AIG Leaders Discuss Fed Regulations, Quarterly Earnings
May 1, 2015 by Arthur D. Postal, arthur.postal@innfeedback.com
WASHINGTON – AIG’s corporate leadership used today’s first quarter earnings call to discuss the company’s relationship with the Federal Reserve.
Restructuring AIG to escape regulation by the Federal Reserve is worth looking into, but it is not clear how doing so would benefit the company, AIG president and CEO Peter Hancock said.
In comments at today’s conference call with analysts on the company’s first quarter results, Hancock said AIG will certainly “weigh” whether to seek to restructure in order to escape designation as a systemically important financial institution (SIFI).
He explained that the Federal Reserve is just one of 200 AIG regulators, and, “To date they been an extremely constructive coordinator of those regulators and have prioritized derisking exactly along the lines that management would have done already.”
During the earnings call, AIG also became the first U.S. life insurance company to acknowledge that the Department of Labor (DOL) proposal to require companies, agents and brokers to use a fiduciary standard when selling retirement investment products to consumers is weighing on the financial services industry.
“While it is still early to discuss in great detail, we, like our industry peers, are in the process of carefully reviewing this detailed 800 pages of proposed guidance so that we understand the regulation and can provide constructive responses to the DOL,” said Kevin Hogan, executive vice president and CEO of AIG’s global consumer insurance group.
“We would look for any final proposal to ensure both important protections for qualified plan participants, beneficiaries and individual retirement account owners as well as the continued availability of valuable and broad-based products solutions, essential income guarantees and appropriate advice for these individuals to prepare for a successful retirement,” Hogan said. “We will monitor this closely and will work with the DOL and the industry at large to achieve an outcome that truly benefits the American consumer.”
He added that AIG has “the resources, expertise and commitment to the retirement space to respond quickly and to meet the needs of consumers as the regulatory landscape changes.”
Hogan said he believes “that consumer demand for lifetime income guarantees will continue to grow and that the insurance industry is uniquely positioned to meet this increasing need in the years to come.”
With three hearings regarding federal regulation of the insurance industry this week alone, Hancock had some comments to make about AIG’s relationship with the Fed.
He said AIG views the Fed “as a very highly aligned regulator with our intentions to create a robust balance sheet to serve our clients.”
He said the amendment to the Collins Act that was enacted in the first quarter “was a significant positive in our view in terms of the potential risk that future application of the SIFI regulation would be detrimental.” The amendment, which was enacted as part of legislation reauthorizing the Terrorism Risk Insurance Act, allows the Fed to treat insurance companies differently from banks.
Hancock added that AIG is still awaiting greater clarity on exactly how SIFI rules will be applied in the future, “but so far as I said they’ve been extremely constructive.”
Randy Binner, an analyst at FBR Capital Markets in northern Virginia, asked what would happen if AIG underwent a “structural change,” that is, split up into separate life and property and casualty companies, or a domestic/international company. He questioned whether that change ,would impact the net-operating loss carry-forwards the company has as a result of its re-emergence as a private company in 2012 following federal intervention in 2008. Hancock answered by saying, “I think we explained in probably quite enough detail in the shareholders’ letter that there would be significant negative tax consequences of something like that.”
Josh Shanker, an analyst at Deutsche Bank, asked about the Fed’s involvement with AIG’s capital management plan, or stock buyback program.
Hancock replied by saying that, “We are very transparent with the Fed at every stage. They sit in on our board meetings; they certainly scrutinize our capital plan. They are very focused on making sure the governance on how we amend or change our capital plan through time is done appropriately.”
Hancock added that, “I think that in terms of constructive feedback from the Fed they have been very focused on the operational integrity of how we generate our stress test that help determine our capital adequacy and we’ve made a lot of progress in tightening that up.
“So, I’d say it’s a very constructive engagement to make sure that we are prudent and measured in the way we return capital,” Hancock said.
As for earnings, AIG’s first quarter net income rose to $2.47 billion, or $1.78 a share, from $1.61 billion, or $1.09 a share, a year earlier. Operating profit, which excludes some investing results, was $1.22 a share.
However, AIG’s results were materially helped by $174 million in profits from real estate investments and a benefit linked to AerCap Holdings, the aerospace leasing business it divested last year.
However, AIG’s life insurance business, which Hogan oversees as part of the company’s restructured consumer business, slumped in the first quarter. Operating income dropped 19 percent to $945 million. Life insurance dropped 27 percent to $171 million. Both segments were pressured by lower returns from alternative holdings, which include private-equity and hedge funds. Personal insurance posted a $26 million loss.
“The performance of the business reflects the sustained low interest rate environment and reflects stable property/casualty underwriting results,” Hogan said.
Assets under management ended the year at nearly $227 billion, 2 percent higher than a year ago, Hogan said. “Strong net flows in retirement income solutions and positive separate account investment performance were partially offset by net outflows for fixed annuities and group retirement,” Hogan said.
In its retirement income business, index annuity sales “continued to gain momentum” although there was “pressure” on variable annuity sales, Hogan said.
“Net flows for fixed annuities continued to be affected by the low interest rate environment and we expect sales of fixed annuities will remain challenged as we maintain our new business pricing discipline,” Hogan said. “We also expect group retirement deposits to be impacted by a sustained low interest rate environment.” He noted that AIG experienced an increase in surrender activity in its group retirement business compared to a year ago in part due to several mid- to large group surrenders.
“The retirement plan market has been impacted by consolidation of health care providers and other groups in our target markets which is impacting both new sales and surrender activity in this business,” Hogan said.
