States Dispute Article Questioning AIG Insurance Units’ Finances

August 3, 2009

State insurance regulators are criticizing a New York Times article that reported that insurance subsidiaries of American International Group, Inc. “show signs of considerable weakness” and that called into question the effectiveness of state regulation of the insurance giant.

The article, After Rescue, New Weakness Seen at A.I.G., by Mary Williams Walsh, published July 30, claimed that although state regulators have been consistently maintaining that AIG insurance units are financially sound, filings in state insurance departments indicate what the author says is an unusual degree of interdependency among the AIG units. These filings, the article says, show the subsidiaries invest in each other’s stocks, borrow from each other and reinsure each other’s insurance policies.

Also, many of AIG’s insurance companies “have reduced their own exposure by sending their risks to other companies, often under the same A.I.G. umbrella,” according to the New York Times.

Critics in the article warn that “billions of dollars worth of risks” may now be placed with AIG units that could be unable to cover them if needed– a situation AIG denies exists.

AIG defended its subsidiaries.

“State regulators who have examined AIG’s books have confirmed that AIG’s insurance companies are fully equipped to meet policyholder obligations. AIG’s insurance companies are well capitalized, and absolutely committed to meeting policyholder obligations and maintaining strong capital levels. Never has the government asked otherwise,” AIG said in a statement. “Our use of affiliate reinsurance is proper and properly accounted for in accordance with applicable statutory guidance. A recent media report relies on the assertions of a consultant paid to say hostile things about AIG in connection with a lawsuit, and another individual who admits he has not fully reviewed our books and inappropriately discounts the points made by our regulators who DO fully examine our books.”

The article cites concerns raised by W. O. Myrick, a retired chief insurance examiner for Louisiana, and Thomas D. Gober, who runs a forensic accounting firm and is a consultant in a lawsuit against AIG by California policyholders.

But representatives for the National Association of Insurance Commissioners say the New York Times article is based on inaccurate and incomplete information and is misleading. They say the author “relied heavily on critics with less access to the facts than state regulators and failed to fully explicate the multiple ways in which policyholders are protected by state regulators.”

“As public officials, it is the responsibility of the NAIC and state regulators to correct any misinformation that is being circulated,” said Therese M. (Terri) Vaughan, NAIC chief executive officer. “Consumer protection is our first and foremost concern. The 71 state-regulated insurance entities within AIG are financially sound and are fully able to pay claims.”

Responsibility for regulating those 71 AIG subsidiaries is shared by 19 states but NAIC says the effort has been coordinated.

The state commissioners’ point was underscored in a letter sent to the editor of The New York Times by Kermitt Brooks, acting New York insurance superintendent, and Joel Ario, Pennsylvania insurance commissioner.

In the letter, the NAIC states that insurance regulators are engaged in a coordinated, comprehensive review of AIG’s U.S. insurance company subsidiaries at both the level of the individual companies and within and across the entire group of companies.

“We are convinced, based on a complete, broad and deep ongoing review of all current material information, that the claims-paying abilities of these companies remain appropriate. If this status changes, we are prepared and fully able to step in on behalf of policyholders and protect their interests,” the letter signed by Ario and Brooks says.

According to AIG, its combined worldwide property/ casualty operations posted a statutory surplus for the year ended Dec. 31, 2008 of more than $32 billion;operating income in 2008 was $3.3 billion; gross premiums in 2008 were nearly $50 billion; and cash flow from operations in 2008 was $5.7 billion.

For the first quarter of 2009, operating income before realized gains and losses was
$816 million. AIG said its property/ casualty companies have no debt.

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