AIG Riding High Eight Years After Bailout

By Cyril Tuohy

Earlier this year, American International Group surged into the top spot as the No. 1 seller of fixed and variable annuities in the United States for two consecutive quarters.

Come again, now?

Wasn’t it just a few months ago that big investors such as Carl Icahn were calling for the company’s break up?

Wasn’t it a few years ago that the company was on the verge of declaring bankruptcy following huge bets on the mortgage market – bets that went horribly wrong and required taxpayers to come to the company’s rescue?

If anyone had predicted back in 2008 that AIG was destined to become the No. 1 seller of life and annuity products in the U.S. in the first half of 2016, few industry analysts and commentators would have taken them seriously.

AIG may not yet be operating at the level senior managers or big investors expect, but there’s no question that AIG has come a long way from where it was on Sept. 15, 2008.

That was the day AIG almost collapsed after Standard & Poor’s cut the company’s credit rating because AIG could no longer meet collateral requirements of $14.5 billion.

The next day, AIG was rescued by taxpayers when the Federal Reserve Board promised the company $85 billion in exchange for a 79.9 percent stake in the company.

Since then, the massive company surprised many observers who had to put away their eulogies and recognize that AIG managed to bail out the ship and turn it around simultaneously.

In the first half of the year, AIG finished in the No. 1 spot with $9.78 billion worth of individual fixed and variable annuity sales, according to data from LIMRA.

The company led in individual annuity sales during the first quarter, with $5.1 billion in sales of fixed and variable annuities, and in the second quarter with $4.6 billion in sales of fixed and variable annuities, LIMRA data show.

Jana Greer, president and CEO of individual and group retirement said in a statement earlier this year that the results were a reflection of the company’s strength and diversity of its retirement product line.

Markets have reacted with approval as AIG stock closed at $58.67 Friday, more than double where it was five years ago.

Consistent Annuity Sales Performer

Despite the turmoil over the past eight years, the company hasn’t fallen out of a top-six position in individual annuity sales since 2008 at least, when the company was the No. 2 seller of fixed and variable annuities.

That year, AIG sold $19.2 billion worth of individual annuities, second only to MetLife with $19.9 billion, LIMRA data show. Last year, AIG sold $19.9 billion worth of individual annuities, second only to Jackson National, and MetLife sold $10.1 billion, barely half as much as AIG.

In AIG’s Life & Retirement operating subsidiaries, net written premiums in individual annuities last year rose 61.5 percent to $14.7 billion over 2014, and net written premiums in the company’s group annuities rose 26.9 percent to $6.4 billion over the same period, according to a recent A.M. Best review.

If any unease about AIG’s future existed shortly after the company’s financial meltdown eight years ago this week – remember this was a time when Lehman Brothers ceased to exist and Merrill Lynch’s “thundering herd” of advisors were corralled into Bank of America’s vast stockade – there’s little trace of it.

AIG has Robert H. Benmosche to thank for it. In 2009, Benmosche, the former chairman and CEO of MetLife, was brought out of quiet retirement in Croatia and appointed by AIG’s board of directors and the U.S. Treasury Department to lead AIG out of near-ruin.

At the end of 2008, AIG had reported a net loss of $99.3 billion compared with a profit the previous year. Employee morale was at an all-time low. Congress was livid.

But as financial markets gradually improved, Benmoshe, who oversaw MetLife’s demutualization, sold billions worth of AIG businesses deemed noncore to the company’s bedrock – and mostly financially sound – U.S. insurance operations.

Included in the sale were a U.S. consumer lending unit, the pan-Asian life insurer AIA, the international life insurer ALICO, the aircraft leasing business International Lease Finance, an Israeli mortgage insurer and even a Russian bank.

In 2011, two years after Benmosche joined the company, AIG reported net income of $17.8 billion, and by the time the U.S. Treasury had sold its remaining shares in AIG, taxpayers had made a profit of $22.7 billion on the more than $182.3 billion invested in AIG’s bailout.

Benmosche eventually stepped down early from AIG in September 2014 citing health reasons. In February 2015, he succumbed to lung cancer at the age of 70.

With the stern, frugal hand of Peter D. Hancock, who was appointed president and CEO two years ago, AIG has continued down the same path.

After shedding unwanted business units and tweaking the balance sheet, the New York-based company boasts improving loss ratios and a lower risk profile than its competitors MetLife and Prudential Financial, according to company presentations.

“We’ve executed more quickly and smoothly than expected and our confidence in reaching our 2017 financial targets is high as our earnings become more sustainable,” said Hancock, in a conference call with analysts last month.

Changing Channels

AIG declined to make executives available for this story, but the past two years have been a time of streamlining, expense control and lower risk exposures, according to company presentations and filings.

In its consumer insurance division, where life and annuity products are housed, AIG said it intends to expand further into the lucrative high net worth and services segment where AIG already had a significant presence.

To cut expenses, the company said it would reduce its personal insurance organization's footprint from 62 countries last year to 15 countries by next year for individual products.

The cuts are expected to contribute to an overall company goal of shaving $1.6 billion in operating expenses, about 14 percent of 2015 operating expenses, and the company has made clear it is prepared to sacrifice any business unit that doesn’t meet the economic or customer-service thresholds required of it.

In May, the company completed the sale of its broker-dealer AIG Advisor Group to Lightyear Capital and PSP investments.

In addition, the company will reinsure life insurance portfolios and invest in “most attractive post-DOL (Department of Labor) opportunities across the market,” according to company executives in an August investor presentation.

In the wake of the company’s most recent restructuring, AIG seeks to be nimbler than it has ever been. “Size is not an end in itself,” Hancock wrote in a commentary piece published on CNBC's website in February.

Since 2008, the company has sold more than 50 businesses and other assets and axed 300 of the company’s top 1,400 positions.

Hancock and his lieutenants say they are ready in the face of their first major regulatory test as the DOL’s new fiduciary rule redraws the map on the sale and distribution of life insurance, annuities and mutual funds into group and individual retirement accounts.

Siding with Third-Party Independent Distribution

Nearly 100 percent of AIG’s variable annuity sales are expected to come from third-party independent distribution and as of June 30, independent distribution accounted for more than 80 percent of U.S. life sales, said Kevin T. Hogan, executive vice president and CEO of AIG’s consumer insurance unit.

Only advisors with AIG’s Variable Annuity Life Insurance Co., or VALIC, remain as a propriety distribution channel for group retirement plan sponsors and participants, along with the company’s direct-to-consumer channel AIG Direct, he said in a conference call last month.

Increasing the company’s focus on independent distribution cuts fixed costs and enables AIG to “change emphasis in product sales according to opportunity,” Hogan also told analysts. To be sure, the company’s distribution tentacles were and still are the envy of the industry.

At any time, the company can develop life and annuity products tailored to a model that favored career and independent agents, independent and regional broker-dealers, wirehouses, banks, independent marketing organizations, investment advisors, insurance agents and the direct-to-consumer channels.

Beyond that, AIG maintains top positions in bank fixed annuity sales, nonprofit employers, CPAs, trust and estate attorneys and worksite and direct marketing deals, according to A.M. Best.

Industry analyst and annuity expert Sheryl J. Moore is impressed with how the mammoth company managed to improve its many facets of operation.

“They are a company that operates in multiple distribution channels and are successful in all of them,” said Moore, who as president of Moore Market Intelligence tracks the fixed indexed annuity market. "It’s unusual to see an insurer perform so consistently across distribution channels and hard to pull off.”

Product Development

In the past, AIG’s distribution prowess masked what some described as sometimes stale or out-of-date product lines and the company occasionally sat on products for years, even if nobody paid much attention to them.

But Hancock and his team have signaled that those days, too, are long gone as the reconstruction of AIG proceeds apace.

Hancock and his new managers are in the midst of recasting AIG into a more modular organization in which business units are charged with “end-to-end responsibility and accountability.”

In conjunction with managers honing the company’s focus, the product development machine has also kicked into higher gear.

AIG Life & Retirement’s Value+ indexed universal life insurance product comes with “liquidity features that I’ve never seen in a life insurance product before," Moore said. These features allow policyholders to take money out of the policy without reducing the death benefit, she added.

Reacting deftly to the changing marketplace, the company recently rolled out a new suite of what the company calls “quality of life insurance” products with living benefit riders that policyholders can use while still alive.

In fact, AIG has been a product development machine for decades, particularly in the company’s commercial property-casualty division, and AIG is used to releasing a lot of competitive products.

“They’ve been a product development machine since the reorganization, they don’t sit on their haunches,” said Moore, who also praised the company’s customer service especially in the bank and broker-dealer distribution channels.

For decades since its founding in 1919, AIG’s aggressive pursuit into new markets has by and large worked in the insurance giant’s favor, even if it almost killed the company nearly a decade ago.

That was when a rogue unit in London, operating beyond the scope of U.S. regulators, developed insurance products to cover securities that bundled mortgage loans that could never be repaid, but on which AIG earned massive fees.

The return to the product development machine for which the company was known has helped the company climb back to the top of the annuity league tables, and for ambitious managers, AIG’s aggressive and constant reinvention is about as exciting, challenging and lucrative as it gets.

In life and annuity markets, AIG is stronger than it has been in the past 12 or 15 years, Moore said.

Can AIG Do Better?

The extended period of low interest rates has made life and annuity subsidiaries less attractive to analysts and investors.

Yet to expect AIG to shed its life and retirement unit right now seems a fool’s errand, even if the Wall Street rumor mill pointed in that direction late last year with major investors pushing for a company break up.

Hancock has successfully argued that maintaining the company’s diversified businesses in the property-casualty and life and retirement sectors makes the best sense right now given the credit rating and regulatory thresholds under which AIG operates.

Labeled a “systemically important financial institution,” or SIFI, by the federal government, AIG is worth more as a single company than the sum of its parts.

Splitting the company into three parts would negate the benefits of deferred tax assets, sever the company’s diverse earnings streams and erode efficiencies of scale, Hancock has argued. Activist investors have backed off calls to split the company and appear to agree.

For the moment, the liability profile of AIG’s Life and Retirement subsidiaries is well-balanced among spread-, fee-, and mortality-based products, A.M. Best notes in a mid-June rating report.

But Hancock knows the company still has a long way to go and management wants to return at least $25 billion of capital to shareholders over the next two years.

“We’re in the second quarter of an eight-quarter journey to return the company to a level of profitability which we feel is compelling,” Hancock said told analysts in last month's conference call.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].