So you’ve found your way onto our website, deciding whether to sell your annuity payments. There are a number of different reasons that people want to sell payments. In this article, we want to highlight one reason that’s often overlooked-the annuity issuer’s ability to make your annuity payments.
It is generally accepted that the insurance company making your annuity payments and other claims is financially sound. But we think that when the global bond bubble pops, several insurance companies could go bankrupt or at least have severe difficulty meeting all of their liabilities. Granted, some will be in better shape than others, depending on their levels of risk. We’ve taken a look at the credit ratings of major annuity issuers (life insurance companies such as MetLife, Jackson National Life Insurance, New York Life, etc.) and added some further analysis to provide additional color.
We’re not there yet, but if you wait until the bubble pops and you really need the cash, the window of opportunity to receive a lump sum for your annuity payments probably closes. If it doesn’t completely close, you may be able to sell your annuity payments, but at an increased discount rate-meaning less money for you.
Insurance Company Downgrades
As insurance companies credit ratings get downgraded, the major annuity buyers (JG Wentworth, Stone Street Capital, Novation Settlement Funding etc.) become more cautious when making lump sum offers on annuity payments they fund. This stems from their own worries as well as investor fears about the sustainability of annuity payments.
Many structured settlement companies act like middlemen, buying the rights to your annuity payments, then packaging these future annuity payments together (into an investable financial product) and selling them to investors. This process is called securitization, and the future annuity payments now get paid to the investors. The risk is transferred from the annuity buyer to investors.
Financial Crisis Bankrupted JG Wentworth
Wall Street’s securitization machine is what fuels loan growth in today’s economy. A decade ago, it was the mortgage backed securities (MBS) that fueled the housing bubble. And we saw how quickly the spigot can be turned off when the music stops playing.
Structured settlements annuity payments are “asset backed securities” which are bundled and sold to investors seeking higher yielding investments. But without the investor demand, the third-party annuity buying slows to a halt.
This happened to JG Wentworth in 2009, when they declared bankruptcy following the credit crunch. Their credit lines froze up and the investor demand dried up-stopping the securitization machine in its tracks. As mentioned in our JG Wentworth reviews page, the company was left in an overleveraged position and had nowhere to sell their bundled annuity payments. As a result, they essentially stopped buying new payment streams.
JG Wentworth commented on the 2008-2009period, “We were forced to limit transaction volume without access to the securitization market and warehouse facility. We significantly scaled back new transactions…”. If you are considering selling annuity payments to one of the larger annuity buyers who is very active in the ABS market, you might consider getting quotes sooner than later. If the ABS bond bubble pops again, the window when selling an annuity could close once again.
Investment Returns Fund YOUR Annuity Payments
A life insurance company funds itself to meet its liabilities (YOUR annuity payments) in a couple ways- 1- customer premiums and 2- earnings on their investment portfolio (a massive war chest of money to pay out claims). For some of the larger portfolios, such as Met Life, we’re talking over half a trillion dollars. The investment portfolio of all life insurance companies has their white elephant in the room-rising interest rates.
Annuity Payment Risk: Interest Rates Rising
Today, interest rates are basically zero. Here’s why this is a problem-they have nowhere to go but up. And when they do, the investment portfolios we just described (which pay various types of annuities) will get hammered. Rising interest rates harm all existing bonds since with interest rates rising, the bonds with existing (lower) coupons) are less attractive. And the investment portfolios are made up of almost all bonds (or similar debt instruments such as bundles of loans in an alphabet soup of various forms, CLOs, ABS, CMBS, RMBS, etc.). The portfolios need the bond’s interest income to match claims.
Think about it: Let’s say you bought an investment grade corporate bond that currently yields an investor a fixed rate of 3%. If over the next few years, interest rates double-market rates are 3% and investment grade corporate debt is being issued to investors at 6% yields you’d be upset. You’re stuck getting 3% when you could get 6% like everyone else, had you waited.
As such, your 3% bond isn’t as attractive and its price will reflect it. The bond values could crash. Rising interest rates generally affect the higher quality bonds, investment grade corporates and Treasuries (lower rated bonds such as high yield and structured products are more affected by deflation).
The Bond Bubbles Duration Risk
It’s not just the interest rates rising, that’s so dangerous. It’s how the bonds will react to the rate hikes, known as interest rate sensitivity (known as duration). The longer the bonds have until maturity, the more they will be negatively affected by rising interest rates. We are at the highest durations on record.
We’re not exaggerating by saying that insurer’s investment portfolios are basically a giant bond-a junk bond. Still wondering, “Should I sell my annuity”? Hopefully you can view that question with a fresher perspective. If you are selling annuity payments, consider starting the process sooner than later by getting a quote.