In testimony before the House Financial Services Committee last week, Federal Reserve Board Janet Yellen repeated what she said during her confirmation hearing last November, that the federal regulators are aware that insurers are different from banks and regulatory schemes are going to have to be tailored to fit the insurance model.
John Nadel, insurance analyst at Stern, Agee and Leach in New York, reacted by saying it was “positive news” that the Federal Financial Oversight Stability Council (FSOC) “recognizes that there are several key differences between the business models of large, systemic insurers and banks.”
Nadel added that he believes that initial proposals as to how systemic insurers will be regulated at the federal level won’t be proposed before the latter part of 2014, and more likely will slip into 2015. “As we've said before, we believe it unlikely that SIFI (systemically important financial institutions) stress testing for the three named insurers will begin until 2016 based on late 2015 data submissions,” Nadel said. However, the issue is broader than the two current SIFI companies, AIG and Prudential Financial, and, most likely, going forward, MetLife.
The Fed also oversees as consolidated federal regulator insurers which operate savings and loans, although it has repeatedly declined to provide a list of insurers with thrift operations it oversees. Two of the largest are State Farm and USAA. They will also likely be impacted by how federal regulators determine to oversee insurance companies, including whether they will accept use of statutory accounting principles, or demand an overall switch Generally Accepted Accounting Principles, as used by banks.
American International Group’s life and retirement unit had record sales and profits in 2013, and plans to try and sustain those results by growing its distribution organization and increasing productivity, Jay Wintrob, the unit’s CEO said.
In a conference call Friday with analysts following disclosure of its fourth quarter and full year results, Wintrob said fourth quarter operating income was $1.4 billion, up 29 percent. This increase was prompted primarily by strong growth in fee income, active spread management throughout the year, and higher net investment income.
Wintrob said that returns on alternative investments were approximately $200 million above expectations and 52 percent higher than the prior year period, driving much of the increase in net investment income.
In an interesting product note, Wintrob said fixed annuity sales increased over 90 percent in 2013, and sales in the fourth quarter were nearly four times what they were in the year ago period. He said consumer demand for fixed annuities has improved from the year ago quarter, though sales have moderated somewhat from the third quarter, due to interest rates declining from peak levels reached last quarter and our related disciplined pricing actions.
Responding to another key concern about the life insurance industry, Wintrob said a decision to redesign its variable annuity products over the last four years is paying off. He said that in the retirement income solutions business, of $24 billion of variable annuities with guaranteed minimum withdrawal benefits, 71 percent include benefits with “strong derisking features.” These include the fixed indexing of our rider fees, volatility control funds, and required minimum allocations to the fixed account, Wintrob said.
The high cost of guarantee riders took a huge toll on the life insurance industry during the severe economic downturn of 2008 to 2010, even prompting one strong player, the Hartford, to leave the business, and most large players substantively reducing their commitment to the VA business, and moving aggressively to lessen the attractiveness of guarantees.
Wintrob said that AIG individual variable annuity sales were $2.3 billion for the quarter and $8.2 billion for the full year. “We remain comfortable with this run rate of sales, particularly given the actions we’ve taken over the years to derisk this product,” he said.
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We also saw increased premiums and deposits in our institutional businesses, with growth in both group retirement and institutional markets on a year over year basis.”
In his comments to analysts, Wintrob said that, “Given its relative size, we view our variable annuity business as an opportunity to generate attractive returns, especially as competitors reduce their appetite for additional exposure while consumer demand for income solutions remains robust.”
As for its distribution strategy, Wintrob said increasing the productivity of AIG’s wholesalers, affiliated agents and financial advisors is a priority. He said AIG wants to leverage its strong relationship with distribution partners to increase penetration of its broad retail product portfolio within firms.
It is also looking for opportunities to grow its institutional businesses, especially in areas where we can achieve the most attractive risk-adjusted returns.