AIG - Where There Is Smoke, There May Be Fire (And There Ought To Be Sources)

The NY Times front-pages a thinly sourced story warning us that AIG may be a house of cards:

The dozens of insurance companies that make up the American International Group show signs of considerable weakness even after their corporate parent got the biggest bailout in history, a review of state regulatory filings shows.

Over time, the weaknesses could mean trouble for A.I.G.’s policyholders, and they raise difficult questions for regulators, who normally step in when an insurer gets into trouble. State commissioners are supposed to keep insurers from writing new policies if there is any doubt that they can cover their claims. But in A.I.G.’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.

Let's start with a tedious "I told you so" moment - last March I noted that AIG had managed to lose plenty of money in their conventional lines of business, mainly by aggressively investing insurance premiums in mortgage backed securities.  Michael Lewis made a similar point more recently in Vanity Fair.

Secondly, although Mary William Walsh of the Times is reporting from one of the financial capitals of the explored universe her primary sources seem to be W. O. Myrick, a retired Louisiana insurance examiner, Thomas D. Gober, a former insurance examiner now in Mississipi, and Rob Schimek, the CFO of AIG.  That's it?  We can all hope that a front page story will shake lose a few more sources.

Subject to that caveat, the scary stuff is scary:

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.

...

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.

“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.”

Ms. Walsh studiously avoided the use of the phrase "Ponzi scheme", so I will too.  However, let me ask a question - if a company is just too cool to examine, are they engaging in a Fonzi scheme? 

We are offered a couple of "No worries" quotes from insurance commissioners in Pennsylvania and New York, but where is the credibility?

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.

And hints of a Fed-instigated cover-up:

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.”

I am keeping my shoes on for now, but let's hope truth is putting its boots on.

Comments

[Fresh Air]

Cross-investment within the same holding company is definitely not reinsurance. I wonder if the N.J. & N.Y. regulators aren't concerned by this because Ms. Walsh has her facts wrong.

Not that AIG isn't a house of cards, or a disaster in general, but no risk manager at any insurance company would consider cross-investment as legitimate reinsurance. All of this would also be disclosed on the insurance companies' state filings, so Walsh shouldn't have to ask an expert what's happening, she should be able to read it off the footnotes for herself.

[Rick Ballard]

FA,

Better wait until Uncle Ben's 'Washed in the Blood of the Fed' debt monetization program starts winding down. AIG's dirty portfolios should be clean as a new lamb by spring (no guess as to what year).

[John Smith]

Change the name to "Ponzie Scheme" and see how it flies.....

[Jim]

Anyone who think eliot spitzer's vendetta against Hank Greenberg turned out well, raise your hand!

[daleyrocks]

Not many specifics in that article or in the comments from the "experts."

Investing in the stock of related companies is typically called stacking capital. It all comes out in GAAP consolidated financials but since each regulated entity files separate statutory statements, the stacking is less apparent and the illusion of excess capital is created.

Reinsuring with affiliated entities is also not illegal but typically requires regulatory approval of the contracts. Even 100% reinsurance for some business is not unusual or prohibited. Where it can become a concern is if the business is being reinsured to a less credit worthy entity - one that leverages itself more highly than the ceding company or has a history of deficient reserves. The article didn't make those points. Looking at the Bests ratings of the various AIG entities would give clues about that or if the business was flowing offshore to affiliates in less regulated climes.

Hank Greenberg did have a well deserved reputation for telling insurance regulators to pound sand, but all the article does is raise smoke about a bunch of permitted insurance industry practices. The 2005 restatement AIG booked showed they were not above some chicanery, but some specifics would have been nice.

[Melinda Romanoff]

A concise summation of the re-in industry's methodology.

Thanks.

And my Daley's a bit of a power freak, but that's just me.

And it's not Janet.

[daleyrocks]

Melinda - Are you speaking of me? Heh!

Greenberg was cooking the books no question before the 2005 restatement, turning losses in the car warranty business into realized investment losses as I recall. He and his CFO got a little too cute with the games.

A company like AIG that was posting 14% quarter after quarter growth in income in a cyclical industry was too good to be true. With its size and dominance of markets its results should have reverted to the mean unless they were cheating or cooking the books. They were doing both. They were paying extra commissions for business flow to make an playing field unlevel, for which Spitzer fined the big brokers and their books were phony. Whether there is enough crap left on their books from the Greenburg days is a valid question. When the company was a virtual dictatorship it's tough to find all the sins of the past.