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Going "To the Mattresses"?

In modern times, this phrase may imply going to war or preparing for a fight (thank you Sonny Corleone). But recent economic events have brought back its more historic meaning: people now talk about “going to their mattresses” as though that might be the safest place to store money.

Given the apparent sophistication of Wall Street’s “Masters of the Universe”, who would ever have believed that some of our largest and most vaunted financial institutions would have to sell themselves or close up shop altogether? The news has panicked some: a father involved in the final stages of settling a case for his impaired son called me demanding that I “cancel Matthew’s structured settlement due to the “Financial Crisis” in this country”. On another case, a mediator actually told a plaintiff’s mother that it was “not a good idea to buy a structure in today’s economic climate”. Are they right?

No, they are not right -in fact, they could hardly be more wrong. As it turns out, for anyone interested in a “flight to quality”, life insurance company annuities remain one of the safest havens available. Not a single issuer of settlement annuities has been linked to any of the dire news we have been seeing of late.

How can that be you may ask. What about AIG? We taxpayers now own 80% of that company; surely an AIG-backed annuity should be of concern. Nope. And no less an authority than the Insurance Commissioner of the State of New York is on record as having said so. Ditto the National Association of Insurance Commissioners. What do they know that this father and mediator do not?

Simple: they know the difference between a real, live, state-regulated insurance company and every other kind of company. They know that non-insurance corporations may own insurance companies but they are not free to do whatever they want with them. Most pertinent to the AIG situation, they know that, while the parent holding company may need money, they are not allowed to take any out of their insurance company subsidiaries without permission of the state regulator. Given the situation so far as we know it, that is not likely to happen. All structured settlements backed by AIG life insurance companies are protected in this manner.

What is it, exactly, that makes life insurance products “safe”? The answer is this: a blend of time-tested risk spreading and risk managing strategies combined with robust state laws that enable state regulators to continuously evaluate the soundness of a company’s operations and empower them to force change upon that company (even to the point of taking it over) should problems develop. When you understand the layers of protection in place, you will understand why current events really don’t affect structured settlements much.

True life-insurance-company-issued annuities offer five fundamental levels of protection:

1. The risk they underwrite is highly predictable. Life insurance companies take on one risk and one risk only: life expectancy. Life expectancy tables just don’t change very much. Life insurance companies have the ability to spread this risk over tens of thousands of “measuring lives”, thus making the timing of future claims a low risk proposition indeed.

2. For every promise they make, state laws require them to set money aside in a special account called a “reserve”. That money is available only for the purpose of meeting policyholder obligations and may not be used by the company for anything else.

3. The state regulates how these reserves are invested, controlling not only what kind of investments they may be invested in, but also how those investments are performing. If the investments do poorly, the state can require the company to alter its investment strategy, force it to add more money to the reserve, or both. Companies must report the status of their reserves annually and are subject to outside audit at the regulators’ discretion.

4. Over and above this “reserve”, states further require that a company have on hand an added cushion of money to cover unforeseen events. This extra money is called “surplus” capital, because it represents more than is necessary to pay future claims. According to the American Council of Life Insurers (ACLI), to be considered “healthy”, assets must equal two and a half times liabilities, not counting the reserve. The ACLI further reported that a recent survey of their members showed this factor to be over four times the recommended number.

5. Lastly, if the worst of the worst happens - assets are insufficient to meet liabilities, all 50 states have “guaranty fund associations” to further secure obligations to policyholders. Set up to work in the manner of FDIC (but not federally run) and subject to certain dollar limitations, state guaranty funds exist to collect money from all the other companies doing business in the state to make up for any shortfall caused by one.

In the end, when Matthew’s father settled down and learned what protections were in place to secure his son’s payment, he came to realize that cancelling the structure would only impair, not improve his son’s financial security. He agreed that the structured settlement was, in fact, the best decision. We have a call in to the mediator…

In the end, money-stuffed mattresses are too lumpy. You’ll sleep far better knowing that your structured settlement is backed by a state-regulated insurance company. Need help conveying this information to any concerned parties? Call Frank C. Kilcoyne, CSSC at 800-544-5533, I am here to help.

“Solvency Requirements and Regulatory Oversight of the Life Insurance Industry”, Wayne A. Mehlman, American Council of Life Insurers, January 2008, Austin, Texas