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 Big “I” National News

P-C Trends
AIG to Focus on P-C Business, Sell Assets to Repay Debt
Under pressure to raise funds, the company puts subsidiaries on the market.

In a pivotal announcement last week, American International Group, Inc. (AIG) indicated its intention to focus solely on property-casualty and foreign general insurance, and sell its various other assets in order to repay its outstanding loan to the Federal Reserve.

Earlier this week, former AIG Chief Executives Hank Greenberg, Robert Willumstad and Martin Sullivan testified before the House Oversight and Government Reform Committee about business and pay practices following the company’s bailout by the Federal Reserve. Greenberg, who left AIG in 2005, was the company’s largest shareholder prior to the buyout. Willumstad acted as CEO for the company from June to September and was preceded by Sullivan. The three men attributed AIG’s failings to a variety of reason, but cited the overall poor state of the market and accounting rules that led to forced losses and credit downgrades as the primary culprits of the company’s breakdown.

AIG Chairman and Chief Executive Edward Liddy said in a conference call on Oct. 3 that the company will retain its U.S. p-c and foreign general insurance business and maintain a continued interest in its foreign life insurance operations, but will sell its personal lines business; a portion of its life insurance business and look for alternatives for its securities lending business.

“We are refocusing on our traditional strengths in property and casualty underwriting,” Liddy said. “We have a number of remarkable businesses with leading market positions and significant competitive advantages that could not be recreated today.”

The company is selling its assets to garner funds to repay up to $85 billion in debt borrowed from the U.S. government to cover losses it incurred because of the mortgage crisis. The company, teetering on the edge of collapse, accepted the bailout on Sept. 16, giving the government 80% ownership of what was once the country’s largest insurer. As of Sept. 30, AIG had drawn $61 billion from the loan, but could utilize more funds in the future if needed. AIG has two years to repay the outstanding loan, plus substantial interest and fees, but Liddy says if AIG’s assets go up the loan will be paid off earlier. Yesterday, the Federal Reserve Board also authorized an additional transaction that provides an additional $37.8 billion in credit to the company to help repay collateral investors and other parties provided to the company to obtain securities loans.

Liddy acknowledged that several potential buyers are interested in the company’s assets and expects some small AIG subsidiaries --- including Hartford Steam Boiler Inspection and Insurance Co. and the company’s 60% stake in Transatlantic Holdings Inc. --- to sell quickly. However, he declined to disclose the potential buyers or indicate when sales will take place.

“To realize our objective, we will sell a number of extraordinary businesses that are proving to be highly attractive to buyers,” Liddy said. “We have already been contacted by numerous strong, stable parties and we expect that buyers will recognize the value of these properties, be a good strategic fit and offer the greatest potential for growth, profitability and continuing opportunities for employees.”

Following AIG’s announcement, Standard & Poor’s downgraded the CreditWatch status of its ratings for the company and its subsidiaries to negative due to its outstanding debt and potential difficulties in executing the sale of its assets.

“The ‘A-/A-1’ counterparty credit rating on AIG relies on significant support from the $85 billion borrowing facility provided by the Federal Reserve Band of New York,” S&P said in an Oct. 3 statement. “The facility provides liquidity, allowing the company and its subsidiaries to meet debt and other obligations while it implements its plan to sell various businesses.”

S&P says it will reevaluate AIG’s ratings as it determines buyers and sells off its subsidiaries.

“We will analyze the capital structure and business prospects of each potential subsidiary sale and make rating changes as necessary when those sales materialize,” says Rodney Clark, an analyst with S&P. “For the subsidiaries that are likely to remain part of AIG, the ratings will depend on the ongoing ability to attract and retain profitable business, and on the capital structure of AIG once the corporate structuring is completed.”

AIG also had to address some negative press this week as news leaked out from the hearing about a weeklong retreat at the St. Regis Resort in Monarch Beach, Calif. that life insurance subsidiary AIG General held for its top agents a week after the company accepted help from the Federal Reserve. The outing carried an estimated $442,000 price tag, including $150,000 for meals and $23,000 in spa fees, according to the committee.

In response to the allegations of overspending made during hearing, AIG released a statement clarifying the trip that was planned well in advance of the bailout.

“The event, mischaracterized as an ‘executive retreat,’ was held by one of AIG’s insurance subsidiaries for independent life insurance agents, not for AIG employees,” the release said. “These agents were top business producers for the company, and of the more than 100 attendees, only 10 were employees of the AIG subsidiary who were there to represent their company. No AIG executives from headquarters attended. “

Michelle Payne (michelle.payne@iiaba.net) is IA’s managing editor.

On the Hill
What does the “Bailout” Mean for You?
Small businesses likely to benefit.

The Emergency Economic Stabilization Act of 2008, referred to in the media as the Wall Street bailout or Wall Street rescue, has many independent agents and brokers asking how it will affect insurance consumers and their agencies.  

This law authorizes the U.S. Department of the Treasury to establish a troubled asset purchase program (TARP) and a principal and interest payment guarantee program for purchasers of troubled assets. This law also extends several expiring tax breaks and includes provisions regarding mental health benefits.

It is unclear whether insurance companies will choose to participate in TARP given the limitations on participation such as the nonvoting warrants requirements, public disclosure of participation and executive compensation limitations. While it is highly unlikely that Big “I” members will participate directly in TARP, many provisions of the act are intended to provide more stability to the financial markets in general, especially in the area of credit liquidity, which could indirectly help independent insurance agencies. 

Even though they are not to blame for the current economic meltdown, the ability to access credit is especially important to small businesses. This bill should help revive frozen credit markets to bring more liquidity, which should help small businesses. The increase in the FDIC limit from $100,000 to $250,000, which is included in the bill, also should help provide more stability to the banking industry. This limit increase likely will have the most positive impact on small banks and small businesses.  

The bill also extends several tax breaks for both individuals and businesses, such as an extension of the 15-year cost recovery for leasehold improvements through 2009. The bill also mandates that insurers who cover mental illnesses now must provide benefits, copayments and treatment limits equal to those for physical ailments.

Margarita Tapia (margarita.tapia@iiaba.net) is Big “I” director of public affairs.





VIEW: P&C Trends
The Power of Words
Sen. Reid’s comments last week had far-reaching consequences.

An unfortunate episode last week was a reminder of the danger of spreading rumors and misinformation. The United States economy has been in the grips of economic volatility that has not been seen since the Great Depression of 1929. Legendary financial giants like Merrill Lynch, Lehman Brothers and AIG have been absorbed, gone out of business or forced to shed operations. In AIG's case, the non-insurance operations led to the problems, and the exposure was not understood by stock analysts, the investing public or even senior management. The uncertainty gave great concern to investors, policyholders and the public at large.  

It was against this backdrop that Senate Majority Leader Harry Reid (D-Nev.) started a near panic with his comment regarding a major insurance company. Speaking prior to the Senate's 74-25 vote approving H.R. 1424, the Emergency Economic Stabilization Act, Reid told colleagues that Congress "didn't have a lot of leeway on time" to approve the $700 billion legislative package.

"One of the individuals in the caucus today talked about a major insurance company. A major insurance company — one with a name that everyone knows that's on the verge of going bankrupt. That's what this is all about," Reid said. 

As a result, the public tried to figure which carrier Reid was referencing and of course, given the anxiety  in the market, shares of several major life insurers plummeted. Among the hardest hit were MetLife Inc., (NYSE: MET) down 16.7% to $40.11; Hartford Financial Services, (NYSE: HIG) down 20.5% to $30.29; Axa ADS, (NYSE: AXA) down 11.8% to $30.26; and Principal Financial Group, (NYSE: PFG) down 15.1% to $31.95. Reid, after his comment that an insurer was on the brink of failure, issued a statement through an aide, Jim Manley, that said, “Senator Reid is not personally aware of any particular company being on the verge of bankruptcy.” 

This situation highlights the importance of using good judgment in both actions and words. Independent insurance agents undoubtedly have been contacted numerous times since the beginning of the financial crisis by their customers regarding their insurance policies and carriers. (The Big “I” has been providing information on this issue which can be accessed by members at www.independentagent.com via the home page)

Independent agents need to provide accurate, timely information by reviewing information from the ratings agencies, the carriers themselves and other reputable sources and shouldn’t engage in speculation and innuendo. This situation harkens back to World War II and the expression "loose lips sink ships" which was coined as a slogan by the U.S. Office of War Information in an attempt to discourage people from inadvertently giving useful information to enemy spies. Of course, I'm not suggesting that Sen. Reid was attempting to do any harm, but rather he had an unfortunate error in judgment.  

Last week's situation is a reminder to all of us not to speculate, as it can result in unintended consequences causing problems for third parties and damaging our own credibility.  Independent insurance agents should remember the impact of their comments on customers and carriers.

Dave Evans (dave.evans@iiaba.net) is a certified financial planner and IA l-h contributing editor.




P&C Trends
Analyzing P-C Insurer Capitalization Rates
Data shows rates for p-c industry are higher than banking industry.

After last week’s Insurance News & Views article, “The Property-Casualty Balancing Act,” readers raised the question of how p-c insurers’ capitalization rates compare over time --- that is, the ratio of an organization’s net worth to assets.

That question can be answered by looking at data on all FDIC insured banks, an indicator of banking capitalization rates, and A.M. Best Aggregates & Averages for p-c industry data.  As shown in the graph below, it turns out the current situation is not an aberration and p-c capitalization rates are several times higher, as compared to industry assets, than  the banking industry.


*Source: A.M. Best Aggregates & Averages and FDIC.Gov.

The information in the graph is probably not a surprise to some as it is intuitive that as a percentage of assets, insurers would hold a greater proportion as “cushion” for unexpected events than would a typical FDIC-insured bank. Banks, after all, generally avoid risks and seek to make safe loans. Insurers, on the other hand, are decidedly in the risk taking business and might expect more variability. This, however, is an oversimplification and no one should conclude that the typical p-c insurer is “better capitalized” than the typical bank. An assessment of an insurer or bank’s capital adequacy is actually a complex question. The industry as a whole as well as individual institutions are reviewed by legends of analysts in order to asses “capital adequacy.” 

Paul Buse (paul.buse@iiaba.net) is president of Big I Advantage^SM and a licensed p-c agent.




Legal Advocacy
Red Flag Rules Prevents Identity Theft
Many insurance agents and brokers are exempt from rule.

Last year the Fair Credit Reporting Act was amended by the Fair and Accurate Credit Transactions Act of 2003 (“FACT Act”). The primary purpose of the FACT Act was to combat identity theft. 

Identity Theft Red Flag Rules adopted under the FACT Act became effective Jan. 1 with compliance mandatory by Nov. 1 for entities to which the rules apply. In summary, the rules require covered financial institutions and creditors that hold “covered accounts” to implement a program to detect warning signs or “red flags” of identity theft, so identity theft can be prevented and mitigated.

Key definitions under the Rules include:

1) Financial institutions - State/national banks, state/federal savings and loan associations, mutual savings banks, state/federal credit unions or any other entity with an account from which the owner makes payments/transfers;

2) Creditors – any business that provides services in advance of receiving payment (e.g., an entity that arranges, extends or renews credit); and

3) Covered accounts – any account used for a personal, family or household purpose involving multiple payments (e.g., credit card accounts, checking accounts or car/home loans).

Insurance agents/brokers typically do not fall within the definition of a financial institution or creditor under the rules, and in those instances, are not required to comply with the rules. The acceptance of credit card does not alone make an entity a creditor under the rules, nor does referring a customer to an entity that is a financial institution, such as for a loan. However, if a business, including an insurance agency or brokerage, has covered accounts and conducts business in a way that meets the definition of a financial institution or creditor under the rules, compliance is required. 

For an agency or broker owned by an entity that meets the definition of a creditor or financial institution under the rules, the entity that owns the agency or broker should be aware of the rules and may determine the program should be implemented. 

For entities subject to the rules, there is no standard program they can adopt, as the program must be customized to the entity’s size, complexity, organizational structure and business operations/activities. Any such program must include reasonable policies and procedures to detect red flags (described below) of identity theft in covered accounts, and prevent and mitigate identity theft in connection with the opening and maintenance of covered accounts. 

Red flags of identity theft may come from things such as past incidents of identity theft, reports in industry publications and information published by regulators like the FTC. Examples of red flags can include: warnings/alerts from credit bureaus, presentation of suspicious documents (such as those with suspicious personal identifying information or a suspicious address change) and notices from anyone who believes he/she has been a victim of identity theft.

An entity required to have a program must have the initial program approved by its board of directors or an appropriate committee of its board of directors. In addition, the board of directors, an appropriate committee of the board or someone from senior management must be involved in the oversight, development, implementation and administration of the program, and the entity’s staff must be trained to implement the program. 

An entity subject to rules can face civil penalties by the FTC for failure to meet its requirements, but it is uncertain if private lawsuits are permitted for violations of the rules.
For more information on the FACT Act and the rules, log in as a member to www.independentagent.com, go to Legal Advocacy, select Memoranda & FAQs, and select Overview of the Fair Credit Reporting Act, the Fair and Accurate Credit Transactions Act and the Drivers Privacy Protection Act.

Debra Perkins (debra.perkins@iiaba.net) is executive vice president and general counsel of IIABA.