Are AIG companies stable? On a closer look, maybe not

McClatchy NewspapersJune 8, 2010 

WASHINGTON — A deeper look at 20 of the American International Group's insurance subsidiaries illustrates why untangling their spaghetti-like connections is a tall order.

Those seven AIG commercial insurers, 12 life insurers and a mortgage insurer reported a collective $49.6 billion in year-end surpluses in 2008, a McClatchy analysis found.

Less obvious were their nearly $240 billion in potential liabilities, such as affiliates pooled pledges to reinsure a portion of their sister companies' policy claims or guarantee them altogether.

In addition, those companies held $22 billion in stock in affiliated companies — shares that couldn't be traded on any exchange.

Robert Willumstad, who served as AIG's chief executive during the summer of 2008, said in a phone interview that such incestuous stockholdings could jeopardize policyholders, because one firm's problems "would ripple through other parts of the organization."

Take Pittsburgh-based National Union Fire Insurance Co., the largest of the firm's U.S.-based property and casualty underwriters. NUFIC listed an $11.8 billion surplus on its 2008 financial statement, but held $10.7 billion in illiquid stock in AIG affiliates at the time.

Much of the stock was in AIG's troubled aircraft leasing firm, International Lease Finance Corp. According to AIG's current chief executive, Robert Benmosche, regulators told National Union that the stock's fair market value was zero because no firms had submitted a bid to buy ILFC.

To avoid complications for National Union, the Federal Reserve Bank of New York loaned ILFC $4 billion — a figure set by an independent party — to buy back the shares and beef up NUFIC's balance sheet, said Steve Johnson, a deputy commissioner of the Pennsylvania Department of Insurance.

Benmosche told a congressional panel in late May that he hopes that ILFC will soon be able to repay the $4 billion to taxpayers. He also said that the company is attempting to untangle the web of "cross-collateralizations" among its subsidiaries.

In 2009, National Union reported that affiliates had written unsecured reinsurance on $39 billion of its risks, liabilities that the insurer would reacquire if those affiliates failed.

A senior AIG official, who was made available on the condition of anonymity, said that the shifts in liabilities don't increase the risks of losses, but stem from a "pooling" technique that spreads the risks among 10 of the company's commercial insurers.

National Union also "unconditionally and irrevocably" guaranteed $39.5 billion of the policy obligations of 18 affiliated AIG businesses. New York-based American Home Assurance Co., a separate large AIG commercial insurance subsidiary that listed $5 billion in assets in 2008, guaranteed more than $122 billion in potential losses among affiliates.

"I've looked at every kind of insurance company under the sun," said Thomas Gober, a former chief examiner for Mississippi's Insurance Department who's closely monitored the condition of AIG's subsidiaries. "I have never in my entire career — 25 years — seen an insurance company guarantee other companies."

The subsidiaries were able to maintain investment-grade ratings partly because their AIG parent pledged to provide financial support, if needed, to keep them afloat.

The irony: AIG's parent was in worse shape than the insurers.

Nonetheless, state regulators, who provide the bulk of AIG's supervision, have stood solidly behind the company, even posting notices on their websites vouching for its stability.

AIG's remaining three-dozen U.S. property and casualty insurers, now operating under the name Chartis, are "in good shape," said Pennsylvania Insurance Commissioner Joel Ario, who spearheads regulation of nine of those firms. Ario said those companies have received no direct bailout money, have $26 billion in combined surpluses and are untangling obligations to each other.

Johnson, the Ario deputy, said the nine insurers pool their risks and, after booking $1.5 billion in total profits last year, have adequate capital.

The roughly 16 domestic life insurers, now operating under the SunAmerica Financial Group, "remain well capitalized and appear to have stabilized after a period of stress in the months following September 2008," said Douglas Slape, the chief financial analyst for the Texas Department of Insurance.

Therese Vaughan, the chief executive of the National Association of Insurance Commissioners, said that if AIG's parent company had filed for bankruptcy protection, she's confident that state regulators could have protected the assets of the firm's domestic insurers and paid off policyholders "over time," backed by an industry guaranty fund.

Some other industry watchers, however, are skeptical, given the AIG subsidiaries' less-than rock-solid financial condition.

Gober said that some of the insurance subsidiaries made such huge guarantees and reinsurance commitments that it's hard to imagine how they could fulfill them, especially if offsetting commitments from affiliates fell through.

"If I had a receivable from Fort Knox, that receivable would be good," he said, "but if I had a receivable from my cat, can I actually collect it?"

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