AIG's Affiliated Re Deals Challenged, But State Regulators Defend Practices

The article–headlined "After Rescue, New Weakness Seen At AIG"–reported that since its "$182 billion rescue" by the federal government, "state insurance regulators have said repeatedly that its core insurance operations were sound–that the financial disaster was caused primarily by a small unit that dealt in exotic derivatives."

However, according to the story, "state regulatory filings offer a different picture. They show that AIG's individual insurance companies have been doing an unusual volume of business with each other for many years–investing in each other's 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 went on to say that "more ominously, many of AIG's insurance companies have reduced their own exposure by sending their risks to other companies, often under the same AIG umbrella."

The Times implied that regulators were complicit with AIG's Ponzi-like reinsurance scheme because of concerns about the parent company's ability to pay off bailout loans.

"State commissioners are supposed to keep insurers from writing new policies if there is any doubt that they can cover their claims," said the article. "But in AIG's case, regulators are eager for the insurers to keep writing new business, because they see it as the best hope of paying back taxpayers."

W.O. Myrick, a retired chief insurance examiner for Louisiana, was quoted in the article as stating that a conglomerate like AIG "can keep moving assets around to clean up one company" at a time, when examiners weren't looking.

Only a coordinated, multistate examination of all AIG insurance companies would catch this, Mr. Myrick said. The article added that AIG has 71 American insurers spread throughout 19 states, and that those states do not conduct examinations simultaneously.

In a statement, AIG said the Times report "relies on the assertions of a consultant"–Thomas D. Gober, a former insurance examiner who now has his own forensic accounting firm–"paid to say hostile things about AIG in connection with a lawsuit, and another individual"–Mr. Myrick–"who admits he has not fully reviewed our books and inappropriately discounts the points made by our regulators, who do fully examine our books."

The company added that its insurance companies are "well capitalized, and absolutely committed to meeting policyholder obligations and maintaining strong capital levels. Never has the government asked otherwise."

Michael Moriarty, deputy superintendent for property and capital markets at the New York Insurance Department, said he did not agree with the way the Times article characterized AIG. He conceded that AIG is a complex entity, but said he would not equate that complexity with something sinister going on.

He said he was not aware of any asset-moving to spruce up an individual company's balance sheet for an exam. All licensed AIG companies are reviewed and analyzed on a quarterly basis, and any material movement of assets would be seen and questioned, according to Mr. Moriarty.

Companies can move capital around to shore up an affiliate's capital base, he said, but "that's not a sign of anything sinister."

While AIG does have a lot of companies domiciled in many states, Mr. Moriarty said the states are protective of their domestic carriers. For example, he said American Home Assurance is a New York-licensed AIG company. New York regulators, he said, make sure the company complies with the law and has enough assets to cover its liabilities, and other states do the same with their domestics.

Regarding AIG companies reinsuring each other, Mr. Moriarty said accounting rules are in place to guard against anything nefarious. He said if a New York-based AIG company gets reinsurance from another AIG insurer not licensed in New York–and the department therefore does not get the financial statements of the reinsurer–that reinsurer would be required to post 100 percent collateral.

"This is not a Ponzi scheme type of thing," Mr. Moriarty stated.

Joseph Fritsch, director of accounting policy at the department, added that multiple states do coordinate and conduct joint exams every three-to-five years.

Acting New York Superintendent Kermitt Brooks–who chairs the National Association of Insurance Commissioners AIG Managing Task Force–wrote a letter to the editor of the Times criticizing the article.

"During this extremely critical time, it is vital that important voices in the public discourse such as The New York Times act and speak responsibly with the full recognition that making inappropriate assertions based on incomplete information ultimately hurts both policyholders and taxpayers," he said.

Therese M. Vaughan, chief executive officer of the NAIC, said in a statement that "consumer protection is our first and foremost concern. The 71 state-regulated insurance entities within AIG are financially sound and are fully able to pay claims."

NEW CEO

Meanwhile, Mr. Benmosche will take over as AIG's new CEO on Aug. 10. He replaces Edward Liddy, who took the reins last year when the government agreed to rescue the company.

Mr. Benmosche, 64, is a former securities industry executive who took Metropolitan Insurance Company public in 2000 and built it into what is considered by some measures as the largest U.S. life insurer. He retired in 2006.

A former MetLife executive who worked closely with Mr. Benmosche before leaving the company described him as a tough manager who is numbers-oriented and not easily pushed. "Don't expect Mr. Benmosche to be a punching bag when he talks to Congress," this source told NU. "He will speak his piece and will not take the abuse Mr. Liddy did when explaining his position [to members of Congress]."

The source, who would speak only on condition of anonymity, said Mr. Benmosche is more of a "chief operating officer-type than a hands-off CEO. He operates in the numbers."

"Managers at AIG ought to be stepping up their efforts, because he will demand results," the source said. "He will take home reams of reports, and he will come back the next day ready to ask the tough questions."

Mr. Liddy, a retired Allstate CEO, accepted the AIG post for $1 a year and equity grants when the government took a 79.9 percent interest in the conglomerate in exchange for billions in taxpayer backing to keep the firm from drowning in credit default swaps sold to guarantee securitizations of subprime mortgages.

During his brief but tumultuous tenure, Mr. Liddy was blasted by congressional critics for paying big executive bonuses that he said were required by contract and necessary to keep top talent.