Best FIA's for Cash Growth

[Larry Tew]

Not really a paradox but essentially how all fixed investments work, right? They HAVE to offer a higher yield to entice buyers due to credit risk.

Like treasuries yield less than munis (AAA) which yield less than investment grade corporates etc.

Now that you mention it, I see your point. I wonder how the conversation might go if an agent said to a prospect or client...

"Bob, there are around 350 companies with stronger financial ratings than what I'm recommending. But on the other hand, they're offering a 1% higher cap."

I guess it could go either way. But a better question is what percentage of agents would make that statement in the first place.

 

[Tahoe Ray]

Now that you mention it, I see your point. I wonder how the conversation might go if an agent said to a prospect or client...

"Bob, there are around 350 companies with stronger financial ratings than what I'm recommending. But on the other hand, they're offering a 1% higher cap."

I guess it could go either way. But a better question is what percentage of agents would make that statement in the first place.

There reaches a point where there is an exponential increase in risk for an incremental gain...that is where our discussion becomes interesting.

Your last point is well taken and although probably meant as being rhetorical, is the real issue here, IMHO.

 

[Larry Tew]

There reaches a point where there is an exponential increase in risk for an incremental gain...that is where our discussion becomes interesting.

Your last point is well taken and although probably meant as being rhetorical, is the real issue here, IMHO.

Semi-rhetorical, but I think even if an agent were to ask a prospect if they were willing to be in a company with lower ratings in trade for a better cap, the answer 90% of the time would be "well... I don't know. What do you think?" So it still comes down to the agent to decide what they will put in front of a prospect.

Even though very few companies fail, I'm not ready to say that ratings don't matter.

 

[scagnt83]

Am I the only one who sees it as a paradox that the companies that promise the most are also the lowest rated?

Not really a paradox but essentially how all fixed investments work, right? They HAVE to offer a higher yield to entice buyers due to credit risk.

Like treasuries yield less than munis (AAA) which yield less than investment grade corporates etc.

Also, it is easier to hold a AA or AAA rating when you pay lower rates or offer lower benefits.

NWM does not guarantee Term Life rates for the whole term. They do not allow conversions after 5 or 10 years.
If NYL and MM did the same to their products they could put less in reserves (like NWM) and they would probably have an AAA rating just like NWM.

Have you seen fixed rates from AA rated companies these days? They are basically out of the Fixed Annuity business by default.

Sure they are safer than A rated or B rated options. But you might as well get a CD or put your money under the mattress for the rates they are offering.

I keep seeing articles and about the huge sales growth that NYL is having with their Deferred Income Annuity. Well.... that is because their old bread and butter (Fixed Annuities w/ ROP), is in the tank right now because of rates! The DIA is their only competitive deferred product right now. So everyone over there has their hammer out right now....


So one might argue that it is some companies business model (at least at the moment) to be competitive in the Fixed Annuity market. And in the current rate environment, it seems impossible to do that and keep a AA or AAA rating. If it was possible they would be doing it.

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I wonder how the conversation might go if an agent said to a prospect or client...

"Bob, there are around 350 companies with stronger financial ratings than what I'm recommending. But on the other hand, they're offering a 1% higher cap."

I guess it could go either way. But a better question is what percentage of agents would make that statement in the first place.

That is a misleading statement around the context of our conversation.

We are talking about Fixed Annuities, not every insurance product on the market.

Going back to our 5 year example:

How many carriers currently offer a 5 year FA? Can you name 20? Can you name 30?
I dont know the exact answer. But I do know that it is not over 30 or 40.... 50 absolute tops.
And out of that number, how many have a rate above 2%?

Your conversation with Bob the client changes drastically if he is in the market for a short term FA. And that is what our conversation is about.

Bob would most likely stick his money under the mattress before he locked it up for 5 years for what AA rated companies are paying....


Dont get me wrong. I am a former NYL agent. I have a very deep rooted appreciation for strong financial ratings. But I am also a realist. And realistically, in the current rate environment, there are no decent 3 or 4 year options. As I pointed out, at 5 years Midland (A) becomes competitive. (but it is still 1% lower than the highest B rated option)

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Semi-rhetorical, but I think even if an agent were to ask a prospect if they were willing to be in a company with lower ratings in trade for a better cap, the answer 90% of the time would be "well... I don't know. What do you think?" So it still comes down to the agent to decide what they will put in front of a prospect.

Even though very few companies fail, I'm not ready to say that ratings don't matter.

How does a stock broker or financial advisor decide if they should put the client in A rated or B rated bonds?

They usually talk to the client and gauge their goals, risk tolerance, current situation, etc.

You know as well as any other agent that some clients are more comfortable with risk than others. Some would jump at the extra 1% and sacrifice a slightly lower rating. Others might hesitate more so.

But people are interest starved right now. They want a decent rate so inflation stops eating away at their savings. But at the same time they are hesitant to do anything long term (or even short term) because of all of the uncertainty.

So it just comes down to the situation imo. As an agent, I would never recommend below a B+. And for anything over 5 or 6 years I would only recommend A rated or higher.

This is just my opinion, but I think that for a 3/4/5 year option, if a client compared the difference in rates to the % chance of a B++ company going under in 5 years, and then compared that companies ranking to the competitors in that market; many would go with a B++ over an A for a 1% higher return. Some would for even a .5% more return. But to me that is the range that the debate gets interesting.

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There reaches a point where there is an exponential increase in risk for an incremental gain...that is where our discussion becomes interesting.
.

Yes but how exponential is that increase in risk?
Does anyone have any hard stats on the % risk of a B++ company vs. an A?

And of course that incremental gain is relative to the amount of assets at hand.
1% extra on $10k is $100...
1% extra on $100k is $1,000...
1% extra on $1mill is $10,000...

There are some big differences between those returns.

Is an extra $100 per year worth the risk of a B++ rated company? Is $10k?

And lets not forget that is $10k per year over 5 years (yes its more with compounding but im keeping the math simple)


But of course there is the flip side to that argument.... if the company has trouble or goes under would you rather have $10k with them or $1mill??



But if a client were to be shown the % chance of receiving $10k more in gains, right beside the % chance of that company going under in 5 years... what would most choose?

As an advisor, how do we best quantify this risk for the client?

 

[Larry Tew]

5 years for a company to fail isn't long if you say it really fast. When Kentucky Central failed in 1993, we had NO notice. When General American went into receivership in 2003, there was no notice on that one either. So 5 years can be an eternity. And if you ALREADY have 3rd party opinion that the "B" company is relatively weaker than the majority of companies, 5 years is FOREVER.

The question floating around is whether a client would choose to be in that "B" company in trade for a higher cap or interest rate, and if so, where is the tipping point. That's a great question... THAT NO AGENT EVER ASKS.

The last time I checked, there were 543 companies with a Best rating. 375 of those companies were higher than B++.

So IF we give our clients full disclosure, who of us would actually tell a client that we're putting them in a company that is in the bottom 3rd of companies with a Best rating and ask them if they are willing to take the risk (real or perceived)?

Or the semi-rhetorical statement I made earlier about telling "Bob" that there are 375 (real number, I said 350 earlier) companies rated stronger by Best?

Or do we tell them that regardless of the Best rate, very few companies actually become insolvent (even though it's true)?

Here's an interesting statement from Wiki regarding Kentucky Central:


"The KentuckyEnron"[edit]

One reason for the pushinto the real estate and property development market was due to higher thanexpected payouts on certain high-risk life insurance products. Kentucky Centralhad set sales goals which could not be met under the financial conditionsgiven, meaning that the company felt it had to push as much revenue as possibleout of its real estate investments. This would eventually lead to fewerinternal controls and a risky business plan.[4]

Having been a general agent with them prior to the failure, I know that statement to be true first-hand. Kentucky Central tried to bend reality in order to meet it's own expectations. they couldn't. How is that different than a weaker company offering better rates than stronger companies deem sustainable in order to get business?

So how can a weaker company realistically offer higher caps and rates than a stronger company? They can't. Just because they HAVE to in order to compensate for their weaker financial position to attract business doesn't mean they can somehow bend math and reality to make it work.

We all have to let our consciences be our guide. This thought process is how I'm wired, and it reflects my experience with 2 companies that failed. Someone might be thinking that if those companies I mentioned were still reasonably well rated that the ratings are irrelevant. Maybe, but IF I have to go to a client and tell them that there's going to be some changes because of a company failure that I put them in, I want to be able to answer the client's question when they ask me how much of this did I know about before the insolvency. I don't want to have to say that I knowingly put them in a weaker company because the caps were higher.

Like I said, this is my thinking on the issue... it doesn't have to be yours.

 

[Tahoe Ray]

5 years for a company to fail isn't long if you say it really fast. When Kentucky Central failed in 1993, we had NO notice. When General American went into receivership in 2003, there was no notice on that one either. So 5 years can be an eternity. And if you ALREADY have 3rd party opinion that the "B" company is relatively weaker than the majority of companies, 5 years is FOREVER.

The question floating around is whether a client would choose to be in that "B" company in trade for a higher cap or interest rate, and if so, where is the tipping point. That's a great question... THAT NO AGENT EVER ASKS.

The last time I checked, there were 543 companies with a Best rating. 375 of those companies were higher than B++.

So IF we give our clients full disclosure, who of us would actually tell a client that we're putting them in a company that is in the bottom 3rd of companies with a Best rating and ask them if they are willing to take the risk (real or perceived)?

Or the semi-rhetorical statement I made earlier about telling "Bob" that there are 375 (real number, I said 350 earlier) companies rated stronger by Best?

Or do we tell them that regardless of the Best rate, very few companies actually become insolvent (even though it's true)?

Here's an interesting statement from Wiki regarding Kentucky Central:


"The KentuckyEnron"[edit]

One reason for the pushinto the real estate and property development market was due to higher thanexpected payouts on certain high-risk life insurance products. Kentucky Centralhad set sales goals which could not be met under the financial conditionsgiven, meaning that the company felt it had to push as much revenue as possibleout of its real estate investments. This would eventually lead to fewerinternal controls and a risky business plan.[4]

Having been a general agent with them prior to the failure, I know that statement to be true first-hand. Kentucky Central tried to bend reality in order to meet it's own expectations. they couldn't. How is that different than a weaker company offering better rates than stronger companies deem sustainable in order to get business?

So how can a weaker company realistically offer higher caps and rates than a stronger company? They can't. Just because they HAVE to in order to compensate for their weaker financial position to attract business doesn't mean they can somehow bend math and reality to make it work.

We all have to let our consciences be our guide. This thought process is how I'm wired, and it reflects my experience with 2 companies that failed. Someone might be thinking that if those companies I mentioned were still reasonably well rated that the ratings are irrelevant. Maybe, but IF I have to go to a client and tell them that there's going to be some changes because of a company failure that I put them in, I want to be able to answer the client's question when they ask me how much of this did I know about before the insolvency. I don't want to have to say that I knowingly put them in a weaker company because the caps were higher.

Like I said, this is my thinking on the issue... it doesn't have to be yours.

Straw man argument...how many of those companies offer FIAs? I don't disagree that a company should have strong financials in addition to offering a competitive product, however the space that we are discussing has no where near as many companies as you are indicating.

There is a line somewhere that each client/agent needs to discuss in detail. What rate justifies choosing an A rated company over an A+? 1%? 1.5%? I don't have an answer because each case is unique.

What if the A+ rated company markets more aggressive products than the A rated company? Should that matter?

It is a good discussion and one that each agent needs to analyze for themselves.

Like you said, to each their own.

 

[scagnt83]

Again. We are talking about the annuity market. Not 375 different companies.


My argument is limited to MYGAs 5 years and under.


A better question is would that prospect actually go with a AA rated option when they can get the same rate from a CD? Probably not.

This is a very specific situation based solely on the current interest rate climate.

What if a client asks you for a 3 year product? Would you say I dont offer that? If that clients alternative was a CD at the bank, do you think the funds would be safer in the CD or the B++ MYGA???

 

[Larry Tew]

It's not a "straw man argument" or a red herring to me. Maybe to you. I've worked through a few company failures and until you have too, you may not appreciate my point of view. And I don't care if we're only talking about the annuity market or how many of the "375" offer FIAs. That is a non-point for me.

"What if a client asks you for a 3 year product? Would you say I dont offer that?" That is exactly what I would say. But I would also explain to them WHY. Tell a client that in order to put them in a 3 or 5-year product, we'll need to use a company that is rated lower - and in some cases substantially lower than the higher-rated companies and see what he says. That was my point earlier... that agents just show these products / companies without ever mentioning the lower ratings.

I'm not afraid to tell a client that wants his money back in 3 years that maybe he could park it somewhere besides an annuity if I can't find a satisfactory work-around to the "B" company.

Speaking of a "B" company, I just pulled this off their site. I removed their name. Have you EVER heard a company - regardless of their rate - say that they weren't stronger than bear's breath?...

Our Ratings

Pride In Our Ratings
At XYZ, our ratings are more than just a measure of confidence in our company and its products. They are a point of pride.
We believe our current Financial Strength Rating of B++ (Good) by A.M. Best and Company (the fifth highest of 15 such ratings)1 and our current Insurer Financial Strength rating of BBB+ (Good) by Fitch Ratings (the eighth highest of 21 such ratings)2 reflect the overall strength of our balance sheet, offset in part by the relative youth of our parent company.

I'm not interested in changing anyone's mind, and mine isn't going to be changed, so let's all go out there and have a good rest of the day.

 

[scagnt83]

I'm not interested in changing anyone's mind, and mine isn't going to be changed, so let's all go out there and have a good rest of the day.

Not looking to change minds. Was just trying to have a discussion about risk/reward in relation to annuities....

 

[bobson]

It would be interesting to find a list of insurance companies that failed and see what they were rated right before they crashed. I know some A rated or better companies have failed.

I wouldn't be afraid to put my own money in a B rated company.