American International Group Inc. had more than $600 million in impairments since the end of 2010 on death-benefits bets as the company was stuck paying insurance premiums for people who lived longer than the firm expected.
The insurer recorded $309 million of impairments in 2012 and $312 million in 2011, AIG said in its annual report last month. So-called life-settlement contracts let investors buy insurance policies from individuals and pay the premiums until those people die. The arrangement is less profitable for AIG the longer a person survives, the opposite of traditional life coverage sold by the firm, in which early deaths hurt results.
Chief Executive Officer Robert Benmosche has more recently added bets on home loans as he refocuses the investment portfolio. He said in 2011 that New York-based AIG reviewed the life contracts and that “this is not an area we’re going to be emphasizing.” It can be difficult to sell the holdings, said Gary Brown, CEO of CMG Life Services Inc.
“It’s truly almost always a buyer’s market,” Brown, whose firm oversees contracts with a face value of more than $5 billion for institutional clients, said yesterday at an industry conference in New York. “You’ve got to hold to maturity. You can’t plan on this being freely tradable.”
AIG had 5,673 policies with a carrying value of about $4.2 billion at the end of 2012, compared with 5,901 policies carried at $4 billion a year earlier, and 2,632 policies worth about $1.6 billion at the end of 2007
Investors like AIG gain if the death benefit exceeds the purchase price and cost of maintaining a policy. The value of the contracts is reduced when AIG determines that a person will live longer than expected. The insurer doesn’t restate the value higher if it expects the contract to be more profitable, Peter Hancock, head of AIG’s property-casualty business, said on a 2011 conference call.
Some of the impairments stem from AIG’s increased use of medical information starting in 2011 to determine the contracts’ value, according to the filing. The insurer also recorded impairments because of a “change in management’s intent about continuing to hold certain life-settlement contracts,” the document shows. Jon Diat, an AIG spokesman, declined to comment.
“In some cases, this updated information indicates that an individual’s health has improved, resulting in an impairment loss due to revised estimates of net cash flows from the related contract,” according to the Feb. 21 filing.
“You’re betting against mortality improvements, typically, and that’s not been a good bet,” said Paul Newsome, an analyst at Sandler O’Neill & Partners LP. “It’s a tough business for everybody.”