AIG Life Canada has decided to discontinue all but one of Norwich Union’s brokerage products. Out the window are Norwich’s term-ten critical illness, universal life, regular term, and investment products.
All the direct products will be maintained for the time being, states Peter McCarthy, President and CEO of AIG. “We will be launching a T10 CI product to replace [Norwich’s] later this year,” he adds, “hopefully sometime before the fourth quarter.” Only the participating whole life product stays.
The products simply do not meet AIG’s return on equity requirements, explains Mr. McCarthy. “Because Norwich was a mutual company, … they priced at a lower ROE than we do.” Norwich Union will not significantly impact AIG’s annual premiums, he adds.
So why did AIG buy Norwich? Because of its over $500 million in assets, responds Mr. McCarthy, and the direct business that is too costly to build up from the start.
Norwich’s MGA network was not performing well according to Mr. McCarthy. The network consisted of roughly 15 MGAs, but only about five of those produced the bulk of the business. New premiums for this network last year were only $5 million, “less then 10% of our agency sales.” In addition, most of the MGAs also have contracts with AIG, creating a business overlap situation. In the end, says Mr. McCarthy, AIG gains access to about a thousand new brokers.
The “good fit” of the two companies stems from the acquired assets and the direct distribution infrastructure. For a purchase price of just under $130 million, AIG purchased an established company with over a hundred years of experience. It has a “very large” block of in-force business, states Mr. McCarthy, as well as a building in downtown Toronto, and much-needed staff.
Norwich is also arguably the most well known direct distributor of life insurance. Not only is it well known, but also the overall number of companies in this market is extremely limited. This is a market that you need to buy into, explains Mr. McCarthy, because it is too costly to build from scratch.
“We plan to expand the direct business and make it even more profitable,” continues Mr. McCarthy. How the company will go about this remains under wraps, however. “We have a lot of experience world-wide,” he says, but would not go so far as to say the US model will be applied directly here. AIG Canada will also keep the new premiums of its direct business confidential, as did Norwich.
Norwich Union was AIG’s second large acquisition in Canada. The first was Hartford Life of Canada (the bulk of its life operations), but these are not the only companies AIG has bid on. “It’s a bidding war,” says Mr. McCarthy. “There are not a lot of opportunities in Canada. We make offers… some we get and some we don’t.” The company won two out of its last six bids, he adds.
AIG ended 2000 with new annualized first year premiums of $58.3 million (see table on page 16), up from $10.9 million in 1999. Mr. McCarthy says this ranks the company in seventh place overall according to LIMRA. He adds that AIG is in second position for all life products, and he suspects that it is first in universal life sales.
The company’s aggressive growth is a result of its commitment to be a dominant player in Canada, explains Mr. McCarthy. AIG’s strategy was clearly laid-out by its former president, Ralph Gaudio, back in 1998. The then newly-appointed president and CEO served notice that his small company would be moving aggressively into the big leagues. “Our strategy is to look at any and all opportunities for gaining market share,” he stated in an interview at the time with The Insurance Journal.
“We want to become a diversified insurance company with as many sources of ever-increasing, recurring premiums as possible,” he added. “Over the long-term, we aim to become one of the top five Canadian insurers in terms of new premiums.”
When Mr. Gaudio assumed the presidency, he also announced his intent to create a totally producer-oriented culture – it was one of the keys to the growth strategy he envisioned.
“The producer is our customer, and our primary task is to make the producer’s job easier,” he said, adding that if the company’s underwriters didn’t understand that, they wouldn’t be working there. “Our whole culture, our philosophy and technological thrust, is to provide exemplary service to our customers.”
“We’ve certainly gone into the market with a whole new philosophy,” says Steve Carter, Vice-President of Marketing at AIG. “There’s been a real thrust to build relationships with MGAs and producers, to provide the products that they need and to be responsive.” Given the results to date, this strategic shift to producer-oriented service seems to have worked for AIG.
But while relationship building has been important, Mr. Carter sees AIG Canada’s growth as a function of more than just philosophy. “There’s no question that we also have an excellent product which hits a lot of the key issues that producers have with Universal Life contracts,” he notes. “We’ve been told, for example, that we have the widest range of investment options in the industry.”
“We also have guaranteed, unconditional bonuses, guaranteed MERs, and of course very competitive cost of insurance,” Mr. Carter continues. “We have flexible software that is easy to use. Plus we’re strong – we’re a Triple-A rated carrier and that has a lot of appeal to producers who sell big cases. In fact, our average premium is twice the industry average.”
Still, what of AIG Canada’s recent announcement of price increases and commission decreases for its YRT and Level Cost universal life products? The announcement has some industry observers speculating that the changes will put a damper on the firm’s flagship universal life sales, and that perhaps it was done because the firm has grown too much and is getting growing pains.
Mr. Carter downplays the impact of the changes. “They’re pretty modest – only three percent for YRT and six percent for Level Cost,” he says. “I don’t foresee any impact at all on YRT sales, because we’ll still be the leader in terms of cost of insurance. And YRT accounts for 70% of our premiums.”
Apart from seg funds, which it abandoned last year because of the new capital requirements, it would seem that Mr. Gaudio’s strategies have worked and his ambitious targets have been met, perhaps with some room to spare. “Ralph really laid the foundations for our new direction,” says Mr. Carter. “We’ve become very sales and marketing-driven, and that’s been a key draw for business.”
“In 1999 we weren’t even on the radar screen,” says Mr. Carter, “but the competition certainly have taken notice of us now.”