Cramer: Market Matching Annuities Too Risky

As though this market wasn’t bad enough, now we are learning that insurers who took our money and were supposed to give us a guaranteed return as good as the stock market—with no downside—may not pay up when we need it most. I didn't think this was possible until now.

I figured a promise was a promise and, if bought, an annuity was supposed to match the stock market and not lose money. It was pretty much a sure thing. Now, people who invested in annuities are beginning to wonder if they made a huge mistake in believing that their insurer would be able to give them good returns in this miserable bear market.

That's got me wondering if you shouldn't pull out right now, before others do, if you have a stock-based annuity. Now, if you've been reading my column, I have expressed serious concern about whether your money is safe with companies whose stock seems to go down every day. So far, thankfully, everyone who has had to pay off, has been money good. That's why my jaw dropped the other day when I read a little item in The Washington Post about Shenandoah Life. This small life insurance company was placed in receivership by the state - meaning the state of Virginia took it over - a move that could very well trigger the annuity apocalypse I've been writing about (where insurers didn't hedge their stock portfolios against the downside).

Now, they can't make good on their promises.

This one seemingly dropped out of the sky, with the major ratings agencies - on a string of bad performances of their own lately - showing up late to the Shenandoah intervention.

Here's the back story: Virginia insurance regulators hit Shenandoah with a receivership notice last February 12, but most ratings agencies hadn't given policyholder's sufficient notice. Sure, A.M. Best, the "famous" rater of insurers, had downgraded Shenandoah last September from "A-" (Excellent)  to "B++" (Good), but Best was lulled into complacency as the insurer began touting a potential merger with Indianapolis-based OneAmerica Financial Partners. Shenandoah even signed a letter of intent to merge with OneAmerica, signifying a smooth road, it hoped, to buy time to get its financial feet back on the ground and keep the credit rating agencies at bay.

Well, the first goal didn't work out - Shenandoah lost $50 million betting on the preferred stock of Fannie Mae (Stock Quote: FNM) and Freddie Mac (Stock Quote: FRE) last year, and the company is finding it tough to pay off on its claims. It wasn't Shenandoah's fault.  Many insurers owned that paper - in fact it was a staple for them - but it was just too much for a small insurer like Shenandoah.

According to the Virginia Bureau of Insurance, some policyholders may not see any return on claims money on their premium payments. The state insurance regular recently posted a helpful FAQ on the Shenandoah situation, if you're a Shenandoah policyholder, or if you are an insurance customer curious about payoff realities when an insurer collapses, you should read the whole thing.

Here are some of the big questions:

Is Shenandoah Life currently paying all of its claims?
Answer: No.  At this time, the Deputy Receiver has imposed certain moratoriums upon policy loans (other than automatic loans), payment of cash or surrender values, surrenders, fund transfers, cash-outs, and similar payments and certain contract changes or conversions pending further orders.  The moratorium may be adjusted as and when the Deputy Receiver and/or the State Corporation Commission find that the circumstances are appropriate.

Is Shenandoah Life paying all of its other claims?

Answer: Yes, the moratorium does not affect death, accident and health claims, or periodic annuity payments until further notice. Plus—and this really worries me—there is no guarantee that current Shenandoah annuity holders will continue to receive their regular payments (although they do for now).

Will I continue receiving periodic monthly principal payments under my annuity?
Answer: Yes.  At this time such payments will continue. However, changing circumstances may require that such payments be suspended in the future.  Such payments made after the date of receivership will be taken into account in future distributions to the extent necessary to avoid unlawful preferences.

Call me crazy—and many have—but if I were a Shenandoah annuity holder, I'd be a bit worried about all this hedging and uncertainty coming out of Virginia. Think about it - nobody at the state's insurance bureau can say for certain whether Shenandoah customer assets are safe.

Shenandoah's OneAmerica gambit actually did work out on the back end, for a while at least. It took A.M. Best until February 12 - the same day that the insurer fell into receivership - for it to downgrade Shenandoah, from "B++" to "E," which in insurance-speak means "under supervision."

For its part, A.M. Best said that it had been given no advance warning that Shenandoah's letter of intent with One America had become undone. But if you think Best was behind the curve, consider that Fitch Ratings - another major credit rating agency - didn't downgrade the insurer until February 20 - eight days after Shenandoah collapsed into receivership. Until then, Fitch had Shenandoah at a ratings level consistent with a solid company able to meet its debts. That sounds to me like a "trust nobody situation" when it comes to these annuities, particularly the ones pegged to the stock market. I always thought they might be too good to be true. After all, the promise was to give you the upside but cut off the downside. That's just not realistic.

I don't mean to pick on Shenandoah, and as I wrote last week, most insurance companies are in no danger of going down a similar rough and rocky path. While the insurer isn't dead yet, it's a good lesson for insurance consumers who wonder what their options are when dealing with a collapsing insurer.

Right now those options are limited. If you're a Shenandoah annuity customer who really needs money, you can write a surrender letter to the insurer directly. But as the Virginia insurance office says, they're not currently paying out any surrender money.

Or, you can apply for hardship, again through  the Shenandoah web site. They'll review the letter, but
will only grant hardship money in narrow cases.

Otherwise, the Shenandoah saga is a painful lesson learned for insurance customers wondering about the health of their own companies. In the process, it's triggering a crisis of confidence about the insurance industry, and the agencies that rate them.

Not good, but just another day under the economic big top.

So here is the bottom line: If you have an annuity and it's not invested in good, old-fashioned bonds issued by the U.S. government, I would think about trying to get my money back - especially if there is a guarantee to get back at least what you put in, if not more.

Better to be safe about these products than sorry.

Brian O'Connell contributed to this article.

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