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Independent Insurance Agent


Sullivan Insurance
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AIG RECEIVES FEDERAL LOAN, LOOKS TO SELL SOME ASSETS AIG Receives Federal Loan, Looks to Sell Some Assets
Agents should monitor carrier ratings, possible subsidiary sales.

The ripples of the subprime mortgage meltdown continued to reverberate this week as Lehman Brothers Holdings, Inc. filed for Chapter 11 bankruptcy, Merrill Lynch was sold to Bank of America, and of particular importance to independent insurance agents, American International Group received a commitment from the Federal Reserve Bank of New York for an $85 billion loan for 24 months, secured by all the assets of AIG. In return for the short-term loan, the U.S. government is getting a 79.9% equity stake in AIG.

According to various sources, former Allstate Corp. chief Edward Liddy will replace AIG’s Chief Executive Officer Robert Willumstad who is exiting the scene with severance reportedly as high as $8 million. While AIG’s insurance business units and subsidiaries have been described as remaining solvent and able to pay claims, the company’s primary financial setbacks stemmed from selling protection against default exposure for a variety of assets, including subprime mortgages. This made the company more susceptible to problems in the housing and credit markets.

Essentially, banks wrote mortgages and sold them to investors. The investors then packaged the mortgages as securities and sold them to the investment community. AIG wrote insurance on these securities to protect investors in the event of defaults. AIG also put up collateral to back these obligations. The insurance contracts required AIG to provide additional collateral if the company’s credit ratings deteriorated. As AIG's investment portfolio declined, ratings agencies cut AIG’s ratings on Monday, leading to a huge collateral call on AIG obligations covering the mortgage-backed securities.

While AIG’s second quarter assets exceeded liabilities by $78 billion, it has had to write off more than $18 billion in assets during the last three quarters. Accounting rules require companies to “mark-to-market” the value of their assets, and valuing assets accurately is particularly difficult with illiquid assets, such as real estate, which AIG holds in its portfolio. Thus, AIG’s problem has been one of liquidity, not of solvency, which is the reason for a bridge loan by the Federal Reserve Bank of New York.

While consumers and policyholders may not discern a distinction between the liquidity of AIG and the solvency of its insurance business units and subsidiaries, the reality is that AIG’s non-insurance operations created the magnitude of AIG’s liquidity problems. In fact, according to AIG’s press release Tuesday evening, the statutory surplus of AIG Commercial Insurance has increased by 50% to $26.7 billion from 2005. AIG has a number of p-c and l-h subsidiaries, and agents should continue to monitor the ratings assigned to its insurance units and subsidiaries by the major ratings services.

On Wednesday, insurance regulators created a state regulatory working group chaired by New York Insurance Superintendent Eric Dinallo, with Pennsylvania Insurance Commissioner Joel Ario serving as vice-chair, to help facilitate the orderly sale of some of AIG’s insurance assets. Agents should stay up to date on any sales of AIG’s business units and subsidiaries where they have placed business.


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