AIG - V/As

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Sep 15, 2008 7:39 pm


Curious, has anyone done any research about V/A benefit guarantees would survive should AIG go down?

Sep 15, 2008 7:42 pm
prudent:


Curious, has anyone done any research about V/A benefit guarantees would survive should AIG go down?

 
Likely none.  You would probably get what's in the contract value.
Sep 15, 2008 10:27 pm

Yes, I heard that, too.  It's extremely unlikely that another insurance company would take on any of the living benefit riders.  It seems that some of the riders were underpriced to start with so even less reason for a new company to take the risk.

Sep 15, 2008 11:03 pm

It really depends on what % of these contracts are under water and how much risk is really there.  The price for most of these riders can really be jacked up if the insurance company wants to do so. 

 
Also, "under water" for a GMIB rider should not be defined as having a GMIB rider that is greater than the contract value since the GMIB is not cash and carry.  A contract is only under water if one can annuitize the GMIB and get more money than they can by annuitizing the contract value.
Sep 15, 2008 11:16 pm

I agree, if the contract value is above the guaranteed benefit base, than there really is no additional risk.  Taking on the GMIB would be similar to funding a new contract in this instance.  However, most new VA contracts within the last 24 months will be less than the GMIB base. 

Sep 15, 2008 11:21 pm

I never saw AIG / Sun America VAs as a good deal.  There should be plenty of other options to choose from should you get the policy value returned.  

Sep 15, 2008 11:32 pm

BACFA, it's ok if the contract value is below the GMIB base.  We often make the mistake of thinking that the GMIB value is a dollar figure.  It isn't.   With clients, I never refer to the GMIB value and I never talk about a percentage.  Instead, I say things like, "When you are 68, your worst case scenario is that you will have an income stream of $2200/month."

 
Let's use an example.  A VA has a contract value of $120,000 and a GMIB Value of $140,000.  Is this contract under water?  Probably not.   With the $120,000, one can shop the market to find the best SPIA rates.  Maybe this will give the client, $1000/month.  The GMIB value can only be annuitized using the contractual rates which are artificially low.  Maybe this will give the client $800/month.  The VA is only under water if the contractual rates on annuitizing the GMIB will pay more than the current SPIA rates on the contract value.   
 
In many cases, the GMIB would have to be about 40% above the contract value for the VA to be under water.  For example, in my book of VA business, I have no contracts that would be under water.
Sep 15, 2008 11:53 pm
gvf:

I never saw AIG / Sun America VAs as a good deal.  There should be plenty of other options to choose from should you get the policy value returned.  



GVF,
I think you will find that SunAmerica is a legally separate entity from AIG and has no bearing on SunAmerica contracts.
I am not saying they are a good or bad value or that I am an attorney, which I am not.  I am saying I think the "soundness" of the riders from SA have nothing to do with the transgressions of AIG.

My $.02 which of course I could lose if the FED does not back me or force a merger to save the financial system.  If I have bad results to post I will do it on the weekend.  Long holiday weekend if I can. 

Sep 16, 2008 9:05 am


a couple of comments:

1)  if the acct values are indeed higher than the GMIB, sure, no problem.  if they're 30% below, that's where it gets interesting, and, as you know, many of these riders have a market value re-set feature, at the margins increasing the number of contracts that would be below water.

3)  if you're looking at a spia as an alternative, are you punting on the lifetime guarantee, assuming the risk that the term of the spia exceeds the life of the owner?

2)  re: pricing of the riders, are you an actuary?  i'm not, so i actually have no idea which/if any particular company's riders are under/overpriced.  i'd love to know which companies you are underpriced.

talk amongst yourselves...

Sep 16, 2008 9:08 am

anonymous, I understand that the client can shop out a better annuitized value than what's offered by the VA.  However, why would a new VA company want to take on contracts with lower values (whatever the break-even point is)?  Sure, the rider is generally charged based on the initial premium but they are also working with a greater chance that if the client has a SWP, the contract may have to be annuitized to continue the income.

Sep 16, 2008 10:47 am

Question - Did Lehman Bank go under yesterday with LEH? 


Answer - No.  The bank is alive and kicking. 
 
Question - If AIG Financial Companies goes under does that mean that VALIC, SunAmerica, American General, International Lease Finance, and United Guaranty go under too?  No.  Just like with LEH vs Lehman Bank. 
 
They might get sold to some other company in order to raise capital for AIG, but the troubles AIG is having has very little to do with those other companies.  So, the insurance guarantees on things like DB and income riders will be fine. 
Sep 16, 2008 11:52 am

Sure, the rider is generally charged based on the initial premium



 
No.  The rider is generally charged based upon the current value of the rider.  If $100,000 is put into a VA with a GMIB and the cost of this rider is .8%, it costs $800 or, obviously .8%.  However, if the investments do poorly and are now worth $70,000 and the GMIB value is now $117,000, the cost will be $936 or 1.33%!  (type of pricing structure increases the chance of contract values going to zero if money is being removed from the contract.  The lower the contract value, the more expensive the GMIB becomes as a % of this contract value.)
 
Now, let's go back and look at why another company may want to take over if the first company goes out of business.  We'll assume that the GMIB value is greater than the contract value.  Let's use an $80,000 contract value and a $100,000 GMIB value and .8% GMIB and 1% M&E.   The insurance company is collecting $1800 in fees.  (These can always be raised.)
 
What is the risk for the new company?  If the client wants to cash out, it doesn't hurt the company.  If the client wants to annuitize now, it should be profitable for the insurance company.  If the client does nothing, it will continue to be profitable for the insurance company.  The only way that it doesn't make sense for the new company is if the client dies while the contract value is below the initial premium of if the contract loses another 25% (roughly) and then the client annuitizes using the GMIB.   Even if that happens, it still may be profitable, but just not as profitable. 
 
The companies have made the guaranteed annuitization rates so bad that it will be awfully difficult for these products not to be profitable.
Sep 16, 2008 8:29 pm
Spaceman Spiff:

Question - Did Lehman Bank go under yesterday with LEH? 


Answer - No.  The bank is alive and kicking. 
 
Question - If AIG Financial Companies goes under does that mean that VALIC, SunAmerica, American General, International Lease Finance, and United Guaranty go under too?  No.  Just like with LEH vs Lehman Bank. 
 
They might get sold to some other company in order to raise capital for AIG, but the troubles AIG is having has very little to do with those other companies.  So, the insurance guarantees on things like DB and income riders will be fine. 
Look at where the paper for American General and  International Lease is trading..... It looks ugly.
BTW, the AIG Sunamerica VA's are the most sold in the Jones system or so I was told.
Sep 16, 2008 11:29 pm
Sonny,
Yes I understand the hedging strategies to proctect themselves in the event of a payout but the VA's make their money on the the fees that they charge.  A VA's profit comes from the fees that it charges, not from betting the market short with a client's money.  They use the hedge to mitigate the risk, not to profit from it. 
If a new VA company takes over a contract with a $100,000 DB and a cash value of $10, can they make enough on fees on this contract to justify the hedging?  They would have to hedge that if the client dies, they can come up with $99,000.  They cannot earn the fees to cover such a large payout.  Therefore, why would they back the death benefit guarantee?
Sep 16, 2008 11:42 pm

anonymous,

You are correct, what I meant was benefit base (or value of the rider), not premium.  There is so much terminology flying around on VA's that I mis-spoke.
 
My premise still stands that it is not necessarily profitable for the company.  Assume that a new VA is taking on a contract with a GMIB of $100,000 and cash value of $20,000, how would it be profitable?  The new company did not collect several years of fees while the subaccount lost money (or as income was withdrawn) and now it is forced to create an income stream for the client based on a GMIB of $100,000.
 
$100,000, 20 year payout, 1% rate of return, immeditate annuity will yield $5,541.53/year.  With only $20,000 cash value, this immediate annuity is severely underfunded and the fees will not make up the difference.
 
Bottom line, there is a break even point (GMIB vs. Cash Value) for the new VA company but no knows where it's until your contract gets "renegotiated."
Sep 17, 2008 8:18 am

 Bottom line, there is a break even point (GMIB vs. Cash Value) for the new VA company but no knows where it's until your contract gets "renegotiated."


This is correct.  As a realistic guess, I would say that the Cash Value has to be about 30% below the GMIB value for it not to be profitable. 
 
Keep in mind with the examples that we use, it's not about 1 single contract, but the book of business as a whole.
 

If a new VA company takes over a contract with a $100,000 DB and a cash value of $10, can they make enough on fees on this contract to justify the hedging?  They would have to hedge that if the client dies, they can come up with $99,000.  They cannot earn the fees to cover such a large payout.  Therefore, why would they back the death benefit guarantee?
 
Just for argument's sake...   If a contract has a DB of $100,000 and a cash value of $10, it would mean that one of two things.  1) We're in a serious depression in which case the guarantees of all of the companies will be worthless or 2)We're talking about a contract which has had withrawals and has something other than the standard death benefit guarantee.
 
Assuming that this is the latter, the insurance company may still be fine because the client is paying a fee for this guarantee that is based upon the $100,000 value and not the $10 contract value.   
 
Anyway, I think that we are probably in agreement.  These won't be profitable if the GMIB value gives a higher payout than the SPIA rates in effect at that time.
Sep 17, 2008 10:01 am
noggin:
Spaceman Spiff:

Question - Did Lehman Bank go under yesterday with LEH? 


Answer - No.  The bank is alive and kicking. 
 
Question - If AIG Financial Companies goes under does that mean that VALIC, SunAmerica, American General, International Lease Finance, and United Guaranty go under too?  No.  Just like with LEH vs Lehman Bank. 
 
They might get sold to some other company in order to raise capital for AIG, but the troubles AIG is having has very little to do with those other companies.  So, the insurance guarantees on things like DB and income riders will be fine. 
Look at where the paper for American General and  International Lease is trading..... It looks ugly.
BTW, the AIG Sunamerica VA's are the most sold in the Jones system or so I was told.
I'm not sure about Jones in general, but the Polaris VA is by far the most sold VA in my office.  It's a great VA, so it wouldn't surprise me if it is the most sold at Jones.  It's either them or Hartford. 
 
We've got a conference call this morning on AIG, so we'll have to see what the GPs say.   
Sep 17, 2008 11:15 am

Spiff, what makes it so great? 


More specifically, what would have to happen for this particular annuity to perform better than another VA?  I'm going to try to get my hands on a prospectus to take a look at this product.
Sep 17, 2008 2:19 pm

Ok, I quickly looked at the prospectus (It's a 500 page prospectus!).  If I'm not mistaken, the M&E is 1.65%.  The market lock feature is .95%.  The optional death benefit is .25%, but I'll ignore it since I don't know what it is.

 
So anyway, we are looking at 2.6% before any fund expenses.  These range from .72 -1.65%.   Let's assume an average of 1%....3.6% "all in". 
 
Spiff, please let me know if I'm wrong about any of this. 
 
Expenses of 3.6% crushes the upside potential.  Spiff, would you also agree that taking 5% out of an investment that has 3.6% in expenses will lead to a great possiblity of a decreasing the contract value?  If a decreasing contract value means a higher expense ratio (it does), doesn't it make it even more likely that the contract value will drop once it is down?   This means that ultimately, one will only get what's guaranteed in the contract...which is why, the agent better understand what is guaranteed in the contract...yet as agents, we sell this stuff and have no idea what is guaranteed!   Annuitization rates matter.   We can't call a product "great" without understanding how it stacks up to alternatives in both good scenarios and bad ones.
 
Spiff, I admit that I may be missing something with this one, so please take my post in a questioning tone and not how it may come across.