Risk Management

AIG Insurance CFO: We’re Not Like Papa

The property-casualty group's finance chief tells corporate insurance buyers that it made money while its parent company lost $61.7 billion.
David KatzMarch 6, 2009

Like the child of a convict, the property-casualty insurance business of American International Group is struggling to distinguish itself from its embarrassing parent.

Trying to assure corporate policyholders that there’s more than enough capital to cover their claims, Robert Schimek, CFO of AIG’s property-casualty insurance group, is touting the group’s new holding-company structure as a way of clearly separating it from the fortunes of its stumbling parent company.

On Monday, as AIG was reporting a $61.7 billion net loss for the fourth quarter of 2008, it also announced that it intends to form AIU Holdings, a holding company for its property and casualty businesses that will be run by a separate board and management team and feature a “brand distinct from AIG.”

The new structure will enable the business-insurance companies to gain direct access to debt and equity markets, the CFO said during a Webinar held by the Risk and Insurance Management Society. The group previously had to tap the capital markets via AIG Inc., the wobbly financial-services giant that’s currently 80 percent owned by the U.S. Federal Reserve Board.

What would happen, however, if AIG Inc. went bankrupt? “Under U.S. insurance law, the insurance companies can’t go bankrupt, and so bankruptcy would not be an issue for the insurance companies themselves,” contended Schimek, who noted that the property-casualty insurers are very well capitalized. “The single biggest issue for us would be further brand damage from the challenges to AIG. But it wouldn’t be a concern for us in paying claims or [in terms of] financial strength.”

Indeed, executives argued, the new structure will enable the AIU companies to boost the value of parent company shares, which were at 35 cents a pop in late trading Friday. “It gives us a platform to grow shareholder equity in our company,” said John Doyle, a senior vice president of AIG as well as an executive vice president of the property-casualty group. The group hopes to grow its shareholder equity from its current worth, between $43 billion and $45 billion, to $50 billion over time, he added.

AIG will own 100 percent of AIU Holdings and has expectations of being at least an 80 percent owner in the future. Selling such a minority stake to an outside investor would generate “a gain on the sale of the operations to AIG that would go to the benefit of the [parent company’s] stakeholders,” said Schimek.

At pains to draw a contrast between his company and AIG, however, Schimek noted that the property-casualty group, “in stark contrast with the performance of AIG Inc.,” reported a profit of $520 million for the fourth quarter and one of $1.852 billion for all of 2008.

Making a particular pitch to corporate insurance buyers, the CFO noted that the group recorded $26.6 billion in “policyholder surplus” at the end of 2008 — a 50 percent rise from where it stood at the end of 2005, the year Hurricane Katrina depleted the coffers of the property-casualty industry. (Policyholder surplus is the amount by which an insurer’s assets exceed its liabilities; another way to put it is that it represents the total assets that are unencumbered by liabilities.)

“We have continued to be well capitalized, have continued to be very strong on our own, and therefore we have not required capital contributions from the Fed or the U.S. Treasury to support our operations,” added Schimek.

The finance chief also touted his group’s fixed-income portfolio. Noting that he has often been asked if the property-casualty companies bear excessive exposure to municipal bonds in the midst of the current economic downturn, Schimek pointed out that more than 80 percent of the company’s municipal-bond portfolio was still rated AA or higher as of December 31.

Along with its cash holdings of $2.5 billion, 10 percent of the group’s municipal-bond portfolio “generates a wonderful degree of liquidity for us,” he said, referring to holdings that are part of a group of bonds that issuers want to refinance to take advantage of a drop in interest rates. In such instances, rather than retire the bonds, the municipal issuer must place them in a trust backed by U.S. Treasury bonds.

“Those securities can be sold pretty much at any time at or above par value” because they’re backed by U.S. Treasuries, noted Schimek. “And another nice thing is, they continue to carry the yield of the initial muni bonds that I issued. So I have a U.S. Treasury that is actually given the yield of a muni bond.”


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