A.I.G. has been much in the news of late. The impression grows that notwithstanding the government’s $182 billion bailout the company may be in a far worse condition than is commonly understood. On July 31, 2009, the New York Times reported that a review of state regulatory filings showed that A.I.G.’s individual insurance companies may be at risk. Mary Williams Walsh, After Rescue, New Weakness Seen at A.I.G., N.Y. Times, July 31, 2009, at A1.
The Times article reports that A.I.G.’s individual insurance companies “have been doing an unusual volume of business with each other for many years – investing in stocks; borrowing from each other’s investment portfolios; and guaranteeing each other’s insurance policies, even when they have lacked the means to make good.” The article quotes Rob Schimek, A.I.G.’s CFO, as stating that these companies have adequate capital. But the article ominously offers the observation from W.O. Myrick, a retired Louisiana insurance examiner, who warns that if “premiums shrink,” the arrangement will “collapse on itself.”
The article relates that National Union Fire Insurance Company has $42.1 million in off-balance sheet obligations, which have been transferred to 56 other A.I.G. companies, through reinsurance. What is more, American Home assurance has taken $26.3 billion off of National Union’s books, despite having only $26.3 million in assets to pay claims.
The article notes that A.I.G.’s premiums have been declining as it has lowered its prices to attract customers who have been reticent to buy insurance from a company whose ratings have fallen.
Worse still, the article quotes a former state insurance commissioner who predicts that eventually the Federal Reserve and A.I.G.’s life insurance policyholders will clash over who has priority over A.I.G.’s revenues. In that vein, one should not lose sight of the fact that the U.S. government now owns 80% of A.I.G.
The article remarks the pending lawsuit in Los Angeles Superior Court where California policyholders have asked the court to order A.I.G.’s subsidiaries doing business in California to deposit adequate funds in a secure account to cover their obligations to the policyholders. Harris v. Am. Int’l Group, et al., Case No. BC414205.
On August 5, Moody’s Investors Services downgraded A.I.G.’s lending units, American General Finance Corp. and International Lease Financial Co., to Baa3, which is just above junk-bond status.
Yet on August 8, A.I.G. announced that it had returned to a profit in the second quarter, its first quarterly gain since 2007. The news was, however, less than positive. The Wall Street Journal reported A.I.G. had “pumped $2.2 billion into its domestic life-insurance and retirement-services operations in order to maintain ‘solid’ capital ratios.” Liam Plevin, Wall Street Journal, August 8, 2009. The article related that premiums had fallen 15% in the company’s life insurance division from the same period last year, and the commercial insurance business had declined 18% from the same period last year.
Tellingly, A.I.G.’s quarterly results included a $1 billion operating loss, larger than the company’s $745 million operating loss in the second quarter of 2008. Mary Williams Walsh, After Rescue, New Weakness Seen at A.I.G., N.Y. Times, August 31, 2009.
Bloomberg reports that A.I.G.’s results stemmed from earnings of $121 million from hedge funds, on which the company had previously lost $2 billion in the nine months that ended March 31. Andrew Frye, AIG’s Hedge Funds Rebound After $2 billion in Losses, Bloomberg.com. As of March 31, A.I.G. had $6.7 billion in hedge fund assets and $13.8 billion in private equity. Id.
A.I.G. benefited from a rebound in the hedge fund market. In the second quarter, hedge funds generally posted an average gain of 9.1 percent, the best in more than nine years. Id. MetLife and CNA Financial Corp. also realized gains in the second quarter from hedge funds. Id.
Adding to the miasma that hangs over A.I.G. is the imminent breakup of A.I.G. The company has announced plans to issue two IPOs of multi billion-dollar subsidiaries. The Wall Street Journal reports that the company is considering a third, which could generate $570 million. Liam Plevin and Aaron Lucchetti, Wall Street Journal, August 6, 2009. Quite predictably, the article reports that Wall Street bankers and lawyers could collect nearly $100 billion in fees from the Federal Reserve Bank of New York and A.I.G.
The more things change, the more they stay the same.
