Will we see more income equality?

Economic data should show, if it isn't already, that the ridiculously rich have gotten considerably poorer in the Great Recession. The super wealthy have not been immune to the collapse in asset prices.

Perhaps the broadest question is what a hit to the wealthy would mean for the middle class and the poor. The best-known data on the rich comes from an analysis of Internal Revenue Service returns by Thomas Piketty and Emmanuel Saez, two economists. Their work shows that in the late 1970s, the cutoff to qualify for the highest-earning one ten-thousandth of households was roughly $2 million, in inflation-adjusted, pretax terms. By 2007, it had jumped to $11.5 million.

The gains for the merely affluent were also big, if not quite huge. The cutoff to be in the top 1 percent doubled since the late 1970s, to roughly $400,000.

By contrast, pay at the median — which was about $50,000 in 2007 — rose less than 20 percent, Census data shows. Near the bottom of the income distribution, the increase was about 12 percent.

Some economists say they believe that the contrasting trends are unrelated. If anything, these economists say, any problems the wealthy have will trickle down, in the form of less charitable giving and less consumer spending. Over the last century, the worst years for the rich were the early 1930s, the heart of the Great Depression.

Other economists say the recent explosion of incomes at the top did hurt everyone else, by concentrating economic and political power among a relatively small group.

The whole article is an interesting read. It brings forward (data) points such as:

• The Mei-Moses index, which tracks art prices, has fallen 32% in the last 6 months
• Income distribution was relatively flat in the U.S. in the 1950s and 1960s
• For the super-rich to return to their old levels of wealth quickly would likely require another asset bubble
• Incomes of the wealthiest Americans rose the most during the stock market bull markets
• "Since 1980, tax rates on the affluent have fallen more than rates on any other group"
  

The article also weaves the tale of John McAffee, of McAffee anti-virus software fame, into the overall article. So if you're interested in what's happened to him, now you can find out.

What about the recession's effect on the mass affluent? Well, the original article authors did a follow-up blog post responding to a comment one of the orignla article's readers asked. Their argument is that the upper middle class will fare relatively better than other income groups, and bring up a better unemployment rate for the managerial and professional class and favorable tax policy as supporting points.

Let's not forget about Social Security

Allan Sloan has done another first-rate job trying to focus Americans' attentions on the cluster that is Social Security. He's cut through all the tripe that we keep hearing from our leaders and pundits that says Social Security is fine for another 20 or 30 years and even then it will still be able to to pay 80% of benefits. Do yourself a favor and take 10 or 15 minutes to read the whole story. I'll give you the money 'grafs.

Just last year Social Security was projecting a cash surplus of $87 billion this year and $88 billion next year. These were to be the peak cash-generating years, followed by a cash-flow decline, followed by cash outlays exceeding inflows starting in 2017.

But in this year's Social Security trustees report, the cash flow projections for 2009 and 2010 have shrunk by almost 80%, to $19 billion and $18 billion, respectively. How did $138 billion of projected cash go missing in just one year? Stephen Goss, Social Security's chief actuary, says the major reason is that the recession has cost millions of jobs, reducing Social Security's tax income below projections.

But $18 billion is still a surplus. Why do I say Social Security could go cash-negative this year? Because unemployment is far worse than Social Security projected. It assumed that unemployment would rise gradually this year and peak at 9% in 2010. Now, of course, the rate is 9.5% and rising -- and we're still in 2009.

Sloan does more than call attention to the issues. He offers honest to goodness thoughtful (and dare I say non-partisan) solutions. If we don't start paying attention to these generational accounting problems, we will be on our own and have to suffer tax increases.

Luxury homes at auction

Homes that were valued in the multi-million dollar range just a few years ago being auctioned off for an order of magnitude less in some cases. Bankruptcy is sometimes the culprit behind the auction.

Mr. Warner, 61, bought his house and an adjacent property that once had a trailer park on Little Torch Key, north of Key West, in 1993. It was appraised at nearly $14 million just two years ago. But after losing a large amount of money, he liquidated his construction business in Elkhart, Ind. Last year, another company he owned, Lucky’s Landing, which essentially owned his Florida real estate, filed for bankruptcy protection and its assets came under court oversight.

When no buyer emerged at the listing price of $5.9 million, Mr. Warner asked the United States Bankruptcy Court in Miami to approve the property’s sale at auction. He had a lot riding on the request. To avoid personal bankruptcy, he said, the sale had to generate more than $3 million, roughly the remaining amount of the mortgages.

[...]

Stacy Kirk, who together with her mother co-founded Grand Estates Auction Company in 1999 to handle multimillion-dollar homes exclusively, said her business had grown to 30 homes last year, from 20 homes sold in 2005. “We have been receiving more inquiries from homeowners in the $1.5 million and up price range,” she said. “And we are talking to banks for the first time about whether we can help sell similarly priced homes that are headed for foreclosure.”

'Creating an anchor' investing strategy

Here's an investing strategy for emerging markets that claims it will generate 75% of a 'fully invested' strategy, but with half the volatility.

Emerging markets investors worried about a pullback can do what Bob Phillips, a managing partner at Spectrum Management Group in Indianapolis, calls "creating an anchor." That means taking 50% of the money you've earmarked for emerging markets and putting it into cash. The other half goes into an emerging-market index fund or exchange-traded fund. Every month the allocation should be rebalanced back to a 50-50 split. Over time, Phillips says, that strategy has produced 75% of the returns with half the volatility.

Read the full article for ideas on an alternative to the 50% cash portion of the allocation.

I did a quick search on 'creating an anchor investment strategy', '50 50 investment plan', '50-50 reallocation' and a few other terms. Unfortunately, I couldn't find any other published data on this strategy.

The end of strong U.S. GDP growth?

Americans, especially those Boomers, are spending less. That's bad news for an economy that is over two thirds driven by consumer spending.

When 79 million people—nearly a third of Americans—start spending less and saving more, you know it won't be pretty. According to consulting firm McKinsey, boomers' conversion to thrift could stifle the economy's hoped-for rebound and knock U.S. growth down from the 3.2% it has averaged since 1965 to 2.4% over the next 30 years. "We would have gotten here in 5 or 10 years as boomers retire, but we pushed it up," says Michael Sinoway, managing director of consulting firm AlixPartners.

3.2% growth down to 2.4% growth is a decline of .8 percentage points. Multiply that by the U.S.'s 2008 GDP of $14.3 trillion. That's over $114 billion less in GDP per year, which will compound over the 30 year projection. We'll need to find other ways to grow our economy.

Startup Investing

It's not easy to invest in startups, at least not the ones that you would like to invest in (i.e., non-shady ones with a chance of generating big returns). Startup investing is for the stouthearted. But even if an individual has the stomach, she might find her money not wanted due to competition from larger investors. BusinessWeek offered some tips to get in on early stage companies, if you're so inclined.

1. Do you qualify as an "accredited investor" under the current SEC definition?

2. Do you have reliable information about the company's finances?

3. Can you gain entrée through personal connections to the company, its existing investors, or its board? Do you work in the same field as the company, which could make you a more attractive investor?

4. Have current shareholders listed to sell on one of the secondary market platforms?

One of the hurdles for a mass affluent investor to overcome is the requirement to be an accredited investor.

a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase;

a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year;

The accredited investor rule comes straight from the Securities Act of 1933. From what I can tell, the dollar amounts haven't been adjusted since 1982.

One of the illiquid securities exchanges mentioned in the article, SharesPost, promotes having access to sellers of Facebook shares. You don't necessarily have to be a Russian billionaire to buy into the Facebook party.

Prepare for a major tax increase

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Your taxes are going to go up. Not just taxes on the rich, or the mass affluent, or the solidly middle class. Taxes for everyone will increase, since we're going down the road of needing a value added tax (VAT) in the form of a national sales tax to get us out of this massive national debt hole that we've dug ourselves into.

The bill is far too big for only the rich to pick up. There aren't enough of them. America will have to lean on citizens far below the $250,000 income threshold: nurses, electricians, secretaries, and factory workers. Within a decade the average household that pays income tax will owe the equivalent of $155,000 in federal debt, about $90,000 more than last year. What the Obama administration isn't telling Americans is that the only practical solution is a giant tax increase aimed squarely at the middle class. The alternative, big cuts in spending, aren't part of the President's agenda. To keep the debt from wrecking the economy, the U.S. would need to raise annual federal income taxes an average of $11,000 in 2019 for all families that pay them, an increase of about 55%. "The revenues needed are far too big to raise from high earners," says Alan Auerbach, an economist at the University of California at Berkeley. "The government will have to go where the money is, to the middle class." The most likely levy: a European-style value-added tax (VAT) that would substantially raise the price of everything from autos to restaurant meals.

(Added emphasis is mine.)

Anyone who tells you that our national debt won't be a huge problem is bs'ing you. Sure, politicians love to talk about how they'll bring down the national debt by eliminating earmarks, cutting discretionary spending, blah, blah, blah. Budget cuts ain't happening, unless China stops buying all those Treasuries which would negate our ability to do deficit spending. And then there is the required spending on entitlements: Social Security, Medicare and Medicaid. Do a search on 'generational accounting' to see what kind of financial damage entitlements are going to do to our children and grandchildren. Except we're the children and grandchildren and the problems are upon us already. Don't get me wrong, I think entitlements are a great thing and keep people out of poverty. However, we as a nation never figured out how to pay for them.

It can't go on forever, and it won't. What will shock America into action is the prospect of fiscal collapse, which will grow more vivid each year. In 2008 federal borrowing accounted for 41% of GDP, about the postwar average. By 2019 the burden will double to 82% by the CBO's reckoning, reaching $17.3 trillion, nearly triple last year's level. By that point $1 of every six the U.S. spends will go to interest, compared with one in 12 last year. The U.S. trajectory points to the area that medieval maps labeled "Here Lie Dragons." After 2019 the debt rises with no ceiling in sight, according to all major forecasts, driven by the growth of interest and entitlements. The Government Accountability Office estimates that if current policies continue, interest will absorb 30% of all revenues by 2040 and entitlements will consume the rest, leaving nothing for defense, education, or veterans' benefits.

National bankruptcies

The other option is national bankruptcy. It's not an option, obviously, and a national U.S. bankruptcy will never happen. But for kicks, I did some research on what happens when nations go bankrupt.

A couple of examples I found (thanks Wikipedia!) are defaults on debt incurred by previous national governments, such as post-Revolutionary France defaulting on the debts of Bourbon France and Soviet Russia defaulting on debts of Czarist Russia. There's also an example of a default of Danish bonds in 1850, and another Danish bankruptcy in 1813. Germany has gone bankrupt twice after the World Wars. More recent examples are Russia in 1998, Argentina in 2001-2002, and Iceland in 2008. A national bankruptcy may lead to massive inflation, as the country prints money to pay its debts. Gold could be a hedge against this situation.

Looking at the last Argentina bankruptcy:

Once the Argentine businessmen had transferred their dollars abroad, the second phase of the collapse began. The Argentine government froze all bank accounts, capping the maximum amount an accountholder could withdraw at only $250 (€198) a week. Small investors, those who had left their money in the banks, were the hardest hit. Tens of thousands of desperate citizens stormed the banks, and many spent nights sleeping in front of the automated teller machines.

The last phase of the downturn began in the Buenos Aires suburbs. After consumption had dropped by 60 percent, young men began looting supermarkets. In December 2001, 40,000 people gathered on Plaza de Mayo in front of the Casa Rosada, the presidential palace. There, they banged pots and pans together day and night, until an unnerved President Fernando de la Rúa fled by helicopter.

[...]

Nevertheless, the country recovered from the crash with astonishing speed. In recent years, the Argentine economy has grown at impressive rates of 7 to 9 percent.

Again, it's inconceivable that the U.S. will go bankrupt. That's just not going to happen. But, I do see a large tax increase and increased inflation. The hardest thing to swallow about the tax increase is that since it may be a national sales tax, there's no way to avoid the taxes later by using vehicles like a Roth IRA or Roth 401(k).

College endowments take a big hit

As expected, college endowments had a bad (fiscal) year (most just ended June 30). Interestingly, it was the smaller college endowments that did better (or less bad). (free WSJ Digg link) The median decline for small endowments was 16%, for medium was 20% and for large was 25-30%. The blame for the underperformance in 2008 is laid at the feet of the alternative investments that the big endowments have favored.

The so-called Yale approach espoused that endowments -- as long-term investors unconcerned about redemptions or short-term market fluctuations -- were the ideal candidates for alternatives. Yet in 2008, many of these assets became hard to sell, forcing schools to either dump their best-performing securities or funds, or borrow money, to meet their obligations.

Ivy League schools, more reliant on investment gains to fund daily operations, also suffered more from these drops. The average college relies on its endowment for 5% of its operating revenue, while at Ivy League schools the number ranges from 25% to 45%. That caused the type of asset-liability mismatch that has long bedeviled financial firms.

Yale does not plan to change its investment philosphy because of one bad year. And prior to 2008, for 20 years Yale averaged a 15.9% return on its endowment.

Leaving your financial planner

If you're thinking of replacing your financial planner with a new one because of terrible performance in this market, you're not alone. (Or maybe you'll consider doing it yourself.)

A recent survey by consulting firm Oliver Wyman found that the number of affluent investors looking to switch advisers has tripled in one year. According to Spectrem Group, a scant 36% of millionaires think their advisers performed well during the market turmoil of the past year or so.

Not so fast. This is a terrible market for just about everyone. Will you do better with a different planner?

"If you fire Fred and hire George, who's to say that George isn't even worse than Fred?" asks Jack Waymire, co-founder of the Paladin Registry, which matches investors with advisers in their communities. "They might just be trying to win your business, so there's a natural bias there. And if you ask for a sample portfolio, they're never going to show you a bad one. So you'll never really know what they've produced for an average client."

The story recommends getting an agreement from the new advisor that you're considering will evaluate your situation for a fixed fee with no commitment that you will hire him or her.

The casino business

Have you ever wondered what the largest gaming companies and gaming geographic markets are? Probably not, but now you know. I was surprised to see Detroit that high in the rankings. I didn't think casino gambling was that big there.

Corner the frozen concentrated orange juice market

Commodities trading is so 1983. The game these days is farmland. If you believe this, you're in good company along with George Soros, a Rothschild and Jim Rogers.

The fundamentals remain in place for a long-term boom in the prices of everything ag-related. The simplest metric to consider is the amount of farmland per person worldwide: In 1960 there were 1.1 acres of arable farmland per capita globally, according to data from the United Nations. By 2000 that had fallen to 0.6 acre (see chart above, "Precious Acres"). And over the next 40 years the population of the world is projected to grow from 6 billion to 9 billion.

Other forces conspiring to push up the cost of farmland is water scarcity, improving diets in developing countries and climate change, which will raise sea levels and cause more droughts.

Direct farmland investment seems quite difficult. Who among us has the time or skills to understand agriculture and negotiate deals? It's mostly large funds buying up the farmland, and these funds have too high minimum investments for the mass affluent. Fortunately, there is a company called Chess Ag Full Harvest Partners that is trying to become the first farmland-only REIT (Real Estate Investment Trust) in the United States. It's run by a former Nebraskan who was managing a grain elevator at 14 and did stints as a commodities trader and a hedge fund executive. It also seeks to avoid country risk.

her strategy is strictly focused on the U.S. "Yeah, land might be cheap and plentiful in Russia, but if the price of wheat goes up, is your deed going to be honored?" she says by way of explanation. Rather than buy farms in what she calls the "Prada handbag" states of Illinois and Iowa, where land comes at premium prices, she concentrates on less-well-known farming areas. In addition to her home base in Clarksdale, she has an office in South Dakota, and so far the fund has bought land in Arkansas, Kansas, Missouri, and Texas as well as Mississippi.

More simple estate planning

A Fortune article reinforces the basics of estate planning; gifts, life insurance and trusts.

Gifts

Gifts of $13,000 or less a year to an individual aren't taxable.

Life Insurance

Look into using a life-insurance trust as the beneficiary of your life insurance policy. Another (maybe somewhat depressing) suggestion is to gift money to your children to use to take a life insurance policy out on you.

Trusts

Grantor-retained annuity trusts (GRATs) are seeing a surge in popularity due to depressed asset prices.

Hedge fund fees take a haircut

The sacrosanct "2 and 20" fee system at hedge funds may be coming to an end. Hedge fund investors are tired of paying big fees for poor performance.

In recent months some of the biggest institutional investors, including the $175 billion California Public Employees' Retirement System, have gathered at closed-door meetings in New York and Toronto to talk about ways they might flex their newfound muscle. A number of public pensions, such as the $16 billion Utah Retirement System, have pushed firms publicly to ease terms. "This is top of mind for investors," says John-Austin Saviano at Cambridge Associates, a consultant to major investors.

In this market, other investment options are available to the hedge fund investors that haven't been there before.

Private equity and hedge fund managers would prefer the status quo but fear losing big investors, who finally have other options. Instead of plowing money into new funds, for example, investors can buy into an existing portfolio cheaply on the secondary market: Some private equity funds are trading at a 50% discount. There's also the worry that the biggest pension funds will open their own hedge fund and private equity operations. That's making it difficult for money managers to get more assets without giving in to investors. Says one private equity manager: The fund-raising environment is "brutal, just brutal."

While this news affects few individual investors directly, it affects many individuals indirectly whose pension funds might be investing in hedge funds. No longer will their pension funds be paying fees for bad performance and having one fifth of the gains kept by the hedge fund manager.

Taxes originally designed for the wealthy now hit the mass affluent

Money Magazine has a short article on taxes that used to exclusively hit the wealthy, but, because of their not being adjusted for inflation, now hit lower income earners.

• Social Security benefits get taxed if you have more than $25,000 in income, the same as 1984
  

• The Alternative Minimum Tax (AMT) that now affects over 4 million taxpayers, up from less than 20,000 in 1970

• The capital-loss carry-forward amount hasn't been adjusted for inflation since 1978, and still stands at $3,000

I won't do any editorializing.

The death of conspicuous consumption hits the rich

Even the very rich are giving up extravagance (free WSJ Digg link).

Richard and Amanda Peacock spent five years building their dream home, a 10,000-square-foot, orange mansion overlooking the ocean here. They filled it with leopard-skin chairs, pinball machines, antique Coca-Cola signs and six sports cars. It had a room full of 100 hunting trophies -- including a hyena and the head of an elephant -- and an aviary out back housing eight rare parrots.

On a recent Saturday, they held a one-day auction to try to sell it all.

[...]

Mr. Peacock's auction marked a new moment in the fall of the latest Gilded Age. Fire-sale auctions of mansions, yachts, sports cars and other trappings of wealth have become increasingly common as the rich become less rich. But Mr. Peacock is in the vanguard in attempting to downsize in just one day. The event was less an auction than a lifestyle liquidation, a clearance sale on a decade's worth of conspicuous consumption.

He has plenty of company among the once-wealthy. Half of all millionaires have lost 30% or more of their fortunes during the financial crisis, according to a recent survey from Chicago-based Spectrem Group. Whether unable to pay their bills or loath to appear lavish at a time of national thrift, many millionaires and billionaires are unloading their baubles. In a twist on the estate sales of deceased celebrities, "living estate sales" have become increasingly popular.

John Bogle on fixing our retirement system

I'm not a Boglehead, but I vacillate between thinking that no one can beat the market (and so you should put all your money in index funds) and thinking that there are star fund managers who of course can beat the market (and so you should invest in actively managed funds). It all depends on which of my funds is doing better at that particular time, I guess. I have taken an interest in Jack Bogle's ideas to fix our retirement system (I leave it up to the reader to decide if the system is broken and needs fixing).

The financial system, he charges, is too far skewed toward Wall Street and money management firms. At the same time, he says, individual investors have far too much freedom to make ruinous decisions with their retirement accounts.

So how would he fix things? Bogle proposes the creation of a federal retirement board to simplify and clarify the retirement-savings process. The board would oversee a new kind of defined-contribution account to replace the salad bowl of options—401(k), IRA, Roth IRA, Roth 401(k), 403(b)—that currently confront and confound investors. It would also monitor savers' investment choices to help them determine just how much risk they can tolerate and would emphasize low-fee mutual funds over pricier ones. Just as important, Bogle is urging Washington to require retirement plan providers—and all money managers, for that matter—to meet basic client protection standards. He wants fuller and clearer disclosures of all potential conflicts of interest and any other information that might affect investing decisions.

What I like about this: I agree that fees are too high and some of our retirement system is designed to enrich the fund managers. There is way too little accountability for poor performance from the fund managers.

What I don't like about this: I may be reading this wrong, but it seems like this proposed federal board would determine what we could invest our retirement funds in. I worry that the choices would be so conservative that it would be impossible to get the returns needed for a nice retirement. I don't mind someone overseeing investment suitability and pointing out investment risks, but it should be up to the individual to say if he or she wants to take those risks to get bigger rewards.

Sadly, the article says that Mr. Bogle has failing health. More of his investing philosophies can be found here.

Financial crisis numbers

I was reading a story about how innovation will lead us out of the current financial crisis (the online version has some differences from the print version). What really interested me was not the praise given to innovation, which is the central point of the article, but some of the facts and figures the author gave about the cause of the crisis.

He lays the blame for the crisis not on any one group, but on just about everyone involved; American consumers, the U.S. government, politicians, banks, rating agencies and regulators. And he says that allowing Lehman Brothers to collapse is what really made things awful. But on to the numbers.

From 1930 to 1997, U.S. house prices grew by .7% annually. From 1998 to 2006, they rose at an 8% clip.

[...]

driving mortgage equity withdrawals to over 10% of disposable income versus 3% a decade earlier and the equity content of the U.S. housing stock down from nearly 70% in 1965 to 43% - the lowest level since records have been kept.

[...]

These lower-quality mortgages grew from less than 10% to 40% of originations; interest only or negative amortization loans that didn't require near-term principal repayment were introduced and grew to around 25% of originations; and over 75% of these mortgages were not held by the lenders but rather were packaged into securities and sold to others.

[...]

Consumer balance sheets swelled with indebtedness as debt service payments reached nearly 15% of disposable income - as in the 1930s.

[...]

we experienced after 2002 the first economic recovery since the war in which real median incomes went down.

[...]

The decline in the prices of stocks and values of homes robbed American households of nearly $11 trillion in net worth - which equals the combined output of Germany, Japan and the U.K. - and perhaps $30 trillion globally. Since consumers usually spend about 5% of their net worth a year, the negative "wealth effect" likely caused them to reduce spending by about $550 billion domestically and perhaps $1.5 trillion globally.

Market graphs

Some telling graphs accompany the story.

Wicked plunge in Americans' net worths

(Welcome to those visiting from the Carnival of Personal Finance #195. Read more about the Carnival of Personal Finance. Subscribe to this site.)

Recently released Fed data on consumer finances paints a picture of how bad things are. In the Fed's report, their assumption of the average drop in net worth from beginning of 2008 to October 2008 is 22.7% (see them on page 12 of the PDF), and their assumption of the median drop in net worth is 17.8%. Since the median is less than the average, it is the wealthier families that saw greater drops in net worth. (The BusinessWeek slide show that I linked to seems to be using the adjusted net worth on page 12, since it quotes about a 13% drop in median net worth.)

If you look at the BW slide show, you can see that only the top decile of households had less than 40% of their entire net worths tied to their primary homes. Housing price declines would tend to disproportionately affect the less well off.

Some other nuggets I've pulled out (keep in mind these, unlike the net worth numbers above, only cover up to the end of 2007, before the financial crisis really hit):

• Capital gains went from 3.2% of income (across all families) in 2004 to 6.7% in 2007. Wages decreased from 69.7% of income in 2004 to 64.5% in 2007.
• 'Education' given as an answer to the 'reason for saving' question decreased from 11.6% in 2004 to 8.4% in 2007. 'Purchases' increased as an answer from 7.7% in 2004 to 10.0% in 2007.
• 59.7% of families use the Internet for financial information or financial services
• Vehicles are the most commonly held nonfinancial asset. From 2004 to 2007, the share of families that owned some type of vehicle rose 0.7 percentage point, to 87.0 percent.

One thing that our government does well is provide economic data after the fact. Economics isn't everyone's cup of tea, but if you're an arm chair economist, read this one.

Protecting life insurance

The last issue of Fortune ran a blurb on what happens to your life insurance policy if your insurer goes bankrupt. (Unfortunately, the story is not available online.) In the event of an insurer's bankruptcy, the guaranty association for the state in which the insurer is located takes over the failed insurer and either pays the claims or transfers policies to a solvent insurer.

Since insurance is regulated by the states, the amount insured varies, but the story states most benefits are capped at $300,000. The National Organization of Life and Health Insurance Guaranty Associations has more information. As an example, in 2004, when a Pennsylvania insurer went bankrupt, the state guaranty association transferred most policies to stable Pennsylvania insurers.

The story also notes that in the case of AIG, it's the parent company and not the life insurance subsidiary that is experiencing problems. It might be a good idea to check on your insurers corporate structure to know what your insolvency risk could be.