AIG Group Perspective

Wednesday, September 24, 2008 | 0

By John Bessey

The American International Group Inc. (AIG) holding company which is listed on the New York Stock Exchange is comprised of more than one hundred subsidiary insurance companies, including 21st Century Auto, and other operations, such as AIG credit and leasing operations.  On September 15 A.M. Best downgraded AIG’s debt to “bbb.” At the same time, AIG’s lead property and casualty insurer, National Union Fire Insurance Company of Pennsylvania and its sister companies had their “A” rating “placed under review” and A. M. Best has announced a conference call to discuss AIG later this week.
 
AIG’s infusion from the Treasury last week did not relate to the company’s solvency, but rather to maintaining known, immediate capital requirements to keep its internal financing costs.
 
While holding companies are primarily subject to SEC regulation, their subsidiary insurance companies are regulated by the state insurance departments.  Aggressive state regulation is focused on solvency and policyholder protections, including the acceptability and integrity of the capital held by each insurance subsidiary.  At the extreme Insurance Commissioners have discretionary power to take guardianship of companies domiciled in their states. 
 
At the same time, the AIG group is the leader in providing surety bonds and insurance to some of the nation’s largest financial institutions.  Those surety bonds are recorded with both Federal and State regulators on behalf of  banks, S&L’s, securities brokers, mutual funds and virtually all financial institutions which trade with the public.
 
In their market leadership position, certain AIG companies also had become involved in creating exotic contracts and mechanisms for securitizing the risk component of financial transactions.  These included CDO’s – “Collateralized Debt Obligations,” “credit default swaps,” “finite risk transfers,” and other financial vehicles beyond the scope of traditional insurance regulation.  Some were treated as securities or simply as unregulated contracts between companies.
 
While a downgrade of AIG’s insurance ratings is possible or even likely, it is my opinion that the AIG insurance companies remain viable institutions prepared to respond to their obligations for traditional insurance products.  At the same time, the company is likely to beset by claims under its policies such as insurance for Directors’ and Officers’ actions, for financial institutions which fail, and for litigation regarding the company’s own management behaviors.
 
As brokers with access to AIG our posture is one of concern, but not of alarm.  We do not suggest cancelling policies at this time, but we are not actively offering AIG products.  Both individuals and companies are protected to certain limits by state insurance funds, including California Insurance Guarantee Association, and its life and health insurer counterpart.
 
We will attempt to keep you apprised as the AIG situation and its impact on other insurers and this situation continues to evolve.  REMEMBER Warren Buffet’s advice to not invest in anything you don’t fully understand.
 
John Bessey, CPCU, ARM, is president of Primary & Excess Insurance Services in Thousand Oaks, Calif.