Episode Transcript
Speaker 1 00:00:05 This is annuity straight talk since 2008. Your host Brian Anderson has helped clients nationwide navigate the complex market for annuities with Brian's assistance. Hundreds of clients have achieved a profitable and secure retirement. I would know because Brian has answered many of my questions concerning annuities and retirement planning so that you can benefit as well. Let's get started. Here's Brian
Speaker 2 00:00:49 Hello and welcome everyone to the annuity straight talk podcast, episode number 22, we're going to talk about what happens if an insurance company fails. My name is Brian Anderson, founder and creator of annuity straight talk. If you didn't know that you must be new to this. So I encourage you and anyone else who would like to look at it to go to YouTube, search annuity, straight talk, checkout all the podcasts on video or go to your favorite podcast platform, find the channel. And there'll be a list of all the episodes. If you want to catch up, or if you want to look specifically for what you guys are interested, everybody's a little bit different. Some people want to talk strategy. Some people don't want to talk safety. Some people want to talk products. We're going to try to do as much of all those things as we can so that everybody has exactly what they're looking for.
Speaker 2 00:01:37 When the researching, researching the topic. When we look at different elements of it, this takes a lot of information to really cover the subject. And so I try to stay on point and stay relevant to recent conversations I've had. Now a lot of people that have been listening to this know that I've been working on a, a website redesign that has been taking frustratingly longer than I wanted it to. And I hope to have that in the next few weeks when I do, I'm going to show everybody to a podcast and just kind of walk you around the site. So this is something where, because I've been doing the website redesign, I kind of took a break from business. I've been talking to clients a lot and you know, doing service on contracts and all that stuff. And I haven't been advertising a lot. So I haven't had a whole lot of new meetings.
Speaker 2 00:02:19 Well, what happens is then I don't have as many case studies. I don't get as many ideas because I get all this stuff. I get all these questions from you guys. So if you're watching the video or listening to the podcast, you have any comments, feel free to comment, subscribe to either of those platforms. If you want to be notified. When a podcast comes out, ask questions for every person that asks a question, there are probably 10 or 15 that don't ask the same question because they don't want to raise their hand. Your questions, help other people. They give me content ideas. And obviously without sharing personal information, sometimes I take those questions and maybe a little bit of your situation and make a specific podcast about that. And that's where we get very specific answers and very specific strategies for the people who visit the website or any of the ways they consume the information.
Speaker 2 00:03:04 So as far as what happens with an insurance company that fails, you guys might notice here it is. Yes. I broke my hand. My typing is not that great. Anybody who's been listening to the podcast, maybe the, you know, the newsletter has been known for over three years. And it's two, it's two different pieces of content, which takes a lot of creativity on my part. Like I said, I haven't had as much coming in the funnel in the last couple of months. So I don't try not to force anything out unless it's really good. And then obviously, you know, the podcast is a priority because I'm actually paying people to produce the podcast. Whereas the newsletter is just my time. So the podcast is probably going to get the full focus and attention for the time until I pick things back up in December and into the new year, we'll have some really good stuff for you.
Speaker 2 00:03:45 So, uh, broke my hand. No, I did not fall off my horse. Stupid accident. A friend of mine who's really good at roping. We were goofing around with the rope and he was rubbing my feet and he tripped me up and I fell onto it. So that's what happens when a T or a 40 something tries to act like a teenager, but as a good friend of mine, who's about 30 years older than me once said, you're only young ones, but you can be immature forever. So I fit firmly into that category. Now onto the topic at hand, a lot of people talk about either talk about it or they're thinking about it, or I'm going to put a bunch of money into an insurance company. What happens to the company goes bankrupt. And there's not a lot of information online as to how it happens.
Speaker 2 00:04:24 And I mean, even this morning before I recorded this, I said, well, I'm going to go, maybe go get a little documentation. I can take you guys to a couple different websites. And it's just not really there or the website. You can't verify if it's even legitimate. So what I'm gonna do is share you my screen. So I did this a newsletter a while back, we are going to look at it, I'll walk you through it and I'll tell you what happens if an insurance company fails. And the reason I do this is because you want to understand why this is one of the safest investments or allocations you can make with your retirement assets. You know, in the past few weeks, it seems like I would say one in, I don't know, one in three people I talked to will specifically say, well, what happens if the company goes bankrupt or fails term is insolvent.
Speaker 2 00:05:04 So a company never really goes bankrupt, but when I'm talking about the process for that and why through that process and understanding it, you'll realize why fundamentally insurance companies are really the bedrock of our financial system. And so first and foremost, so this, uh, this letter, October, 2019, so a little over two years ago, I'm again, go to the newsletter page. You can say search the word bankrupt, and this article will come up. So annuity straight talk.com forward slash newsletter hit that. Anytime you want to, what a lot of people understand is that isn't there a guarantee fund for the state. Yes, there isn't. And I don't like, I don't even know. We're not supposed to talk about it to say, well, we can't say that. Oh, well, it's fine. Because the state guarantee fund is, and I, when some states it's forbidden for us to even mention it.
Speaker 2 00:05:54 And so I CA I'll breeze over it, but I'm going to talk to you about why that's not even important, really? Because if you get to the state guarantee fund, then it's a long shot before you even get there. And there's only a handful. There's only a couple of real examples where that's happened on a large scale, maybe some smaller companies, but only a couple of really big ones in the past. So, but aside from that, there are several layers of protection that annuities provide. So when you look at it, first and foremost, insurance companies offer very differently than banks because they have $1 of assets to $1 of liabilities. You, when you put your money into an insurance company, they take that money and they buy highly or investment grade bonds, treasury stuff like that, really safe stuff. Okay. And of course they've got costs, I've got marketing costs and commissions.
Speaker 2 00:06:42 So a portion of it goes in there. But part of what they do is they peel off a little bit extra for reserves. They make up for it. So in the 2008 financial crisis, when everybody was scared, I remember reading that one of the banks, and I think it was bear Stearns was one to 36. So $1 in deposits for $36 in liability that is extremely leveraged. And an insurance company is just one-to-one. So they've got, they've got a buck, they owe a buck and they have a buck. Okay. So in a one to 36 scenario, that meant less than 3% of their loans had to fail in order for the company to be completely wiped out. That's a huge difference. So foreclosure started to happen because the real estate market got hot, not too different from what's happening. Now, I think in some cases, 10% of the loans failed.
Speaker 2 00:07:33 I mean, that's why we got in the predicament we did about 12 or 13 years ago. So in addition to having a very, a very conservative leverage ratio, the insurance companies are required to hold a certain amount of cash reserves to prevent short-term funding issues so they can sell their assets and eliminate their liabilities in large part. But in addition to that, they have a huge chunk of reserves on top of it. So it prevents short-term funding issues related with a normal business cycle. Sometimes one year sales are hot. One year they're low. They've been really good at using those reserves to smooth out performance over time. And this is where I like to point out the little fun fact that New York life, one insurance company that happens to be probably arguably the best most stable insurance company out there has more in reserves than, than the FDAC one single company has more than the corporation that was built to protect the entire banking industry.
Speaker 2 00:08:35 As a cynic, I'll tell you honestly, all the FDAC does is they've got the ability to levy tax payers, essentially they're getting bailouts every time a company fails. And so that's just, you know, increasing inflation, the supply of money, keeping, you know, rates really low, all that stuff. So the banking system as it's built is not really that great for the consumer economy, although it's, it's good to go get cheap money to buy homes and cars and whatever else you need to get by. So, you know, when you look at that, like one to 36 ratio backup here real quick, even like your small town community banks in that, during that time in 2008, I went to a family friend whose family owns a small bank in Western Montana. And of course it's a bank, so they do well, but they've owned it for, I don't know, 40 or 50 years.
Speaker 2 00:09:26 And I asked him, cause I read the article about the 30 to one leverage ratios in LA. And I said, what's your leverage ratio? What is it? He said, it's funny. Those big banks get to have those leverage ratios because they're powerfully connected. We're just a small bank. And the regulators really push on us if we get anywhere close to seven to one, so seven to one, that means 14% of their loans have to go bad. That's why smaller banks like that didn't necessarily fail, except with the exception of a few new banks that really took a lot of risks back then. But you know, the old stable banks that were six or seven to one were fine because on a national average, 10% of loans failed there. And it didn't mean that they had 10% fail, but it's just an interesting deal to think, you know, the FDI see hat, uh, or banks have insurance because they need it.
Speaker 2 00:10:12 And insurance company insures itself, okay. By matching liabilities with assets and having reserves on top of it. So one thing you need to know about some of the failures of the past is that an insurance company has two different types of accounts. They have a general account and a separate account. When you buy an annuity, your money goes into the general account. That means they go buy bonds and treasuries and really safe stuff with it. And that's where your money is held in safe, stable assets. Now the separate account, which may in some instances make up 10% or so of an insurance company, some are more risky. I'm not a certified financial analyst. I'm not going to speak specifically to, you know, what some banks have as far as risky portfolios, but separate account is where they take some of the profits off of their general account.
Speaker 2 00:11:00 And they invest them into more aggressive opportunities. Now, if the insurance company fails, it's typically not because of problems with the general account. Remember that's just liability matching. That's all they're doing. So your annuities are based on the general account. If they take something on the separate account, if they go build a hotel in Hawaii and a tsunami comes in and wipes out the hotel before their re-insurance contract kicks in, then that's not going to affect your annuity. Even though the insurance company lost a billion dollars in Hawaii. Okay? So when AIG ran into trouble with the collateral collateralized debt obligations, that's kind of a tongue twister to me in 2008, many aggressive agents urge annuity holders. They used it as a pitch to say, get out your AIG annuity is in trouble. They're going down. And they did require a bailout, but it ended up being phony because AIG got in trouble with their separate account, not their general account.
Speaker 2 00:12:00 So the company itself and state regulators sent letters to all contract owners telling him this is a scam. Don't fall for it. Your annuities are just fine. So a lot of people remember AIG and they safety. They didn't own a contract. I looked back at AIG and say, well, it wasn't that a really bad one. How, how bad did people get hurt? I had sold some AIG contracts, fixed annuities that early in my career. And I knew that right off the bat like, Hey, this is fine. So what AIG actually did is they took their general account subsidiaries, like American general. They split them off and they became standalone companies while they rehabilitated the banking side, the more the banking side of the business. So the general account was not compromised in 2008. So annuities were not in danger. And there's also some issues. There's a lot of different reasons why an insurance company might get into trouble and maybe they, most of them, it comes in with, you know, like the state guarantee fund, state guarantee funds good for state farm when there's a hurricane in Florida.
Speaker 2 00:12:52 Okay. When there's billions of dollars of damage and then state farm obviously has re-insurance, they've got extra protection and all that stuff. There's so many different layers where they get in there, where they can assure there the ability to make their obligations. So there's a lot of like, you know, if health insurance costs go way up or if they priced long-term care, those are separate parts of business that are usually peeled off. Hartford was a really good example. They got in trouble with the variable annuity portfolio and they just split the pieces of business up. And the profitable stuff went, you know, or the stable stuff was sold off to different companies. Hartford rebranded themselves as a health insurance company. I think they're not doing it in annuities anymore, but when you're talking about fixed and fixed index annuities, extremely stable, what is likely happening?
Speaker 2 00:13:39 Let me see what I get. Uh, well, let's hold on. I'll stay because that comes up in the article a little bit later. So there's also, I think a little bit of misunderstanding about what it takes for a company to actually fail. What happens first is the company is put under state receivership. So if a company is domiciled, if its headquarters are in Montana and expenses exceed revenues. So remember they haven't really dipped into their reserves yet in large part. And there might be a strategic play for the insurance company not to make a payment. Doesn't mean they couldn't. They decided not to because they want to accelerate the process. But so if an insurance company based in Montana, it might be a couple of small ones. I mean, subsidiaries, I know blue cross health insurance company, I think has a Montana presence, but it's not.
Speaker 2 00:14:26 Anyway. I don't know what that is, but no major insurance companies in the state of Montana. But if they did the Montana insurance commissioner would take control of that company, right? Boot everybody out and say, all right, this is it. We're locking it down. They're not going to sell new stuff. They're not going to do anything. They're going to dig through the books and they're going to start dividing up pieces of business. So they're going to see if they can rehabilitate the company first. And they're going to offload non-profitable parts of business, where they see where they're losing money. In some cases, it was an excessive executive compensation and or bad investments, whatever it was, they might liquidate investments. They might get rid of, uh, they might actually direct like a reasonable compensation package for executives or put someone new in there. So it doesn't mean that they ran out of money.
Speaker 2 00:15:12 It's not like the bank where 3% or 10% of loans failed. And all of a sudden the bank has no money. They stop it well ahead of when the insurance company would truly get into trouble. So remember then you'd still have your dollar for dollar plus there'd be a pile of reserves. And some companies have more than others. That's why we go with a plus strong companies, but there's typically a long period of time that's involved with rehabilitating or dividing up an issuing insurance company. So Sharon's company takes state of domicidal take over control of the company when certain financial distress conditions have been met. So like when people ask me, like typically what, like my first response is that if a company fails, then another company is probably going to buy your annuity. So if you have a great American annuity or an equity trust annuity, and all of a sudden, like they get locked up by a state receiver, sometimes auto titles go nine times out of 10, what's going to happen.
Speaker 2 00:16:10 And in relatively short order, you're going to have another company is going to come in and say, Hey, look, they've got 3% liability on a 4% revenue that we'll take that all day long. They'll buy it. So if great American fails, well now that's hard cause great Americans own my mass mutual. It's the strongest company out there now in the index annuity space. But if they fail, then somebody is going to come in. So let's, let's say Equitas so if Equitrust fails, ah, some other company is going to come in and buy those profitable piece of business. And more often than not, it's going to be the fixed and fixed index annuities. If the company can not be rebuilt rehabilitated, they will sell that off to someone else. And so you might get an echo trust annuity, and all of a sudden you're going to get a letter in the mail.
Speaker 2 00:16:55 Hey, MetLife bought it. And all of a sudden you're going to have a MetLife cover page or a stamp on your contract, essentially. So in most cases like another insurance company is going to come up and buy it out. So the worst one, the worst case I recall. And I obviously it happened in 1990 or 91 executive life in New York. And it was one of the larger companies in the country. I mean, I was 12 or 13 years old. So I was in junior high. Of course I was not paying attention to insurance company news back then, sorry, I didn't start doing that until I was about 22, but the process of rehabilitation and liquidation took 22 or three years to complete. So it was late 2012 or 2013 that a final settlement was finally reached throughout that time period, annuity payments were continued to be made in whole right.
Speaker 2 00:17:46 Contracts were cashed out. Claims were, you know, regulators managed the investments, cleaned up the business, sold pieces of the business and slowly worked through the company reserves. It was, it might've been stressful for some, but nobody lost money. All right. In 2013, regulators took our remaining reserves and remember, so this is a company. Most companies operate in 49 states. Nobody wants to do it in New York because of strict regulation. Some have separate subsidiary companies that only operate in New York, but most companies don't want to subject their entire company to the regulations in New York. So we'll say most of them operate in 49 states. So what happens is if you live in Texas or Florida or California or Missouri or Montana, those four or five people from different states in the country all buy a contract from MetLife and MetLife fails the regulators from Texas, Florida, California, Missouri, and Montana have to all get together and say, all right, what are we going to do?
Speaker 2 00:18:48 And so it was a, it was a board meeting that came together. All the state funds said, well, this is what we're going to do. I'm paraphrasing based on what I heard, but it really takes that kind of coordination. So it can't just be the state of Missouri saying, ah, they failed. We're cashing checks out. It's not the same thing anywhere, but they're going to get on the same page and say, okay, what do we do about these remaining liabilities for executive life? New York Eleni is what a lot of people call it. It's less of a mouthful I suppose, but essentially a board meeting, all that to say like, there is no hard, fast rule as to how this happens. If a bank goes under and you have $251,000 in a savings account right there, I mean, in relatively short order, they're going to send you a check for $250,000.
Speaker 2 00:19:32 The insurance company is probably going to liquidate. It's going to take some, take a while. Some people are going to get out. You know, if people are getting payments are going to continue to get payments, that's one thing they try to stay away from. So in the end, what happened is all the regulators came in and Missouri pitches in this and Montana pitches in this and Texas, Florida, California will pitch in that. And I was told that a lot of actual insurance companies came in and made contributions to a settlement fund. They started a nonprofit organization called the guaranteed annuity benefits company GABC. And with all those proceeds, they bought a series of zero coupon bonds that were target dated for the time when payments or cash flows were needed. So that corporation is now being run after the final liquidation. So if you had <inaudible> as a contract holder, you now got you get payments from GABC and life goes on, everybody got their money, right?
Speaker 2 00:20:25 That's a rare example. And I say rare, because I found on once website this morning, you know, all the insurance company failures, and it was kind of an obscure website. So I don't know how legitimate was. It had probably 25 or 30 of them, 25 or 30. I mean, there were like 2000 pinks that failed in 2008. It was ridiculous. So that's why there aren't a lot of answers. There's not a lot of about it. And I wrote this thinking, Hey, this is pretty interesting. And I want to take what I've learned by asking the questions and, you know, kind of share that with everybody, just so you can kind of think about it. I really, and what I say is if in order for you to really lose money with an annuity, it's going to take like it's a failure of the system, not an accompany.
Speaker 2 00:21:07 And the failure of the system means that there's a lot of people are going to be hurting. Not just, I mean, if a whole bunch of insurance companies go down at once, what does that mean for the stock market? The bond market, corporate portfolios. I mean, and everybody wants to talk about crypto. Like, well, what if the power goes out? You crypto's nothing. If you don't have power, that takes me on a different tangent. I'm going to try to do a crypto episode coming up pretty soon. Cause a lot of people ask about it. So like in large part, like this is really the fundamentally safest place. You can possibly have money aside from having some insurance. But if, if banks didn't have to pay for FDA to see insurance, do you think they could offer higher interest rates? Huh? Probably that's one of the reasons why insurance companies do now, they all have to make contributions to the guarantee funds.
Speaker 2 00:21:53 So that kind of waters it down a bit. But remember if you want security, you're going to pay for it in some way or another. So kind of in summary, four components to the safety of annuity. So first insurance companies back every debt liability dollar for dollar, with an income producing asset. Second additional reserves insulate the company from the ups and downs of the regular business cycle. Third profitable asset classes like annuities can be sold to other carriers in times of financial distress. And finally, if all else fails and once everything has been located, the guarantee associations from several states, step in to soak up the remaining liabilities. And again, like in the case of Eleni, I was told that there were a lot of insurance companies that actually make contributions to that. So the insurance company is not as cutthroat as other ones. Obviously they all compete with each other for business.
Speaker 2 00:22:41 It's really a system that they want to maintain. And you know, there's a reason why companies like guardian life, mass mutual and New York life have paid dividends above guarantees. Since before the war, the civil war, we're talking 150 hundred and 8,200 years of stability and you find another company and maybe they don't have the products you want. But if you find another company that's capitalized, similarly, then you should have more confidence with that type of investment from a security perspective than you could with just, there's just nothing else out there aside from putting bars of gold under your bed. And then you got volatility of the asset, but it's intrinsically valuable. You can hold onto it. It's right there. But it's the kind of thing that happens. So infrequently that I only have one really good example from the past 30 or 40 years. So that's just the simple explanation.
Speaker 2 00:23:41 But one thing I hear from people that I have no problem with someone who wants to limit their investment to the maximum coverage offered by the state guarantee. But if you do your due diligence and I'm not telling people to go over it now there's some companies that are a bit archaic that are only a hundred thousand of coverage. A lot of them have bumped up to two 50 to 300. Uh, there's a couple of states that actually have $500,000 worth of coverage available. So it's, it's just one of those things where if you think about a massive failure across the insurance industry, that obviously other assets aren't going to be in dire shape as well. So by all means, go ahead and stick to the state guarantee limits, but it's different for every state anyway. And I don't think it really comes into play because most people aren't going to be, you know, a lot of people I'm talking to, we're dealing with sixties to 70 years old.
Speaker 2 00:24:30 If it takes 23 years to liquidate an insurance company, a lot of people about the contracts aren't going to be around. But if you rely on the state guarantee fund, this is why, you know, I don't talk about it. I talk about why it's not, I think it's mostly not relevant. Again, it's relevant to the catastrophic losses and insurance company faces in times, you know, for an act of God, wartime, stuff like that. And a lot of wards and wartime stuff, I guess they get out of it in some cases, but nine 11 was considered an act of war. And so insurance companies did not, they didn't have to pay. And a lot of them stepped up and said, we'll pay the death benefits for those. But if you have, if you rely on the state guarantee fund again, meat saying, it's not relevant, then you haven't done your homework, but there's a lot of places where we can provide greater T detail.
Speaker 2 00:25:09 And I understand if somebody has question about this or maybe a criticism, a complaint, something like that, or, or, you know, it's, it's constructive. So I don't mind being pointed out if I'm wrong, I'm going off of what I've done with. I'm going on 19 years now. And I have an inquisitive mind and I always dig deeper. I dig for more information. I try to take belief to the point of knowledge or as close as I can get to knowledge. So I have a hunch on something in my head. I think about it enough. And I thought, well, if a whole can be poked in it, I need to plug that hole with more information. And so that's kind of the result of this. And I thought it was important to put out on the podcast for anybody who wants that platform to let everybody know that annuities are safe.
Speaker 2 00:25:58 And here's why really strong examples. So, um, what I will do real quick again, I'm going to show you I'll go back any page in the website, go to the newsletter, search the topic, find it. If you want to read through it. I covered a lot of it. Uh, some of it word for word, just want to walk you guys through it quickly. Go back to the newsletter page search bar. So these are the ones that social security, how to beat the market or stuff like that. So I know the tag words for someone's. That's why my searches are a bit weird. Uh, schedule a call green, schedule a call button. If you want to chat about it, if you have any concerns, questions, or comments, I'd be happy to hear it. Go ahead and comment on any of the platforms YouTube or the podcast helps other people realize things maybe they didn't see.
Speaker 2 00:26:38 And then if you'd like to chat, you can give me a call at (800) 438-5121. So hopefully you guys understand a little bit more now about what happens if an insurance company fails and next week, not sure the topic, but I've got a couple of guests lined up and I've got kind of a fun one I want to do about cowboy hats. So you guys may not think it has anything in common with retirement planning, but I beg to differ and I'm gonna explain why. So I'll get to those, but we're coming into the holidays, try to bank a few of them so that there's consistent content for anybody. Who's sitting there with a food coma and wants to check it out. My name is Brian Anderson, annuity straight talk.com. Thank you for joining me. And I will see you all next week for episode 23, have a great day. Goodbye.
Speaker 1 00:27:36 You've been listening to annuity straight talk. The proceeding is for informational and educational purposes only and does not represent tax legal investment. The views expressed by guests on this program are their own and do not necessarily reflect the views of the nerdy straight talk or its partners. No information presented today should be acted upon without meeting with the qualified licensed professional. It is important that you read all insurance contract disclosures, carefully making a purchase decision guarantees are based on the financial strength and claims paying ability of the insurance company.
