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AIG's cash crisis stokes fear among advisers lead to higher costs, experts say By Darla Mercado |
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Financial
advisers could soon find themselves paying more for AIG's variable annuities.
American
International Group Inc.'s cash crisis, which rattled the global financial
system last week, will likely lead to the sale of the company's variable
annuities unit. If that happens, a new owner could ratchet up costs that
aren't contractually guaranteed, experts said. "At the end of the
day, and especially if the markets continue sliding, the costs and prices of
these very-long-dated guarantees will have to increase," Moshe A. Milevsky, an associate professor of finance at York
University in Toronto, wrote in an e-mail. Scott J. Witt,
founder of Witt Actuarial Services LLC in New Berlin, Wis., agrees. "When people
think of variable annuities, they think of traditional accumulation and that
everything is in a separate account," he said. "But riders are
handled with a company's general account, so those features are more impacted
by insolvency or the threat of it." Although the cost of
a rider is usually delineated in an insurer's sales and marketing material,
it isn't fixed and may go up under certain conditions. In other words, a guaranteed-lifetime-withdrawal
benefit may be marketed as costing 0.7% but could go up to 1.5%. "How those
elements are handled with the buying company is the thing to figure
out," Mr. Witt added. ROLE OF REGULATORS To
be sure, regulators will keep a close eye on how policyholders are affected
by the sale of AIG's variable annuity business, Steve Davis, partner at
Philadelphia-based Stradley Ronon
Stevens & Young LLP. "Nobody knows
what the new helmsmen might do with these companies, if anything, but in the
event of a sale or other change in control, there is a state statutory
framework to protect policyholders," he said. AIG sold $4.7
billion in variable annuities in the United States during the first six
months of the year, making it the ninth-largest seller during that period,
according to LIMRA International Inc. of Windsor, Conn. It also ranked as the
No. 1 seller of all U.S. individual annuities, posting $10.9 billion in sales
during the first half. After the New York-based
insurance juggernaut was brought to its knees early last week, seeking
capital to stave off falling credit ratings and collateral demands, the
Federal Reserve Bank of New York threw it an $85 billion lifeline late
Tuesday night. The money, a 24-month
term loan, bought AIG time to spin off assets and certain businesses to repay
the government. That move also gave the federal government ownership of 79.9%
of the company and led to the replacement of chief executive Robert Willumstad with Edward Liddy,
former CEO of Allstate Corp. of Northbrook, Ill. "My sense is that when
the dust settles, the 'new' management will start an orderly sale of the
non-core assets of AIG," Mr. Milevsky wrote.
"They will slim down to a transparent property and casualty company,
which is their bread and butter, and most powerful brand." SALES BLOCK Units
on the auction block likely will include the VA business, which includes AIG SunAmerica Life Assurance Co. of Los Angeles, and
Variable Annuity Life Insurance Co. of Houston. Possible bidders
include Manulife Financial Corp. of Toronto, which already owns John Hancock
Financial Services Inc. in Boston, according to a research note from analyst
Mario Mendonca of Genuity
Capital Markets in Toronto. Major insurers in China, Europe and Australia,
plus other domestic large-cap carriers could also be interested, according to
a note from Thomas Gallagher and Michael Zaremski,
New York-based analysts with Credit Suisse Group of Zurich, Switzerland. Hedge funds and
private-equity firms also may be ready to scavenge parts of AIG, observers
said. Rising costs are not
advisers' only concern involving the possible sale of AIG's VA business. Pasquale
J. Sacchetta, president of CFIG Wealth Management
of Westport, Conn., is worried that the company that acquires that business
also could tamper with investment allocations — if those allocations are not
contractually guaranteed. "If you use
certain riders, the company can become more conservative or more aggressive
because they want to recoup their money," he said. Other advisers
expressed concern about the quality of the company that buys AIG's variable
annuity business. The financial
strength of the purchasing entity, as well as the amount it pays for the
unit, will play a role in the strength behind the policies, Mr. Witt said. "All of that is
affected by the purchase price, and that will affect the way the buyer treats
the block of business," he added. The eventual owner of
the annuities business and how the business will be split still are unclear,
but the industry anticipates potential buyers to emerge soon. "The company
has a gun to its head in the form of a usurious loan at 8.5% over
Libor," said Sean Egan, founding principal at Egan-Jones Ratings Co. in
Haverford, Pa., referring to the London Interbank Offered Rate. "The
sooner they can pay it off or minimize future takedowns on the loan, the
better off they'll be." E-mail Darla Mercado
at dmercado@investmentnews.com. http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20080922/REG/309229957/1009/TOC |
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