More unknown risks these days in fixed annuities

[Allen Trent]

If Colorado Bankers wasn't bad enough of fraud & lack of oversight, saw these 2 articles that make me concerned that over half the industry is using private equity run reinsurers in Bermuda & Cayman Islands as it allows more aggressive accounting & investment practices.

Think Sentinel & Atlantic Coast are tied up with one that is being pursued for fraudulent activities & buying pretty aggressive assets.

https://www.google.com/amp/s/www.barrons.com/amp/articles/annuities-risks-a-cap-777-cdf7a4ee

Bermuda firms benefit from surge in annuity reinsurance

Bermuda firms benefit from surge in annuity reinsurance

www.bermudareinsurancemagazine.com

I wonder if agents will be accused by clients, like happens with CBL sales, that they should have known the carrier was involved in such things. With best interest & possibly fiduciary rule, it might require an agent to ask carriers about their reinsurance & investment policies. Especially if the consumer came to the product for "safety "

 

[annon123]

1) The way private equity works is that a venture capital firm (VC) creates a "fund" that private investors (which may or may not include members of that VC firm) invest in (usually for 10 years max) that is then used to invest in a startup or a company much further along. VC's usually specialize in an industry and also how close the start up is to going public or being acquired by another company (FYI angel investors usually invest in brand new companies some VC companies specialize in companies in their final expansion prior to being sold/going public). VC companies only make their money when the company is sold or goes public. This means that they often (especially if the company is more mature that they become involved in rather than looking at expansion if the company is "young") make deep cuts making the company more "efficient" before they sell the company. The buyer of the company often takes on a lot of debt to buy the company, which of course, affects the buyer's bottom line. As a result the venture capital company are not the long term owner of companies they are involved in (or start) as they make their money when they sell their "shares" of whatever company they invested in. That is the business model of VC companies.

2) This means that the best interests of the VC firm (making their return selling off the company via selling off their shares) will not be the same as the buyer company (making money in the long run as an expansion to their business) thus there is an inherent conflict of interest. The customers (eg the people buying the annuities), of course, are concerned with the long term stability of the company and the stability of the "product" they are buying.

3) One big catch is that "failure rates" of companies VC funds invest in is relatively high which means high risk for what will happen with to anyone's money.

This article also addresses pension funds
https://www.fastcompany.com/3003827/why-most-venture-backed-companies-fail (their article is based on credible research and not just shooting from the hip although is written for a causal reader).

4) Setting up shop off shore to found and operate high risk companies happens because there is less regulation and oversight (along with tax consequences - generally more favorable to the owners of the company - on a domestic level look at why so many companies are incorporated in just a few states in the USA). That increases the risk. At least in the USA companies selling these kinds of products are regulated, funds anc companies are rated, and detailed financial information (and yes I know even in the USA accounting shenanigans exist) is available. Choosing to set up in a country that has far less oversight, regulation, outside of USA oversight, etc. (and, of course, some countries have good oversight but the ones talked about here do no) means investing one's money or one's client's money in these companies is much higher risk than doing so in the USA. If the company is still under VC control as they haven't sold it yet the risk is even higher.

5) As a result it is worthwhile knowing where your client's money is ending up. In the long run for your own best interests stay clear and have good liability insurance for when/if things head south. These will be riskier "investments" for the clients and you are the "expert" making the recommendations. As a result you likely will be held liable for not understanding the risk yourself and/or helping them understand it so they make an informed decision (although I am not sure without specialized knowledge a client will ever be able to make an actual informed decision). Depending on the state you practice in and state laws your own legal liability may be relatively high. As a result if you run your own company make sure however you are incorporated protests your own personal assets and if you lose a lawsuit only your company money is lost, not the shirt off your family's back too (eg sole proprietorships and Limited Partnerships increases the risk to your own money where as using the LLC ownership structure, or if you are big enough, a corporation structure, will protect your own personal assets)
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My take - run! This will be high risk in the long run and while some of our clients may end up doing well, many won't. It's not where (eg off shore) I'd personally put my own money or risk that of my clients. In my opinion you need to know where a client's money is "resold"/finally ends up.

 

[walthamny]

First clients can sue for anything. It is really hard to know exactly how even the best Mutual companies invest all their Capital. They all invest in private equity and non traded fixed income. How they value these things and account for it is always a blackbox. Both MassMutual and NY Life at one time had invested in Madoff so obviously even the large ones do crazy things with their super safe capital. I think overall it would be difficult to charge agents with not knowing when regulators are not so sure how some of their money is invested. It would be very easy however to sue an agent for not knowing State Guaranty Fund limits and not diversifying large annuity cases.

 

[scagnt83]

First clients can sue for anything. It is really hard to know exactly how even the best Mutual companies invest all their Capital. They all invest in private equity and non traded fixed income. How they value these things and account for it is always a blackbox. Both MassMutual and NY Life at one time had invested in Madoff so obviously even the large ones do crazy things with their super safe capital. I think overall it would be difficult to charge agents with not knowing when regulators are not so sure how some of their money is invested. It would be very easy however to sue an agent for not knowing State Guaranty Fund limits and not diversifying large annuity cases.

This is much different than what you speak of.

Mass and NYL listed that on their balance sheet at a risky asset. Might not have said what fund it was. But the assets were listed and properly classified in the Annual Report.

AND, it was a tiny amount of their overall assets.

What is happening in the Annuity market is the complete opposite of that.

These reinsurers are essentially lying about their holdings and how they are invested.

And its huge chunks of certain carriers books of business.

That means financial ratings for those carriers are meaningless and likely not representative of the truth.

Its no different than the CBL fiasco where they were lying on paper about their holdings. Look how that has turned out for policy holders.