Vol 10 No 8		September 2008

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AG Policy Status and Sales Following the Bailout

"It has been reported that AIG neared bankruptcy before intervention by American taxpayers on September 16. American General Life is a subsidiary of AIG. AG has put out the word that they are in good financial shape and doing business as usual. It is an interesting question whether the marketplace will let them."

I suspect that life insurance agents will move quickly to convince AG policyholders to replace their coverage with a safer alternative, resulting in hefty commissions for a successful switch. It is also quite unlikely that agents will be recommending AG for new coverage, drying up their sales. I will not recommend AG to clients for the time being, except in rare situations where they may have a substantial advantage. In addition, many policyholders will act on their own to cancel their policies or borrow the maximum cash values. Uninformed decisions, howver, should be avoided. A logical process should be used in considering options regarding AG life insurance policies.

The first concern clients have when hearing negative news about their life insurance company is "will it pay the death benefit?" Yes. I don't know of such a contrary result and have no concern that this will be a problem with AG. But there are more subtle issues that need to be considered in assessing AG as your life insurance company. Determining what type of AG policy will largely dictate the relevant issues.

Term - Most of AG term is for 10- and 20-year periods. The premiums are guaranteed for the period of time. AG has excellent rates, but there are many companies with similar rates, which is why recommending them for term insurance over another company is probably not going to be too popular due to negative perceptions. Why would an agent convince a buyer to buy an AG policy when they can buy one with similar cost, better financial strength ratings and no negative publicity? Regarding an existing AG term policy, let's consider John with a $1,000,000 20-year term policy purchased five years ago when he was 45. As a preferred risk five years ago, the annual premiums are $1,420. If John is in similar health his options are to continue the AG policy, replace it with a 15-year policy having annual premiums of $1,720, or switch to another 20-year term policy, extending his coverage for five years at an annual premium of $2,200. As noted the death claims will be paid by AG and the other companies. But a realistic reason to switch is John's conversion rights to permanent insurance when the term period is over. John may be more comfortable with the thought of having another company for that. I could support whatever John decides to do regarding this.

If John's health has deteriorated replacing the AG policy might carry an annual premium of $2,720, a $1,000 annual increase. Under this circumstance John is probably better off retaining the AG policy. (Note that when life insurance is replaced a new two year contestable and suicide period starts. If death occurs within two years many companies will investigate the claim to be sure there wasn't a material misrepresentation during the application process).

Universal Life (Market-Priced) - A market-priced UL needs to be distinguished from a static-priced UL. The latter has guaranteed premiums and death benefits, and low to zero cash values. They are like term insurance for life. In contrast, market-priced UL, the only ULs available until about eight years ago, have changing crediting rates and insurance costs, and this directly affects the premiums that change over time. Since adding static-priced ULs, AG hasn't sold many market-priced ULs, so most of market-priced ULs will be more than eight years old.

Bob has $1,000,000 AG market-priced UL purchased in 1998 at age 45. He received a preferred rating. The annual target premiums have been $11,500. His cash value is $105,000 with a surrender charge of $12,000, making the surrender value $93,000. Cecil, the agent that sold the policy, calls to recommend Bob immediately apply for a replacement UL due to AG's difficulties. This time around Cecil is pushing a static-priced UL. Bob is in the same good health. The new policy's guaranteed premiums with the transfer of the $93,000 are $7,000. This is probably something Bob should have looked at earlier since the static-priced ULs have low pricing. But remember Bob is giving up most of his liquidity in the form of cash values. Depending on what is more important to Bob, pure death benefits or access to cash values later will determine his best choice. I could support either decision.

Let's change this. Bob's health has deteriorated and can no longer qualify for preferred. The best offer is sub-standard Table 4 with a static-priced guaranteed premium of $12,000. In this case he is probably better off retaining his AG market-priced UL.

Static-Priced UL - Ted, 57, bought a $2,000,000 static-priced AG UL in 2003 as a standard risk. His guaranteed annual premiums are $36,000. Although Ted has paid combined premiums of $180,000 there is no cash surrender value. A financial planner, Hugo, sells life insurance. He believes Ted should immediately replace his AG policy before it is too late. Ted's health has remained the same. A replacement policy's premiums are $43,000. This $7,000 increase in annual premiums has a present value cost, measured from Ted's life expectancy, of about $104,000. This situation raises an interesting issue. If the AG franchise takes a serious hit, and essentially vanishes, will the company be able to financially support its blocks of policies? Significant replacements will allow AG to retain a huge amount of surrender charges. The retention of these surrender charges make AG quite profitable, causing the remaining policies to be very safe. If I were Ted I would retain my AG static-priced policy and tell Hugo to go pound sand.

Hugo may come up a strategy of selling the AG policy in the life settlement market and use the proceeds to reduce the premiums on the new policy making the net present value cost more like $40,000 instead of $104,000. However, the dominant life settlement company is presently not buying AG policies. Life settlement brokers that peddle policies won't be so picky and will be buying AG. But if Ted deals with this system does he know who will end up owning his policy? (Is Tony Soprano an investor in life insurance policies?). This strategy wouldn't change my mind. I would retain the AG policy.

Variable Universal Life - Andy acquired an AG VUL in 2002 at age 32. It has a preferred rating. Hearing about AIG he calls in a panic. What should he do about his $400,000 cash value policy? His $400,000 cash value is invested in various equity sub-accounts and aren't part of AG's general portfolio. Even if AG failed and was seized by regulators Andy should have complete access to his cash values. Not only is there no rational reason to replace this VUL, it is subject to a $40,000 surrender charge. I will keep my eye on this, but as long as this VUL is serving its intended purpose there will be no reason to replace it.

Life insurance company financial positions are difficult to understand, and especially when they are a subsidiary of a complex conglomerate with units around the world. As best I can perceive, AG has a decent chance of remaining solvent. It is reasonable to believe that the AG franchise will be lost because agents will play on consumer fears and attack existing AG policies with replacement strategies. In addition, agents are unlikely to recommend AG for new policy purchases if there are similar policies the consumer can buy.