To What Degree Were AIG’s Operating Insurance Subsidiaries Sound? (4)

Unrealized Capital Losses

SubsidiaryC UR CG / Surplus2008YE Surplus
Pacific Union Assurance Co

-385%

20

AGC LIC

-360%

5887

American Life IC “Alico”

-118%

3900

American General LIC

-89%

5185

SunAmerica LIC

-74%

4653

AIG Casualty Co

-46%

1457

AIG Annuity IC

-29%

3045

American Home Assurance Co

-21%

5702

The Variable Annuity LIC

-20%

2841

Hartford Steam Boiler IAIC

-16%

443

Commerce and Industry IC

-16%

2678

Audubon IC

-15%

39

AIG LIC

-15%

360

Lexington IC

-10%

4263

Am Int Specialty Lines IC

11%

726

AIU IC

32%

726

UG Residential IC of NC

34%

200

AIG SunAmerica LAC

50%

1271

The table to the left indicates current unrealized capital gains as a fraction of surplus.  When I first looked at this, I though most of these must have been from unrealized losses on bonds, but to my surprise, they are mostly losses from affiliated company stocks, which must be valued at market price or net worth.

But as I began to dig into the losses, I found something unusual at Alico. At the end of 2007, almost the entirety of their surplus assets were composed of AIG common stock.

Delaware regulators, please tell me, why would you allow this?  It is one thing to allow this for a pup subsidiary like Pacific Union, and quite another thing for a big dog like Alico.

For those less aware, holding affiliated stock of subsidiaries is capital stacking, which raises leverage, but owning holding company stock is creating capital out of thin air.  When things are going good capital rises disproportionately.  When things are bad, the opposite happens.  We are experiencing that negative part of the cycle now.

Now there were other areas of loss for AIG OISs, many are detailed in this article here.  I’m not generally a fan of insurance companies investing in anything more dangerous than investment grade bonds.  My main reason for this view is the outlier types of events, like that which we are seeing now.  Insurance companies should never want to be in a situation where they are suffer underwriting losses at  a time where they are taking losses on the investment side as well.  Most of these losses from limited partnerships (private equity and hedge funds), though unrealized, have already hit capital levels.  Some will make part of the losses back, but many will not.  In this environment, high risk investments are not being rewarded.