recognised world wide as being equivalent to other regimes such as the European Solvency II.

So now you see a bunch of new reinsurance companies setting up in Bermuda, partly owned by US insurers who have a ready made pipeline so they can write business at scale with low marginal cost.

The US state regulators have to approve all of these transactions, they’re comfortable with the level of risk. In most cases, the assets remain onshore and the companies are holding as much “just in case” capital as they would onshore, but now the economics of the deal get passed to third party investors through the Bermuda company. The Bermuda regulatory framework is robust and has very strict requirements. It’s a market based regime that means reserves reflect current market conditions, unlike the book value regimes of the US. If interest rates fall, you have to increase your reserves to reflect the fact that it would cost more to service your future liabilities in an environment of lower returns. The policy being passed to Bermuda doesn’t result in any more risk to you as the policyholder.

Now companies like 777 Re are the exception. They thought they saw some holes in the regulations and have tried to take advantage. This became clear to the Bermuda regulator in the normal course of business, who took action and forced 777 Re to fix things. The deficiencies were picked up on by ratings agencies and the company’s rating was dropped to C, and it looks the company won’t exist for much longer. If anything this reflects the strength of the regime.

Note, even in this case of a bad apple, the policyholders’ money is still safe. The insurers who sent the business to 777 Re have taken it back along with all their money. Note the reinsurance transaction, along with most others in Bermuda was what’s called a ModCo transaction. The policy reserves and all the assets remained onshore in an account owned by the ceding company, ACAP, so it’s not like 777 Re could ever have just taken them and started doing whatever they want with them.

I’ll write more later when I have time, but my key message is that annuities being reinsured to Bermuda is not necessarily a bad thing, but bad companies are bad companies whether they’re in the US, Bermuda or anywhere else in the world.
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Re: Annuity concerns with Bermuda reinsurance

Post by Charles Joseph »

cvn74n2 wrote: Fri Apr 12, 2024 4:48 pm In today's Washington Post is an article discussing reinsurance of retirement and structured settlement annuities by companies based in Bermuda https://www.washingtonpost.com/opinions ... e-bermuda/ along with the potential pitfalls of investment issues underpinning the annuities using 777 Re as the example (i.e. soccer teams) https://substack.news-items.com/p/a-huge-trend.
Whether based in Bermuda or Parsippany, New Jersey, annuities en totale are a complete rip-off, in my opinion.

No insurance company is getting a nickel of my money for a high-commission, high-fee, hidden-cost annuity. Within the next few years I will already have the best lifetime, inflation-indexed annuity that money can buy.

Watch your wallet around these insurance people. Avoid annuities.
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Re: SPIA Safety Concerns

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PrudentInvestor wrote: Sun Apr 14, 2024 3:29 pm
Now companies like 777 Re are the exception. They thought they saw some holes in the regulations and have tried to take advantage. This became clear to the Bermuda regulator in the normal course of business, who took action and forced 777 Re to fix things. The deficiencies were picked up on by ratings agencies and the company’s rating was dropped to C, and it looks the company won’t exist for much longer. If anything this reflects the strength of the regime.

Note, even in this case of a bad apple, the policyholders’ money is still safe. The insurers who sent the business to 777 Re have taken it back along with all their money. Note the reinsurance transaction, along with most others in Bermuda was what’s called a ModCo transaction. The policy reserves and all the assets remained onshore in an account owned by the ceding company, ACAP, so it’s not like 777 Re could ever have just taken them and started doing whatever they want with them.

I’ll write more later when I have time, but my key message is that annuities being reinsured to Bermuda is not necessarily a bad thing, but bad companies are bad companies whether they’re in the US, Bermuda or anywhere else in the world.
Welcome to the Forum!

And thank you for your very thoughtful post. It’s clear that you’re quite knowledgeable about the offshore reinsurance market. I hope that you continue reading and posting here.

I’m clearly as not up to speed on these offshore transactions as you are. That being said, I’m a bit confused about the counterparty risk posed by 777 Re.

I’ve seen in the press that 777 Re has been considerably downgraded by AM Best, and you note that the company might not survive. I understand that.

What I don’t fully grasp is the risk posed by 777 Re to their reinsurance counter parties, the A-CAP companies and SILAC. Each of those domestic companies has also been placed on downgrade watch by AM Best, due (I believe) to their reinsurance exposure to 777 Re.

Are you saying that those domestic companies aren’t facing the risk of the loss of their assets backing the reserves? If that’s true, then is the risk that the domestic companies are facing merely the loss of the capital supporting their ceded business?

Again, I very much appreciate your post.
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Re: Annuity concerns with Bermuda reinsurance

Post by adamthesmythe »

Charles Joseph wrote: Sun Apr 14, 2024 7:00 pm
cvn74n2 wrote: Fri Apr 12, 2024 4:48 pm In today's Washington Post is an article discussing reinsurance of retirement and structured settlement annuities by companies based in Bermuda https://www.washingtonpost.com/opinions ... e-bermuda/ along with the potential pitfalls of investment issues underpinning the annuities using 777 Re as the example (i.e. soccer teams) https://substack.news-items.com/p/a-huge-trend.
Whether based in Bermuda or Parsippany, New Jersey, annuities en totale are a complete rip-off, in my opinion.

No insurance company is getting a nickel of my money for a high-commission, high-fee, hidden-cost annuity. Within the next few years I will already have the best lifetime, inflation-indexed annuity that money can buy.

Watch your wallet around these insurance people. Avoid annuities.
Since the Post article doesn't seem to say, I was wondering whether they were talking SPIAs or the other (undesirable) kind.

This post further confuses the issue it seems to me.
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Re: Annuity concerns with Bermuda reinsurance

Post by ResearchMed »

Charles Joseph wrote: Sun Apr 14, 2024 7:00 pm
cvn74n2 wrote: Fri Apr 12, 2024 4:48 pm In today's Washington Post is an article discussing reinsurance of retirement and structured settlement annuities by companies based in Bermuda https://www.washingtonpost.com/opinions ... e-bermuda/ along with the potential pitfalls of investment issues underpinning the annuities using 777 Re as the example (i.e. soccer teams) https://substack.news-items.com/p/a-huge-trend.
Whether based in Bermuda or Parsippany, New Jersey, annuities en totale are a complete rip-off, in my opinion.

No insurance company is getting a nickel of my money for a high-commission, high-fee, hidden-cost annuity. Within the next few years I will already have the best lifetime, inflation-indexed annuity that money can buy.

Watch your wallet around these insurance people. Avoid annuities.
[emphasis added]


Would you care to distinguish between types of annuities?
SPIAs are simply "owner-made pensions". Yes, there are fees. Do you think "company-made" pensions are provided without fees?

SPIAs are completely different from the variable annuities with all sorts of hidden and complicated <whatevers> and extra ways to extract money.

WIth an SPIA, if it is set up to provide, say, $$,000 per month for life, that's what you get: $5,000 per month for life. (There may be a co-annuitant, and that person may get 100% or something like 75%/etc., when the first annuitant passes.)
These are very competitive, because they are not "complicated financial products". This also keeps fees down, given the competition from other large insurers.
For the complicated "stuff", it's almost impossible to understand some of the products, much less compare them.

It's a real shame that the word "annuity" has so many different meanings and uses, and some are good (at least for many purposes), and others... er, "not so much...."

And then there is the twisted word usage of "annuitizing an annuity", but I digress...
That certainly doesn't help!
:annoyed

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Re: Annuity concerns with Bermuda reinsurance

Post by Johm221122 »

Charles Joseph wrote: Sun Apr 14, 2024 7:00 pm
cvn74n2 wrote: Fri Apr 12, 2024 4:48 pm In today's Washington Post is an article discussing reinsurance of retirement and structured settlement annuities by companies based in Bermuda https://www.washingtonpost.com/opinions ... e-bermuda/ along with the potential pitfalls of investment issues underpinning the annuities using 777 Re as the example (i.e. soccer teams) https://substack.news-items.com/p/a-huge-trend.
Whether based in Bermuda or Parsippany, New Jersey, annuities en totale are a complete rip-off, in my opinion.

No insurance company is getting a nickel of my money for a high-commission, high-fee, hidden-cost annuity. Within the next few years I will already have the best lifetime, inflation-indexed annuity that money can buy.

Watch your wallet around these insurance people. Avoid annuities.
Should I avoid CDs and bonds also?

I like guaranteed income for some of my money and if an annuity meets that goal it's no different to me than a bank, corporation, municipality, federal agency or federal government bonds
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Re: Annuity concerns with Bermuda reinsurance

Post by Rex66 »

Johm221122 wrote: Sun Apr 14, 2024 8:00 pm
Charles Joseph wrote: Sun Apr 14, 2024 7:00 pm
cvn74n2 wrote: Fri Apr 12, 2024 4:48 pm In today's Washington Post is an article discussing reinsurance of retirement and structured settlement annuities by companies based in Bermuda https://www.washingtonpost.com/opinions ... e-bermuda/ along with the potential pitfalls of investment issues underpinning the annuities using 777 Re as the example (i.e. soccer teams) https://substack.news-items.com/p/a-huge-trend.
Whether based in Bermuda or Parsippany, New Jersey, annuities en totale are a complete rip-off, in my opinion.

No insurance company is getting a nickel of my money for a high-commission, high-fee, hidden-cost annuity. Within the next few years I will already have the best lifetime, inflation-indexed annuity that money can buy.

Watch your wallet around these insurance people. Avoid annuities.
Should I avoid CDs and bonds also?

I like guaranteed income for some of my money and if an annuity meets that goal it's no different to me than a bank, corporation, municipality, federal agency or federal government bonds
its certainly fine to purchase an annuity but thats just not true

those other items are backed by the federal government.

insurance is primarily backed by the company then the state insurance guaranty assoc will try to make you whole. When a company has gone under (which is uncommon), they have historically been successful around 94% of the time for annuities and 96% for life insurance. If under the state limits it appears to be near 100% but trying to there if i recall there was only one link to the state assoc results years ago about that so it isnt easy to investigate. Now sometimes it has taken years so that has to also be considered. If you go over to the insurance agent forum you will see posts from unhappy people when that happens (which is rare).
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Re: Annuity concerns with Bermuda reinsurance

Post by Johm221122 »

Rex66 wrote: Sun Apr 14, 2024 8:31 pm
Johm221122 wrote: Sun Apr 14, 2024 8:00 pm
Charles Joseph wrote: Sun Apr 14, 2024 7:00 pm
cvn74n2 wrote: Fri Apr 12, 2024 4:48 pm In today's Washington Post is an article discussing reinsurance of retirement and structured settlement annuities by companies based in Bermuda https://www.washingtonpost.com/opinions ... e-bermuda/ along with the potential pitfalls of investment issues underpinning the annuities using 777 Re as the example (i.e. soccer teams) https://substack.news-items.com/p/a-huge-trend.
Whether based in Bermuda or Parsippany, New Jersey, annuities en totale are a complete rip-off, in my opinion.

No insurance company is getting a nickel of my money for a high-commission, high-fee, hidden-cost annuity. Within the next few years I will already have the best lifetime, inflation-indexed annuity that money can buy.

Watch your wallet around these insurance people. Avoid annuities.
Should I avoid CDs and bonds also?

I like guaranteed income for some of my money and if an annuity meets that goal it's no different to me than a bank, corporation, municipality, federal agency or federal government bonds
its certainly fine to purchase an annuity but thats just not true

those other items are backed by the federal government.

insurance is primarily backed by the company then the state insurance guaranty assoc will try to make you whole. When a company has gone under (which is uncommon), they have historically been successful around 94% of the time for annuities and 96% for life insurance. If under the state limits it appears to be near 100% but trying to there if i recall there was only one link to the state assoc results years ago about that so it isnt easy to investigate. Now sometimes it has taken years so that has to also be considered. If you go over to the insurance agent forum you will see posts from unhappy people when that happens (which is rare).
I meant I feel no better about the companies or government entities. They all have issues with trust and ethics.

But CD's have coverage limits, municipal bonds have many problems and Corporate bonds have no guarantees at all.

All else being equal I would choose a Federal government Bond but everything being equal is not what the different investments I mentioned offer.
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Re: Annuity concerns with Bermuda reinsurance

Post by Stinky »

Charles Joseph wrote: Sun Apr 14, 2024 7:00 pm No insurance company is getting a nickel of my money for a high-commission, high-fee, hidden-cost annuity.
Sounds like a smart decision to me. Nobody should want the particular annuity that you describe.

Just realize that not all annuities are like the product you describe.
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Re: SPIA Safety Concerns

Post by PrudentInvestor »

Stinky wrote: Sun Apr 14, 2024 7:25 pm
PrudentInvestor wrote: Sun Apr 14, 2024 3:29 pm
Now companies like 777 Re are the exception. They thought they saw some holes in the regulations and have tried to take advantage. This became clear to the Bermuda regulator in the normal course of business, who took action and forced 777 Re to fix things. The deficiencies were picked up on by ratings agencies and the company’s rating was dropped to C, and it looks the company won’t exist for much longer. If anything this reflects the strength of the regime.

Note, even in this case of a bad apple, the policyholders’ money is still safe. The insurers who sent the business to 777 Re have taken it back along with all their money. Note the reinsurance transaction, along with most others in Bermuda was what’s called a ModCo transaction. The policy reserves and all the assets remained onshore in an account owned by the ceding company, ACAP, so it’s not like 777 Re could ever have just taken them and started doing whatever they want with them.

I’ll write more later when I have time, but my key message is that annuities being reinsured to Bermuda is not necessarily a bad thing, but bad companies are bad companies whether they’re in the US, Bermuda or anywhere else in the world.
Welcome to the Forum!

And thank you for your very thoughtful post. It’s clear that you’re quite knowledgeable about the offshore reinsurance market. I hope that you continue reading and posting here.

I’m clearly as not up to speed on these offshore transactions as you are. That being said, I’m a bit confused about the counterparty risk posed by 777 Re.

I’ve seen in the press that 777 Re has been considerably downgraded by AM Best, and you note that the company might not survive. I understand that.

What I don’t fully grasp is the risk posed by 777 Re to their reinsurance counter parties, the A-CAP companies and SILAC. Each of those domestic companies has also been placed on downgrade watch by AM Best, due (I believe) to their reinsurance exposure to 777 Re.

Are you saying that those domestic companies aren’t facing the risk of the loss of their assets backing the reserves? If that’s true, then is the risk that the domestic companies are facing merely the loss of the capital supporting their ceded business?

Again, I very much appreciate your post.
There’s still a risk of losing the assets, just as there’s a risk even without reinsurance, if there’s a problem with the investment strategy.

In 777 / ACAP’s case, as they used Modified Coinsurance Funds withheld, the assets remained on ACAP’s balance sheet in a trust owned by ACAP. ACAP had ownership of the assets and could see at all times what was happening with the assets. 777 will have been selecting the investments but they couldn’t just go away and start buying whatever they want, they’re restricted by ACAP’s investment guidelines. 777 re just had the rights to the profits from the investments.

ACAP likely have had a “recapture” clause in the treaty, for example, they have the right to cancel the contract if 777 re is downgraded or if capital falls below a certain level (which they did. The problem with recapturing though means ACAP now have to find that additional capital that they need to hold on the side to support the business (which they seemed to have no problem finding). They’ll likely just look to find a new reinsurer to take on the deal to free up the capital again.
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Re: SPIA Safety Concerns

Post by Stinky »

PrudentInvestor wrote: Mon Apr 15, 2024 10:06 am
Stinky wrote: Sun Apr 14, 2024 7:25 pm Are you saying that those domestic companies aren’t facing the risk of the loss of their assets backing the reserves? If that’s true, then is the risk that the domestic companies are facing merely the loss of the capital supporting their ceded business?
There’s still a risk of losing the assets, just as there’s a risk even without reinsurance, if there’s a problem with the investment strategy.

In 777 / ACAP’s case, as they used Modified Coinsurance Funds withheld, the assets remained on ACAP’s balance sheet in a trust owned by ACAP. ACAP had ownership of the assets and could see at all times what was happening with the assets. 777 will have been selecting the investments but they couldn’t just go away and start buying whatever they want, they’re restricted by ACAP’s investment guidelines. 777 re just had the rights to the profits from the investments.

ACAP likely have had a “recapture” clause in the treaty, for example, they have the right to cancel the contract if 777 re is downgraded or if capital falls below a certain level (which they did. The problem with recapturing though means ACAP now have to find that additional capital that they need to hold on the side to support the business (which they seemed to have no problem finding). They’ll likely just look to find a new reinsurer to take on the deal to free up the capital again.
Thank you again for your further clarification. I do understand modified coinsurance - I just hadn’t known the particulars of the A CAP transaction.

I’m certainly hopeful that A CAP is able to get new reinsurance, new external capital, or both.

The alternative, which could be a technical insolvency by either of the A CAP companies, would be a huge black eye for the insurance industry.
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Re: Annuity concerns with Bermuda reinsurance

Post by Johm221122 »

Charles Joseph wrote: Sun Apr 14, 2024 7:00 pm

Within the next few years I will already have the best lifetime, inflation-indexed annuity that money can buy.

Watch your wallet around these insurance people. Avoid annuities.
We call Social Security the best annuity and I'm guilty of this also. But can you imagine if an insurance company put on their website because we promised you too much we're going to cut your payments by 20%.

Can you imagine the uproar if the insurance company did that with an annuity or a bank did that for a CD (and FDIC didn't step in). Not to be political but they took our money and it was implied we would get a certain amount and I was actually planning on getting that and we call that the best "annuity" :?:
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Re: Annuity concerns with Bermuda reinsurance

Post by AlwaysLearningMore »

Johm221122 wrote: Mon Apr 15, 2024 12:10 pm
Charles Joseph wrote: Sun Apr 14, 2024 7:00 pm

Within the next few years I will already have the best lifetime, inflation-indexed annuity that money can buy.

Watch your wallet around these insurance people. Avoid annuities.
We call Social Security the best annuity and I'm guilty of this also. But can you imagine if an insurance company put on their website because we promised you too much we're going to cut your payments by 20%.

Can you imagine the uproar if the insurance company did that with an annuity or a bank did that for a CD (and FDIC didn't step in). Not to be political but they took our money and it was implied we would get a certain amount and I was actually planning on getting that and we call that the best "annuity" :?:
You make a good points.
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GermanHinton
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Re: Annuity concerns with Bermuda reinsurance

Post by GermanHinton »

Reinsurance of annuities abroad may pose risks to investors, especially in the absence of effective regulatory controls. The need for additional oversight and protection to prevent such situations is critical. A list of insurance companies that regularly reinsure offshore annuities can be a useful tool for investors looking to minimize risk.
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Re: SPIA Safety Concerns

Post by GA Dawg 78 »

PrudentInvestor wrote: Sun Apr 14, 2024 3:29 pm
Stinky wrote: Sat Apr 13, 2024 12:51 pm
Rocinante Rider wrote: Sat Apr 13, 2024 10:31 am For those of you who have bought, or are considering buying, a SPIA, do you have safety concerns? What, if anything, can you do to lessen the risk that even a high-rated insurer could exacerbate risk through reinsurance? I'm uneasy about purchasing one of these products if there's no way to look under the hood.
If I was to buy a SPIA, I’d probably stick with an extremely highly rated mutual company like New York Life or Mass Mutual.

I think that companies like those are least likely to do the Bermuda reinsurance shenanigans.
MassMutual have been passing their annuity policies to Bermuda for years. You’ll struggle to find an annuity provider that DOESN’T send their business to Bermuda in some way.

I think there’s a lot of misunderstanding of what insurers are using Bermuda for though. It’s not necessarily making your policy any less safe than it would be if it remained onshore.

Take MassMutual for example. There’s probably demand in the market for $100b of annuities a year right now. Can MassMutual cover that demand alone? Consider that to sell $100b in annuities, you need to inject $10b of your own money to meet regulatory requirements. The regulator makes you set aside ~10% of the premium to ensure you have enough to pay your polocyholder in an adverse scenario. Do MassMutual have $10b sitting around that they can’t find a use for? No. So should they just let the demand go unfilled and leave profit on the table?

What MassMutual did 2 years ago is set up a new company (Martello Re), and together with a bunch of other investors, injected $1.5billion into it. They put in ~500m of their own money and got the investors to put in $1b. MassMutual therefore own ~30% and third party investors own the rest. This new company now had the capacity to reinsure $15b of annuity business.

MassMutual then write business through their annuity selling pipeline in the US, and reinsure their business to Martello. They can now write an additional $15b a year, even though they only get to keep 1/3 of the profits of the business they give away, and the other investors get 2/3 (but Martello will be charging them a fee to manage it). They also free up some of their capital to use on other things.

This model has been followed by many. Athene, Global Atlantic, MassMutual, Prudential, AIG, RGA are some big name examples.

Now if you’re one of these third party investors, being approached to set up a new reinsurer, where do you want to set it up? There are various things you want to consider, taxes, regulations, politics are three big ones. If you’re a Middle Eastern sovereign wealth fund, do you want to set up a company in the US and voluntarily pay US tax? Or do you set up in a more tax efficient jurisdiction? If you want low tax, do you go for somewhere like Cayman, BVI? Or do you choose somewhere that has a robust regulatory framework and a thriving reinsurance market? This is where Bermuda comes in.

You set up in Bermuda, you have a strong pragmatic regulator who can get you your licence in the space of a few months. You have easy access to the talent needed to run your new company. You have the ability to write policies in the US, Europe and Asia, and the regulatory framework is recognised world wide as being equivalent to other regimes such as the European Solvency II.

So now you see a bunch of new reinsurance companies setting up in Bermuda, partly owned by US insurers who have a ready made pipeline so they can write business at scale with low marginal cost.

The US state regulators have to approve all of these transactions, they’re comfortable with the level of risk. In most cases, the assets remain onshore and the companies are holding as much “just in case” capital as they would onshore, but now the economics of the deal get passed to third party investors through the Bermuda company. The Bermuda regulatory framework is robust and has very strict requirements. It’s a market based regime that means reserves reflect current market conditions, unlike the book value regimes of the US. If interest rates fall, you have to increase your reserves to reflect the fact that it would cost more to service your future liabilities in an environment of lower returns. The policy being passed to Bermuda doesn’t result in any more risk to you as the policyholder.

Now companies like 777 Re are the exception. They thought they saw some holes in the regulations and have tried to take advantage. This became clear to the Bermuda regulator in the normal course of business, who took action and forced 777 Re to fix things. The deficiencies were picked up on by ratings agencies and the company’s rating was dropped to C, and it looks the company won’t exist for much longer. If anything this reflects the strength of the regime.

Note, even in this case of a bad apple, the policyholders’ money is still safe. The insurers who sent the business to 777 Re have taken it back along with all their money. Note the reinsurance transaction, along with most others in Bermuda was what’s called a ModCo transaction. The policy reserves and all the assets remained onshore in an account owned by the ceding company, ACAP, so it’s not like 777 Re could ever have just taken them and started doing whatever they want with them.

I’ll write more later when I have time, but my key message is that annuities being reinsured to Bermuda is not necessarily a bad thing, but bad companies are bad companies whether they’re in the US, Bermuda or anywhere else in the world.
Thank you for this explanation. Very helpful. I'm reading Kenneth King's February webinar about the 777 Re issue. He says this:

If we go to the next part of the discussion, you know, specifically 777 and the downgrade, I just wanna reiterate or point out a couple of. of important things that we need to think about relative to our reinsurance relationships.

There was no, and there is no financial impact to the A-CAP affiliates related to AM Best downgrading 777 Re. from A- to C-. And that’s because the exposure, the reinsurance exposure is fully supported not only by collateral that’s kept on our accounts or the investments that are made by 777 Re are already held in our account, but we also have set aside additional capital that I pointed out previously to support it. So there’s absolutely no risk, financial risk associated with the performance of 777 Re because we’ve effectively removed it all from our rated carriers.

Out of prudence though, and really to take candidly some of the noise off of us, we are in the process, and began the process of recapturing 777 Re’s business and moving the business to a A- or better rated company. And we’re doing that in three specific scenarios. One for our MIGA business at Haymarket, and then two more times for our app products, both in Sentinel Security Life and Atlantic Coast life.



Probably a very novice question, he is saying the reinsurance exposure at 777 Re is fully supported by capital that ACAP has on the books? It's a confusing statement to me. Appreciate any insight you can provide.
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Re: SPIA Safety Concerns

Post by Stinky »

GA Dawg 78 wrote: Thu May 30, 2024 10:21 am
Probably a very novice question, he is saying the reinsurance exposure at 777 Re is fully supported by capital that ACAP has on the books? It's a confusing statement to me. Appreciate any insight you can provide.
Here’s something I posted in another thread about the King companies
Stinky wrote: Sat May 25, 2024 4:35 am The companies I alluded to above are Sentinel Security Life and Atlantic Coast Life. The two companies share a common parent, named A-Cap. The companies and A-Cap have a relationship with a troubled Bermuda reinsurer named 777 Re, which is affiliated with 777 Partners, a firm that has been in the news recently as the potential buyer of the Everton soccer team.

Back in February 2024, AM Best placed the B++ "Insurer Financial Strength" ratings of Atlantic Coast and Sentinel Security under "negative outlook", and downgraded the "Long-Term Issuer Credit Rating" (which is not commonly referred to in the media) of the two companies by one notch. A "negative outlook" sometimes, but not always, precedes a ratings downgrade. Here's the AM Best press release on the ratings action: https://news.ambest.com/newscontent.asp ... My4wLjAuMA..

Then, in April 2024, it appears that AM Best was planning to downgrade the Insurer Financial Strength Ratings of the Atlantic Coast and Sentinel Security by three notches, from B++ to B-. The companies filed a lawsuit in New Jersey court to stop the downgrade, and the downgrade has not yet been announced by AM Best. Here's a news article on this action: https://www.insurancebusinessmag.com/us ... 88008.aspx

It appears that Blueprint Income removed Atlantic Coast and Sentinel Security products from its platform within the last two weeks or so. However, products from the two life insurers remain available on other sites, including Stan the Annuity Man and Annuity Advantage.
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Re: Annuity concerns with Bermuda reinsurance

Post by Harmanic »

New investigation by Barron's.
https://archive.ph/6Wz6C#selection-399.24-399.42

Exerpt:
Life insurers have increasingly invested in so-called private placements, generally higher-yielding securities that are exempt from federal reporting requirements and lack active secondary markets, said the Federal Reserve Bank of Chicago in a June 3 report.
“The growing investment in this less liquid asset class therefore increases the risk of fire sales during times of crisis,” wrote the Fed analysts.
Private placements grew to about 20% of all life insurers’ bondholdings in 2022, according to the report, from about 15% five years earlier.
A-CAP is more reliant on private placements than others. They consisted of about 50% of all investments across its three key insurance units, Sentinel, Atlantic Coast, and Haymarket, according to a Barron’s analysis of their most recent filings.
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