With the federal government’s $85 billion bailout of American International Group, the New York-based insurance titan has been extended a lifeline to restructure and divest itself of troubled assets. But AIG’s financial difficulties raise questions among advisors about whether to recommend selling or replacing products from a carrier whose long-term outlook is in doubt.
Chief among advisors’ concerns: Whether AIG’s products will make for a more difficult sale. On this question, much will depend on AIG’s ultimate standing with credit rating agencies A.M. Best, Moody’s, Standard & Poor’s and Fitch. A slight decline from a stellar rating will not have a significant impact on the marketability of the products, sources tell National Underwriter. But a more substantive drop could prompt advisors to hold back.
“When a company’s rating is at or near the top end of the scale, it usually doesn’t have a significant impact because the company is still financially sound,” says Ron Angarella, a chief operating officer at RD Marketing Group, Sacramento, Calif. “But if the decline is more significant, it would be a different situation.”
Adds David Barrist, vice president of Barrist Insurance Group, Bala Cynwyd, Pa., “A lot of financial planners and estate planning attorneys will want to know about the company’s credit rating before making a recommendation. If it goes below two or more ratings levels, say, from an [S&P rating] of AA-plus to B-minus, then you have issues in terms of the company’s ability to back up its product guarantees.”
Until AIG’s rehabilitation is complete some observers think it advisable to defer recommending AIG products. Neal Sullivan, chairman of the board of the Independent Insurance Agents & Brokers of New York (IIABNY) and president of Sullivan Financial Group, Mahopac, New York, says that if AIG’s financial strength remains an issue, then advisors should look to other carriers that offer products with comparable features and benefits of interest to prospects.
Sources add they also need to be proactive in reaching out to existing AIG clients–starting with their best customers and those most heavily invested in AIG solutions–to offer reassurance that they’re closely monitoring the situation and will keep clients informed. They need to be mindful, too, of their choice of words so as not to scare off clients.
“To say, ‘we’re reevaluating our relationship with AIG might make a client think you’re dropping the company,” says Steven Spiro, a national director at IIABNY and president of Spiro Risk Management, Valley Stream, N.Y. “Reevaluating is a premature word.”
Herbert Daroff, a partner at Baystate Financial Services, Boston, Mass., notes that his firm’s 200-plus advisors conducted conference calls prior to the government bailout, in part to share feedback from clients, many of whom have expressed concern about AIG’s troubles or questioned the wisdom of continuing to pay premiums on the manufacturer’s life insurance and annuities products.
But Daroff insists that the client’s financial situation, objectives and product suitability issues, rather than current uncertainty about AIG’s long-term outlook, should be the key factors to weigh in determining whether an exchange is appropriate. One reason is the potentially high cost.
Owners of AIG annuities could, for example, be hit with a high surrender charge if they’re still within the contract period. And, says Daroff, holders of AIG permanent life insurance policies could end up with a reduced cash surrender value–or else a higher premium due to a change in their health–subsequent to a policy replacement.
“If 100% of a client’s retirement nest egg were invested in an AIG fixed annuity, then I’d be really concerned because this is not a sound strategy,” says Daroff. “But if the amount invested were, say, less than 50%, then I definitely would not recommend anything specific without knowing the client’s particular situation. The decision to do an exchange has to be tied to product suitability and the client’s needs.”
Rolf Winch, a partner at Lifetime Financial Partners, Rockville, Md., and immediate past president of the National Capital Chapter of the Society of Financial Service Professionals, Newtown Square, Pa., agrees.
“I would tell the client, ‘here are the ramifications of getting out of an [AIG] product now and here are the benefits of moving to a new company with a higher credit rating,’” he says. “Many clients don’t know the long-term consequences. As advisors, we have a fiduciary duty to help clients understand the pros and cons before they make a move.”
This responsibility, he adds, is all the greater now because clients are especially attuned to advisors’ recommendations during times of financial turmoil. Winch also cautions advisors to guard against the temptation to do otherwise: to generate a windfall in commissions by replacing policies en masse and by preying on clients’ fears.