Congress May Probe AIG Pricing, Pay Practices

By | February 5, 2009

An influential U.S. congressman, concerned that American International Group Inc’s $150 billion federal bailout could be undermining the broader U.S. insurance market, is digging into claims that the insurer is driving down prices to win business.

Rep. Paul Kanjorski, chairman of the House subcommittee on capital markets and insurance, said he has received numerous conflicting reports about “market distortions” in the U.S. property-casualty market, which have prompted him and Spencer Bachus, the top Republican on the U.S. House Financial Services Committee, to ask the Government Accountability Office (GAO) to probe for answers.

At the same time, Kanjorski told Reuters in a telephone interview on Tuesday that AIG’s pay practices could come under increasing scrutiny.

“They (AIG) are not under the same controls that other organizations that got (government) money are; but under a new bill that has been passed it will be more involved, what they can and can’t do, and we can look back,” or claw payments back, said Kanjorski, a Democrat from Pennsylvania.

AIG, the recipient of $150 billion in federal aid last September and November, has irked taxpayers by promising about $1 billion in retention bonuses to employees rattled by its financial woes.

Bad mortgage bets left AIG in a severe cash crunch and on the verge of bankruptcy.

While Kanjorski said he was “very disturbed” by the bonuses, contacting management directly to voice his displeasure, he called the payments a “sideshow” to bigger issues.

“The amount is minuscule in comparison to other potential losses, and destruction of the economy,” he said, adding: “We have to keep our eye on the important big ball, not the little ball.”

AIG said it would “fully cooperate” with the GAO review.

The government stepped in to avert the insurer’s collapse, worried that it could have had global consequences since counterparties — including some of the biggest U.S. and European banks — had billions of dollars in exposure through AIG-issued contracts that guaranteed derivatives against default.

While the federal bailout eased such immediate concerns, AIG’s ultimate recovery depends on the company’s ability to sell off assets to repay a $60 billion federal loan while trying to limit further losses and retain employees and customers spooked by its financial troubles.

At the root of the GAO investigation is whether AIG, empowered by the government assistance it received, is cutting prices to retain customers and gain market share, even as market fundamentals suggest that prices, which have been in decline for several years, need to be raised.

Kanjorski said he expects the GAO study to take a few months, and based on findings, he could then call insurers to testify in an open hearing.

“Our most important job is that they (AIG) carry on, that counterparties are protected, and that we bring about some sort of recovery,” Kanjorski told Reuters.

AIG has denied the price-cutting claims made by numerous competitors.

Chief Executive Edward Liddy, in a speech on Dec. 11, said: “It will do us no good to overcome today’s financial problems only to find a few years down the road that we are sitting on a pile of unprofitable policies.”

In late afternoon trade, AIG shares were off 2 cents to $1.01 on the New York Stock Exchange.

(Reporting by Lilla Zuill; Editing by Lisa Von Ahn and Gerald E. McCormick)

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