Why do people buy annuities? [AIG bailout side discussion]

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beyou
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Why do people buy annuities? [AIG bailout side discussion]

Post by beyou »

[Moved into a new thread from: Why do people buy annuities? --admin LadyGeek]
Stinky wrote: Tue Apr 02, 2024 9:23 am
beyou wrote: Tue Apr 02, 2024 9:20 am
Well then the limit would vary per state then I assume.
So depends what state you live in how much you can safely buy?
Look up your state of residence to see the information about your guaranty fund provisions and coverage.

https://www.nolhga.com/policyholderinfo ... ocation/ga
So here is another concern I have about this method of state guarantee.
Why when AIG went down, did the federal government not just let the state's handle the fallout ?

https://www.thebalancemoney.com/aig-bai ... ts-3305693
Former Federal Reserve Chairman Ben Bernanke reported that the $182 billion bailouts of the American International Group made him angrier than anything else in the recession. Bernanke said that AIG took risks with unregulated products like a hedge fund while using cash from people's insurance policies.1 Bernanke added that the government had no choice but to bail it out
I speculate there are 2 reasons.

1) Most commonly reported reason is due to potential ripple effect their default would have had on banks and brokerages.
AIG had a side business trading like a bank but ran it in a very risky manner for themselves and their clients.

2) I wonder if there was a concern about the ability of the state guarantee programs to handle an insolvency of a firm the size of AIG ?
Seems to me the guarantee requires that other insurance firms are solvent enough to pay the claims of the failing firm such as AIG.
Could an AIG be big enough in a state to harm the health of other insurers and cause a ripple effect ? We never got to that point with AIG due to the federal bailout, but look at the brokerage business. Feds decided to NOT save Lehman, they went under, then decided to save others like Citi and AIG. Relying on federal bailouts that are political decided and not contractual is risky. So the question is still, has the state guarantee program been designed for a black swan event as we experienced in 2008 ? Why can't 2008 happen again without a bailout as with Lehman ?

Again, all decisions involve risk/rewards evaluation. Just seems people assume "it's guaranteed" is eliminating risk.
I think it reduces idiosyncratic risk but does not eliminate systemic risk. For this reason and the per issuer limits, I would limit the % of my assets that I would commit to annuities. Good supplement for those willing to pay more/receive less to reduce some cash flow volatility, but not an overall fixed income strategy for a fixed income heavy retirement portfolio. I am no more afraid or optimistic about this or any other fixed income product, one needs to diversify and know what/how to diversify.

Thanks Stinky, for your answers to my questions. I worked on the investment side of the industry, taking the premium and investing/hedging the obligations. Never got involved with the actuarial nor sales side of the business.
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Stinky
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Re: Why do people buy annuities?

Post by Stinky »

beyou wrote: Tue Apr 02, 2024 11:45 am
So here is another concern I have about this method of state guarantee.

Why when AIG went down, did the federal government not just let the state's handle the fallout ?
The AIG life insurance companies were fine. They never required any type of state or federal assistance.

The problems at AIG were outside of the insurance companies, in the entities that issued credit default swaps.

I actually bought a term policy from one of the AIG insurance companies in 2007 I believe. No concerns on my side.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
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Re: Why do people buy annuities?

Post by beyou »

Stinky wrote: Tue Apr 02, 2024 11:49 am
beyou wrote: Tue Apr 02, 2024 11:45 am
So here is another concern I have about this method of state guarantee.

Why when AIG went down, did the federal government not just let the state's handle the fallout ?
The AIG life insurance companies were fine. They never required any type of state or federal assistance.

The problems at AIG were outside of the insurance companies, in the entities that issued credit default swaps.

I actually bought a term policy from one of the AIG insurance companies in 2007 I believe. No concerns on my side.
I am aware of the CDS being the root cause, but
the lack of linkage to the life insurance contradicts what was published in the link I had provided.


https://www.thebalancemoney.com/aig-bai ... ts-3305693

Former Federal Reserve Chairman Ben Bernanke reported that the $182 billion bailouts of the American International Group made him angrier than anything else in the recession. Bernanke said that AIG took risks with unregulated products like a hedge fund while using cash from people's insurance policies.

Bernake or the reporter quoting him could be wrong of course. But if he's correct, then the reason there was no impact was due to the federal bailout.
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Re: Why do people buy annuities?

Post by Stinky »

beyou wrote: Tue Apr 02, 2024 12:23 pm
Stinky wrote: Tue Apr 02, 2024 11:49 am
beyou wrote: Tue Apr 02, 2024 11:45 am
So here is another concern I have about this method of state guarantee.

Why when AIG went down, did the federal government not just let the state's handle the fallout ?
The AIG life insurance companies were fine. They never required any type of state or federal assistance.

The problems at AIG were outside of the insurance companies, in the entities that issued credit default swaps.

I actually bought a term policy from one of the AIG insurance companies in 2007 I believe. No concerns on my side.
I am aware of the CDS being the root cause, but
the lack of linkage to the life insurance contradicts what was published in the link I had provided.


https://www.thebalancemoney.com/aig-bai ... ts-3305693

Former Federal Reserve Chairman Ben Bernanke reported that the $182 billion bailouts of the American International Group made him angrier than anything else in the recession. Bernanke said that AIG took risks with unregulated products like a hedge fund while using cash from people's insurance policies.

Bernake or the reporter quoting him could be wrong of course. But if he's correct, then the reason there was no impact was due to the federal bailout.
Link is broken.

Either Bernanke was misinformed or misquoted.

I know for a fact that AIG life insurance companies were never under receivership or guaranty fund protection.

I also know for a fact that just two life insurance companies, Lincoln National and Hartford, accepted federal TARP money during the crisis. (Both of those companies had written some products, primarily variable annuities, that proved to be imprudent when the stock market cratered). Meanwhile, AIG did not need TARP money.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
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Re: Why do people buy annuities?

Post by IDpilot »

beyou wrote: Tue Apr 02, 2024 12:23 pm
Stinky wrote: Tue Apr 02, 2024 11:49 am
beyou wrote: Tue Apr 02, 2024 11:45 am
So here is another concern I have about this method of state guarantee.

Why when AIG went down, did the federal government not just let the state's handle the fallout ?
The AIG life insurance companies were fine. They never required any type of state or federal assistance.

The problems at AIG were outside of the insurance companies, in the entities that issued credit default swaps.

I actually bought a term policy from one of the AIG insurance companies in 2007 I believe. No concerns on my side.
I am aware of the CDS being the root cause, but
the lack of linkage to the life insurance contradicts what was published in the link I had provided.


https://www.thebalancemoney.com/aig-bai ... ts-3305693

Former Federal Reserve Chairman Ben Bernanke reported that the $182 billion bailouts of the American International Group made him angrier than anything else in the recession. Bernanke said that AIG took risks with unregulated products like a hedge fund while using cash from people's insurance policies.

Bernake or the reporter quoting him could be wrong of course. But if he's correct, then the reason there was no impact was due to the federal bailout.
Careful beyou.

You accurately quoted Kimberly Amadeo's article from The Balance and added your own underline. Kimberly footnoted this statement to a thesis by Erin Price;
Arizona State University. "A Comparative Communication Discourse Analysis Examination of the Economic Crisis of 1929 and the Mortgage Crisis of 2008 Through the Analysis of Mainstream and Alternative Media Discourses," Pages 92.

Erin Price actually wrote:

In a response to AIG and its troubles, Ben Bernanke stated, “AIG’s ‘irresponsible bets’ had made him ‘more angry’ than anything else in regards to the financial crisis”

Price never said anything about "that AIG took risks with unregulated products like a hedge fund while using cash from people's insurance policies." Kimberely appears to have added that all on her own with no source referenced.

Always remember Sturgeon's Law ... Ninety percent of everything you read is crap!
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Re: Why do people buy annuities?

Post by beyou »

Stinky wrote: Tue Apr 02, 2024 12:39 pm I also know for a fact that just two life insurance companies, Lincoln National and Hartford, accepted federal TARP money during the crisis. (Both of those companies had written some products, primarily variable annuities, that proved to be imprudent when the stock market cratered). Meanwhile, AIG did not need TARP money.
So SOME (2) insurance firms were bailed out, why ? Why didn’t the federal gov leave this to the state run guarantee for policy holders ?
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Re: Why do people buy annuities?

Post by Stinky »

beyou wrote: Tue Apr 02, 2024 1:27 pm
So SOME (2) insurance firms were bailed out, why? Why didn’t the federal gov leave this to the state run guarantee for policy holders?
About all I can say is that 2008 and 2009 were crazy times, when the Federal government took unprecedented steps to prop up the financial system.

Both Lincoln and Hartford had short term “regulatory solvency” crises caused by the sharp stock market declines. (I emphasize - SHORT TERM CRISES). They needed a quick backstop to their solvency, and TARP funds were kind of like a bridge loan.

Both companies survived, and were never under state regulatory or solvency protection. There was no need to put them into permanent receivership for what turned out to be a short term, solvable solvency crunch.

Lincoln is still an active life and annuity market participant today. Hartford sold off most, or all, of its life and annuity business a while ago, but still is in business today.
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Re: Why do people buy annuities?

Post by Johm221122 »

beyou wrote: Tue Apr 02, 2024 1:27 pm
Stinky wrote: Tue Apr 02, 2024 12:39 pm I also know for a fact that just two life insurance companies, Lincoln National and Hartford, accepted federal TARP money during the crisis. (Both of those companies had written some products, primarily variable annuities, that proved to be imprudent when the stock market cratered). Meanwhile, AIG did not need TARP money.
So SOME (2) insurance firms were bailed out, why ? Why didn’t the federal gov leave this to the state run guarantee for policy holders ?
Wasn't TARP voluntary? Maybe those companies choose that over being merged by State Guarantee association
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Re: Why do people buy annuities?

Post by Rex66 »

The truth is nobody knows what would have happened bc we didn’t let things unfold.

Banks use WL . if the banks went under, they could have pulled insurance companies with them. Nobody knows.

Before 2008, agents used to love to talk about how you should buy WL bc you want to be smart like banks. They don’t say that any more.
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Re: Why do people buy annuities?

Post by Stinky »

Johm221122 wrote: Tue Apr 02, 2024 1:44 pm
beyou wrote: Tue Apr 02, 2024 1:27 pm
Stinky wrote: Tue Apr 02, 2024 12:39 pm I also know for a fact that just two life insurance companies, Lincoln National and Hartford, accepted federal TARP money during the crisis. (Both of those companies had written some products, primarily variable annuities, that proved to be imprudent when the stock market cratered). Meanwhile, AIG did not need TARP money.
So SOME (2) insurance firms were bailed out, why ? Why didn’t the federal gov leave this to the state run guarantee for policy holders ?
Wasn't TARP voluntary? Maybe those companies choose that over being merged by State Guarantee association
Yes, TARP was voluntary. And very short term - just a few years.

If I was CEO or CFO of Lincoln National or Hartford, I’d definitely endure the “temporary taint” of accepting government bailout loans rather than letting my company slide under regulatory control.

I was never employed by either company, so I don’t know how close they might have come to insolvency. But TARP funds were definitely useful in preserving their independence.
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Re: Why do people buy annuities?

Post by billaster »

beyou wrote: Tue Apr 02, 2024 1:27 pm So SOME (2) insurance firms were bailed out, why ? Why didn’t the federal gov leave this to the state run guarantee for policy holders ?
AIG contained several divisions. The division that failed was the Financial Products Corporation. This was the division that was operating like a hedge fund, making big bets on CDOs. This is an insurance division but it is insurance issued to institutional investors and big banks for mortgage backed securities, not insurance for individuals. It was not guaranteed by the states so they could not fix it. The danger was that the failure of this division would have a snowball effect of bringing down their counter-party banks such as Goldman Sachs, Morgan Stanley, Bank of America and Merrill Lynch. That's why the Treasury and Fed stepped in and not the states.

AIG's regular insurance businesses were doing fine. They didn't need a bailout. In fact, the Treasury sold off their profitable life insurance company to Met Life and their auto insurance company to Farmers for billions of dollars to refund the billions spent on the Financial Products Corporation bailout.
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Re: Why do people buy annuities?

Post by AlwaysLearningMore »

IDpilot wrote: Tue Apr 02, 2024 1:03 pm
beyou wrote: Tue Apr 02, 2024 12:23 pm
Stinky wrote: Tue Apr 02, 2024 11:49 am
beyou wrote: Tue Apr 02, 2024 11:45 am
So here is another concern I have about this method of state guarantee.

Why when AIG went down, did the federal government not just let the state's handle the fallout ?
The AIG life insurance companies were fine. They never required any type of state or federal assistance.

The problems at AIG were outside of the insurance companies, in the entities that issued credit default swaps.

I actually bought a term policy from one of the AIG insurance companies in 2007 I believe. No concerns on my side.
I am aware of the CDS being the root cause, but
the lack of linkage to the life insurance contradicts what was published in the link I had provided.


https://www.thebalancemoney.com/aig-bai ... ts-3305693

Former Federal Reserve Chairman Ben Bernanke reported that the $182 billion bailouts of the American International Group made him angrier than anything else in the recession. Bernanke said that AIG took risks with unregulated products like a hedge fund while using cash from people's insurance policies.

Bernake or the reporter quoting him could be wrong of course. But if he's correct, then the reason there was no impact was due to the federal bailout.
Careful beyou.

You accurately quoted Kimberly Amadeo's article from The Balance and added your own underline. Kimberly footnoted this statement to a thesis by Erin Price;
Arizona State University. "A Comparative Communication Discourse Analysis Examination of the Economic Crisis of 1929 and the Mortgage Crisis of 2008 Through the Analysis of Mainstream and Alternative Media Discourses," Pages 92.

Erin Price actually wrote:

In a response to AIG and its troubles, Ben Bernanke stated, “AIG’s ‘irresponsible bets’ had made him ‘more angry’ than anything else in regards to the financial crisis”

Price never said anything about "that AIG took risks with unregulated products like a hedge fund while using cash from people's insurance policies." Kimberely appears to have added that all on her own with no source referenced.

Always remember Sturgeon's Law ... Ninety percent of everything you read is crap!

Thank you for providing this valuable clarification.

OP sounds like they are describing an investor who has no intention of investing in equities. So a SPIA might be one prudent component of a total portfolio.
Retirement is best when you have a lot to live on, and a lot to live for. * None of what I post is investment advice.* | FIRE'd July 2023
Bill Bernstein
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Re: Why do people buy annuities? [AIG bailout side discussion]

Post by Bill Bernstein »

Of greater relevance to annuity holders is the Executive Life Insurance collapse, which saw annuitant payouts decimated:

https://www.govinfo.gov/content/pkg/CHR ... g83976.pdf

Of particular interest were 2 issues:

1) the failure of the state "guarantee" to backstop these losses.
2) the role played the private equity stake in the company, an arrangement that's becoming ever more common.
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Re: Why do people buy annuities? [AIG bailout side discussion]

Post by Oicuryy »

Here is the Fed's description of the AIG "bailout". The AIG insurance companies were sound enough for the Fed to accept them as collateral for the loan. Both the Fed and the Treasury made money on the deal.
https://www.newyorkfed.org/aboutthefed/aig/index.html

Ben Bernanke's testimony to the Senate budget committee is here.
https://www.congress.gov/event/111th-co ... C4901/text
Mr. BERNANKE. I think if there is a single episode in this entire 18 months that has made me more angry, I cannot think of one than AIG. AIG exploited a huge gap in the regulatory system. There was no oversight of the Financial Products Division. This was a hedge fund, basically, that was attached a large and stable insurance company, made huge numbers of irresponsible debts, took huge losses. There was no regulatory oversight because there was a gap in the system.

We were then forced�we had no choice but to try to stabilize the system because of the implications that the failure would have had for the broad economic system. We know that failure of major financial firms in a financial crisis can be disastrous for the economy. We really had no choice. And I share your concern, I share your anger. It is a terrible situation. But we are not doing this to bail out AIG or their shareholders, certainly. We are doing this to protect our financial system and to avoid a much more severe crisis in our global economy.
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Re: Why do people buy annuities?

Post by hammockhiker »

beyou wrote: Tue Apr 02, 2024 1:27 pm So SOME (2) insurance firms were bailed out, why ? Why didn’t the federal gov leave this to the state run guarantee for policy holders ?
I think Hank Paulson's book "On the Brink" covers a good bit of this. It's been a while since I read it, but I remember him going into his reasoning behind why certain firms were bailed out and others not. It's not the easiest tale to follow, though I recall reading it with interest some time ago.

https://www.amazon.com/gp/product/0446561932/
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Re: Why do people buy annuities?

Post by IDpilot »

Stinky wrote: Tue Apr 02, 2024 2:01 pm
Johm221122 wrote: Tue Apr 02, 2024 1:44 pm
beyou wrote: Tue Apr 02, 2024 1:27 pm
Stinky wrote: Tue Apr 02, 2024 12:39 pm I also know for a fact that just two life insurance companies, Lincoln National and Hartford, accepted federal TARP money during the crisis. (Both of those companies had written some products, primarily variable annuities, that proved to be imprudent when the stock market cratered). Meanwhile, AIG did not need TARP money.
So SOME (2) insurance firms were bailed out, why ? Why didn’t the federal gov leave this to the state run guarantee for policy holders ?
Wasn't TARP voluntary? Maybe those companies choose that over being merged by State Guarantee association
Yes, TARP was voluntary. And very short term - just a few years.

...
Not all of the TARP programs were voluntary. "TARP" is a broad name for several programs including the Capital Purchase Program which was setup to provide capital to viable financial institutions of all sizes throughout the nation. You could not say no to this program.
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Re: Why do people buy annuities? [AIG bailout side discussion]

Post by cvn74n2 »

I did a little more research on the Executive Life issue and saw all the lawsuits were finally settled in 2015, 16 years after failure. What would be interesting to learn is how many annuitants were made (nearly) whole versus how many died in the intervening years and what QOL isssues arose during that timeframe. Also, what did the California Insurance commission learn from the experience and were changes made to avoid similar situations in the future?

In my research I found a knock-on case involving the original purchaser of an Executive Life administed structured settlement annuity being sued by annuitants holding the annuity to be made whole. In the case, the US Court of Appeals for the Federal Circuit reversed a lower court's decision and found the US government (the purchaser) liable to make up the shortfall (Lanclos v US https://cafc.uscourts.gov/opinions-orde ... 978437.pdf. I don't know if such suits have cropped up at the state court level and what their outcomes were; but, the Executive Life insolvency was still being felt in 2022.

Anyone know of a study or book that tried to capture these aftershocks?

Edited for sp and clarity
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