Concerns About Annuity Issuer Failures Are Misguided

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Economic uncertainty is everywhere except one place: annuities. Advisors still don't trust them. But rejecting them as unsafe is a misguided disservice to clients who would benefit from the financial solutions they provide.

The insurance companies that issue annuities can default, of course, but annuitants' money won't disappear. Most headline-grabbing insurance failures involve long-term care or property and casualty companies, which operate on a different business model. By definition, those companies are impaired by unexpected calamities, while annuity providers are immune to floods, fires and illnesses.

In the aftermath of the financial crisis, between 2008 and 2015, not one provider with outstanding annuity obligations defaulted, according to the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA). Even the AIG debacle of 2008 involved only the parent company, not the annuities operations (which AIG recently announced it's spinning off into a separate company).

Should tragedy strike, a rigorous safety net will provide swift corrective action. In the summer of 2002, for example, London Pacific Life & Annuity Co., a Raleigh, N.C.-based subsidiary of a U.K. insurance group, defaulted on nearly $2 billion in annuity obligations, impacting customers in some 40 states. State regulators moved into its headquarters, liquidated its assets, and ultimately found a buyer, Hartford Life Insurance. All annuity holders were made whole.

To be sure, annuities aren't as secure as FDIC-backed bank accounts or Treasury notes. But their returns are a lot better, and they offer something no other instrument can: guarantied lifetime income.

In fact, corporations such as Lockheed Martin, FedEx, Raytheon, and Alcoa transferred some of their employee pensions to annuities. "The state regulatory system that oversees annuities and the life insurers that issue them imposes a higher level of regulatory and solvency scrutiny than the federal regulations governing pension plans," explained Pensions & Investments magazine in February 2019.

That scrutiny includes requiring a capital cushion that most issuers exceed. In 2018, the most recent figure available, more that 94% of annuity providers had at least twice the minimum required, according to the American Council of Life Insurers' Fact Book.