Capital Markets

CFOs React: AIG’s Rob Schimek

The business insurance group's finance chief foresaw the need to add liquidity just as Bear Stearns was starting to tank.
David KatzOctober 10, 2008

In March, around the time when the problems with Bear Stearns surfaced, Rob Schimek, the CFO of AIG Commercial Insurance and the domestic property-casualty operation of which it is part, began to sock away cash.

Although the big liquidity problems of American International Group, which was taken over in large part by the U.S. Federal Reserve last month, hadn’t yet emerged, Schimek decided it was time to let profitability start taking more of a back seat to liquidity.

As of Wednesday, the commercial insurance group’s average level of cash and cash equivalents (basically overnight liquid investments) topped $1 billion, which is about double the amount that the group held in the same period a year ago, according to Schimek, who tells that the group started holding higher levels of liquidity in March.

“If anything has been proven by the events [involving our] parent company and the credit market,” Schimek says, “liquidity is absolutely a number 1 priority, and [must] never be called into question.”

The group, which New York Insurance Superintendent Eric Dinallo calls the largest commercial and industrial insurance company in the United States, pays claims at a rate of about $73 million per business day. Its policyholders’ surplus — the amount its assets exceed its liabilities — was $26.7 billion as of June 30. “We’ve established liabilities for claims that haven’t been paid, deposits, [and] premiums not earned,” the finance chief explained, noting that these amounts “sit on our balance sheet as liability.”

To be sure, by building up liquidity, the group is trading off the profits it might be earning on its $70 billion investment portfolio, 75 percent of which is in municipal bonds. But that’s an exchange that’s made a great deal of sense in the light of subsequent events, Schimek thinks. “The tradeoff of market perception versus the additional yield, today that’s a pretty easy decision to make,” he adds.

Despite the role the credit crunch has had on the parent company, however, it’s had a small, mostly indirect effect on the fortunes of the domestic business-insurance operations, according to Schimek. AIGCI carries no debt, and the group’s only involvement with the credit markets has been through the letter-of-credit market.

To be sure, that market has gotten “extremely tight” in recent months, and letters of credit may not be readily available from banks, he says. Commercial insurance buyers often use letters of credit as collateral to insure payment to AIGCI, and sometimes the insurer uses them as collateral to insure payments due to corporate policyholders.

But Schimek, along with Dinallo and Ed Liddy, American International Group’s new chief executive officer, have been at pains of late to calm the fears of its many corporate policy holders by distinguishing AIG’s insurance operations from the financial products and securities lending units that plunged the financial services giant to the edge of bankruptcy.

Liddy, who last week outlined plans to sell off chunks of the company to help pay back the $85 billion it borrowed from the Fed, said he plans to hold onto AIG’s domestic property-casualty insurance operations. (On Tuesday, the parent company announced that some of its domestic life insurers had entered into an agreement with the New York Federal Reserve Bank under which the New York Fed would borrow up to $37.2 billion worth of securities from the subsidiaries in return for cash collateral.)

Overall, the Commercial Insurance Group’s abundant liquidity has shielded AIGCI from the demise of its parent company, Schimek insists. More troubling are the intangibles: the loss of the “implicit and explicit benefits” of being part of one of the world’s biggest and strongest financial-services companies. Going forward, that loss could hurt the insurance companies’ access to capital and their ability to make acquisitions, he notes, adding: “What worries me is the reputational risk.”