Congressmen Want Study of AIG Bailout's Impact on Insurance

 

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February 2, 2009 Monday 04:08 PM EST

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Congressmen Want Study of AIG Bailout's Impact on Insurance Markets

Raymond J Lehmann

WASHINGTON



Two members of the House Financial Services Committee have requested the Government Accountability Office study the impact of the government's $150 billion rescue package for American International Group Inc. has had on the U.S. insurance market.

The study, requested by Ranking Member Spencer Bachus, R-Ala., and Rep. Paul Kanjorski, D-Pa. -- chairman of the Capital Markets and Insurance Subcommittee -- would look at how funds were being deployed, whether they were serving to alleviate systemic financial risk and what sorts of distortionary effects they could have on market pricing, terms and capacity.

"There have been troubling reports that market distortions may be occurring in the commercial property casualty market as a result of the actions by the U.S. Treasury and the Federal Reserve Bank to provide loans and other financial support to shore up AIG's capital position," the congressmen wrote, adding that GAO researchers should seek "input from a variety of industry sources, as well as economists and state insurance regulators."

Some competitors in recent months have alleged AIG has been underpricing policies to maintain market share, contributing to the soft market in commercial property/casualty. It is a charge Chairman Ed Liddy specifically refuted during a recent conference call, saying the company "is committed to maintaining the underwriting discipline that has always been essential to our success" (BestWire, Dec. 11, 2008).

Bachus and Kanjorski also asked GAO to look at whether AIG's rescue package has produced "measurable progress toward achieving the federal government's stated goals and objectives," and to report "any setbacks experienced as well as any challenges projected in recouping federal taxpayer funds."

AIG's $150 billion federal rescue package includes $40 billion from the Troubled Asset Relief Program's Systemically Significant Failing Institutions Program, which purchased perpetual preferred shares in the company and warrants equal to 2% of issued and outstanding shares. The Federal Reserve Bank of New York, which provided the remaining $110 billion in loans and asset-guaranty facilities, holds warrants for nearly 80% of the company's equity.

Kanjorski has been particularly critical both of federal oversight of the package and of some decisions made by the company with respect to executive compensation and marketing efforts. Last month, he requested Federal Reserve Chairman Ben Bernanke and former Treasury Secretary Henry Paulson report to Congress with written documentation of "the systems of review and oversight that have been established for AIG" (BestWire, Jan. 14, 2009).

More recently, Kanjorski slammed the company over reports it would pay out $450 million in retention bonuses at AIG Financial Products, the unit that underwrote credit default swaps commonly cited as central to the company's problems.

"After gaining access to more than $170 billion in taxpayer money to keep itself afloat, AIG has now decided to provide an average of $1.1 million to about 400 of its employees at the very business unit that caused the company to collapse," Kanjorski said in a statement. "I have already personally told AIG's chairman that this decision is mind boggling and wrong. AIG needs to reverse course."

Most AIG insurance companies currently have a Best's Financial Strength Rating of A (Excellent) with a negative outlook.

(By R.J. Lehmann, Washington bureau manager: raymond.lehmann@ambest.com)

February 3, 2009

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