Fitch: Underwriting Profit Overwhelmed By Investment Losses for U.S. P/C Insurers

The U.S. property/casualty insurance industry's net profits tumbled in 2008, according to Fitch Ratings in a new report.

While operating performance was expected to decline from the strong results of 2006 and 2007 due to more traditional competitive pressures, the impact of the sharp deterioration in economic conditions and investment markets overwhelmed these concerns.

In a new special report, Fitch evaluates full year 2008 industry performance based on a compilation of GAAP earnings release and 10-K filing data from 49 property/casualty insurance organizations.

Performance for the year for Fitch's rated P/C universe showed flat or reduced premiums in many cases, poorer underwriting results due to weaker pricing and significantly higher catastrophe-related losses, particularly due to Hurricane Ike. Nonetheless, the large majority of insurers in the group reported an underwriting profit for the year.

Operating profits for the group, declined considerably for the year. However, a number of market participants reported reasonable operating returns on capital. When investment losses are considered, a larger percentage of insurers reported unfavorable returns or net losses, as well as declines in GAAP shareholders' equity for the full year.

To access this Special report, 'Property/Casualty Insurers Year-End 2008 Review', please visit Fitch's web site at www.fitchratings.com under the following headers:

Financial Institutions > Insurance > Special Reports.

Divorce AIG Style

Like spouses granted a divorce, AIG's property/casualty insuranceexecutives are relieved and excited about their newfound freedom.

AIG is letting them form their own independent company called AIU Holdings. No longer will they have to answer for what their irresponsible partner-parent AIG has done or is doing.

AIG's P/C executives have been victims of the other AIG operatorswho have tarnished the family name. Their insurance operationshave remained profitable and their policyholders have remained protected. Their insurance monies are completely walled off so that they can't be raided. They have not needed or received any of the billions of dollars doled out by the government to AIG.

But the marketplace hasn't always listened to or trusted these assurances coming from inside AIG. AIG's competitors have also been happy to create noise in the marketplace to confuse matters.

Now the AIG insurance pros are going to be judged on their own merits again.

Officially separating from AIG will take some time but the branding has already begun. "Putting some distance will be good for everyone involved," John Doyle, president of the Commercial Insurance Group for North America, told an Aon client conference a day after AIG announced that it would be spinning off the P/C business. "We appreciate that," he added.

March 2, the day on which parent AIG reported the biggest quarterly loss in history-- $61 billion -- and accepted another $30 billion credit line from the government was nevertheless a "good day for us," Doyle said of the insurance group.

Doyle said AIG's insurance business around the world has continuedto perform well despite the challenges.

It's performed well, perhaps, but not perfectly. There have been some high-profile executive defections, although Doyle maintained that overall employee retention, even at the senior management level, is well within the normal range. Premium retention is down a bit, about five percent but client retention is at normal levels. "No major commercial customers are looking to move on," Doyle said.

Attracting new business in a recession is a challenge for any insurer but it has been especially difficult for AIG as it tries to also overcome client doubts about its financial future. New business premium fell 37 percent in 2008 and that trend has continued in early 2009.

The new AIU will start out with many advantages including $45 billion in total revenues -- enough to be a Fortune 54 company. Its policyholder surplus is unmatched by any rival. Going solo should give AIU more financial flexibility.

Part of the new plan calls for AIU to sell a minority interest. Of course, whether capital markets will be in any shape to respond remains to be seen.

For all its history and size, the newly single AIU Holdings will not be immune to the fallout from a troubled economy. The marriage was good for a long time and made AIU the force it is today. Now it's time for AIG and AIU to go their separate ways and focus on the future.

Rep. Frank: Might Be Time To Fire Some People At AIG

Amid simmering outrage over $165 million in bonuses paid to executives at ailing AIG, Representative Barney Frank said Monday it may be time to fire some people at the insurance giant.

"These people may have a right to their bonuses but they don't have a right to their jobs forever," Frank, a Massachusetts Democrat who heads the House Financial Services Committee, said on NBC's "Today" program.

AIG has received $173 billion in federal bailout money and is at the heart of a global financial crisis that President Barack Obama is trying to address with plans for trillions of dollars in spending.

"The federal government now is the 80 percent owner (of AIG)," Frank said. "These bonuses are going to people who screwed this thing up enormously ... Since the federal government ... now essentially owns that company, maybe it's time to fire some people."

AIG Bailout Good For Goldman Sachs, Other Banks But Not For Investors

The $173 billion government rescue of American International Group Inc. is stoking resentment among investors who see it as a backdoor taxpayer bailout of Goldman Sachs Group Inc. and other banks.

Six months after the government stepped in save an insurance giant overwhelmed by derivative losses, AIG continues to bleed red ink. Its stock and bond holders have been crushed, but one group has suffered almost no damage: banks that bought credit protection from AIG Financial Products.

Regulatory filings show that since the Federal Reserve announced its rescue of AIG on Sept. 15, about $50 billion of government money has passed through the company to banks.

"Treasury is providing a massive wealth transfer from taxpayers to Goldman Sachs and other parties and it's something that absolutely should be investigated," said Eric Hovde, chief executive of Hovde Capital Advisors, where he manages financial services-focused hedge funds.

Once the world's largest and most powerful insurance company, AIG for more than a decade aggressively insured credit and mortgage exposure for banks around the world. At its peak, AIG was backstopping a $2 trillion derivatives trading business.

That business proved its undoing when credit markets broke down in 2007, leaving AIG on the hook for huge losses. At the year-end, it had $302 billion of outstanding credit default swaps, which are contracts that insure against debt default.

Filings show that, in the final months of 2008, as it unwound its money-losing credit derivative portfolio, AIG purchased from banks $46.1 billion of assets underlying swaps. With government financing, it paid $20.1 billion cash and surrendered $25.9 billion of collateral -- a 99.8 percent recovery rate.

BETTER DEAL

On the September weekend that investment bank Lehman Brothers Holdings Inc. collapsed, the U.S. Treasury and Federal Reserve arranged an unprecedented insurance company bailout: $85 billion in loans for AIG in exchange for an 80 percent stake in the company.

The Treasury and the Fed worried that an AIG collapse could further drag down world financial markets. As markets continued to deteriorate and AIG's derivative losses mounted, Uncle Sam extended ever-more-lenient rescue packages.

The bailout has stirred resentment not just in the Congress, but on Wall Street, where investors speculate that Goldman and its connections helped it get a better deal.

"The whole point of the bailout is to save Goldman Sachs," said Christopher Whalen, head of financial advisory services for Institutional Risk Analytics. "The whole thing is so rancid and so hideous."

A Goldman Sachs spokesman declined to comment on the AIG bailout or what government funds it received.

Goldman CFO David Viniar in September and in December told investors the firm had no material losses from AIG. The bank says its AIG exposure was either collateralized or hedged.

Last week, AIG Chief Executive Edward Liddy told investors "the vast majority" of taxpayer funds "passed through AIG to other financial institutions" as it unwound transactions.

During a hearing in Washington last week, legislators demanded the Federal Reserve identify the financial firms that received money from AIG. Fed vice chairman Donald Kohn refused.

The Wall Street Journal, citing unnamed sources, reported Saturday that more than $50 billion of payments went to counterparty banks between September and December. Goldman and Deutsche Bank AGwere the largest trading parties, each receiving about $6 billion, the newspaper said.

Goldman has been singled out by critics who question why Chief Executive Lloyd Blankfein attended meetings that discussed a bailout of AIG.

A Goldman spokesman said Blankfein, at the invitation of then-Federal Reserve Bank of New York President Tim Geithner, attended a meeting at the Fed, along with co-President Jon Winkelried and a group of investment bankers to discuss a private sector solution for AIG. Blankfein left the meeting after about 15 minutes, he said.

Once it was determined that a private sector bridge loan for AIG was not possible, the remaining Goldman executives left, he said. There was no discussion of a government bailout while Goldman people were in attendance, the spokesman added.

Other bankers meeting with the Fed that Monday were James Lee, vice chairman of JPMorgan Chase & Co., AIG's advisers; then-Morgan Stanley President Robert Scully, an adviser to the U.S. government; and Eric Dinallo, head of New York State's Insurance Department.

Critics have also pointed out that then-Treasury Secretary Henry Paulson, who left Goldman in 2006 as CEO, played a lead role in the government's rescue efforts. Meanwhile, the chairman of the New York Fed is former Goldman head Steve Friedman.

BANKRUPTCY BETTER?

The results, investors say, have been poor. With no end in sight for the losses, some investors argue taxpayers would be better off letting AIG go bankrupt.

"AIG should be put through bankruptcy and the federal government should stop funding of all these losses," Hovde said. "I'm opposed to seeing parties that should be taking some financial consequences walking away free and clear off the taxpayer's back."

Seacliff Capital LLC President James Ellman, who manages a financial services hedge fund, said the government could take over the AIG derivatives portfolio. While that would wipe out stockholders and generate losses, the government could then sell off AIG's healthy insurance businesses to investors.

That may be preferable to the government's latest bailout, announced last Monday, which effectively cut the interest and dividend payments AIG must make to the government. The cost to taxpayers is about a billion dollars a year.

"We have the Fed chairman saying he's angry with AIG and yet he consistently rewrites the bailout to make it worse for us and better for a party which is increasingly in a weaker bargaining position," said Ellman.

Whalen, who once ran foreign exchange trading at the New York Fed, concurred that markets would be better served by forcing AIG into liquidation and following the model set by Lehman.

Unlike Bear Stearns and AIG, Lehman was not rescued and filed for bankruptcy on Sept. 16. While many analysts say this event sparked last year's market free fall, the bank's toxic assets are being sold off while healthy businesses found new homes.

Keeping sick patients such as Citigroup Incand AIG on life support, investors say, only increases the risks for taxpayers.

"Every time the government tries to save us, they make the problem worse," Whalen said. "We should just get on with it, resolve AIG now and get them into a restructuring. If we don't, we will muddle through this crisis for a decade."

AIG's Meltdown Has Roots In Greenberg Era

NEW YORK (Reuters) - Maurice "Hank" Greenberg's legacy as the man who built AIG into the world's largest insurer was tarnished by a 2005 probe but questions about whether he created a financial monster that subsequently ran amok could cause greater damage to his image.

The former Army captain -- who left AIG in 2005 amid allegations he used off-balance sheet transactions to improperly boost profits -- had previously been revered for his track record of steady profit growth over a 38-year tenure.

In the years since he quit AIG, Greenberg has pursued other business interests, but much of his time has been spent defending his name and railing against a succession of CEOs who replaced him at AIG.

But AIG's posting on Monday of a $61.7 billion quarterly loss, the biggest in corporate history, and the announcement of a third bailout by the U.S. government have prompted his critics to ask whether Greenberg planted the seeds of the financial disaster that already threatens to cost taxpayers $180 billion.

Greenberg's creation more than two decades ago of a financial products unit, which has triggered the bulk of AIG's massive losses, is their main focus.

Credit default swaps, or CDS, held by AIG Financial Products have been the biggest driver of AIG's losses, which have exceeded $100 billion over the past five quarters.

"The bottom line is that Hank Greenberg wandered out of the very safe, well-capitalized world of insurance into the surreal world of credit default swaps where you can create endless amount of risk," said Christopher Whalen, co-founder of Institutional Risk Analytics, which provides analysis and ratings to banks.

Greenberg has sought to distance himself from the losses at AIG, suing his former company for misrepresenting the risk of losses from credit default swaps held by AIG Financial Products. In the suit, which was filed last week but only surfaced on Monday, he claims to have been misled into buying stock at inflated prices. He said he paid more taxes than he should have because of the inflated prices, which caused him to overstate his income.
Greenberg and his lawyer could not be reached for comment.

DAMAGE CONTROL

Greenberg oversaw AIG's growth into a company spanning 130 countries and serving more than 70 million customers.

But in 2005, amid an investigation by then New York Attorney General Eliot Spitzer, Greenberg was forced out by AIG's board. He had refused to cooperate with the company's own probe.

He is still fighting civil charges being pursued by New York state, as well as a string of other lawsuits outstanding between him and AIG.

But detractors say he could face a tough time saving face given the latest loss revelations since the former chieftain was sole architect of AIG Financial Products -- the business that poured itself into the CDS market, and ultimately cost AIG so much.

That business "brought AIG to its knees," said Mark Keenan, an insurance partner with law firm Anderson Kill & Olick.

AIG itself is clear that Greenberg should bear some of the responsibility.

"AIG FP from the way it operated to its compensation were all set up under Greenberg, and AIG was well into it by the time he left," said Nicholas Ashooh, a spokesman for AIG.

Greenberg, a World War II veteran who helped to liberate the Dachau concentration camp, set up the financial products unit in 1987 as he was seeking new business avenues to diversify his growing empire against the highs and lows that are a trademark of global insurance markets.
He hired a group of traders that had worked together at Drexel Burnham. He would later promote Joseph Cassano to lead the unit, which became a sought-after employer since it offered to share a third of all its profits with staff. Cassano is now at the center of U.S. and UK probes into what happened at AIG Financial Products.

A PLAN THAT BACKFIRED

Greenberg's diversification plan paid off handsomely at first. AIG Financial Products contributed $5 billion to the insurer's profits from the time it was formed in 1987 through 2004, Greenberg's last full year as CEO.

But the risks also grew exponentially as the unit, driven by a thirst for greater profits, racked up guarantees on CDS worth a total of about $450 billion. Cassano boasted in 2007 that the company did not expect to realize even $1 in losses on the portfolio.

"AIG jumped into the high-beta world of credit default swaps when there was a low default environment," said Whalen. "But when the market goes bad it all goes bad, and with the kind of exposure that AIG wrote, it is just rancid."

Greenberg, in written testimony to a U.S. congressional hearing last October, argued that risk controls were not maintained at AIG Financial Products after he left, and that he would have done more to hedge the risks and head off losses.

Gerry Pasciucco, a former Morgan Stanley executive who is now winding down the unit, told Reuters last month that everyone with the benefit of "20/20 hindsight" would have reacted differently. The reality is no one did, under Greenberg, or later, he said.

"The overwhelming majority of AIG FP's books were hedged, but some remote risks were not," said Pasciucco.

AIG withdrew from guaranteeing multi-sector asset-backed securities -- the area that has triggered AIG's worst losses -- about 8 months after Greenberg's departure.

To be sure, some experts say neither Greenberg nor AIG could have predicted the extent of the U.S. housing market bust, or the prolonged recession.

"The business of insuring credit is good, and there is a valid market, but it was left unregulated and unsupervised. Credit insurance was the blind area," said David Kotok, chief investment officer at Cumberland Advisors. "We are now paying the price."

AIG Reports $62B Loss for Q4; $99B for Year

American International Group Inc. posted a $61.7 billion fourth-quarter loss -- its fifth consecutive quarterly loss and the biggest quarterly loss in corporate history.

The quarter's net loss of $61.7 billion compared to a 2007 fourth quarter net loss of $5.3 billion.

AIG's net loss for full year 2008 was $99.3 billion compared to net income of $6.2 billion for full year 2007.

The insurer reported that continued severe credit market deterioration and charges related to ongoing restructuring activities contributed to the record net loss for the fourth quarter. Specifically, about $7 billion was attributed to restructuring costs; $26 billion to market disruption items including a steep decline in commercial mortgage backed securities; $25 billion in accounting costs; and $7 billion in amortization and credit charges for govermment credit facilities.

Despite AIG's credit market and restructuring woes, insurance premiums and other considerations declined only 1.9 percent for the fourth quarter compared to the fourth quarter of 2007. For the year,premiums and other considerations grew by 5.3 percent.

GENERAL INSURANCE

General Insurance fourth quarter 2008 operating loss was $2.8 billion, compared to a profit of $2.1 billion in the fourth quarter of 2007.

AIG said the 2008 results reflect goodwill impairment charges of $2.0 billion, principally related to the transactions relating to Hartford Steam Boiler, 21st Century and Transatlantic, and a decline in net investment income of $1.2 billion, primarily due to losses from partnership and mutual fund investments and an increase in adverse loss development compared to the prior year quarter.

Operating losses at United Guaranty Corp. (UGC) increased by $148 million to $496 million in the fourth quarter of 2008.

General Insurance net premiums written were $9.2 billion in the fourth quarter of 2008, a 16.3 percent decline compared to last year's fourth quarter.

For the quarter, AIG reported an 83.05 percent loss ratio, which compared to 69.70 percent in the fourth quarter last year.

For the year, the loss ratio was 76.93 percent (65.63 in 2007).

The 2008 fourth quarter combined ratio was 129.08 percent; in 2007 it was 95.17. For the full year 2008, the combined ratio was 109.09 percet, compared to 90.15 perent in 2007.

Commercial Insurance reported net premiums written during the fourth quarter of 2008 of $4.4 billion, a 22.1 percent decline from the fourth quarter of 2007, reflecting changes in the structure of catastrophe reinsurance programs and a significant reduction in workers' compensation premiums.

Commercial Insurance renewal premium retention decreasedslightly, but stabilized in early 2009 compared to early 2008, and new business premium decreased in the fourth quarter of 2008.

Foreign General reported a decline in net premiums written of 2.9 percent in original currency. Despite challenging worldwide economic conditions and AIG's headline attention, Foreign General insurance was largely successful in retaining business in its property, casualty and consumer lines in the fourth quarter of 2008.

Overall, rates in Commercial Insurance are flat in early 2009 as compared to the comparable prior year period. The stabilization of rates is an improvement from the fourth quarter of 2008 in which rates declined 6.5 percent. Additionally, retention levels have improved in the early part of 2009 as compared to the fourth quarter of 2008.

At Dec. 31, 2008, AIG's Commercial Insurance fleet of companies had a combined statutory capital base of more than $26 billion, which AIG said is larger than any other competitor.

At Dec. 31, 2008, General Insurance net loss and loss adjustment reserves totaled $72.5 billion, a decrease of $1.3 billion in the fourth quarter 2008 and an increase of $3.2 billion for the twelve months ended December 31, 2008.

For the full year 2008, net loss development from prior accident years, excluding accretion of discount, was adverse by $118 million.

FINANCIAL SERVICES

Financial Services reported a $17.6 billion operating loss compared to a $10.3 billion operating loss in the fourth quarter of 2007. AIG Financial Products Corp. (AIGFP) net operating results for 2008 include the effect of changes in credit spreads on the valuationof its assets and liabilities since AIGFP elected to account for most of its financial assets and liabilities at fair value upon the adoption of FAS 159 on January 1, 2008. Previously, these effects were only recognized in earnings once realized upon a sale, maturity, impairment or termination.

AIGFP , which is in the process of winding down its businesses and portfolios, contributed $17.2 billion to the Financial Services loss, primarily from the unrealized market valuation losses on its super senior credit default swap portfolio and credit valuation adjustments.