XL Estimates Maximum Gustav, Ike Loss At $270 Million

Bermuda-based XL Capital Ltd. said today that its preliminary net loss estimates, insurance and reinsurance, from Hurricanes Gustav and Ike range between $195 million to $270 million.

The announcement also included a rundown on the insurer/reinsurer’s holding in Lehman Brothers, Washington Mutual, Fannie Mae and Freddie Mac.

XL Chief Executive Officer Michael S. McGavick said, “We are pleased that even at the high end of our current estimates, losses from these two hurricanes represent less than 3 percent of pro forma total shareholders’ equity as of June 30. We believe that today’s announcements demonstrate disciplined underwriting as well as our care in managing exposures to individual credits.”

XL said its estimates, pretax and net of reinsurance and reinstatement premium, related to Hurricane Gustav range from approximately $30 million to $35 million, attributable in roughly equal proportions to its insurance and reinsurance operations.

The company’s preliminary loss estimates, pretax and net of reinsurance and reinstatement premium, related to Hurricane Ike range from approximately $165 million to $235 million, of which $65 million to $85 million is attributable to insurance and $100 million to $150 million to reinsurance.

The company said preliminary loss estimates are based on a review of individual treaties and policies expected to be impacted and client data received to date. XL said it takes into account current industry loss estimates, both from published sources and the company’s internal analysis.

Additionally, XL announced that less than one-quarter of a percent of its investment portfolio was exposed to Lehman Brothers Holdings Inc. as of June 30.

As of that date, the cost and market value of XL’s current holdings of equity of Lehman Brothers was $2 million and $1 million, respectively. Also as of that date, XL’s current holdings of subordinated debt of Lehman Brothers had an amortized cost and market value of approximately $34 million and $29 million, respectively, and XL’s holdings of senior debt of Lehman Brothers had an amortized cost and market value of $66 million and $63 million, respectively.

XL said it has made no purchases of Lehman Brothers securities since June 30. XL has no derivative counterparty exposure to Lehman Brothers, it said.

As of Sept. 25, the amortized cost of XL’s fixed income holdings of Washington Mutual Inc. was $4 million.

As of Sept. 25, the cost of XL’s common and preferred equity of Fannie Mae and Freddie Mac was $9 million.

Mr. McGavick said, “Total industry losses for Gustav and Ike are still being calculated, but we believe that Ike alone could be in excess of $15 billion.

XL Capital Ltd, through its operating subsidiaries, is a leading provider of global insurance and reinsurance coverages to industrial, commercial and professional service firms, insurance companies and other enterprises on a worldwide basis. More information about XL Capital Ltd is available at www.xlcapital.com.

AIG Statement & Fact Sheet

Joel Ario, Pennsylvania’s Insurance Commissioner, released a statement declaring that his Department’s most recent examination of the AIG group insurance companies that are domiciled in Pennsylvania are financially sound and that policyholders’ insurance policies are safe. Pennsylvania is a key domiciliary state for AIG commercial insurance companies, and this statement further demonstrates his Department's confidence in the strength and stability of AIG’s commercial property and casualty operations.

Additionally, AIG signed a definitive agreement with the Federal Reserve Bank. This important step allows them to move forward in finalizing and implementing strategic initiatives and shows the Federal government’s recognition of AIG’s important role in the global financial markets.

For more information about the transaction, please view the
AIG Fact Sheet.

You may also visit www.aig.com/commercialinsurance.

NAIC Hires Firm To Supervise Sale of AIG Units

A National Association of Insurance Commissioners working group said it has hired Centerview Partners Holdings L.L.C. to help it oversee the insurance subsidiaries of American International Group Inc.

Kansas City, Mo.-based NAIC set up a 50-state working group to keep tabs on the insurance operations of AIG, after the firm’s financial problems forced to give the government a 79.9 percent interest in the firm in exchange for an $85 billion loan.

AIG’s CEO Edward Liddy said Monday the conglomerate would sell off units to pay off the loan and within seven to 10 days he would identify properties that are for sale and perhaps the conclusion of some deals.

“Any significant transaction affecting an AIG insurance company, including any sale, will need approval from state regulators,” according to an announcement of the hiring of Centerview released by New York State Insurance Superintendent Eric Dinallo, the chair of the AIG working group.

Centerview, New York, is an investment banking advisory and private equity firm run in part by partners who once were top executives at Gillette Company, Boston.

One of the firm’s senior advisors, Ray Groves, is a former chairman and chief executive of Ernst & Young L.L.P., New York.

U.S. P-C Results Down In First-Half 2008, Says Best

Deteriorating underwriting results and declining investment returns led to a decline of more than 50 percent in the U.S. property-casualty industry’s net income for the first half of 2008, according to A.M. Best.

In a special report released yesterday, Oldwick, N.J.-based Best said the U.S. p-c net income was at $15.9 billion for the first half of the year. For the 12 months ended June 30, Best said annualized after-tax return on equity fell to 9.5 percent, down from 14.2 percent for the 12 months ended June 30, 2007.

First-half 2008 net written premiums dropped by $1.6 billion, or 0.7 percent, to $224.3 billion compared to 2007.

The industry’s first-half 2008 combined ratio was 102.1, due to price softening, catastrophe losses, and underwriting losses by mortgage and financial guaranty insurers, according to Best.

Best reported the combined ratio at 102.5 for personal lines and 102.2 for commercial lines. For the U.S. reinsurance segment, the first-half 2008 combined ratio jumped to 97, up from a first-half 2007 combined ratio of 90.3.

Investment results were hurt by “the low interest rate environment, ongoing turmoil in the credit markets, and extreme volatility in the equity markets,” Best said.

Regarding expectations for the rest of the year, Best said it “expects the industry’s performance measures to be pressured through the second half of 2008, given the sustained competitive pressures in practically all lines of business and geographic areas, continued volatility in the financial markets, and the expectation of further hurricane activity in the Atlantic basin.

AIG Exec Questions Competitors’ Motives

An AIG executive said recent changes in some competing companies’ positions regarding writing excess policies over AIG primary policies, or co-surety policies with AIG, are not based on market realities.

Competitors are trying to take advantage of the uncertainty surrounding the AIG liquidity crisis, suggested John Doyle, president and CEO of Commercial Insurance at AIG.

His remarks came during a Risk and Insurance Management Society (RIMS) webinar, “Risk Management Strategies in an Unsettled Financial Market.”

Regarding information revealed yesterday in a Marsh conference call that Travelers and Chubb would no longer write co-surety policies with AIG as a partner, Mr. Doyle said other companies had taken similar positions in other lines of business, but it “quickly dissipated,” and he added state regulators have not been happy with the actions of those companies.

Mr. Doyle said almost all state regulators have released statements speaking to the strength of AIG’s insurance operations. The conglomerate’s non-insurance business problems have forced it to obtain an $85 billion line of government credit in exchange for signing over a 79.9 percent interest in the firm.

His statements came as he sought to clear up questions regarding the financial strength of AIG’s insurance operations amid the financial turmoil surrounding the parent company.

Mr. Doyle said the insurance operations are strong, and added that the events over the last 10 days have never been about the insurance companies at AIG. Rather, he said, the problems have centered on products written by AIG Financial Products, which is part of the company’s financial services operation and is outside of the insurance companies’ domain.

He said the insurance companies’ assets minus obligations are the largest of any insurance company in the U.S., and that the financial strength and capital is greater than any of AIG’s competitors.

The insurance operations are still taking on risk, and still paying claims, he added. If AIG had been forced to file for bankruptcy, Mr. Doyle said, the insurance companies would not have followed suit.

One inquiry from a webinar listener, relayed to Mr. Doyle by moderator Sam Friedman, editor in chief of National Underwriter, questioned why, if AIG’s commercial insurance operations are sound and profitable, AM Best downgraded the company to “A” from “A-plus.”

Mr. Doyle said he is in dialogue with the rating agency, and noted that Best had questions about whether the commercial insurance operations would be broken up. He pointed to recent statements by new AIG CEO Edward Liddy affirming that commercial insurance operations will not be sold and are core to the company.

Mr. Liddy will be holding an investor conference call next Friday to outline the company’s strategic vision regarding which assets will be sold to pay off the federal loan, Mr. Doyle said.

Representatives for FM Global and Zurich North America also participated in the webinar, and answered questions regarding their views on the AIG bailout and whether their appetites for risk would change given AIG’s current situation.

Ruud H. Bosman, executive vice president of FM Global, said from FM Global’s perspective in commercial property insurance, there was no reason for the bailout. Buyers would have been fine with or without the bailout, he said. He noted there are other interconnected consequences that the government considered that he is not privy to, and he was speaking just from a commercial property perspective.

Regarding a change in appetite, Mr. Bosman said FM Global is committed to its corner of the specialty market, but that the company could be looking to expand its business inside that market. Such a decision, though, would be based on FM Global’s balance sheet rather than what is happening with competitors.

Commenting on the AIG bailout, Mike Foley, CEO of North American Commercial Operations at Zurich, said, “These are unprecedented times that we’re living in, and very complicated issues.”

He said he supported the government’s decision. From an insurance perspective, he said the bailout was good in that it brought stability to the industry that may not have been there if the company had not received a loan.

On competing for AIG’s business, Mr. Foley said Zurich has traditionally competed with AIG on many lines, and would continue to do so. As for any change in strategy, he said Zurich will evaluate whether there are capacities that it wants to take higher limits on, but the company’s overall business strategy has not changed.

To listen first hand to the RIMS webinar, go to http://cf.rims.org/Template.cfm?section=Education&Template=/CourseDirectory/CDcoursesDescription.cfm&Course=526.

Chubb, Travelers Will Not Partner With AIG On Surety Bonds

Chubb Group of Insurance Companies and Travelers will no longer participate as partners on co-surety bonds with American International Group, according to a Marsh brokerage executive.

That news emerged during a telephone conference call held today by Marsh to provide an update on the global commercial insurance market in light of the turmoil in the financial markets.

Mark Nickel, who is with Marsh’s surety practice, said Travelers is not willing to participate on co-surety on any bonds not approved by last Friday 19.

Clients will need to replace either Travelers or AIG, he said. He added that, up until Nov. 19, in order to allow for an orderly transition, “Travelers is prepared to absorb AIG’s share of the co-surety exposure if the client needs that additional time to find additional surety capacity or to replace either Travelers or AIG.”

The company will only consider participating with AIG if AIG can provide a third-party backstop acceptable to Travelers, Mr. Nickel said.

The situation with Chubb is similar, he added, in that the company will not accept co-surety with AIG as a partner.

Chubb is giving clients 30 days to make the transition, he said. “Chubb will, however, consider AIG clients in a joint venture project, but this will depend on the complexity and duration of the project,” Mr. Nickel explained.

He noted that AIG is a relatively small player in the domestic contract surety market, having pulled back in that area several years ago. But the company does play a significant role in the international surety market.

On the casualty business, Marsh sought to clear up some false rumors that have been circulating, including one that clients are seeking extensions or alternatives to their AIG coverages midterm.

Marsh said midterm replacement is the exception, not the rule, but the brokerage did note that clients who are up for renewal who would not have considered moving before are giving the idea some thought now.

With respect to property markets, Marsh said AIG subsidiaries exceed Marsh’s minimum financial guidelines, but clients have been inquiring about their overall exposure to AIG.

AIG Shows Feds Should Regulate Insurance, Paulson Says

Treasury Secretary Henry Paulson was highly critical yesterday of American International Group’s oversight, calling for federal regulation of insurance companies during an appearance on “Meet the Press.”

In his comments, Mr. Paulson called AIG “very much a hedge fund on top of insurance companies.” He called AIG a “classic example” of the need for “new regulations, new policies.”

Mr. Paulson earlier this year called for a radical revamping of insurance regulation, starting with the establishment of a federal Office of Insurance Information, and ending up with an optional federal charter. He said the current crisis reinforces his earlier view about inadequacies in regulatory oversight.

“We have a patchwork regulatory system that is outdated, is not a credit to our country, and doesn't match the financial world we are dealing with today,” he said.

“What has gone on here is terrible. And it is inexcusable and we need to deal with it,” he said.

“It would have been, in my judgment, unthinkable to have AIG declare bankruptcy,” he said, adding that the carrier was “a few hours away from declaring bankruptcy” when a deal was struck with Treasury and the Federal Reserve to extend an $85 billion line of credit in return for 79.9 percent of AIG’s equity.

“Something like this [bailout] in my judgment should never have happened,” Mr. Paulson said. “But we did this to protect the taxpayer. And this was something we are going to deal with in the future in terms of our regulatory system.”

Citing the differences between AIG and Lehman Brothers, which the government earlier in the week allowed to fail, “what the government did [with AIG] is come in, in a senior position, assume the debt well ahead of the shareholders in an $85 billion funding facility, to allow the government to liquidate the company in a way in which we are avoiding a real catastrophe in our money markets,” Mr. Paulson said.

In his comments on “Meet the Press,” Mr. Paulson acknowledged that “it is going to take some time to figure out” how to revise regulation of the financial system, “and do it carefully and well.”

He then talked about the blueprint for regulatory change he unveiled on March 31, and the importance for more comprehensive regulation of all financial institutions.

The blueprint calls for legislation that would create an optional federal charter for insurance companies, and, in the interim, the creation of an Office of Insurance Information within Treasury, which would provide the federal government with data on state-regulated insurers, and give the federal government specific authority to negotiate insurance trade agreements with foreign nations.

Such legislation, H.R. 5840, is currently stalled on the House floor.

“We have a patchwork regulatory system that is outdated, is not a credit to our country, and doesn't match the financial world we are dealing with today,” he said.

“We can't deal with that in a week, and we need this legislation in a week,” he said, referring to a bill being crafted to create a federal facility to buy bad mortgage debts stemming from subprime loans and their securitization, “because we have a problem in our capital markets that's urgent to deal with. And we can deal with it when we get the legislation from Congress.”

Under the Treasury Department plan—submitted to Congress in the form of legislation Saturday—the agency would have the authority to buy $700 billion in bad mortgage-related debt.

It was submitted in hopes of staunching a financial crisis that saw three of the five major Wall Street investment banks swallowed up or fail within three months.

Yesterday, in a decision that marked the end of restrictions imposed under the Depression-era Glass-Steagall Act, the Federal Reserve Board approved on an emergency basis the application of Goldman Sachs and Morgan Stanley to become bank holding companies.

Sec. Paulson proposed the federal facility plan as a means of restarting frozen credit market markets. The hope of Mr. Paulson and the administration is that such purchases will stem the financial crisis that has shuttered investment banks, forced mergers and caused panic among investors.

Debate on the plan is expected to consume Congress this week.

Insurance companies would have the ability to sell troubled mortgage assets to the fund being sought by the Treasury Department, under the definition of “financial institutions” included in the legislation submitted to Congress.

According to a provision in the legislation, “financial institution” is defined for purposes of being able to sell troubled assets to the government to mean “any institution including, but not limited to, banks, thrifts, credit unions, broker-dealers, and insurance companies, having significant operations in the United States; and, upon the [Treasury] Secretary’s determination, in consultation with the Chairman of the Board of Governors of the Federal Reserve, any other institution he determines necessary to promote financial market stability.”

AIG To Put Unit ‘For Sale’ Signs Up Within Days, Says CEO

The new chief executive officer of American International Group said within 10 days or less he hopes to list some company units for sale and complete some transactions as the firm acts to pay off an $85 billion government bridge loan.

“I hope in the next seven to 10 days to be out there with a plan that lists everything that’s for sale, and maybe even execute some of those transactions by then,” said Edward Liddy in an interview with Maria Bartiromo on CNBC.

Mr. Liddy, who was CEO and chairman of Allstate until 2006, was appointed to succeed Robert Willumstad Thursday as part of the changes the Federal Reserve Board ordered in its decision to loan the New York-based insurance conglomerate up to $85 billion for up to two years to resolve its liquidity crisis.

AIG confirmed today that Mr. Willumstad had turned down a $22 million severance package. “He stepped up to help AIG under difficult circumstances and we greatly appreciate his efforts,” said a spokesman.

Mr. Willumstad had been in the process of a company reorganization that followed the company’s decision to write off $11.1 billion in credit derivatives linked to the housing market. He was removed before he could deliver a progress report to investors that had been planned for Thursday.

Mr. Liddy said the company will sell off its most valuable assets that can be “digested by buyers in relatively manageable bits.”

He said AIG’s airplane leasing business, International Lease Finance Corp., would be an “interesting” business to sell, remarking that there was “an awful lot of leverage on it.”

Mr. Willumstad had fought to keep the leasing firm with the company after ILFC CEO Steven Udvar-Hazy was reported to have been exploring a possible split in May when AIG financial ratings ran into difficulties. Mr. Liddy said he spoke to Mr. Udvar-Hazy when he was first appointed and would speak with him again today.

Mr. Liddy ruled out sales involving AIG’s core insurance business, saying that portion of the firm “is sacrosanct.”

He spoke out to reassure policyholders, saying their policies are safe and that AIG’s regulated insurance companies are well capitalized.

The company hopefully will not need to make use of the government’s full line of credit, but it will depend on markets, Mr. Liddy noted. “The goal is to pay it back as quickly as possible,” he said.

His comments about the insurance entities’ solvency were backed up by New York Insurance Superintendent Eric Dinallo, who issued a statement reassuring consumers that AIG's insurance companies “are financially sound, with substantially more in assets than they need to pay all valid present and projected claims.”

"Don't worry, and don't make any rash decisions if you have a policy issued by an AIG insurance company," Mr. Dinallo said. "All your covered claims will be paid and all your annuity checks will come. Making sure insurance companies are solvent and able to pay every valid claim is my number-one job, and the AIG insurance companies are strong and solvent.

"If you have a life insurance or annuity policy and someone tells you to replace it because of the troubles at AIG's parent company, call the Insurance Department immediately at 1-800-339-1759," Mr. Dinallo said. "Replacing or liquidating a life insurance policy or an annuity can have heavy hidden costs and tax consequences.”

Mr. Dinallo is in charge of a National Association of Insurance Commissioners task force created to expedite approval of the sale of AIG assets.

He noted that AIG troubles are largely with AIG's non-insurance parent company, which is not regulated by the states and “therefore not held to the same investment, accounting and capital adequacy standards as its state-regulated insurance subsidiaries. The insurance subsidiaries are solvent and able to pay their obligations.”

In a letter to the editor of the Financial Times, he noted that the AIG holding company is regulated by the federal Office of Thrift Supervision.

AIG Shows Feds Should Regulate Insurance, Paulson Says

Treasury Secretary Henry Paulson was highly critical yesterday of American International Group’s oversight, calling for federal regulation of insurance companies during an appearance on “Meet the Press.”

In his comments, Mr. Paulson called AIG “very much a hedge fund on top of insurance companies.” He called AIG a “classic example” of the need for “new regulations, new policies.”

Mr. Paulson earlier this year called for a radical revamping of insurance regulation, starting with the establishment of a federal Office of Insurance Information, and ending up with an optional federal charter. He said the current crisis reinforces his earlier view about inadequacies in regulatory oversight.

“We have a patchwork regulatory system that is outdated, is not a credit to our country, and doesn't match the financial world we are dealing with today,” he said.

“What has gone on here is terrible. And it is inexcusable and we need to deal with it,” he said.

“It would have been, in my judgment, unthinkable to have AIG declare bankruptcy,” he said, adding that the carrier was “a few hours away from declaring bankruptcy” when a deal was struck with Treasury and the Federal Reserve to extend an $85 billion line of credit in return for 79.9 percent of AIG’s equity.

“Something like this [bailout] in my judgment should never have happened,” Mr. Paulson said. “But we did this to protect the taxpayer. And this was something we are going to deal with in the future in terms of our regulatory system.”

Citing the differences between AIG and Lehman Brothers, which the government earlier in the week allowed to fail, “what the government did [with AIG] is come in, in a senior position, assume the debt well ahead of the shareholders in an $85 billion funding facility, to allow the government to liquidate the company in a way in which we are avoiding a real catastrophe in our money markets,” Mr. Paulson said.

In his comments on “Meet the Press,” Mr. Paulson acknowledged that “it is going to take some time to figure out” how to revise regulation of the financial system, “and do it carefully and well.”

He then talked about the blueprint for regulatory change he unveiled on March 31, and the importance for more comprehensive regulation of all financial institutions.

The blueprint calls for legislation that would create an optional federal charter for insurance companies, and, in the interim, the creation of an Office of Insurance Information within Treasury, which would provide the federal government with data on state-regulated insurers, and give the federal government specific authority to negotiate insurance trade agreements with foreign nations.

Such legislation, H.R. 5840, is currently stalled on the House floor.

“We have a patchwork regulatory system that is outdated, is not a credit to our country, and doesn't match the financial world we are dealing with today,” he said.

“We can't deal with that in a week, and we need this legislation in a week,” he said, referring to a bill being crafted to create a federal facility to buy bad mortgage debts stemming from subprime loans and their securitization, “because we have a problem in our capital markets that's urgent to deal with. And we can deal with it when we get the legislation from Congress.”

Under the Treasury Department plan—submitted to Congress in the form of legislation Saturday—the agency would have the authority to buy $700 billion in bad mortgage-related debt.

It was submitted in hopes of staunching a financial crisis that saw three of the five major Wall Street investment banks swallowed up or fail within three months.

Yesterday, in a decision that marked the end of restrictions imposed under the Depression-era Glass-Steagall Act, the Federal Reserve Board approved on an emergency basis the application of Goldman Sachs and Morgan Stanley to become bank holding companies.

Sec. Paulson proposed the federal facility plan as a means of restarting frozen credit market markets. The hope of Mr. Paulson and the administration is that such purchases will stem the financial crisis that has shuttered investment banks, forced mergers and caused panic among investors.

Debate on the plan is expected to consume Congress this week.

Insurance companies would have the ability to sell troubled mortgage assets to the fund being sought by the Treasury Department, under the definition of “financial institutions” included in the legislation submitted to Congress.

According to a provision in the legislation, “financial institution” is defined for purposes of being able to sell troubled assets to the government to mean “any institution including, but not limited to, banks, thrifts, credit unions, broker-dealers, and insurance companies, having significant operations in the United States; and, upon the [Treasury] Secretary’s determination, in consultation with the Chairman of the Board of Governors of the Federal Reserve, any other institution he determines necessary to promote financial market stability.”

Liddy Plans To Keep P-C Business At AIG’s Core

American International Group’s new chief executive officer, Edward Liddy, said he plans to keep the core insurance property-casualty business as he decides how to sell off assets to pay a government-backed $85 billion bridge loan.

The comments came yesterday during a global meeting with employees broadcast by phone and over the Internet, a company spokesman confirmed.

According to reports, Mr. Liddy said he plans to rebuild the New York-based insurer into a smaller but much more nimble company by the time the process is finished. He said he does not plan to liquidate the company as he sells assets to pay back the government-backed loan.

Earlier this week, the Federal Reserve extended AIG an $85 billion loan as it suffered a liquidity problem and was close to filing bankruptcy. The action was taken for fear that the company’s failure would rock the global economy to its core and set off a chain reaction that would prove to be an economic disaster.

In return for the loan, the government now owns 79.9 percent of AIG and gave the company 24 months to pay back the loan at an interest rate of more than 11 percent.

Mr. Liddy said he does not have much time to decide which assets to sell, saying there is about a four-week window for making the decision. According to a Wall Street Journal interview with him, he was critical of the interest rates the government is charging AIG, saying it was an incentive to complete the payback as early as possible.

The new CEO, approved yesterday by AIG’s board, was chairman and CEO of Allstate until his retirement in 2006.

A task force led by New York Insurance Superintendant Eric Dinallo and other insurance commissioners will oversee the sale of AIG assets.

AIG policyholders are taking a wait-and-see attitude, said one insurance broker executive. The company is keeping in contact with brokers with updates on the situation, but the information is nothing more than what has been publicly disclosed. He said some policyholders have requested to be placed with other carriers, but most are watching as events unfold.

Rating Agencies Upgrade AIG, But Remain Cautious

Standard & Poor’s and Fitch raised their credit ratings for AIG on Wednesday in the wake of the Federal Reserve Board’s action to provide the troubled firm with liquidity, but both remain cautious about how the company’s future will ultimately play out.

Both watchdog firms warned that they will be monitoring the situation closely because of the uncertainty associated with the terms of the government’s two-year bridge loan to AIG.

Specifically, S&P said that it raised its short-term counterparty ratings on AIG, its financial guarantee subsidiaries and its International Lease Finance Corp. unit to “A-1” from “A-2.” It also lowered the ratings on various subsidiaries’ preferred shares to “B” from “BBB.”

S&P analysts said the ratings on the preferred shares remain on “CreditWatch-negative” because of the “increased risk of deferral of dividend payments due to the right of the U.S. government to veto dividend payments.”

The “BBB/A-3” counterparty credit rating on American General Finance Corp. is unchanged. The outlook is “negative.”

For its part, Fitch analysts said its “evolving” rating is “intended to communicate the highly dynamic nature of AIG’s current financial situation, which could evolve positively or negatively for different subsidiaries or securities.”

Fitch analysts added that their expectation is that it may revise ratings, outlooks or watches on individual securities’ ratings or specific legal entities within the AIG group, “as it furthers its analysis and more details become available.” Such actions could occur at any time, Fitch said.

S&P analysts said most of the AIG ratings are on “Creditwatch-developing” in order to “reflect the significant uncertainty in the near term as to any impact of recent events on AIG and its ability to attract and retain business, as well as uncertainty as to which businesses might be sold to repay AIG's borrowings from the Fed.”

An S&P credit analyst, Rodney A. Clark, explained that "it is likely that the ratings on AIG and its various subsidiaries will move in different directions as these facts become clearer and strategic alignment within the insurance operations is more defined."

He added that S&P’s “ratings on the preferred shares remain on ‘Creditwatch-negative’ because of the right of the U.S. government under the terms of the agreement to veto dividends on any preferred shares.”

Any action on that right is uncertain, but could occur with little warning at the government's discretion, he noted.

Fitch analysts said they think AIG’s “most pressing” challenges are evolving from meeting immediate liquidity needs to managing higher financial leverage, and related pressures on fixed-charge coverage likely to arise as a result of draws on the Fed’s credit facility.

“To provide funds needed to service debt obligations, Fitch believes that AIG will likely sell a significant number of its operating company subsidiaries, and that these sales may include subsidiaries that Fitch had previously viewed as core operations,” Fitch analysts said. “AIG needs to optimize operating company results under very difficult market conditions in order to retain significant value in its subsidiaries that may be monetized in the future.”

The Fitch analysts said they think any subsidiary would be considered for sale, “and the ratings impact for any subsidiary that is ultimately sold would be greatly influenced by the credit quality of the buyer and terms of the sale.”

AIG Replaced By Kraft On Dow

Kraft Foods will replace American International Group in the Dow Jones Industrial Average on Monday, the publisher of the averages said today.

The change was prompted by the government decision to acquire 79.9 percent of AIG in return for a two-year, $85 billion loan.

The composition of the Dow industrials was last changed in February, when Bank of America and Chevron replaced former Kraft parent Altria Group and Honeywell International.

AIG has been in the industrial average since April 1, 2004.

John A. Prestbo, editor of Dow Jones Indexes, said the change was “forced by the effective nationalization of AIG and its very low stock price.”

Robert Thompson, managing editor of The Wall Street Journal, said, “We are refraining at this point from adding another stock in the financial industry because of the extremely unsettled conditions.

“We realize this decision leaves the Dow Jones Industrial Average underweighted in financials, and we will address this situation in due course," he said.

The Journal's top news editor oversees the makeup of "The Dow," which Charles H. Dow created as a 12-stock index in May 1896 and today is the best-known stock-market barometer in the world.

Dinallo To Lead NAIC Task Force On AIG Asset Sales

New York Insurance Superintendent Eric Dinallo will oversee a National Association of Insurance Commissioners task force created to expedite the approval of sales of American International Group assets.

Creation of the task force was approved by commissioners in a 5 p.m. conference call Tuesday afternoon, as federal and state regulators worked with the Treasury Department to design a solution to AIG’s liquidity crisis, according to David Neustadt, an insurance department spokesman.

The move implied that prompt action to sell AIG assets and pay off a government bridge loan secured late yesterday is necessary to get the best value for the government and shareholders.

That appeared to be an imperative as AIG’s stock price continued to plunge this morning, while the overall stock market continued to decline in the wake of the federal action Tuesday night to rescue AIG from a potential bankruptcy filing.

The stock was selling at $2.06, down 45 percent from Tuesday’s close, at 11:10 a.m. AIG stock had been selling in the mid-20s last week.

At the same time, in an appearance Wednesday morning on CNBC’s “Squawk Box,” Mr. Dinallo lauded state regulators for the way they dealt with AIG’s problems as the company became engulfed in a financial tsunami linked to the plunging value of housing assets.

He also voiced confidence in his decision to approve the appointment of Edward Liddy, former CEO of Allstate, as the new CEO of AIG. Mr. Dinallo characterized Mr. Liddy as a “sterling insurance executive with great competency” to oversee AIG and the sale of the assets needed to pay off the government loan.

Mr. Dinallo spoke as a former chairman of the Securities and Exchange Commission, Arthur Leavitt, described the $85 billion government loan to AIG in return for 79.9 percent of its stock as a “controlled bankruptcy.”

Mr. Dinallo confirmed that a Chapter XI bankruptcy filing would normally have been an appropriate way to deal with AIG’s problems, since it was the lack of liquidity in the holding company—rather than any insolvency in AIG’s operating insurance operations—that were causing the problems.

However, he said, such an action was ruled out because regulators were concerned “it would have created a perception in the eye of the public of problems”—a lack of confidence that could have prompted the frantic sale of AIG products by consumers, as well as a decision by commercial customers to switch their accounts to other insurers.

That would have eroded the value AIG would have received for its viable assets, he explained, and would have reduced the price that could be negotiated for its assets through an orderly sale—the purpose of the government bridge loan, delivered via the Federal Reserve.

Mr. Dinallo also criticized insurance executives, who, he said, “have gotten away from their core competence” by becoming involved in the acquisition of the speculative financial derivatives that laid AIG low. “They have to get better at focusing on their core competence,” he said.

Moreover, he added, the lesson of AIG’s problems is that more capital is needed at the holding company level, as well as in the operating insurance companies.

He also lauded the Federal Reserve Board because it acted in such a way as to protect insurance policyholders by not mandating the collateralizing of assets and surplus in insurance subsidiaries in order to secure the loan.

Under the terms of the loan, entire affiliates, not their underlying cash assets, are securing the loan.

He disclosed that the reason a private solution—that is, a loan from a consortium of banks collateralized by AIG assets—could not be completed was that some of the insurance subsidiary assets were “given low evaluations” by the bankers as they perused AIG’s books.

Fed Rescues AIG With $85 Billion Loan

The Federal Reserve Board threw a life preserver to keep American International Group Inc. from drowning last night, as the Fed agreed to have the U.S. government take a 79.9 percent stake in AIG in exchange for the Federal Reserve Bank of New York providing up to $85 billion in emergency financing.

The 11th-hour deal means AIG will continue to do “business as usual,” rather than have to seek bankruptcy court protection, as had been cited as the worst-case scenario, a Fed official noted.

Meanwhile, New York Insurance Superintendent Eric Dinallo confirmed that Edward Liddy, the former chief executive officer for Allstate Corp., is under consideration to run AIG’s day-to-day operations as its new CEO.

Mr. Liddy, 62, was CEO of Northbrook, Ill.-based Allstate from 1999 until 2005. He would replace Robert Willumstad, still AIG’s chairman, who took on the added CEO role in June when Martin Sullivan—who had replaced Maurice Greenberg—stepped down.

As for the loan package, the Fed said it has authority under Section 13(3) of the Federal Reserve Act to approve the deal with AIG and is proceeding with the full support of the Treasury Department.

“The board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance,” the Fed said in a statement.

“The purpose of this liquidity facility is to assist AIG in meeting its obligations as they come due,” the Fed said. “This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy.”

The AIG board issued a statement welcoming the move by the Federal Reserve and the New York Fed to set up the $85 billion revolving credit facility.
The AIG board added that it “approved this transaction, based on its determination that this is the best alternative for all of AIG’s constituencies, including policyholders, customers, creditors, counterparties, employees and shareholders.”

The board said that “AIG is a solid company with over $1 trillion in assets and substantial equity, but it has been recently experiencing serious liquidity issues. We believe the loan—which is backed by profitable, well-capitalized operating subsidiaries with substantial value—will protect all AIG policyholders, address rating agency concerns and give AIG the time necessary to conduct asset sales on an orderly basis.”

AIG investors have been expressing confusion about whether the Fed really will be taking ownership of 79.9 percent of AIG, or simply treating that percentage of AIG as collateral—only getting the 79.9 percent stake if AIG misses payments.

However, the AIG board said in its statement that “American taxpayers will receive a substantial majority ownership interest in AIG.”

The proceeds of subsequent asset sales should be enough for AIG to repay the loan in full, the board said.

“Policyholders of AIG companies around the world can rest assured that AIG’s commitments will continue to be honored,” the board added.

There were reports in New York Newsday that New York Insurance Superintendent Eric Dinallo-—who was heavily involved with all the efforts to keep AIG from having to declare bankruptcy—will head up a national task force of state regulators overseeing the sale of any of AIG’s insurance assets.

In an effort to provide further cash to AIG, New York Gov. David Paterson on Monday announced that the state would allow AIG to move up to $20 billion in capital from its insurance subsidiaries to the parent firm to help shore up its finances.

With the Federal Reserve loan deal now in place, however, that move might no longer be necessary, although Gov. Paterson said it had helped stabilize AIG’s position while negotiations for a more permanent solution continued.

The New York Fed credit facility “has terms and conditions designed to protect the interests of the U.S. government and taxpayers,” the Fed noted.

The New York Fed’s AIG credit facility has:
• A 24-month term.
• An $85 billion maximum.
• A variable interest rate that will equal the London Interbank Offered Rate, plus 8.5 percentage points.
• The initial interest rate would be 11.3 percent, but AIG apparently would have to pay interest only on the amounts that it draws from the facility.

“The loan is collateralized by all the assets of AIG and of its primary nonregulated subsidiaries,” the Fed explained. “These assets include the stock of substantially all of the regulated subsidiaries. The loan is expected to be repaid from the proceeds of the sale of the firm’s assets.”

In addition to getting a 79.9 percent equity interest in AIG, the government will have the right to veto the payment of dividends to common and preferred shareholders, the Fed noted.

The Fed also will get veto power over “important management decisions,” such as sales of subsidiaries, a Fed official said.

The “government” has not yet decided whether the Fed or the Treasury Department will be in charge of appointing new management at the holding company level, the Fed official said.

For the moment, the official said, the AIG board will remain the same.

Insurance subsidiaries and affiliates will remain subject to state regulation.

The Fed decided to acquire 79.9 percent of AIG rather than 80 percent or more, because 80 percent control would have triggered accounting mandates that would have complicated running the business, the Fed official explained.

Another source who requested anonymity said state insurance regulators would have to approve any change in control over AIG insurance subsidiaries but would not have to approve the Fed’s financing arrangement.

Despite the change in control, when AIG opens for business on Sept. 17 “it will be business as usual for AIG,” the Fed official said.

AIG, one of the largest financial services companies in the world, has been suffering for months from the effects of economic turmoil on mortgage loans and other loans.

The upheaval has caused billions of dollars in losses at the company’s credit default swaps operation, which insures bond holders against defaults.

Last week, when Lehman Brothers Inc. began sliding toward bankruptcy court, AIG warned the Fed that a Lehman Brothers failure could cause the rating agencies to cut its own ratings, triggering massive collateral calls that AIG had too little ready cash to meet.

AIG managers warned the Fed that the absolute last day the company would have to act would be Tuesday, the Fed official said.

Credit rating agencies behaved as AIG had predicted. They cut AIG’s ratings, exposing AIG to the threat of calls for more than $14 billion in collateral as well as to the threat of contract cancellations.

The price of AIG shares fell 46 percent last week, and closed Friday at $12.14 per share.

On Sept. 16, the price of AIG shares opened at $1.85 and closed at $3.75. Shares were selling overnight for $2.60 in after-hours trading.

More than 1.2 billion shares traded on the New York Stock Exchange on Tuesday.

In Singapore, news organizations carried reports of customers lining up to withdraw funds from a unit of AIG.

The Monetary Authority of Singapore said it is watching the local AIG subsidiary’s investments carefully, but noted that the assets linked to insurance products sold in Singapore are segregated from the general assets of AIG.

On Tuesday afternoon, Bloomberg News reported that the Fed was thinking about putting AIG in a conservatorship, as it has done with the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp.

However, although the government will control AIG, “this is not a conservatorship,” the Fed official said.

Senior officials from the Fed and Treasury Department briefed key members of Congress on the arrangement.

AIG executives and government officials signed documents concerning the deal just after 9 p.m. on Tuesday.

The senior Fed official said the government decided to provide access to cash for AIG but not for Lehman Brothers, which filed for bankruptcy protection on Monday, because AIG constituted a “systemic risk” to the financial system.

The markets and regulators seem to be more prepared for the failure of an investment bank than for the insolvency of a complex insurance company, the official explained.

“AIG is a complicated firm, which offers for sale substantial products, such as retail financial products, insurance, guaranteed investment contracts and annuities outside regulated insurance entities,” the official said.

Treasury Secretary Henry Paulson put out a statement noting his interest in working with the Fed, the Securities and Exchange Commission, and other regulators to enhance the stability and orderliness of the financial markets and minimize the disruption to the U.S. economy.

“I support the steps taken by the Federal Reserve tonight to assist AIG in continuing to meet its obligations, mitigate broader disruptions and at the same time protect the taxpayers,” Mr. Paulson said in the statement.

Ken Crerar, president of the Council of Insurance Agents & Brokers, also welcomed the Fed’s move.

“We applaud efforts to help stabilize financial markets, and particularly AIG’s holding company, in order to ensure that going forward, the company’s promises to our members’ clients are kept and protected,” Mr. Crerar said. “AIG has been an important and substantial player in the insurance market, and whatever happens, the first concern of our members is their clients.”

Democratic presidential candidate Sen. Barack Obama, D-Ill., and Republican nominee Sen. John McCain, R-Ariz., said over the weekend that they oppose federal efforts to rescue struggling financial services companies.

Sens. Richard Shelby, R-Ala., and Christopher Dodd, D-Conn., also have criticized the idea of the government helping AIG and other struggling financial services companies.

In Japan, the Tokyo Stock Exchange has responded to news of the U.S. Fed financing arrangement by halting trading in AIG shares.

Ike Insured Loss Estimates Range From $6-To-$18 Billion

Saturday morning’s strike of Hurricane Ike on the Texas coast caused insured property damage of anywhere from as low as $6 billion to as high as $18 billion, the three major catastrophe modelers estimate.

Hurricane Ike battered Galveston, Texas, and the surrounding cities along the state’s barrier islands, leaving homes and businesses leveled along the coast. The storm came ashore as a strong Category 2 hurricane on the Saffir Simpson scale, with winds upward to 110 miles per hour at 2:10 a.m. EDT Saturday.

Flooding from the surging Gulf began on Friday as Ike moved onshore throughout the day. The storm has since swept north into the Midwest, bringing heavy rains and high winds into the region, and knocking out power to hundreds of thousands of homes and businesses—including National Underwriter’s home-office facility in Erlanger, Ky.

Oakland, Calif.-based EQECAT put its damage estimate between $8 billion and $18 billion on Saturday for the counties of Brazoria, Harris, Galveston, Chambers and Jefferson. The figures factor losses for commercial and residential properties, business interruption and offshore energy production platforms.

EQECAT said losses from energy production platforms would primarily be limited to older, shallow-water facilities.

“Onshore, flooded pumping stations and refineries are expected to impede immediate resumption of energy production,” said Tom Larsen, senior vice president of EQECAT, in a statement. “However, disruption isn’t expected to be extensive.”

Risk Management Solutions, based in Newark, Calif., said it estimates losses of between $6 billion and $16 billion, which includes both onshore and offshore losses. The figure does not include flooding.

Boston-based AIR Worldwide put onshore losses at between $8 billion and $12 billion, with expected losses of $10 billion. It put offshore losses at considerably less, $600 million to $1.5 billion.

“High-rise office buildings in downtown Houston have been subject to winds around 30 miles per hour higher than at ground level, potentially aggravated by debris from the proximity of these buildings in the downtown area,” said Christine Ziehmann, director of model management at RMS, in a statement. “Damage that has been observed so far to windows and facades is similar to that experienced in southeast Florida form Hurricane Wilma in 2005.”

RMS said there is approximately $900 billion of property value in Houston County, including the city of Houston.

“As expected, Houston’s high-rise buildings are reported to have sustained major damage to glazing, much like the damage caused by 1983’s Hurricane Alicia,” said Peter Dailey, director of atmospheric science at AIR, in a statement. “AIR expects wind damage to be widespread, not only along the coast, but also extending well over 200 miles inland form Galveston.”

While storm surge damage is considerable, RMS noted that much of it will not be privately insured. More of a question is flood damage to refineries or other large industrial facilities.

AIR said it expected significant damage to mobile homes and light metal construction, such as warehouses, and other structures with ornamental features, such as fast food restaurants. It did not expect significant structural damage to office buildings.

Property Claim Services, a subsidiary of the Jersey City, N.J.-based Insurance Services Office Inc., said in an e-mail that it has not compiled an estimate of insured property damage.

“PCS certainly recognizes the extent of damage the hurricane caused in Eastern Texas and Western Louisiana,” noted Gary Kerney, assistant vice president of PCS, in a statement. “PCS is also evaluating the extent of insured damage that the remnants of Ike caused as it moved away from the Gulf Coast and through the Midwest and into the lower Great Lakes region. Flooding and windy conditions caused additional damage to insured property, and PCS is gathering information about damage reported in these affected areas.”

On Sunday, Bloomington, Ill.-based State Farm, the top private insurer in Texas, said it received 14,000 calls from customers needing assistance and was adding call centers and staff to deal with the influx.

“If early reports are any indicator, there is significant damage to property spanning hundreds of miles,” said Larry Pratt, state executive director of Farmers Insurance in Texas. He said the company planned for this event, deploying people and resources 10 days ago.

As far as Hurricane Ike affecting the current soft market, Meyer Shields, a financial analyst with Stifle Nicolaus, said that while the storm might stem the recent slide in property insurance prices, it would not alter the global soft market.

Lis Gibson, insurance partner at Deloitte, said Hurricane Ike, along with Fay and Gustav, are “still not large enough to drive a change in the market rates. It would take 2008 turning into a repeat of 2005, with industry losses of $30 billion to $50 billion, for that to occur.

Deloitte later gave its own lost estimate of between $20 - $25 billion including losses to the National Flood Insurance Program.

A Bermuda-based reinsurer, Flagstone Reinsurance Holdings Ltd. released its own estimate on the storm from onshore damage with a range from $10 billion to $16 billion. The estimates were based on its on proprietary system.

Today, insurance rating agency A.M. Best said despite the size of Hurricane, it would not be a solvency event for the industry and that while some ratings of individual companies might be affected, the overall financial strength of the industry would not be weakened.

President George W. Bush has declared large portions of Texas and Louisiana disaster areas from Ike. The Federal Emergency Management Agency said more than 2.5 million customers are without power in Texas, Louisiana and Arkansas. More than 98 percent of the Gulf’s natural gas and crude oil remains “shut-in” (in non-production mode) and 15 refineries are shut down in Texas and Louisiana.

N.Y. Okays AIG $20B Asset Shift To Avert Downgrade

New York Gov. David Paterson today agreed to allow American International Group to transfer up to $20 billion in high-quality assets from its insurance company subsidiaries to the parent company, as the huge international carrier struggled to regain the confidence of investors and avoid a potentially devastating rating downgrade.

In a noon press conference, Gov. Paterson said he acted after the company approached the state for help. He added that state government officials have been working closely with the firm since the weekend as it struggled to deal with the warning of a potentially disastrous ratings downgrade from Standard & Poor’s.

"AIG still remains financially sound," Gov. Paterson said.

The announcement seemed to stop the precipitous decline in AIG’s stock. The stock dropped to as low as below $4 before noon, but was selling at $6.40 at 1:30 p.m.

The stock closed Friday at $12.14 a share, a decline of 46 percent for the week.

The company is also seeking to raise cash by selling assets. Among these are its highly profitable leasing subsidiary, which has been valued as high as $50 billion, and its much smaller auto financing unit.

CNBC reported in a noon broadcast that AIG has been talking with Warren Buffett about a potential investment in AIG.

In addition, over the weekend, AIG held talks with venture capital firms, including J.C. Flowers Associates, but couldn’t come to terms on a deal.

At the same time, The Wall Street Journal said a meeting got underway at the New York Federal Reserve branch regarding AIG that included Treasury Department and New York Insurance Department officials.

Gov. Paterson was very vocal in supporting AIG’s request for a $40 billion bridge loan while it raised more liquid capital to meet S&P’s demands for up to $14 billion in additional cash to avert a ratings downgrade.

In his press conference, Gov. Paterson was also highly critical of federal regulators and voiced concern about the cost of the continuing housing loan crisis on the state. Specifically, he noted that three of the top-five investment banks in New York have been extinguished by takeover or failures over the last several months.

These were Lehman Brothers (which filed for bankruptcy early this morning), Merrill Lynch (acquired today by BankAmerica) and Bear Stearns (which was forced to merge several weeks ago with J.P. Morgan because of the same type of liquidity crisis that has befallen AIG).

In the Bear Stearns case, the Federal Reserve took $30 billion face value of illiquid mortgage-backed securities off J.P. Morgan’s hands to facilitate the deal.

“This is a very serious situation,” Gov. Paterson said. “The people who are paying the price are the workers.”

He said the crisis resulted from a lack of “transparency” in the balance sheets of investment banks, which were “acting outside the perusal of any supervisory body.”

An insurance industry analyst, who could not be quoted by name due to industry and company guidelines, called the move by Gov. Paterson a “positive” as AIG worked to avoid the downgrade.

“It will help,” the analyst said. “This is all about liquidity.” The analyst noted that AIG already has $21 billion in cash at the corporate level, and $1 trillion in total assets.

“This is all about being able to show S&P it can post collateral to counterparties” of its troubled credit default swaps, the analyst added. These instruments were sold as insurance by AIG to guarantee mortgage-backed securities backed by subprime loans that are currently tanking at a growing rate.

The analyst said the state’s move allowing AIG to move high-quality bonds from its insurance company subsidiaries to its parent company gave AIG the ability to raise cash by offering the bonds in the “repo market,” which gives it the ability to buy back the bonds over a period of time.

Meanwhile, in an investment note early Monday, UBS insurance analysts Andrew Kligerman and Julie Oh still called AIG a buy, although they lowered the insurer’s 12-month price target and earnings-per-share projections.

“Even post any agency downgrades, we think AIG has sufficient cash and collateral to meet near-term liquidity/capital needs without raising equity,” they said.

They also projected AIG’s Hurricane Ike losses as “manageable,” at between $175 million and $475 million.

Over the weekend, the insurer was working on a three-part plan involving asset sales, shifting regulated capital from insurance operations to the holding company, and working with private equity investors, said a person familiar with the negotiations.

The discussions followed Friday’s announcement by S&P that because of the increasing likelihood that credit swaps involving AIG would force the carrier to pay counterparties, it wanted AIG to increase its capital.

S&P cited the $18 billion in losses over the past three quarters from credit swaps AIG wrote to insure mortgage-backed securities that included subprime loans, which have been deteriorating in value.

AIG reported $13.2 billion in losses in the first six months of 2008, largely owing to declining values in mortgage-related securities held in its investment portfolio and collateralized debt obligations it owns.

Ratings downgrades could force AIG to post up to $14.5 billion more in collateral, according to a regulatory filing last month.

Cuts in ratings could also be severely detrimental to AIG's commercial insurance business, since some policies carry clauses that nullify a contract in the event of downgrades below a certain level.

AIG Scrambles to Raise Cash, Talks to Fed

Insurer American International Group Inc., succumbing to relentless investor pressure that drove its shares down 31% on Friday alone, is pulling together a survival plan that includes selling off some of its most valuable assets, raising more capital and going to the Federal Reserve for help, people familiar with the situation said.

The measures are aimed at staving off a downgrade by major credit-rating firms. AIG executives worried that such an action would set off a chain reaction that could be fatal to the firm. The insurer, which has already raised $20 billion in fresh capital so far this year, was seeking to raise an additional $40 billion to avoid a downgrade.

During a weekend scramble to shore up its finances, AIG turned down a capital infusion from a group of private-equity firms led by J.C. Flowers & Co. because an option tied to the offer would have effectively given them control of the company, an 89-year-old giant that does business in nearly every corner of the world.

The proposed option would have allowed the firms to acquire AIG for $8 billion under certain conditions. That price is just one-fourth of AIG's current market value.

J.C. Flowers didn't respond to messages seeking comment.

When AIG's board rejected the capital infusion, the company's recently appointed chairman and chief executive, Robert Willumstad, took the extraordinary step of reaching out to the Federal Reserve for help. Mr. Willumstad asked New York Federal Reserve President Timothy Geithner if the Fed could backstop some asset sales.

Two other private-equity firms -- Kohlberg Kravis Roberts & Co. and TPG -- offered to inject capital into AIG if the Fed agreed to provide the insurer with a bridge loan until its restructuring plan was completed.

AIG viewed the request to the Fed not as a bailout but rather as a temporary measure that would give the insurer some breathing room until it was able to dispose of the assets.

As of late Sunday, the Fed had yet to decide whether to offer the assistance. The Fed usually deals with banks and brokers, and it wasn't clear what it could do. An AIG spokesman had no comment.

The Fed may not draw the line with AIG's request for support as clearly as it has with Lehman, distinguishing between its lending programs and the use of taxpayer funds. But any Fed action to help the firm still would have a high bar. Central bank officials took an extraordinary step in expanding the discount window to securities firms earlier this year. Expanding it to other firms would be another big step, though it could be considered if a case can be made for how such a lending lifeline would be critical to overall financial stability.

The assets AIG intends to sell include its domestic automotive business and its annuities unit, according to people familiar with the matter. It also looked into selling its aircraft-leasing arm, International Lease Finance Corp., but it isn't clear whether action on ILFC will be part of the emergency steps.

AIG also considered shifting assets from its regulated insurance business to its holding company, which would help the holding company respond to demands for cash or collateral. But that plan was met with resistance from regulators and by late Sunday it appeared unlikely it would come together.

The rush for cash represents a remarkable comedown for AIG, whose role in global finance is in many ways as critical as investment banks such as Lehman Brothers. AIG's troubles were one of the subjects at the weekend meeting of Wall Street chiefs and regulators at the New York Fed.

Eric Dinallo, the insurance superintendent in AIG's home state of New York, took a significant role in the talks over the weekend, according to a person familiar with the matter. One key issue, the person said, was the proposed shift of assets. Insurers typically face stringent regulations on how they use their assets, as regulators seek to make sure that they can meet their obligations to policyholders.

The turmoil in housing and credit markets has hammered AIG, largely because of contracts it sold protecting others against losses tied to subprime loans and other risky assets. AIG's stock has fallen nearly 80% this year. It reported a second-quarter net loss of $5.36 billion last month after a first-quarter loss of $7.81 billion.

Among its challenges: It doesn't have access to the Fed's lending window, as some other troubled financial firms do. It could face significant claims from Hurricane Ike, which battered the Texas coast over the weekend. It had to pay a stiff premium in August when it borrowed money in the corporate bond market.

As recently as Thursday, AIG said it was sticking to a schedule to unveil its strategic plan on Sept. 25. But its shares fell 31% on Friday alone. Late that day, Standard & Poor's warned that it could cut AIG's credit rating by one to three notches, citing concerns that AIG would have difficulty raising capital. Such a step would make it more expensive for AIG to borrow and further undermine investor confidence in the company.

Earlier this year, AIG considered selling or spinning off ILFC, the aircraft-leasing arm, but it decided against the idea in June. Since then, AIG's position has deteriorated, making it more likely that it would try again to unload the unit.

AIG could also raise cash by selling its investments in Blackstone Group LP, which is also helping to advise the insurer on its restructuring. AIG owns a stake in Blackstone worth about $700 million. It also has roughly $1 billion in investments in Blackstone's funds, according to regulatory filings, that it could sell in the secondary market.

It's not clear whether AIG has buyers lined up for any of the assets it wants to sell. Also unclear is how much interest private-equity firms would take in an AIG investment, and whether they have enough capital to make a dent in AIG's problems.

"The numbers are too daunting," said a senior executive at a large private-equity firm. Given AIG's huge balance sheet, "we just don't have enough capital to fill the hole."

Over four decades, former Chief Executive Maurice R. "Hank" Greenberg built AIG into one of the world's largest financial firms. He made major acquisitions, and pushed AIG into businesses beyond the world of traditional insurance. For years, investors paid a hefty premium to buy AIG shares.

Now AIG is not even the most valuable insurer in the U.S., as measured by market capitalization.

A 2005 accounting scandal precipitated Mr. Greenberg's departure. He has denied wrongdoing. A protégé, Martin Sullivan, ran the company until this summer when he was replaced under shareholder pressure with Mr. Willumstad, a former Citigroup Inc. executive who has been AIG's chairman since 2006.

When Mr. Willumstad said in June that he would release his turnaround plan in a few months, some wondered whether that gave him enough time to get his hands around such a multifaceted enterprise. But rapid shifts in the market have forced his hand.

Mr. Willumstad reached out to Mr. Greenberg after taking over in June, But a spokesman for Mr. Greenberg said the former CEO wasn't involved in the weekend talks, "though he repeatedly offered to assist in anyway he could" -- suggesting that Mr. Willumstad was pursuing his own strategy.

The aircraft-leasing arm could be part of his efforts. Founded in 1973, ILFC boasts a fleet of more than 900 airplanes valued at more than $50 billion. It is the largest single customer for both Boeing Co. and European Aeronautic Defence & Space Co.'s Airbus. Given that ILFC logged record operating income of $352 million in the second quarter, its value may be relatively high at the moment compared to some other AIG units.

S&P said AIG had enough money to pay claims and post collateral, if needed -- an important statement, given that AIG could have to post billions of dollars if it got downgraded.

AIG had over $1 trillion in assets at the end of the second quarter. Its shareholders equity -- assets minus liabilities -- stood at about $78 billion at that point.

Good News! APA Workers Compensation Dividend Declared

AequiCap Program Administrators (APA) has announced that AequiCap's board of directors declared a dividend for the 3rd quarter of 2008, making it 4 straight quarters that they have declared a dividend. As the year moves forward, AequiCap has pledged to continue to search for ways to differentiate themselves as your MGA of choice.

If you have any questions, please contact your workers' compensation agent / representative.

We appreciate and value your business!

State Farm Must Repay Fla. Homeowners $120 Million

State Farm must pay $120 million to 98,000 policyholders after failing to give them a required discount for storm-proofing their homes, Florida Insurance Commissioner Kevin McCarty announced yesterday.

Under a consent order that the insurer signed, State Farm Florida must also pay a $1 million penalty to the Florida Insurance Regulatory Trust Fund.

According to Mr. McCarty’s statement, the company must issue credits or refunds totaling the $120 million to present or former policyholders who did not apply for, or who did not receive the Windstorm Loss Reduction Rating Plan discount for making their homes more resistant to wind damage.

The commissioner’s Office of Insurance Regulation began investigating the insurer for failing to make the payments in July.

Justin Glover a spokesman for the company said that the investigation was the result of the company contacting the OIR. “We were the ones that notified OIR of the inconsistencies in the discount program and began working with them on the refund program and steps we are taking to ensure consistency in the future.

He said the company discovered the inconsistencies “during a review of our discount program, at that point we immediately notified OIR.” Mr. Glover said the program is a complicated one to administer.

Under state law, insurers are required give notice to homeowners applying for or renewing policies that they can qualify for discounts or credits by taking steps to make homes resistant to storm damage.

According to the order signed by the company, the infractions occurred in 2005, and the company this May instituted processes and reprogrammed computers to make sure policyholders are aware of the windstorm mitigation discounts.

“I am very pleased that State Farm policyholders will now be getting the appropriate monetary credit for the important wind mitigation devices they put on their homes,” said Commissioner McCarty. “Taking steps to fortify our homes against wind damage is very important. Everything Florida consumers can do to reduce storm damage helps to keep property insurance costs down.”

The OIR said State Farm policyholders who are entitled to the refunds will receive a notice from the company. They include policyholders who currently have, or did have, a homeowners, renters, condominium unit owners, apartment or condominium association policy.

Refunds will be credited to the renewal premium for all renewing policyholders entitled to the refund, or the company will issue a check, OIR said.

Under the order, former policyholders or those to whom State Farm has sent a nonrenewal notice prior to yesterday will receive a check within 180 days, In addition, the refund must include 7 percent interest on the amount due to each policyholder until paid, the announcement said.

Further, State Farm has 90 days to prepare the credit or refund process, and 365 days for all credits or refunds to be issued. The company must then provide a signed certification, by a company officer, within 30 days of the date the last credit or refund is issued. OIR said it will conduct a follow-up compliance audit in 12 months.

The law requiring mitigation discount notices was passed in 2005 after Hurricane Katrina, and amended in March 2007 to specifically require insurance companies to tell their policyholders about the discounts at the time a policy is issued or renewed.

OIR issued a memo to insurers on Sept. 14, 2007, reminding them of the statutory requirement.

Odds Of More U.S. Storm Hits Increased

Tropical Storm Risk, the London-based climate and risk forecasting consortium, said today in a new prediction that there is a greatly increased chance of hurricanes hitting the United States this storm season.

TSR in its early August outlook said it expected Atlantic basin activity to be about 80 percent above the 1950-2007 long-term norm. Now the consortium said it has raised its forecast for U.S. landfalling activity to 150 percent above norm.

The hurricane season runs from June 1 to Nov. 30, with tomorrow being the peak point in hurricane climate activity.
TSR’s updated outlook includes:

• A 97 percent probability of an above-normal Atlantic hurricane season, only a 3 percent probability of a near-normal season, and no chance of a below-normal season.
• An expectation of 18 tropical storms for the Atlantic basin as a whole, with 10 of these being hurricanes and 5 of these being intense hurricanes. To date there have been 10 tropical storms with five of these being hurricanes and three intense hurricanes; the climate norm numbers for the whole season are 10, 6 and 3, respectively.
• An expectation of seven tropical storm strikes on the United States, of which four will be hurricanes. (To date there have been 4 tropical storm strikes of which 2 were hurricanes; the climate norm numbers for the whole season are 3.1 and 1.5 respectively).

Adam Lea, a TSR Research Fellow, commenting on the 2008 hurricane season so far and TSR’s updated outlook said, “Atlantic basin hurricane activity so far has been 100 percent above norm. This ranks 2008 as the seventh most active hurricane year to date since 1950.”

He added, “TSR believes this high activity is due to a combination of weaker than normal trade winds over the Caribbean Sea and tropical North Atlantic and to warmer than normal sea waters between West Africa and the Caribbean. TSR anticipates a continuation but slight decrease in above-norm activity during September and October.”

TSR is led by the Benfield UCL Hazard Research Centre at University College London.

Rate Declines Persisting For All Lines, Says MarketScout

Property-casualty insurance premium rate reductions may be moderating, but declines continue for all lines of business, according to the monthly market barometer issued by MarketScout.

Overall p-c composite rates declined 10 percent in August, the Dallas-based online insurance exchange reported. This figure compares to an overall 11 percent decline in June and July MarketScout reported previously.

The firm said workers’ compensation rates moderated the most, coming in at a reduction of 5 percent compared to 7 percent in July.

Small and large accounts declined 10 percent during the month, while medium size accounts ($25,001 to $250,000 in premium) were down 11 percent. Jumbo accounts of over $1 million in premium were down 9 percent.

The account sizes were one percentage point less than July except for small accounts, which remained unchanged on a month-to-month comparison.

By industry class, manufacturing, service and habitational shared reductions of 11 percent each, while public entity insurance rates were down 10 percent during the month. Contracting and transportation both were down 9 percent, while energy had an 8 percent reduction.

Comparing the results to last month, manufacturing moderated the most, dropping two points from July. Service and energy both declined one point from July to August, while the others sectors remained unchanged.

Richard Kerr, chairman and chief executive officer of MarketScout, said in a statement that additional research indicated that rates from the business owners policies (BOP) for the small accounts segment “declined 14 percent as compared to an average 10 percent decline for all other types of small accounts (under $25,000 premium).”

“BOPs are very competitive due to the large number of insurers in the space and the ease of access to SEMCI (single entry, multiple company interface) quoting engines,” he pointed out.

“These online software programs are a powerful way for agents to quickly canvass the market. However, some believe it is a strong driver of price reductions. Others feel it is a useful tool to determine an insurer’s appetite,” said Mr. Kerr.

“The aggregators who utilize SEMCI software appear to provide positive results for their insurers,” he explained. “The question is, how do results from the aggregators differ from business secured directly from appointed agents? In the future, most retail agents will gain increased access to SEMCI software and multiple insurers. So the results from directly appointed agents should ultimately be similar to those produced by aggregators.

“For now, BOP business appears to be experiencing the most aggressive rate cutting of all lines of coverage,” he observed. “It will be interesting to track BOP underwriting results in the years to come.”

Fla. Sees No Reason To Reverse Nix Of State Farm Rate Hike

Florida’s top regulator said today that State Farm Florida’s petition for a formal hearing on his agency’s announced plan to disapprove the carrier’s request for a 47.1 percent statewide average homeowners insurance increase has been rejected.

Insurance Commissioner Kevin McCarty issued the Office of Insurance Regulation’s notice of intent to disapprove the proposed rate hike on Aug. 25.

State Farm now has until Sept. 15 to amend its petition and resubmit it to the OIR. If State Farm fails to file a sufficient petition within the 10 days, it will not be entitled to a hearing, OIR said.

The company also could withdraw its rate filing and make a new filing that is appropriately supported in compliance with Florida law, OIR added.
Explaining his action, Mr. McCarty’s office said in a statement that State Farm was required by law to set forth disputed issues of material fact in its petition, as well as cite specific statutes or rules it believes supported its request for reversal or modification of the office’s notice.

The OIR, it was noted, is empowered by law to reject the petition if it believes the company has not properly specified any disputed material facts.

“State Farm’s petition for hearing was incomplete,” said OIR General Counsel Steve Parton. “In our opinion, they did not demonstrate that there were any material issues of fact in dispute. They basically just said that they disagree with the reasons we gave in the Notice.”

Meanwhile, the company’s 9 percent rate reduction, which became effective in accordance with an Oct. 1, 2007, agreement, remains in effect.

In a March 2007 filing, State Farm initially planned to reduce its rates by 7 percent, but agreed to reduce them by an additional 2 percent. State Farm received a 52.8 percent overall average increase in late 2006.

Last month, in rejecting the State Farm rate proposal, the OIR cited 20 reasons, including the assertion that the company failed to demonstrate that the net reinsurance costs included in the filing did not result in excessive costs, in violation of the rating law.

The OIR also cited the profit and contingency factor, as well as the additional retained hurricane risk load used in the filing. The retained hurricane risk load was previously allowed by law, but that provision was repealed in Senate Bill 2860, the OIR said.

The OIR said State Farm still cannot implement the proposed rate increases, because Senate Bill 2860 also prohibits companies from implementing rate hikes through the "use and file" process, through Dec. 31, 2009.

Insurers Prepare For Hanna, As Ike Looms As Bigger Threat

Insurers advised customers along the East coast to be prepared for a swipe from Tropical Storm Hanna, meanwhile a catastrophe modeler forecasted that Hurricane Ike may be a bigger concern by next week.

Several insurers issued statements today advising their customers that they are prepared to respond to policyholder’s claims reports resulting from a series of tropical storms that are lined up in the Atlantic and aiming for the East coast.

Liberty Mutual Group’s regional companies, Ohio Casualty and Montgomery Insurance, said customers in Delaware, Georgia, Maryland, North Carolina, South Carolina, and Virginia need to be ready with an emergency plan that includes evacuation route, supplies, protection of essential documents, contacts and home preparation.

“Families and businesses that are in storm-prone areas really should have procedures in place to secure their properties and get out of harm’s way if need be,” said Mark Anderson, vice president of field claims operations for Liberty Mutual. “Once you’ve developed a checklist, prepared an emergency kit, and an inventory of personal property, getting ready for severe weather becomes second nature.”

“Claims reported by our customers will be assessed quickly to assure fast and quality service,” said Ken Enscoe, Nationwide’s director of catastrophe claims operations. “It’s important for us to prepare early and be ready to act quickly for our customers.”

Joe Thomas, GEICO regional vice president, said his company “urges policyholders to take all necessary steps to protect their families, their homes and their vehicles prior to the storm, and reminds all residents to heed state warnings.”

An insurance carrier association expressed equal concern, advising consumers to be prepared as the storms approached.

“As the southeastern states brace for Tropical Storm Hanna, property owners should be sure to take basic precautions to protect families and homes,” said David Sampson, president and chief executive officer of the Des Plaines, Ill.-based Property Casualty Insurers Association of America.

“Residents are strongly encouraged to follow the advice of local officials, and anyone who may be ordered to evacuate should be prepared to report claims to their insurer as soon as it is safe to return to their homes and businesses and assess the damage.”

According to the National Weather Service, Hanna could intensify into a hurricane before landfall sometime late tomorrow or early Saturday. The storm is expected to hit the coast, possibly a Category 1 hurricane on the Saffir-Simpson scale of either North Carolina or South Carolina and move up the East coast through New England over the weekend.

However, it is Hurricane Ike that can pose a greater threat. The National Weather Service says the storm is currently a Category 4 hurricane with sustained winds near 140 mph. The National Weather Service says it is too early to know what land areas might be affected.

Weather models, said Steve E. Smith, president of Property Solutions, Carvill ReAdvisory in Chicago, are generally calling for Ike to remain a major hurricane as it approaches the Bahamas by early next week.

“Ike must now be considered a significant threat to the Southeast U.S. coast with high potential for Ike to make landfall somewhere from Miami to the Carolinas as a major hurricane during the middle of next week,” he said in a statement.

Ike is the third major hurricane of this season, he noted.

Tropical Storm Josephine, with sustained winds at 50 mph, is the 10th named storm of the season. It is moving West-Northwest at 10 mph and is expected to remain in the Atlantic through Sunday. Little change in strength is expected over the next couple of days, the National Weather Service said.

Hanna Track, Intensity Seen As Unpredictable

Two catastrophe modeling firms cautioned today that the track and intensity of Tropical Storm Hanna is currently highly unpredictable.

Christine Ziehmann, director of model management at Newark, Calif.-based Risk Management Solutions, said forecasts suggest Hanna will gradually re-strengthen to hurricane intensity before striking the U.S. coast.

But Ms. Ziehmann noted that “the systems around the storm are complex at the moment, so confidence in the intensity forecast is lower than usual.”

The National Hurricane Center forecast has Hanna striking the Georgia coast as a hurricane on Friday evening, but like the intensity, the track confidence remains low until Hanna’s motion becomes better defined.

Hanna dumped heavy rain on the Southeastern Bahamas, the Turks and Caicos Islands, and Haiti, which was already saturated by rain from Hurricane Gustav last week. Accumulations of 4-to-8 inches were expected, with isolated amounts up to 12 inches.

AIR Worldwide in Boston said there is considerable uncertainty with respect to Hanna's track through the Bahamas.

The firm mentioned that the National Hurricane Center’s most likely track has Hanna skirting the Bahamas to the north and well away from the most heavily populated islands of New Providence (and the capital Nassau) and Grand Bahama.

AIR said other models show a more southerly track directly through the middle of the islands. Given that the moderate wind shear that Hanna was experiencing was expected to diminish, some additional intensification is likely, AIR said.

However, AIR noted that dynamic forecast models are in reasonably good agreement that Hanna will speed up and eventually make a U.S. landfall somewhere between Savannah, Ga., and Myrtle Beach, S.C.

Ms. Ziehmann said the eastern coast of Florida, Georgia and South Carolina “should all keep an eye on Hanna.”

Should Hanna make landfall as a hurricane, carriers in the Southeast face a potential risk worth $25.5 billion, according to Highline Data, a unit of Summit Business Media, the parent company of National Underwriter.

Regarding other storms that are in the Caribbean, RMS said that forecast models for Tropical Storm Ike are in good agreement that Ike will likely intensify to a hurricane within the next 24 hours, and will continue on a westward track due to a building mid-level high in the Atlantic.

Behind Ike is Tropical Storm Josephine. Satellite intensity estimates that it will strengthen only modestly over the next five days, as the shear environment will become steadily less favorable, RMS said.

Hurricane Gustav, meanwhile, moved inland and was downgraded to a depression, but was causing flooding and a threat of tornados in parts of Louisiana, Texas, Arkansas and Mississippi.

According to the Highline Data’s “Gustav Exposure Report,” State Farm Illinois Group is the carrier in Louisiana with the greatest exposure for personal and commercial lines, with $794 million and $45 million in premiums in the region, respectively.

Fidelity National Financial faces the greatest federal flood exposure, with $61.8 million in premiums at risk in the region.

RMS said its reconnaissance teams will be reaching the areas that are reported to be worst hit later today, around the landfall area in Houma and Morgan City, La.

Gustav Insured Losses Could Top $10 Billion

Hurricane Gustav--a Category 2 hurricane that battered the Louisiana coast yesterday--could cost insurers up to $10 billion, according to early catastrophe loss estimates.

The top damage estimates include losses from oil and gas production fields, which felt the brunt of Hurricane Gustav as a Category 3 storm, with sustained winds topping 115 miles-per-hour.

To recap the estimates from the catastrophe modelers:
EQECAT Inc., based in Oakland, Calif., said insured losses from Hurricane Gustav could range from $6 billion to $10 billion--primarily in Louisiana for onshore losses.

While not issuing an estimate for losses from the storm to oil and gas production fields along the Gulf of Mexico, EQECAT did say it expects 5 percent of production for oil and 5 percent of gas production capacity to be shut off for the next year.

EQECAT said its onshore loss numbers include expected demand surge for products and services, in addition to property losses and business interruption claims.

After its initial loss estimate, EQECAT sent out a revised loss estimate, dropping the loss range to $3 billion to $7 billion.

Risk Management Solutions in Newark, Calif., estimated insured losses could range between $4 billion and $10 billion, including onshore and offshore losses, but did not include potential damage to the levees.

RMS said losses for offshore damage to oil platforms and wells, including production interruption, could range from $1 billion to $3 billion. Onshore looses for both residential and commercial properties--including business interruption--could run between $3 billion and $7 billion. The estimate does not include the National Flood Insurance Program.

AIR Worldwide Corp. issued a lower estimate range between $2 billion and $4.5 billion, not accounting for flooding for onshore losses. It estimated offshore insured losses between $1.8 billion and $4.4 billion.

Steve Smith, president of ReAdvisory, part of the Carvill Reinsurance brokerage, said while loss estimates range between $5 billion and $10 billion, “our view is that losses will be towards the bottom of this ranges.”

Losses from Hurricane Gustav had the potential of being much worse, noted several of the modelers, as the storm was feared to hit the region as a Category 4 storm (which would have meant sustained winds between 131-to-155 mph on the Saffir-Simpson scale).

Instead, Gustav hit the energy production fields in the Gulf of Mexico off the Louisiana coast as a Category 3 storm, with sustained winds at 115 mph.

Gustav made landfall at around 9:30 a.m. yesterday near Cocodrie, La., South of Houma, La., as a Category 2 storm with sustained winds clocked at 110 mph.

“Offshore damage was not as extensive as originally anticipated as Gustav weakened from a Category 4 hurricane to a Category 3 storm before blustering into the platforms,” observed Christine Ziehmann with RMS. She noted the platforms are “fairly resistant” to storms of this intensity, and said structural damage and impact to production would be relatively low.

Yesterday, the U.S. Minerals Management Service, which regulates energy production off the U.S. Gulf coast, reported that 87 percent of production platforms and 83 percent of rigs were evacuated in the Gulf. One hundred percent of oil production was shut-down and 95 percent of natural gas production was shut-down.

Reports indicate that the New Orleans levees that gave way during Hurricane Katrina in 2005 held this time, although waters from Late Pontchartrain did overlap the walls and some flooding was expected, and continued pressure on the levees could yet cause them to fail.

While insures are beginning to assess the damage from Gustav, Hurricane Hanna is churning away in the Caribbean and heading toward the U.S. mainland. Hanna is threatening to strike the East coast anywhere from Florida to North Carolina.

The National Weather Service is also watching Tropical Storm Ike and Tropical Depression 10, which could become Tropical Storm Josephine.

Energy Platform Insurers Seen In Better Shape Than 2005

Energy insurers, with the lessons of the 2005 hurricane season behind them, are in a better position to withstand losses from offshore energy fields, according to a brokerage expert.

Bruce A. Jefferies, resident managing director, Aon Risk Services, Natural Resources Group, a unit of Chicago-based insurance broker Aon Corp., said, “Underwriters believe that with all of the changes in exposure and underwriting methods and rating, the insurance industry can weather, so to speak, a major storm without sustaining a marketwide underwriting loss.”

He commented as some energy companies were involved with personnel evacuations at offshore platforms as a precaution against Tropical Storm Gustav, which was expected to elevate to hurricane strength and move into their vicinity in the Gulf of Mexico.

Mr. Jefferies said multiple storms in a year “would put some pressure on the market, but with aggregate windstorm limits, and limited or no business interruption coverage, the total losses to the market could not approach those sustained during [Hurricanes Katrina and Rita in 2005].”

He said by e-mail that since 2005, insurers in this sector have undergone a “complete overhaul of the underwriting practice and rating of offshore energy property.” He said they realized they could not withstand another storm that produced losses of 10 times their premium income as they did in 2005.

To meet this challenge, deductibles were increased from $500,000 to $5 million per occurrence. Rates increased 10 times 2005 rates. Despite declines since, rates remain five times what they were prior to 2005.

The insurers also adopted windstorm modeling to better estimate risk, he continued, and limited aggregate amounts per year for any one insured rather than any one occurrence. Coverage was also “significantly reduced.”

With rate increases and limitations on business interruption and contingent business interruption coverage, few energy producers now purchase the coverage, he said, noting that if it is offered it is “uneconomical.”

Many offshore energy producers, he said, feel they can recoup their losses in production through increases that result from price spikes.

Oil rigs and platforms have been constructed to higher standards under guidelines issued by the U.S. government’s Minerals Management Services, Mr. Jefferies noted. Older and smaller offshore production facilities that were lost and replaced after the 2005 season were built under these higher standards, “so they should be more resistant to damage from future storms,” he said.

Gustav, he said, could “be a good test of how the revised program structures and coverages perform for the oil and gas companies and the insurance companies.”

Minerals Management reported that by Thursday a total of three platforms and rigs were already evacuated. Energy production was not affected.

Tropical Storm Gustav was reported to have taken a total of 59 lives in Haiti. The National Weather Service expected Gustav to reach the Gulf Coast sometime Tuesday morning as a major storm with sustained winds possibly as high as 120 mph.

Officials in New Orleans and surrounding parishes began evacuations of some residents yesterday.

Meanwhile, forecasters said Tropical Storm Hanna could become a hurricane by Sunday and strike the Bahamas aiming toward Cuba or Haiti.

Highline Data, a unit of National Underwriter parent company Summit Business Media, put out a report that examines the risk to top carriers writing federal flood, homeowners multiple peril and private automobile physical damage insurance in five Gulf Coast states: Alabama, Florida, Louisiana, Mississippi and Texas. The five together represent more than one-fifth of the nation’s premiums written across these lines of business. The report also examines the percent of each of the top 50 carriers’ total books of business for each line that may be jeopardized by Gustav.

State Farm is the carrier with the greatest amount of premiums at risk with 26 percent of its total book of business, or $6.9 billion, covering flood, homeowners and private automobile.