#249 | AIG Exits Life & Retirement

Yesterday, AIG announced that it has made the strategic decision to exit its Life & Retirement division in order to create two distinct “market-leading” companies with AIG itself focusing exclusively on its P&C business. The details of the separation have yet to be ironed out. It could come in the form of an IPO, a sale of minority stakes, a spin-off or an outright sale. It might even take more than a couple of years to come to fruition. But no matter how it ultimately unfolds, AIG’s announcement closes the book on the company’s twenty-year attempt to create a dominant position in the life insurance business. After spending more than $41 billion buying SunAmerica in 1998 and American General in 2001, AIG’s market capitalization swelled to $215 billion. Today, AIG’s market capitalization is just $27 billion. The AIG of yesteryear wanted to be a financial goliath. The AIG of today, it seems, wants to focus only on its core business. Everything else can go – including Life & Retirement.

After digging through the statutory filings for AIG, it looks like this split is going to be quite clean. American International Group, Inc owns SAFG Retirement Services, which is presumably the old SunAmerica Financial Group business unit. SAFG Retirement Services owns AIG Life Holdings which, in turn, owns AGC Life Insurance Company. AGC Life Insurance Company has three main subsidiaries – American General, VALIC and US Life. These three subsidiaries account for $201B in general account assets and $107B in separate account balances and nearly 7 million policies. The new company – which I’m going to go ahead and call SunAmerica – will be an instant goliath in its own right, roughly the size of MassMutual in terms of assets and dwarfing other spin-offs like Brighthouse ($70B GA assets / $108B SA assets) and Equitable ($68B / $148B).

The usual narrative for these sorts of divestitures is veiled language about the fact that the divested business will be stronger on its own two feet and then, in excited tones, discussions about a future without the ball-and-chain of low return, high risk, capital intensive businesses like life insurance and annuities. Rod Martin at Voya was practically giddy about offloading Voya’s life and annuity businesses at a loss. But that doesn’t seem to be the narrative with AIG and SunAmerica. Instead, it seems like AIG has been prepping this business for divestiture and expects to be paid fairly on exit.

The statutory filings provide a bit of a glimpse as to why AIG is looking at SunAmerica differently. SunAmerica certainly has its own block of high-risk guarantees, particularly in variable annuities, but the exposure makes up a smaller percentage of the total block than at other insurers that have been spun off. Of SunAmerica’s $201B in general account assets, Variable Annuities with Living Benefit reserves account for just 11.75% of the total reserves. These general account reserves tied to the Variable Annuity block are a proxy indicator of both the size of the block and the richness of the guarantees. By contrast, Brighthouse’s VA with Living Benefit general account reserves make up more than 20% of total reserves. Equitable rings in at 16% on the same metric. Compared to these other spinoffs, SunAmerica isn’t sitting on the huge concentration of risk. It’s a much more diversified book of business.

On the Life side, SunAmerica doesn’t appear to heavily utilize affiliated captives for Guaranteed UL, which stands in stark contrast to virtually all life insurers with comparable corporate structures and block composition. There’s a relatively small trade ($1.2B in reserves) to parent AGC Life, but that’s it. Instead, American General executed an absolutely mammoth trade with Hannover Re back in 2016 to coinsure nearly $500 billion in face amount and $21 billion in reserves. This single reinsurance trade makes up 80% of American General’s total reinsured face amount and a whopping 96% of its total reinsured reserves. As far as I know, this single trade is something like three times bigger than any other trade executed by a major life insurer with a single reinsurer. It’s huge – and it’s smart. Without knowing the details of the contract, I think it’s fair to assume that it actually removes the risk from American General’s balance sheet. What’s left over ain’t much. Retained Guaranteed UL reserves account for just 2% of American General’s net life reserves.

There are other indicators that AIG has been prepping SunAmerica for a sale for a while. Back in 2016, AIG carved off its “legacy” businesses into a separate reporting unit. Shortly thereafter, AIG formed Fortitude Re in Bermuda and reinsured more than $30 billion in Life & Annuity reserves to Fortitude. Later that year, private equity giant Carlyle Group purchased a 20% interest in the company. The Fortitude Re has at least two benefits. First, it takes some liabilities that probably have high rate guarantees off of AIG’s balance sheet. Second, it allows Carlyle to manage the assets and earn a higher yield (with more risk) than what AIG would feel comfortable doing within its own life insurance entities. This is referred to as the Bermuda Triangle Trade (insurer + reinsurer + asset manager) on the annuity side of the business. The deal must be working because Carlyle just increased their stake to 70% and brought on a Japanese insurance conglomerate, T&D Group, to buy another 25%. Fortitude Re is now a fully independent company (AIG owns just over 3%) and, therefore, all of the obligations reinsured to it are truly offloaded from SunAmerica’s balance sheet.

AIG has also made the hard move to reposition SunAmerica’s sales mix away from risky, capital intensive products and towards the spread-based products favored by ratings agencies and investors. Annuity sales last year were nearly $17B, of which only $4.5B were variable annuities with guarantees, and the company held market-leading positions in both fixed and indexed annuities. Life sales have also gravitated away from Guaranteed UL and towards Indexed UL.

All of these moves mean that SunAmerica appears to be in a strong position to go it alone as an independent company. The combined companies will have at least $10.5 billion of capital and a 400% RBC ratio. I would expect that the ratings for the new entity will be similar to the current ratings. Over the past two years, the combined insurance entities of SunAmerica have paid $4 billion in dividends to AIG, signaling generally profitable and well-capitalized enterprises.

In short, this isn’t another Voya. It’s not even another Brighthouse, which dramatically changed its life product strategy as a part of the spin off. Instead, this is more like AXA and Equitable – business as usual, but now with a new name. I’d argue that separating from AXA has been a benefit to Equitable and set the stage for the company continuing to grow and evolve without the unnecessary and cumbersome oversight from Paris. The same will likely go for SunAmerica. It’s hard to see how they won’t be better for being independent.

But there’s a risk that can’t be ignored. Some folks familiar with the transaction were quoted by one of the publications about the fact that AIG may decide to sell the company in minority stakes. With KKR swallowing Global Atlantic for a whopping $4.4B, it is possible that a private equity firm steps up to buy all or a major part of SunAmerica. The economics would work. SunAmerica has enough spread-based business courtesy of its massive fixed and indexed annuity reserves (over $60B) to make any private equity firm with an asset management arm salivate. 

The most obvious candidate would be Carlyle, the 2nd largest private equity firm in the world and sitting on $81B in private equity assets under management. Carlyle presumably knows the SunAmerica business because of its majority stake in Fortitude Re. Blackstone also has a well-developed insurance arm, just pocketed $2.7B by selling Fidelity & Guarantee Life to Fidelity National Financial and has been rumored to be looking for a new play. It’s also possible that a consortium of smaller firms get together to create a new company that buys SunAmerica as a joint investment, similar to what happened with Hartford and Voya’s legacy blocks, with a major flow reinsurer like Athene or Global Atlantic taking the pole position. The possibilities are endless.

In the end, whether policyholders are on the right or wrong side of the trade depends on what happens next. If SunAmerica is spun off in the same way that Equitable and Brighthouse were, as strong stand-alone enterprises, then I’d argue that policyholders will be better for it. But if SunAmerica is snapped up by a private equity firm, then all bets are off. It could be great for policyholders or it could be a disaster and yet another example of a life insurer’s best assets being drained out, chopped up and sold off. Let’s hope that’s not what happens.