News of AIG’s troubles, the subsequent bailout funds given to the insurance company, and its effect on the industry have been making headlines for months. But where are we now, and what can you do in this climate?
To find out, we spoke with William Klepper, adjunct professor for California Lutheran University in Thousand Oaks, CA. With more than 24 years in the financial industry, Klepper teaches courses in retirement planning, financial planning, and insurance at the university. He is also first vice president of RNC Genter Capital Management.
ASJ: Just to review, how did AIG get into trouble in the first place?
WK: They really had a nice business niche, and most of it was overseas, but then, in certain areas, the margin became less productive, and they entered new areas in 2000 — home loans, CDOs, hybrid securities. They were making a ton of money, but then the housing market crashed at the same time as the recession happened. AIG had gotten big into credit default swaps … and when the housing market crashed, that basically took away the collateral [on the credit default swaps].
ASJ: So what position is AIG finding itself in now?
WK: A lot of its entities are worth money, but trying to sell in a down market is tough. An insurance company is only as good as its financial reputation. Nobody knows how to evaluate AIG right now, so it sort of gets difficult.
I worked for a company with a similar name to another company that went under. Even though it wasn’t ours, when people heard our company name and associated it with the other company, it affected our business. With anything tied to AIG, clients aren’t going to be happy. People will be transferring policies, trying to get out of them, or stopping payment on premiums. But, AIG is a large, diversified company. When you get into these credit default swaps, like any other time you get into a hybrid security, a lot of people don’t understand the risk involved.
All they understand is that everybody is making money. You come across these scenarios where you say, “It can never happen,” but things can happen, and they obviously did.
ASJ: What does this mean for the life insurance market in general?
WK: The companies that have retained their ratings are doing much better and are attracting policyholders. Anyone with an AIG policy is probably waiting to see what happens. People need insurance, though, so they will go to the best players in the industry. This is where the [agent] is highly important, to guide them to [these companies]. This is when they should be proactive, getting as much information out to the client, keeping them informed of their options.
For [agents], a down market is when you can capitalize on your market share. When everything is doing good, it’s harder to increase your market share. But if you stand out in a down market such as this, this is when you can increase your market share. The good reps are aware of this and are communicating with their clients.
Don’t leave your clients just hanging; you don’t want them to be getting the information from the talking heads. You want to be the one getting the right information to your client. But it just goes to show you, even as you develop a business, as a life agent, it’s like anything else — you have to diversify. Think of this like your portfolio. If you get tied to any one company too much and something happens to that company, you can see your business blow up on you.
ASJ: What is the industry doing right now to get out of trouble?
WK: AIG right now is to unwind their contracts in an orderly fashion. I know people were mad at the bonuses made to AIG executives who were there to unwind the contracts, but that was probably the best situation in a bad scenario. They paid out $161 million and change in bonuses, but that probably saved the government billions more.
Obviously, there will be more regulations. AIG really got into an area that was not their forte. They were good at distribution services and products, but they really got into an area that was a bubble. I think people should have been a little smarter. When you have a bubble, nothing goes up forever, and everybody was betting on the house market. As the quality level deteriorated, it just unraveled.
ASJ: In May 2009, the U.S. Department of the Treasury approved TARP funds for six insurers. As of press time, two — Hartford and Lincoln National — had accepted. To date, AIG has been the only insurer to receive TARP funds. How do you see this affecting the companies that accept, as well as those that were offered the money but may turn it down?
WK: The government was trying to avoid a housing crisis, followed by a credit/banking crisis, followed by an insurance crisis. It is like the car makers – if you don’t accept, you are seen as a strong entity that is going to survive. If you accept, from a marketing stance, it will raise questions and will most likely hurt sales. As a side note, AIG was selling their investment management arm two months ago for about $800 million. It looks most likely the deal will close for about $500 million; the change of price most likely was caused by asset runoff. So, headline news of [insurers] accepting government money can [clearly] have significant penalties, both by the government and the investing public.