MYGA returns in low-yield environment (article)

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EvelynTroy
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MYGA returns in low-yield environment (article)

Post by EvelynTroy »

Sharing this link because of recent discussions about MYGA's (multi-year guaranteed annuity)
It was referenced this a.m. on Oblivious Investor.

https://www.advisorperspectives.com/art ... nvironment

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Re: MYGA returns in low-yield environment (article)

Post by Stinky »

Thank you for posting.

This is a solid, objective, well written article. It’s a great summary of the current MYGA marketplace.
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Re: MYGA returns in low-yield environment (article)

Post by nisiprius »

"I wonder often what the vintners buy
One half so precious as the stuff they sell."

What assets are insurance companies are buying that satisfy the regulators, yet are able to safely support these guaranteed returns?
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Re: MYGA returns in low-yield environment (article)

Post by nedsaid »

nisiprius wrote: Fri Oct 16, 2020 9:31 am "I wonder often what the vintners buy
One half so precious as the stuff they sell."

What assets are insurance companies are buying that satisfy the regulators, yet are able to safely support these guaranteed returns?
Great question. You also wonder what risks that insurance companies in general are taking within their bond portfolios. I am soooo old that I remember when AIG blew up over credit default swaps, foggy memory recalls AIG had the assets to cover their obligations but not the liquidity.

Larry Swedroe feels comfortable enough with MYGAs that he made a recent favorable recommendation.
A fool and his money are good for business.
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Re: MYGA returns in low-yield environment (article)

Post by Stinky »

nedsaid wrote: Fri Oct 16, 2020 10:07 am
nisiprius wrote: Fri Oct 16, 2020 9:31 am What assets are insurance companies are buying that satisfy the regulators, yet are able to safely support these guaranteed returns?
Great question. You also wonder what risks that insurance companies in general are taking within their bond portfolios. I am soooo old that I remember when AIG blew up over credit default swaps, foggy memory recalls AIG had the assets to cover their obligations but not the liquidity.

Larry Swedroe feels comfortable enough with MYGAs that he made a recent favorable recommendation.
As to AIG, I don’t believe that the CDS that were so problematic were held at the life insurance companies. I believe that the AIG life companies were solid through the 2008 crisis, even though the AIG parent holding company had some significant problems. There are significant regulatory barriers between life insurance companies and their parent holding companies that work to substantially insulate the insurance companies from holding company problems.

As to the assets backing the MYGAs, I think that we would need to have an insurance company actuary or investment person post on the Forum as to what the investments are. My experience from my time in a life insurance company was that companies price their products to make a profit in aggregate. That being said, there may some pricing cells that are expected to earn lower profits, and are effectively “subsidized” by other pricing cells with higher expected profits.
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Re: MYGA returns in low-yield environment (article)

Post by CWRadio »

Trying to understand financial ratings of companies and interest paid.

In reference to a 3 year MYGA for the state of Michigan for $100,000.

What are the pros and cons or your thinking why a person should buy a MYGA from New York Life Insurance Company rated A++ paying 1.60% interest as compared to Sagicor Life Insurance Company rated A- paying 2.40%?
Or in other words why would a person buy a New York Life MYGA instead of a Sagicor Life MYGA 3 year MYGA?

Thanks Paul
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Re: MYGA returns in low-yield environment (article)

Post by vineviz »

Stinky wrote: Fri Oct 16, 2020 10:23 am As to the assets backing the MYGAs, I think that we would need to have an insurance company actuary or investment person post on the Forum as to what the investments are. My experience from my time in a life insurance company was that companies price their products to make a profit in aggregate. That being said, there may some pricing cells that are expected to earn lower profits, and are effectively “subsidized” by other pricing cells with higher expected profits.
Even without knowing the particular portfolios of a specific insurance company, there need not be a big mystery.

Five-year MYGAs with yields of 2% or better aren't hard to explain. It's not difficult to build a portfolio of bonds (Treasury, investment grade, and high yield) with maturities of five-years that yields 2.25% or better.

If an investor didn't want to purchase a 5-year MYGA directly, they could "build their own" at whatever level of credit risk they were comfortable with using a combination of:

iShares iBonds Dec 2025 Term Treasury Bond ETF (IBTF)
iShares iBonds Dec 2025 Term Corporate Bond ETF (IBDQ)
iShares iBonds 2025 Term High Yield Bond ETF (IBHE)

or the Invesco equivalents.

For example, a 40/20/40 combination of those three ETFs would produce a yield of roughly 2.44%. Right in the ballpark of the highest-paying MYGAs with less counterparty risk and only a tiny bit of reinvestment risk.
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Re: MYGA returns in low-yield environment (article)

Post by TN_Boy »

nedsaid wrote: Fri Oct 16, 2020 10:07 am
nisiprius wrote: Fri Oct 16, 2020 9:31 am "I wonder often what the vintners buy
One half so precious as the stuff they sell."

What assets are insurance companies are buying that satisfy the regulators, yet are able to safely support these guaranteed returns?
Great question. You also wonder what risks that insurance companies in general are taking within their bond portfolios. I am soooo old that I remember when AIG blew up over credit default swaps, foggy memory recalls AIG had the assets to cover their obligations but not the liquidity.

Larry Swedroe feels comfortable enough with MYGAs that he made a recent favorable recommendation.
I feel better about these things because a respected advisor like Swedroe is recommending them. And well, they do have state level guarantees.

But I am also baffled by how the insurance companies are funding them. Out of general revenues? Buying junk bonds? A mix of stocks and bonds? From other threads on MYGAs, it sounds like the gap between what they are paying out and the return of conventional fixed income is higher than usual.
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Re: MYGA returns in low-yield environment (article)

Post by Stinky »

CWRadio wrote: Fri Oct 16, 2020 10:58 am Trying to understand financial ratings of companies and interest paid.

In reference to a 3 year MYGA for the state of Michigan for $100,000.

What are the pros and cons or your thinking why a person should buy a MYGA from New York Life Insurance Company rated A++ paying 1.60% interest as compared to Sagicor Life Insurance Company rated A- paying 2.40%?

Or in other words why would a person buy a New York Life MYGA instead of a Sagicor Life MYGA 3 year MYGA?

Thanks Paul
I believe that both of these companies are overwhelmingly likely to fully perform on a three year MYGA. Given that, I would personally take the higher credited rate on the Sagicor product.

If I interpret the website correctly, you have a $250k ceiling on coverage for annuity policies in Michigan, which will easily cover your $100k policy.

A measure of the risk was addressed in a previous thread which links also to this thread with a table of risk by indexfundfan:
viewtopic.php?p=5435915#p5435915
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Re: MYGA returns in low-yield environment (article)

Post by ponderosa »

[edited to create a new post, to avoid derailing discussion on MYGA returns]
Last edited by ponderosa on Sat Oct 17, 2020 4:56 pm, edited 1 time in total.
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Re: MYGA returns in low-yield environment (article)

Post by patrick »

nisiprius wrote: Fri Oct 16, 2020 9:31 am "I wonder often what the vintners buy
One half so precious as the stuff they sell."

What assets are insurance companies are buying that satisfy the regulators, yet are able to safely support these guaranteed returns?
I doubt that regulators would allow them to load up on junk bonds. Maybe they can get away with holding mainly long-term bonds at the lower bound of investment grade. That would cover the MYGA rates if all goes well, but with significant risk for the insurance company.

I suspect that these annuity rates are not particularly profitable by themselves. Perhaps they instead make money by selling riders on the annuities and/or collecting surrender charge.
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Re: MYGA returns in low-yield environment (article)

Post by Stinky »

patrick wrote: Fri Oct 16, 2020 12:48 pm
nisiprius wrote: Fri Oct 16, 2020 9:31 am "I wonder often what the vintners buy
One half so precious as the stuff they sell."

What assets are insurance companies are buying that satisfy the regulators, yet are able to safely support these guaranteed returns?
I doubt that regulators would allow them to load up on junk bonds. Maybe they can get away with holding mainly long-term bonds at the lower bound of investment grade. That would cover the MYGA rates if all goes well, but with significant risk for the insurance company.

I suspect that these annuity rates are not particularly profitable by themselves. Perhaps they instead make money by selling riders on the annuities and/or collecting surrender charge.
Under the "risk based capital" calculations that regulators (and rating agencies) require life insurance companies to perform, lower-rated bonds require higher amounts of capital to be held. The trade-off isn't perfect, and insurers can pick up some yield net of capital charges by going into lower-quality bonds, but it's not a free lunch.

Life insurers typically don't hold common stock to back their insurance liabilities, because the risk-based capital required is very high.

Yes, surrender charges and rider fees are sources of profit for the insurance company. If you look at the details on MYGAs from some of the lower-rated companies, you'll see that a surrender charge is assessed even on the death of the insured, unless a "death benefit" rider is purchased. Most MYGAs sold by higher-rated companies pay out the full accumulated value on death.
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Re: MYGA returns in low-yield environment (article)

Post by nedsaid »

Stinky wrote: Fri Oct 16, 2020 10:23 am
nedsaid wrote: Fri Oct 16, 2020 10:07 am
nisiprius wrote: Fri Oct 16, 2020 9:31 am What assets are insurance companies are buying that satisfy the regulators, yet are able to safely support these guaranteed returns?
Great question. You also wonder what risks that insurance companies in general are taking within their bond portfolios. I am soooo old that I remember when AIG blew up over credit default swaps, foggy memory recalls AIG had the assets to cover their obligations but not the liquidity.

Larry Swedroe feels comfortable enough with MYGAs that he made a recent favorable recommendation.
As to AIG, I don’t believe that the CDS that were so problematic were held at the life insurance companies. I believe that the AIG life companies were solid through the 2008 crisis, even though the AIG parent holding company had some significant problems. There are significant regulatory barriers between life insurance companies and their parent holding companies that work to substantially insulate the insurance companies from holding company problems.

As to the assets backing the MYGAs, I think that we would need to have an insurance company actuary or investment person post on the Forum as to what the investments are. My experience from my time in a life insurance company was that companies price their products to make a profit in aggregate. That being said, there may some pricing cells that are expected to earn lower profits, and are effectively “subsidized” by other pricing cells with higher expected profits.
Obviously, I am not an Insurance Actuary and I am not privy to what is in the Insurance Company investment portfolios so we have to do some guessing. My best guess is that these bond portfolios are more heavy on Investment Grade Corporates and also Mortgage Backed Securities like GNMAs to boost yields. I would also guess they extend the average maturities of their bond portfolios a bit. Insurance Companies also benefit from float, that is the difference in the time when they collect premiums and when they pay claims.
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Re: MYGA returns in low-yield environment (article)

Post by nedsaid »

TN_Boy wrote: Fri Oct 16, 2020 11:04 am
nedsaid wrote: Fri Oct 16, 2020 10:07 am
nisiprius wrote: Fri Oct 16, 2020 9:31 am "I wonder often what the vintners buy
One half so precious as the stuff they sell."

What assets are insurance companies are buying that satisfy the regulators, yet are able to safely support these guaranteed returns?
Great question. You also wonder what risks that insurance companies in general are taking within their bond portfolios. I am soooo old that I remember when AIG blew up over credit default swaps, foggy memory recalls AIG had the assets to cover their obligations but not the liquidity.

Larry Swedroe feels comfortable enough with MYGAs that he made a recent favorable recommendation.
I feel better about these things because a respected advisor like Swedroe is recommending them. And well, they do have state level guarantees.

But I am also baffled by how the insurance companies are funding them. Out of general revenues? Buying junk bonds? A mix of stocks and bonds? From other threads on MYGAs, it sounds like the gap between what they are paying out and the return of conventional fixed income is higher than usual.
See above to my previous post. I also have wondered about the use of derivatives to boost returns but that is above my pay grade. Hopefully others will comment.
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Re: MYGA returns in low-yield environment (article)

Post by whyamihere »

nedsaid wrote: Fri Oct 16, 2020 1:55 pm
TN_Boy wrote: Fri Oct 16, 2020 11:04 am
But I am also baffled by how the insurance companies are funding them. Out of general revenues? Buying junk bonds? A mix of stocks and bonds? From other threads on MYGAs, it sounds like the gap between what they are paying out and the return of conventional fixed income is higher than usual.
See above to my previous post. I also have wondered about the use of derivatives to boost returns but that is above my pay grade. Hopefully others will comment.
In regard to Sagicor, I looked at a report they posted. Per the link:
The company's bond portfolio primarily consists of investment-grade government bonds, corporate issues and public utility bonds. Over time, the amount of NAIC class 2 bonds has slightly increased. The company maintains a portfolio of CMO's to support its participation in the Federal Home Loan Bank (FHLB) lending program, which provides the company with net investment income to support its operating performance, as well as a source for liquidity, if needed. The mortgage loans portfolio as a percentage of invested assets represent approximately 3% of total invested assets. The remainder of Sagicor Life's investment portfolio consists principally of policy loans and preferred and common stock holdings.
CMO = collateralized mortgage obligation
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Re: MYGA returns in low-yield environment (article)

Post by whyamihere »

nedsaid wrote: Fri Oct 16, 2020 1:52 pm
Stinky wrote: Fri Oct 16, 2020 10:23 am
nedsaid wrote: Fri Oct 16, 2020 10:07 am
nisiprius wrote: Fri Oct 16, 2020 9:31 am What assets are insurance companies are buying that satisfy the regulators, yet are able to safely support these guaranteed returns?
Great question. You also wonder what risks that insurance companies in general are taking within their bond portfolios. I am soooo old that I remember when AIG blew up over credit default swaps, foggy memory recalls AIG had the assets to cover their obligations but not the liquidity.

Larry Swedroe feels comfortable enough with MYGAs that he made a recent favorable recommendation.
As to AIG, I don’t believe that the CDS that were so problematic were held at the life insurance companies. I believe that the AIG life companies were solid through the 2008 crisis, even though the AIG parent holding company had some significant problems. There are significant regulatory barriers between life insurance companies and their parent holding companies that work to substantially insulate the insurance companies from holding company problems.

As to the assets backing the MYGAs, I think that we would need to have an insurance company actuary or investment person post on the Forum as to what the investments are. My experience from my time in a life insurance company was that companies price their products to make a profit in aggregate. That being said, there may some pricing cells that are expected to earn lower profits, and are effectively “subsidized” by other pricing cells with higher expected profits.
Obviously, I am not an Insurance Actuary and I am not privy to what is in the Insurance Company investment portfolios so we have to do some guessing. My best guess is that these bond portfolios are more heavy on Investment Grade Corporates and also Mortgage Backed Securities like GNMAs to boost yields. I would also guess they extend the average maturities of their bond portfolios a bit. Insurance Companies also benefit from float, that is the difference in the time when they collect premiums and when they pay claims.
Oceanview posts this link with their portfolio having a higher proportion of mortgage-backed debt than Sagicor. There's a link to the full PDF like an annual report but I don't think anyone wants to dig into that. It's my understanding that these MYGAs can be offered at higher rates as the insurance companies can hold more illiquid debt to maturity (less risk of needing to sell early due to the penalties on the surrender charges discouraging policyholders from surrendering their annuity).
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Re: MYGA returns in low-yield environment (article)

Post by nedsaid »

whyamihere wrote: Fri Oct 16, 2020 4:09 pm
nedsaid wrote: Fri Oct 16, 2020 1:52 pm
Obviously, I am not an Insurance Actuary and I am not privy to what is in the Insurance Company investment portfolios so we have to do some guessing. My best guess is that these bond portfolios are more heavy on Investment Grade Corporates and also Mortgage Backed Securities like GNMAs to boost yields. I would also guess they extend the average maturities of their bond portfolios a bit. Insurance Companies also benefit from float, that is the difference in the time when they collect premiums and when they pay claims.
Oceanview posts this link with their portfolio having a higher proportion of mortgage-backed debt than Sagicor. There's a link to the full PDF like an annual report but I don't think anyone wants to dig into that. It's my understanding that these MYGAs can be offered at higher rates as the insurance companies can hold more illiquid debt to maturity (less risk of needing to sell early due to the penalties on the surrender charges discouraging policyholders from surrendering their annuity).
Thank you whyamihere for providing this information. It is enlightening. I hadn't thought of policy loans and illiquid debt securities. The insurance companies have all of this figured out.
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Re: MYGA returns in low-yield environment (article)

Post by Lastrun »

nedsaid wrote: Fri Oct 16, 2020 10:31 pm Thank you whyamihere for providing this information. It is enlightening. I hadn't thought of policy loans and illiquid debt securities. The insurance companies have all of this figured out.
Right, and that's why they have the market value adjustments (MVA) in the MYGA's that allow you take a portion out during the term.
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Re: MYGA returns in low-yield environment (article)

Post by LadyGeek »

This thread is now in the Personal Finance (Not Investing) forum (annuity).

The wiki has some background info: Fixed annuity
A fixed annuity is an insurance contract that pays a fixed rate of interest for a "set term", usually ranging from one to ten years. After the set term, a new fixed rate is offered for the next term. One popular form of a fixed annuity is a "multi-year guaranteed annuity", or "MYGA", also referred to as a "CD annuity".
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