Podcast Center
Video Center
Webcasts
Resource Center
Events
December 12, 2012 at 02:00 AM
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 (AnnuitySpecs.com’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.
