The AIG Effect: AIG Life Companies Suffered Sales Losses, but Improved Operating Income

Events of a year ago brought some economic pain to American International Group Inc.'s life insurance subsidiaries. These came in the form of higher surrenders and lower premiums, deposits and other considerations for both life insurance and retirement services, according to AIG's second-quarter report.

"While our insurance companies' operating results remain challenged, largely driven by weak economic conditions and the lingering effect of negative AIG events earlier in the year, performance trends stabilized from the first quarter," said Edward Liddy, then-chairman and chief executive officer, in AIG's second-quarter earnings release.

Despite domestic life and retirement services sales and retention problems, AIG actually reported significant improvements in operating income in the second quarter, at $409 million over the second quarter of 2008, with a loss of $918 million. The company said that realized capital losses subsided, equity markets improved over the prior quarter, and mortality experience was favorable.

AIG said that while surrender levels were higher in the second quarter of 2009 than in the same period of 2008, surrender activity has stabilized in that surrender rates declined during the second quarter, compared with the previous quarter.

Some investment losses in the past year of AIG's domestic life and retirement services subsidiaries may have been due to decisions beyond their control. According to an AMB Credit Report on these subsidiaries, they participated in a centrally managed securities lending program, or pool, which was facilitated by AIG Investments.

"Securities were loaned to various financial institutions, primarily major banks and brokerage firms," said the report. "While the life and retirement services segments participated in this pool, there were restrictions as to their input with respect to the re-investment of the collateral backing the lending assets. The corporate risk appetite was greater than the risk appetite at the insurance subsidiaries, hence the market valuation losses experienced at the life and retirement services segments were beyond the control of the segment's executive management team."

AIG has announced initiatives to raise capital to repay loans provided by the Federal Reserve Bank of New York, according to the A.M. Best report. As part of that initiative, AIG had reported plans to sell its U.S. life insurance, annuity and consumer finance operations, according to the A.M. Best report. Domestic companies include Variable Annuity Life Insurance Co., AIG Retirement Services, AIG American General and SunAmerica Life Assurance. However, the company said on March 2 that its restructuring plan "has evolved" due to deteriorating global economic conditions that posed risks to AIG's ability to divest assets at acceptable values. AIG's domestic life and retirement services entities have benefited from roughly $16 billion of capital infusions to offset significant losses stemming from its securities lending portfolios, the A.M. Best report said.

AIG acquired several domestic life insurance companies in the August 2001 purchase of American General. Those were AIG Life Insurance Co., American General Life Insurance Co., American General Life and Accident Insurance Co., and American General Assurance Co. New York residents buy from American International Life Assurance Company of New York and the United States Life Insurance Company in the City of New York. Seven other companies do business outside the United States.