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Wall Street Journal has article today that insurance industry has seriously underestimated the cost of the lifetime guarantees they have made with variable annuity contracts.

I presume this means clauses that guarantee minimum values when you annuitize the contract and agree to accept lifetime payments in lieu of the cash value of your investments.

Moody's has concluded that many life insurance companies are under funded. They are responding by modifying the contracts. In one example, contract owner was required to select a bond fund investment option or lose his guarantee. The article mentioned specifically Hartford.

The implication is that insurance companies who have offered guarantees with their annuity contracts may not be able to keep those promises.
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Was there not a problem several years ago when interest rates were high? Some companies sold annuities based on those high interest rates, but when interest rates went down, they could not make good on those promises.
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Yes, and there was a time when junk bonds crashed and people were worried about whether their pensions would continue to be paid.

The industry claims that so far they have always been able to rescue any failing company--usually a stronger company acquires the assets and contracts of the failing company--and make good on their contracts.

But with large numbers of baby boomers starting to collect, people worry if that will always be true.

Same old, same old. The same headline gets recycled about once per decade. Details change, but the safety of long term promises is always a popular subject.
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The industry claims that so far they have always been able to rescue any failing company--usually a stronger company acquires the assets and contracts of the failing company--and make good on their contracts.

Assuming that 'make good on ther contracts' means that the original terms of the annuity contract were honored, the claim that the industry is making is false. Executive Life failed when their junk bond portfolio collapsed in 1991. Now, 15% of annuity holders have had their payouts cut, some by more than 50%: http://www.post-gazette.com/stories/business/news/broken-pro...

Mrs. Lawley, whose payout has been reduced to 47 percent of its original value, is one of 62 Pennsylvania residents who will lose a total $32 million in annuity policy payments in the Executive Life case. Nationwide, about 1,500 policyholders will lose a total of $920 million, highlighting potential weaknesses in the risk-free guarantee that many insurance companies emphasize when marketing annuities.

The annuity industry is based on people trading large sums of nonrefundable cash immediately or over an extended period of time in exchange for the promise of pre-defined monthly payments for the rest of their lives or for a specified period of time.

But Executive Life Insurance Co. fell on hard times in 1991 when its parent company -- Executive Life Insurance Co., Los Angeles -- collapsed. Although it was taken over by the superintendent of insurance in the state of New York and handed to the New York Bureau of Liquidation, the company's losses continued to mount over the years and it now faces a $2 billion shortfall.

Under a court ruling, 85 percent of the policyholders will receive 100 percent of what they are owed by Executive Life. The other 15 percent of policyholders -- including Mrs. Lawley -- will absorb $920 million in losses in the form of reduced annuity payments.


If 'making good on their contracts' means that everyone gets something, but maybe not what they were originally promised, then yes, the industry has lived up to that claim.

AJ
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It might help to clarify this, if one just uses the Insurance Industry's unabridged dictionary. In this, the word 'guaranteed' is defined as "the intent to pay if funds are available after paying all sales commissions and generous executive salaries and bonuses".

BruceM
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It might help to clarify this, if one just uses the Insurance Industry's unabridged dictionary. In this, the word 'guaranteed' is defined as "the intent to pay if funds are available after paying all sales commissions and generous executive salaries and bonuses".

Don't forget the expense accounts and perks. ;-)

--Peter
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This thread is a good example of the misinformation and bias (often rightfully so) against anything with the word annuity in it.

Notice no where in this entire thread did anyone attempt to actually learn more about what Hartford is actually doing. I contacted them and asked them for a copy of the letter they sent clients.

What Hartford is doing is not because of underfunding but because clients more often than not are lousy investors (which is likely why they are in an annuity in the first place). VA's are designed protect people from market losses in one form or another. This often leads to people being more aggressive and more lazy in their asset allocation than they should. Hartford, like many VA companies, made the mistake of letting clients with such guarantees invest their money any way they wish, even if it is in something not diversified and very aggressive. This means that when the client losses a ton, Hartford still has to pay those guarantees even though the account has lost 50% of its value (which is the base Hartford gets to charge their annual fees). Hartford is now doing what I assume most companies do today on new contracts, require that such guarantees have some diversification in order to ensure the account has some cash value long enough to pay out the guarantees. Hartford is too late to make this change in my opinion, which is likely why they have such a hard rule on their asset allocation.

Quotes from the letter:

Consistent with our goal of reducing the market volatility risks of our inforce annuity business, we will begin enforcing subaccount investment restrictions on your optional benefit rider. ...your contract value must be invested with a minumum of 40% in fixed investment subaccounts...

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The letter goes on to state that the fixed account (basically an account earning money market rates) will also be prohibited under the rider. Again, Hartford was a bonehead for letting clients invest in such with the rider because Hartford charges no fees on the fixed account and of course it only yields money market rates.

Nothing in the letter suggests the guarantee is being impacted, only the underlying subaccounts.

Not defending Hartford here, they clearly screwed up, but people that bought this for the guarantee of income (why else buy it?) will still get such under this change.

I'd still get out of it as soon as I could unless I was very much underwater.
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This thread is a good example of the misinformation and bias (often rightfully so) against anything with the word annuity in it.

Notice no where in this entire thread did anyone attempt to actually learn more about what Hartford is actually doing.


Although Hartford is mentioned in the original post, I didn't think that this thread was about Hartford in particular, but more about issues with whether guarantees would be able to be kept with these types of products. In the original article http://online.wsj.com/article/SB1000142412788732399860457856... there are more companies than Hartford mentioned, including ING, MetLife, Aegon and AXA. This indicated to me that even though this particular change was being made by Hartford, the issue seems to be more widespread.

Nothing in the letter suggests the guarantee is being impacted, only the underlying subaccounts.

I wonder if the letter was changed after the Wall St Journal article? Because, according to the article, the copy of the letter the reporter was given did say, the guarantee "WILL BE REVOKED" in bold print. Or is there something else (not the guarantee) that "WILL BE REVOKED" in the letter you got?

Or maybe you got a different letter? They also did say in the article that there will be a 'series of reminder letters' being sent to customers.

In any case, I think it'a a good reminder that any annuity contract that is purchased is only as good as the insurance company backing the contract, and, if the proverbial stuff hits the fan for that company, any state insurance guarantee fund that the policy holder may be covered by. If you have any money at risk beyond those levels, the guarantee for that money may be at risk.

AJ
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people that bought this for the guarantee of income (why else buy it?) will still get such under this change.

But what happens to people who fail to make the change or authorize it? Does Hartford make the change for them? Or do they lose their guarantee? WSJ says they lose their guarantee.
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the guarantee "WILL BE REVOKED" in bold print. Or is there something else (not the guarantee) that "WILL BE REVOKED" in the letter you got?

Good question. The letter does state that the guarantee will be revoked if the client DOES NOT agree to the asset allocation change. Investors have until some time in October to make the change. Hartford WILL NOT make the change on the clients behalf (they have to opt in to keep the guarantee vs it being manually done - which is somewhat stupid from a client perspective but likely what is legally required).
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WSJ says they lose their guarantee.

Yep. and lot of lazy annuity owners are going to lose their guarantee because they fail to act by the required date.
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Although Hartford is mentioned in the original post, I didn't think that this thread was about Hartford in particular, but more about issues with whether guarantees would be able to be kept with these types of products. In the original article...

I no longer subscribe so I cannot access the full article but I am familiar with the changes many of the others have made - and they made them in a much more timely manner than Hartford.

Hartford has completely left the individual annuity market because of their losses. Metlife, AXA and others have significantly changed their riders (for new applicants) over the past five years in order to ensure that they don't make some of the same mistakes Hartford made. Doesn't mean they are fool proof but it does likely mean that those existing contracts are unlikely to face anything like Hartford has done. For example, AXA stopped allowing new money to be added to some of their contracts and offered buyouts to people with certain riders.

No new account today is nearly is nice (guarantees, benefits, low(er) fees, and investment options) as they were back in 2006 and 2007.
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