New York Regulator Demands Answers on Allstate Op-Ed

R. J. Lehmann
A. M. Best
April 20, 2009

NEW YORK, Apr 20, 2009 (A. M. Best via COMTEX) -- New York state Insurance Superintendent Eric R. Dinallo is asking Allstate Corp.'s Tom Wilson to disclose any details of the company's participation in "unregulated insurance markets," responding to a recent opinion piece authored by the chief executive officer.

In a letter to Wilson prompted by his April 16 op-ed piece in the New York Times, Dinallo said the Allstate chief's argument for federal regulation for insurance "makes a number of broad statements that could risk unnecessarily undermining consumer confidence in the insurance industry as a whole."

Dinallo was particularly rankled by what he deemed a mischaracterization of the credit default swaps market and the role insurance companies played in writing the derivatives products. Noting they were central to the near-collapse of American International Group Inc. (NYSE: AIG), Wilson's piece argued that it was "an insurance product that contributed to the risk that almost brought down the global economy."

"While we played only a small role in unregulated insurance markets, we have a duty to help stabilize the financial system. It was, after all, an insurance product that contributed to the risk that almost brought down the global economy," Wilson wrote.

Dinallo asked in his letter that Allstate (NYSE: ALL) clarify the statement, noting that "in New York and in other states, it is illegal for an insurance company to write a credit default swap unless approved by the state insurance regulator under limited conditions."

"If Allstate broke the law or is aware of any other insurance company that broke the law, Allstate should immediately report that conduct to the appropriate state insurance regulator. I have asked Allstate's New York companies to report immediately any inappropriate or unregulated use by them of credit default swaps," Dinallo said.

Allstate representatives said they weren't prepared to comment on the letter.

Dinallo noted that AIG's swaps contracts were written through its AIG Financial Products unit, which he called a "federally regulated non-insurance subsidiary." In March 5 testimony before the Senate Banking Committee, Scott M. Polakoff, acting director of the U.S. Office of Thrift Supervision, suggested that as regulator of AIG's holding company, his office should have exercised its authority in 2004 to stop AIG's Financial Products division from writing $80 billion of credit derivatives guarantying multisector collateralized debt obligations that were exposed to the subprime mortgage market (BestWire, March 5, 2009).

Dinallo said AIG "would not have been allowed to sell swaps with no limits, no controls and no reserves through a state-regulated insurance company," like those swaps sold by financial guaranty insurers like Ambac Financial and MBIA.

"The monolines were allowed to write CDS through transformers," department spokesman Andy Mais said. "One crucial difference with AIG's CDS sales is that the monolines were required to underwrite the risk, establish adequate premium levels and post reserves, with the capital and reserves controlled by the operating companies and invested in relatively liquid investments as opposed to other operating companies."

Allstate Insurance Group currently has a Best's Financial Strength Rating of A+ (Superior).

Shares of Allstate stock closed at $21.21 on April 20, down 9.44% from the previous close.

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