The federal government’s intervention in the capital markets this month, capped by an $85 billion bailout of American International Group, the New York-based insurance titan, has producers questioning whether other life insurers may be experiencing financial troubles.
If that’s the case, then they need to determine whether it’s advisable to recommend selling or replacing the annuities they offer to clients.
A chief concern for many advisors is whether the issuing carrier’s annuity products make for a more difficult sale. On this question, much will depend on the insurer’s ultimate standing with credit rating agencies A.M. Best, Moody’s and Standard & Poor’s. A slight decline from a stellar rating will not have a significant impact on the marketability of the products, sources tell Annuity Sales Buzz. But a more substantive drop could prompt advisors to hold back.
“When a company’s rating is at or near the top end of the scale, it usually doesn’t have a significant impact because the company is still financially sound,” says Ron Angarella, a chief operating officer at RD Marketing Group, Sacramento, Calif. “But if the decline is more significant, it would be a different situation.”
Adds David Barrist, vice president of Barrist Insurance Group, Bala Cynwyd, Pa.: “A lot of financial planners and estate planning attorneys will want to know about the company’s credit rating before making a recommendation. If it goes below two or more ratings levels, say, from an [S&P rating] of AA-plus to B-minus, then you have issues in terms of the company’s ability to back up its product guarantees.”
When a manufacturer’s financial strength is in question, sources say, it may be advisable to defer recommending its products until the markets exhibit greater confidence in the firm’s long-term outlook. In the interim, says Neal Sullivan, chairman of the board of the Independent Insurance Agents & Brokers of New York and president of Sullivan Financial Group, Mahopac, New York, producers would do well to look to other carriers that offer products with comparable features and benefits of interest to prospects.
However, Keith Hennessey, a vice president and membership chair of Iowa State chapter of the National Association of Insurance and Financial Advisors and an agent for Farm Bureau Financial Services, Des Moines, Iowa, insists a product offering superior benefits from a financially weak carrier may be worthwhile to buy. It may be advisable, for example, to purchase an annuity paying 4.5% interest from a B-rated insurer when the alternative is an annuity paying 4% interest from an A-rated company.
“Generally, the longer the surrender period is, the higher will be the interest rate offered on the annuity,” he adds. “So if you’re working a B-rated company, you may want to consider a shorter surrender period to hedge against [the insurer's balance sheet] going south.”
Sources add that producers also need to be proactive in reaching out to the insurer’s existing clients–starting with their best customers and those most heavily invested in the carrier’s solutions–to offer reassurance that they’re closely monitoring the situation and will keep clients informed. They need to be mindful, too, of their choice of words so as not to scare off clients.
“To say, ‘we’re reevaluating our relationship [with the manufacturer]‘ might make a client think you’re dropping the company,” says Steven Spiro, a national director at IIABNY and president of Spiro Risk Management, Valley Stream, N.Y. “Reevaluating is a premature word.”
Herbert Daroff, a partner at Baystate Financial Services, Boston, Mass., notes that his firm’s 200-plus advisors conducted a series of conference calls this month to share feedback they’ve been hearing from clients, many of whom have expressed concern about their investments and the wisdom of continuing to pay premiums on the annuities they purchased.
But Daroff insists that the client’s financial situation, objectives and product suitability issues, rather than current uncertainty about a manufacturer’s long-term outlook, should be the key factors to weigh in determining whether an exchange is appropriate. One reason is the potentially high cost. Owners of annuities could, for example, be hit with a high surrender charge if they’re still within the contract period.
“If 100% of a client’s retirement nest egg were invested in a fixed annuity, then I’d be really concerned because this is not a sound strategy,” says Daroff. “But if the amount invested were, say, less than 50%, then I definitely would not recommend anything specific without knowing the client’s particular situation. The decision to do an exchange has to be tied to product suitability and the client’s needs.”
Rolf Winch, a partner at Lifetime Financial Partners, Rockville, Md., and immediate past president of the National Capital Chapter of the Society of Financial Service Professionals, Newtown Square, Pa., agrees.
“I would tell the client, ‘here are the ramifications of getting out of a product now and here are the benefits of moving to a new company with a higher credit rating,’” he says. “Many clients don’t know the long-term consequences. As advisors, we have a fiduciary duty to help clients understand the pros and cons before they make a move.”
This responsibility, he adds, is all the greater now because clients are especially attuned to advisors’ recommendations during times of financial turmoil. Winch also cautions advisors to guard against the temptation to do otherwise–i.e., to generate a windfall in commissions by replacing contracts en masse and by preying on clients’ fears.
Such fears might be misplaced because, even in the event the carrier should declare bankruptcy, policy holders can rest easy that at least a portion of their retirement funds held in an annuity will be insured by a guarantee fund where the state is domiciled. Gary Lanzen, a chartered financial consultant and principal of The Brooks & Stafford Co., Cleveland, Ohio, says annuities valued at up to $100,000 are protected by the Ohio Insurance Guarantee Association.
“If the value of the annuity is over the $100,000 threshold, then it’s a bigger concern,” says Lanzen. “In this case, I would say to the client, ‘here are the options. Are you willing to take a loss to move to a more financially stable company or not?’”
Hennessey, the Iowa agent, says the one lasting consequence of this month’s events will be a reorienting among investors from “exotic” investments to products offering greater stability.
“People will be looking for more guarantees,” says Hennessey. “That might be in the form of a living benefit guarantee or a guaranteed interest rate, where the product isn’t so market-driven. And people will be willing to pay more in fees for these guarantees.”