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Exactly what do pianos have to do with annuities?

This may seem like an odd question, but customers of insurance companies owned by Baldwin-United Corp. would have been wise to make that inquiry when deciding which companies to trust with their retirement savings.

In the 1960s and 1970s, Baldwin Piano & Organ Co. was the nation’s largest keyboard company. Baldwin’s decades of experience in financing pianos led them to believe they were qualified to diversify into financial services. Starting with a bank acquisition in 1968, Baldwin acquired dozens of financial services companies, including insurance companies, savings and loan institutions and investment firms. In 1977, Baldwin merged with United Corp., an investment company, and became known as Baldwin-United Corp.

Baldwin-United insurers began offering single premium deferred annuities (SPDAs) in 1979, and soon they became big sellers of one of the fastest-growing products in the insurance industry. According to a Society of Actuaries case study from 1986, these contracts offered double-digit interest crediting rates that were “substantially in excess of the investment income of the companies.” Few buyers seemed to worry that Baldwin-United’s SPDAs promised values that were “far beyond what the competition could match,” as the Chicago Tribune reported in 1987.

Unfortunately for the buyers of these contracts, they proved to be unsustainable–meaning that the crediting rates were higher than the investment income available to support the promised benefits. The severe negative spreads these companies were running, when combined with the insurers’ purchase of securities issued by other Baldwin-United affiliates that proved to be worth significantly less than what the insurers paid for them, created conditions that were “clearly hazardous to policyholders,” the Society of Actuaries’ study said. These conditions directly caused the Baldwin insurers’ insolvencies and also contributed to the bankruptcy of Baldwin-United.

In 1983, Indiana and Arkansas insurance regulators took over the assets of Baldwin-United’s insurance subsidiaries and began the long process of rehabilitating the two insurance carriers. In addition, the state insurance regulators sought the support of various life insurers, including Metropolitan Life Insurance Co., to implement the court-approved rehabilitation plans. MetLife ultimately assumed the assets and annuity contract liabilities of the insolvent insurance carriers as part of this plan.

The benefits of experience

Looking back, it’s very telling that an experienced insurance company was called upon to help ensure that Baldwin-United policyholders would be able to recover their principal and some interest. When the rehabilitation plan was approved by the courts, state insurance regulators worked with the insurance industry to implement the plan. At the end of the day, insurance companies have one main objective–to meet their financial obligations to their policyholders. Top insurers achieve this through careful planning, disciplined investing, and risk-management expertise built through decades of experience in the industry.

The annuity industry continues to attract interest from money managers that believe they can capitalize on their investment savvy to create greater profits than traditional insurance carriers. For example, a recent article in Bloomberg BusinessWeek states these money managers are “betting they can wring more profit from annuity contracts” than traditional insurance companies. A recent Wall Street Journal article stated companies “controlled by hedge funds, private equity groups and other investment managers” have recently been buying annuity businesses as a way to boost assets under management.

Financial professionals should pay attention to this trend because it is unclear whether the new entrants will be successful in managing long-term annuity contract obligations in order to deliver promised benefits to their clients. Sustainability–or the ability to deliver long-term promises–is the key attribute of top insurers, and the financial strength of the issuing company should be among the top considerations connected to any sale. Looking back over the past 10 years, many of the leading fixed indexed annuity (FIA) companies have been in the top five in sales each year (’s Indexed Sales and Market Report, 4Q 2011) for good reason–financial professionals and their clients recognize and value the long-term focus and financial strength of these companies.

Managing risk

When determining which insurance carriers to work with, financial professionals should consider attributes such as strong credit rating requirements, efficient asset-liability matching, strong risk modeling and extensive risk-management capabilities to monitor and control risk in real time. This helps protect policies against potentially extreme market events, from general market turbulence to periodic financial crises.

Top insurers earn and maintain high ratings from independent rating agencies that reflect their stability, integrity and strong balance sheets. Their high ratings have been maintained in good times and in bad.

Importance of legacy

So what does this trend mean for financial professionals? First and foremost, you should ask questions about the companies you recommend to your clients. Are they controlled by outside entities that lack insurance background? As the Baldwin-United example suggests, experienced insurance companies have the expertise to manage products for the long-term to help ensure the promised benefits will in fact be available when needed.

Do their products include features that are far above what the competition is offering? The insurance industry welcomes competition because good competition breeds innovation and encourages insurers to truly listen to consumer demand. More often than not, product innovation helps address consumers’ key concerns about retirement. However, if aggressive competition means long-term promises are not kept, the result can be a black eye not only for the issuing company, but also for the entire insurance industry and for you as a financial professional.

Keep these considerations in mind when you choose an insurer’s product to put before a client since each has a connection to your legacy as an insurance professional. After all, the insurance business is about more than just making a sale today–it’s about how the annuities you recommend help protect and grow your client’s retirement savings. Thus, the decisions you make today can have a profound effect on how you and your business are perceived tomorrow.

The best financial professionals understand that they are not only working with their clients in the present but are also planting the seeds for relationships with their clients’ children as well as their friends and family for many years to come. Insurance is a legacy business, so we must always be conscious that reputation is as important as shorter-term benefits.

This isn’t the first time outside entities have staked a claim in the annuity business and certainly won’t be the last. As we help clients navigate the changing retirement landscape, keep in mind the value of consistency and the ability to deliver on a promise. The top FIA providers have been keeping their promises for decades–make sure you’re confident the companies you recommend to your clients can do the same.

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