How You Too Can Become a Crook in a Gucci Suit

I love it when the news cycle brings me home to blogging on financial topics, especially when I can make a connection. Now gather round and hear a good story:

Once upon a time there was a powerful man who ran a large company. He has a large stake in play since he was given his shares to go with a healthy dose of the “option gun” which gave him more.

But then something nasty happened called the 2005 Hurricane season. And when this powerful man went and checked his reinsurance cupboard for the Gulf Coast it was bare:

For instance, Allstate Corp. said it didn’t buy reinsurance in Louisiana because models showed a “one-in-500-year” risk of a Katrina striking Louisiana. A one-in-100-year event means there’s a 1% annual probability of such a strike; a one-in-500-year event means there’s a 0.2% annual chance. Instead, Allstate concentrated its reinsurance program on high-risk areas, such as Florida, where the company could recoup the cost of the reinsurance through premium increases.

Then what is a good insurance executive to do?
File a 10b5-1 trading plan and make do.
So with the help of his lawyer who can fix anything so the fleecing sticks,
Ed Liddy took the good advice and to the trading plan his name was affixed.

And then the bitch storms began to blow. Minimal Hurricane Cindy hit us first.
Dennis followed and Allstate was covered but it close and could have been worse!

Then Katrina closed in.
What is Ed Liddy to do?

Some say he went on CNBC that day.
And to the world he declared that Allstate was covered
By Reinsurance contracts that were not in his cupboard!

Follow the money gentle Editilla ma bon amie,
straight to Form 4 for Ol Ed Liddy

Because when you follow this link to the trade
You’ll see on 8-29 Ol Ed sold and made…
A pile of money, $16.8 Mill before tax to be exact
And after that trade did Ol Ed relax!

And retire in style Ol Ed Liddy did.
To the Boards of Kroger and 3M where he served
Collecting Phantom Stock he no doubt richly deserved
But then his buddy Paulson called and told Ed he was needed at the federal reserve

“AIG has problems with subprime you know” he was told.
“But worry not for money ’cause AIG will take care of your billfold
For AIG is the company that made Hank Greenberg filthy rich
Until he was caught cooking the books that nasty bitch!”

So now Ol Ed Liddy is back in the saddle
Heading up AIG now that it is feeble

A natural question is will the taxpayers get a good deal from Ol Ed Liddy
Or will we take it on the chin and be left bloody?

sop

18 thoughts on “How You Too Can Become a Crook in a Gucci Suit”

  1. Great post again SOP. Ed is not the person you want to place incharge of risk management. He was ill prepared for Katrina and his Allstate company is upto their neck in sub-prime loans itself. Of course news reports are already running the idea that Allstate should get AIG’s very profitable auto insurance arm as it would be a “good fit”. Yea. Its also the most profitable business line for insurance companies as well.

  2. Steve, I’m a little confused on your 1st post above where you say “Allstate should get AIG’s very profitable auto insurance arm”. I wasn’t aware that AIG had an auto insurance arm. It is my understand that AIG on the insurance side is made up of a lot of individual insurance companies (like over 100) scattered all around the country/world on either a regional basis, or a national basis, or an international basis. I see no way to effectively move one line of business, or a substantial amount of one line, to another carrier unless they put all their auto business they have collectively into just one company or a select few, and then those individual carriers were sold off to someone like Allstate. They haven’t done that in the past so I would pretty much guarantee they won’t do that in the future. And I don’t think you will see them trying to spin off select lines of business from all those individual to other companies. If they break up the insurance side of the company, you will see sell off of whole companies at a time, and that company’s entire book of business.

    I haven’t seen any of the media/news reports that you referenced, but maybe you can link some here as I’d be interested in reading what is out there on this.

  3. Sop, I think AIG Direct is just their online set-up to buy insurance direct vs going through an insurance agent. Look at your 1st link and you can see that a person can buy auto, property, etc insurance through that. There are a lot of carriers offering that these days, but also still use independent agents to write coverages through the various companies under their umbrella of companies.

    Below is a quote from something I read that lists the AIG member companies licensed to write business in just CA alone.

    “AIG owns more than two dozen companies licensed to offer insurance in California, according to the California Insurance Commissioner. They include 21st Century Casualty Co.; 21st Century Insurance Co.; AIG Casualty Co.; AIG Centennial Insurance Co.; AIG Premier Insurance Co.; AIU Insurance Co.; American General Indemnity Co.; American Home Assurance Co.; American International Insurance Co. of California Inc.; Birmingham Fire Insurance Co. of Pennsylvania; Commerce And Industry Insurance Co.; GE Auto & Home Assurance Co.; GE Indemnity Insurance Co.; Granite State Insurance Co.; Hartford Steam Boiler Inspection and Insurance Co.; Insurance Co. of the State of Pennsylvania; Landmark Insurance Co.; National Union Fire Insurance Co. of Pittsburgh, Pa; New Hampshire Insurance Co.; Pacific Assurance; Putnam Reinsurance Co.; Transatlantic Reinsurance Co.; United Guaranty Commercial Insurance Co. of North Carolina; United Guaranty Credit Insurance Co.; United Guaranty Residential Insurance Co.; and Yosemite Insurance Co.”

    If you went into some detail for some of the companiies like American General, you may find that American General was probably made up of numerous insurance companies (such as Maryland Casualty, numerous American General named companies, etc) at the time AIG took over/bought them out..

    I looked for a comprehensive listing of all the different insurance companies under the AIG shell/umbrella, but couldn’t fine one. the # of companies listed to write in CA alone is over 2 dozen, I I think I read or heard that AIG had well over 100 companies as part of the group.

  4. For what it is worth, some of AIG’s insurance businesses (and AIG Direct is among them) are pretty much self-contained and therefore easily salable. ALL, Travelers, GEICO, Progressive and others would probably be interested in that purchasing that business.

    Others are highly intertwined with one another and would be very difficult to unbundle. Their domestic Commercial Insurance business is that way.

  5. Another thing about the insurance end of AIG is I was thinking that is a very stable and probably profitable part of the group, and shedding too much of that may end up sinking the remaining parts. I have read that a lot of producers (agents and brokers) are moving business away from some of the AIG companies at renewal and for new business mainly due to the uncertainity of it’s future, and it’s strength to maintain a strong claims paying ability. With what has happened to their stock value, and the downgrades in their ratings, I don’t blame the producers at all.

  6. Allstate would be a natural contender to buy AIG’s U.S. personal auto insurance unit, said Barile, which would make Allstate the country’s largest auto insurer, surpassing giant mutual State Farm. Liddy, appointed to oversee the sale process, was CEO of Allstate from 1999 to 2006.

    http://biz.yahoo.com/rb/080922/aig_ceo.html?.v=2

    Mr. Barile is an insurance consultant from Southern California and is probably the same person who left this comment on an industry blog recently—

    “AIG controls almost 8 Percent of US P/C market, ahead of Chubb, Travelers, CNA, etc.If Ed Liddy is in charge he can sell the AIG personal book 2.9% of the market to Allstate to give them 14% almost as much as State Farm. AIG surplus lines in US as AMBest has said is the largest writer of this line other than Lloyd’s that can be sold to ACE where Evan Greenberg sits as CEO.In the interim this market dislocation will enable C. V. Starr to continue to grow as they continue to take AIG operating executives quietly. ”

    Anouther link of note—

    http://globalpensions.com/showPage.html?page=gp_display_news&tempPageId=815924

  7. ALL might be a buyer, but I suspect the AIG Direct internet platform has greater value to some other buyers.

    CV Starr is now a non-player: it’s deep-pocketed grandaddy, MRG, just lost 95% of his capital. It will no longer be a factor. (And note: it wasn’t an actual insurer anyway: it was an MGA.)

    From what I understand, the AIG Domestic Commercial Insurance business is structurally indivisible. That makes it too big for Evan to buy. He could nibble at it in pieces if it were sold that way, but it can’t be. So the guy you are quoting comes up short from an information perspective.

  8. I get a sense that a lot of insurers providers are going to get the short end of the stick as this plays out – meaning that virtually overnight they’re competing in a market that changed so rapidly and significantly there was no way for them to be prepared.

  9. I trust your analysis on these matters claimsguy and hope ALL is well for AIG so to say. Do you have any opinion about the future of AIG in terms of stock holders regaining any of their market value for their shares?

  10. Steve you trust Mr CG on this and not when he called us all a bunch of baffoons?

    Personally I’m worried he is going soft on us. 😉

    It’s all good but it will be better when we’re able to sit down and drink a brew together when this is done.

    We have some things in the works I can not discuss
    But rest assured our profile on slabbed is growing and that you can trust.

    sop

  11. Dominic I admire your loyalty to your best friend and I am certain the Ed Liddy you know is indeed a nice gentlemen. It is also only part of the total picture of this very interesting man.

    There is a duality to Ed Liddy that we find most interesting. You have the Ed Liddy who talks contract sanctity when it involves his investment Banking Wall Street buddies for instance. On the other hand you have the Ed Liddy who ruthlessly made certain Allstate not honor their contracts with policyholders after Katrina and the Ed Liddy that fired 6400 of the highest paid Allstate agents becausde THEY made too much money.

    People are complex that way and Ed Liddy is no different. In the end what the AIG bonus mess really shows how out of touch the business elites and the Fluffers at US Treasury are from the rest of this country.

    sop

  12. Sop:

    Really? Ed Liddy fired 6400 of his highest paid Allstate agents becausde THEY made too much money? I CAN PERSONALLY RELATE TO THAT.

    As you mentioned to Dominic, there are many sides to Mr. Liddy – as there are many sides to all of us. But no matter what happened to me (i.e., if became a rich snob – which I’m NOT), I WOULD NOT forget my loyal employees who helped me for decades get where I am today – and I certainly would not tell them that they were being “let go” because they made too much $!!

    ANOTHER FINE EXAMPLE OF WHAT $ AND GREED DOES TO PEOPLE.

    SHIRLEY HEFLIN

  13. Shirley he fired them because he could; Allstate was trying to emulate the State Farm independent contractor sales model. He axed agents who would not convert ‘voluntarily’, some of whom were literally months from retirement…..a lifetime of service and loyalty repaid with pi$$ and vinegar.

    When Liddy left Allstate the BoD gave him credit for extra years of service he never worked, something they could have done for some of those older agents IMHO.

    It shows how the system works.

    I didn’t re-read the comments when I pulled this one up from the archives and yes I think Dominic is the real deal. Claims guy had to cease commenting with us shortly thereafter due to the nature fo the subject matter. He still reads us though.

    The easy way to find it is to use the calander in the top right and click back to September 23, 2008. The permalink is

    http://slabbed.wordpress.com/2008/09/23/this-one-is-for-editilla-how-you-too-can-become-a-crook-in-a-gucci-suit/

    sop

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