Alert: Annuities Sold in Banks (NY TImes)

December 10, 2009
A.I.G. Units Omit Name and Excel
By MARY WILLIAMS WALSH

Just months after dropping the telltale “A.I.G.” from its sales brochures, the company has leapfrogged its competitors and reclaimed a title it held for many years before its bailout — the top seller of fixed annuities to bank customers.

People buying the annuities in bank branches may be surprised to know they are signing up with A.I.G. The contracts are being offered under the names of two subsidiaries, Western National Life and First SunAmerica. Until last June, they carried the name of A.I.G. Annuity.

The booming annuity sales are a bright spot for American International Group, which must raise cash to pay back the federal government.

But some competitors and consumer advocates are questioning A.I.G.’s comeback, saying its ability to keep drawing federal money is giving it an unfair advantage just a year after its government rescue.

Often sold as alternatives to certificates of deposit, fixed annuities are insurance contracts that guarantee a set rate of return, unlike variable annuities, whose returns may track the ups and downs of the markets.

The people who buy them in banks tend to be looking for something safe, but which pays more than a certificate of deposit. Fixed annuity contracts usually run for many years, and even before A.I.G.’s bailout last year, its customers began to have qualms about tying up their money with a company whose future was uncertain.

After the bailout, they accelerated their withdrawals from A.I.G., even if they had to pay a penalty to get their money back. Most new buyers sought out other insurers, like Transamerica and New York Life, which had higher ratings and did not get assistance through the Troubled Asset Relief Program.

But since June, and the name change, the A.I.G. subsidiaries have slogged their way back to the top. In the third quarter, Western National sold more fixed annuities in banks than any other insurer, according to Kehrer-Limra, a research and consulting firm that tracks sales of insurance and investment products in banks.

New York Life, which had claimed the lead in the first half of this year, has now fallen back to third place, and Transamerica is fourth. Other former contenders, like Genworth and MetLife, are not in the top five anymore.

Even though fixed annuities can bring their issuer a lot of cash quickly, like bank deposits, they can also erode an insurer’s capital faster than sales of other types of insurance. That is because they require the company to set aside very large reserves from the outset.

The risks this can pose are not just theoretical. Another A.I.G. subsidiary — one that the Federal Reserve Bank of New York recently took a $9 billion stake in — sold such a large volume of fixed annuities through Japanese banks that it wound up with insufficient capital to support its businesses.

A spokesman for A.I.G., Mark Herr, said the unit, the American Life Insurance Company, had restored its capital by transferring risks “using coinsurance and modified coinsurance,” among other techniques. He said the problem had not recurred since 2007.

In normal times, only well-capitalized insurers tend to promote fixed annuities heavily, to avoid stretching their resources too thin.

But these are not normal times. Western National was one of a dozen A.I.G. insurance subsidiaries whose investment portfolios were dipped into by A.I.G. Securities Lending — an affiliate that pooled more than $80 billion worth of the insurers’ assets and lent them out to banks and Wall Street firms, to use in trading.
The securities lending program imploded. Western National’s share of the losses was $7.9 billion, and the company was recapitalized as part of the federal bailout of A.I.G.

Joseph M. Belth, editor of the Insurance Forum, a consumer-oriented newsletter that tracks the financial strength of insurance companies, said that at the very least, purchasers were entitled to know the extent to which A.I.G., the parent, was standing behind the annuities of its subsidiaries. Only the subsidiaries are monitored to make sure enough money stands behind their promises.

Competitors said they believed Western National was using the new money from the Treasury to finance some of the highest teaser rates in the industry.

“Some insurers are selling annuities at rates that suggest that they are either building more risk into the investment portfolio than might be prudent, or using this as a way of raising cash, perhaps to pay off other obligations,” said Gary E. Wendlandt, the chief investment officer and vice chairman of New York Life.

Judith Alexander, of Beacon Research, which tracks annuity terms, confirmed that Western National was offering some of the higher “bonus rates” on fixed annuities through banks, allowing customers to capture more than 5 percent for one year, but she said it also offered contracts that guaranteed lower rates, in the neighborhood of 2.6 percent, over a longer period.

The chief executive of Western National, Bruce R. Abrams, said customers were opting for the longer terms.

“We’re not selling much bonus-rate product,” he said. “It’s the multiyear guaranteed rate. That’s what the customers are looking for, and that’s what we’re selling them.”

He also cited Western National’s longstanding relationships with banks, which he said allowed the company to negotiate individual terms with banks every week, giving them a high degree of flexibility. For example, he said, if a bank wanted to capture the attention of customers by offering them a higher interest rate than Western National proposed, Western National might arrange for them to do so by offsetting the cost with a smaller commission. The bank would then try to make up the difference on volume.

“That’s unique,” he said. “We’ve been doing that for over 15 years.”