SLABBED Daily – April 3, 2009 (Insurer bankruptcy edition)

Here are some of the insurance/finance stories I’m tracking this morning:

From the Wall Street Journal we find Credit Suisse analyst Thomas Gallagher opinied the Hartford may need to post collateral on about $400 million of credit-default swaps it has written if it suffers further downgrades to its ratings. Moody’s downgraded the Hartford to one notch above junk status Monday. Predictably the CEO and architect of the Hartford plunge into toxic paper Ramani Ayer remains in firm denial:

Hartford’s capital cushion is threatened by weakened earnings, losses in the company’s investment portfolio and its exposure to variable annuity products in the U.S. and Japan, the ratings agency said.

Hartford Chief Executive Ramani Ayer said in a statement late Monday that he disagrees with the Moody’s ratings actions. “The Hartford remains well capitalized to meet our policyholder obligations,” he added.

In its 2008 annual filing with the Securities and Exchange Commission, Hartford said ratings downgrades could trigger collateral calls on its derivatives, and limit its ability to purchase additional derivatives. As of now, the downgrades aren’t severe enough to cause such problems.

But another downgrade is possible, according to Moody’s, if the company suffers certain additional losses in its investment portfolio or certain capital declines.

From the we find that Allstate and Allianz both have units vulnerable to default: (In Allstate’s cases in addition to the Willow tREe)

Life insurance units at Allianz, Allstate and Manulife Financial held more risky mortgage assets than capital and reserves at the end of 2008, making them more vulnerable to loan defaults.

The credit quality of commercial mortgage-backed securities will likely decline this year as defaults rise and the real estate market deteriorates, a new report from Fitch Ratings says. The investment portfolios of the nation’s largest life insurance companies might suffer as a result……

Fifteen of the top 20 life insurers had more commercial mortgage-backed securities than capital and reserves. Five of those companies held more of the riskier bonds, the ones rated A or less. They were Allianz Life Insurance; Allstate Life Insurance; Manulife’s John Hancock Life Insurance; Genworth Life Insurance, part of Genworth Financial; and Hartford Life Insurance, a unit of Hartford Financial Services.

Next up we circle back to AIG as the IRS is challenging another of the insurers sham tax transactiosn involving an offshore subsidiary. This time HP went to the house that Greenberg built for tax advice to their detriment.  The Wall Street Journal picks up the coverage:

The Internal Revenue Service is challenging tax benefits received by Hewlett-Packard Co. from an offshore transaction it purchased from American International Group Inc., court records show.

The dispute centers on yet another offshore tax-cutting deal set up by the AIG unit at the heart of the executive-bonus controversy.

The IRS is challenging the taxes saved by AIG through a series of offshore transactions entered into with several banks, including Crédit Agricole SA of France, Bank of Ireland and Bank of America Corp., according to an AIG lawsuit. AIG paid $61 million in disputed taxes and sued the U.S. government in federal court for a refund.

But a transaction sold to Hewlett-Packard shows that AIG’s tax-cutting deals spread beyond the financial sector, filings in a case in U.S. Tax Court show. According to a person familiar with the business, AIG’s tax-structuring operation was even bigger than the credit-default-swaps business that led to the company’s meltdown.

“We engage in many complex corporate transactions that involve complicated tax issues,” said a spokeswoman for Hewlett-Packard. “Unfortunately, the IRS is claiming that with regard to this one particular transaction H-P’s tax treatment was incorrect. We disagree with the IRS’s position and are optimistic that we will prevail in court.”

So-called “foreign-tax-credit generators” like the ones AIG structured for itself and for Hewlett-Packard effectively stopped in 2007 after proposed IRS regulations sought to shut them down. The agency is now mounting a crackdown on them arguing that they weren’t permitted even before the 2007 proposed regulations explicitly forbade them. A wave of litigation is expected over such deals.

Now the aftermath of doing sham reinsurance transactions with AIG as Berkshire Hathaway exec Elizabeth A. Monrad heads off for an 18 month stretch in the Grey bar hotel for helping AIG cook their books:

General Re Corp.’s former chief financial officer was sentenced to 18 months in prison Thursday for her role in a fraudulent scheme to manipulate American International Group’s (AIG) financial statements.

Elizabeth A. Monrad, 54, of New Canaan, Conn., also was ordered to pay a $250,000 fine.

On Feb. 25, a federal jury in Hartford found her guilty of conspiracy, securities fraud, false statements to the Securities and Exchange Commission and mail fraud charges.

Monrad, who was Gen Re’s chief financial officer from about June 2000 through July 2003; former Gen Re executives Ronald E. Ferguson, Robert D. Graham and Christopher P. Garand; and Christian M. Milton, AIG’s vice president of reinsurance, were accused of participating in a scheme to falsely inflate AIG’s reported loss reserves.

Last October, a federal court found that AIG’s shareholders lost between $544 million and $597 million as a results of the fraudulent scheme

So much for those pesky “I’s” eh Warren?

Finally a sneek peek at my next Moral Hazard post (h/t TPM):


2 thoughts on “SLABBED Daily – April 3, 2009 (Insurer bankruptcy edition)”

  1. Why on earth is Hartford writing credit default swaps?

    Of course it is obvious that none of these people thought that much about the idea of downgrades triggering collateral obligations.

    A lot of economic news is not all that bad, but there are still at least a few more shoes to drop before we can be sure that we are heading out of it. Commerical realestate loans are having their turn right now.

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