Nothing is wrong with spreading risks to other companies, a practice known as reinsurance, when it is carried out with unrelated, solvent companies.
It can also be acceptable in small amounts between related companies. But A.I.G.’s companies have reinsured each other to such a large extent, experts say, that now billions of dollars worth of risks may have ended up at related companies that lack the means to cover them.
If my wife is my grandmother,
Then I am her grandchild.
And every time I think of it,
It simply drives me wild.
SLABBED sang a slightly different version of the song in a Sop and Nowdy tag team post last October: As the husband of my grandmother, I am my own grandpa! My name is RenaissanceRe.
NYT called the tune today in After Rescue, New Weakness Seen at A.I.G.
In the months since A.I.G. received its $182 billion rescue from the Treasury and the Federal Reserve, 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.
But state regulatory filings offer a different picture. They show that A.I.G.’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. Insurance examiners working for the states have occasionally flagged these activities, to little effect.
More ominously, many of A.I.G.’s insurance companies have reduced their own exposure by sending their risks to other companies, often under the same A.I.G. umbrella.
Not only did the NYT call this down home tune, the article quotes two sons of the South:
“An organization like this one relies on constant, ever-growing premium volume, so it can cover and pay for the deficits,” said W. O. Myrick, a retired chief insurance examiner for Louisiana.
If A.I.G.’s incoming premiums shrink, he warned, “the whole thing’s going to collapse in on itself.”
Mr. Myrick has not fully examined all the A.I.G. subsidiaries but said his own recent review of many state filings raised serious concerns, particularly about the use of reinsurance to “bounce things around inside the holding company group.”
“That is a method used by holding companies to falsify the liabilities,” he said.
Welcome to SLABBED, Mr. Myrick and welcome back, Tom Gober:
“Eventually, there’s going to be a battle between the policyholders and the feds,” said Thomas D. Gober, a former insurance examiner who now has his own forensic accounting firm that specializes in insurance fraud. “The Fed is going to say, ‘We want our money back,’ but the law says, ‘Policyholders come first.’ It’s going to be ugly.”
Mr. Gober is a consultant for a lawsuit on behalf of A.I.G. policyholders, filed in California Superior Court in Los Angeles. The lawsuit seeks a court order requiring all A.I.G. subsidiaries doing business in California to put enough money to cover their obligations into a secure account controlled by the state treasurer.
The condition of A.I.G.’s individual companies is hard to see in the parent company’s filings with the Securities and Exchange Commission. Those filings simply tally all the individual subsidiaries’ financial information.
The companies’ weaknesses emerge in their filings with state insurance regulators — particularly when several are reviewed together. But that appears not to happen often, because there are so many. A.I.G. has more than 4,000 units in more than 100 countries.
Responsibility for A.I.G.’s 71 American insurance companies is spread among 19 state insurance commissions, which do not conduct examinations simultaneously.
As a result, Mr. Myrick said, a conglomerate like A.I.G. “can keep moving assets around to clean up one company” at a time, when examiners were looking. He said that it would take a coordinated, multistate examination of all the insurance companies to catch this.
No summary can do justice to the excellent research and writing of NYT’s Mary Williams Welch and full-size version of the complete graphic.
Normally, when an insurance company weakens, regulators in its home state will first measure its capital. They may demand a weak company rebuild its capital, and if it fails, eventually bar it from selling new policies.
Like New York regulators, Pennsylvania regulators say they do not see a problem. “The insurance companies remain strong and are probably the most valuable assets within the A.I.G. structure,” said Joel Ario, Pennsylvania’s insurance commissioner. “To the best we know it, we think the companies are sound.”
But policyholder advocates said they feared state regulators were deferring to the wishes of the Fed and Treasury, to use the insurance operations to pay back the taxpayers.
“The insurance commissioners, for whatever reason, are letting them do this,” Mr. Myrick said. “I’d be jumping out of my shoes.”
While Mr. Myrick tries to keep his shoes on, the company said the interdependency of its businesses posed no problem and strongly disputed that any units had obligations they could not pay.
“There is absolutely no concern about the capital in these companies,” said Rob Schimek, the chief financial officer of A.I.G.’s property and casualty insurance business. The company authorized him to speak about these issues.
No loafers on this one, folks, it’s time to tie your laces and hang on.