AIG Didn’t Report $18.7 Billion of Company Guarantees

By Andrew Frye and Hugh Son
Bloomberg Businessweek
December 30, 2010

(Updates with AIG’s stock decline in the fifth paragraph, the number of guarantees in the eighth.)

Dec. 29 (Bloomberg) -- American International Group Inc., the bailed-out U.S. insurer, failed to report $18.7 billion of policyholder guarantees at two property-casualty subsidiaries in 2008, a Pennsylvania regulator said.

National Union Fire Insurance Co. of Pittsburgh and American Home Assurance Co., which issued the guarantees to bolster other AIG units, had contingent liabilities tied to the promises of $157 billion on Dec. 31, 2008, compared with the $138.3 billion disclosed at the time, Robert Pratter, the state’s acting insurance commissioner, said today in a report.

AIG was instructed by the regulator to limit or end its intra-group guarantees, according to the report. It doesn’t face financial penalties, Rosanne Placey, a spokeswoman for the Pennsylvania regulator, said in an e-mail. The New York-based insurer, once the world’s largest, was brought to the brink of collapse in September 2008 when the company was unable to meet its obligations without a cash injection from the government.

Failing to report contingent liabilities may be "a serious problem because of the systemic risk for the whole enterprise," said Robert Hunter, a former Texas insurance commissioner who is now insurance director at the Washington-based Consumer Federation of America.

AIG fell $1.66, or 2.8 percent, to $57.27 at 4:15 p.m. in New York Stock Exchange composite trading. The company was the biggest decliner in the Standard & Poor’s 500 Index.

Remediation Plan

Insurance companies are required to disclose their subsidiaries’ guarantees to state regulators. They aren’t bound to recognize the obligations as liabilities on balance sheets.

"We have adopted a remediation plan to ensure that our disclosures are more accurate going forward," Mark Herr, an AIG spokesman, said in an e-mailed statement. "We are not required to establish a liability for these guarantees in which the likelihood of payment is remote."

National Union, American Home and New Hampshire Insurance Co. issued 56 guarantees to AIG insurance units, Pennsylvania said. Thirty-six promises were terminated and nine expired. Terminations don’t eliminate all obligations, the regulator said. In one instance, American Home had $31.4 billion of obligations in 2008 tied to a guarantee with American General Life Insurance Co. that was terminated in 2006.

The Pennsylvania review found that New Hampshire Insurance’s guarantees were $99.8 million at the end of 2008, compared with the $100,516 that AIG reported at the time. The guarantors have never faced demands on any of the promises, Pennsylvania said.

AIG’s Pricing

AIG came under investigation in Pennsylvania as rivals including Chubb Corp. and Liberty Mutual Holding Co. complained that the company’s government backstop was allowing the insurer to sell policies below competitive rates.

Pennsylvania said in the report that AIG’s pricing and underwriting were "not out of line" with competitors. The Government Accountability Office, the investigative arm of the U.S. Congress, said in a March 2009 report it found no evidence of under-pricing by AIG.

AIG agrees with Pennsylvania’s findings, Robert Schimek, chief financial officer of Chartis, the company’s property- casualty business, said in a Dec. 7 letter to the regulator. AIG’s units "have the appropriate controls to ensure more accurate disclosures," Schimek said in the letter, which was attached to the report.

--With assistance from Noah Buhayar in New York. Editors: Dan Reichl, Rick Green.

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