To What Degree Were AIG’s Operating Insurance Subsidiaries Sound? (5)

Reinsurance

Before I start this section, a small word of warning.  I am a life actuary, not a P&C actuary, so I may not get all of the nuances on reserve credits for P&C companies.  I have worked on life reinsurance issues at all of the life companies that I have worked with, or consulted for, but it is not my specialty.

Reinsurance involves a transfer of risk to another insurance carrier.  To the degree that risk is transferred, a reserve credit can be set up to reflect the discounted expected value of future claim payments.

Reinsurance does carry a risk, though, if the reinsurer can’t or won’t pay.  AIG’s rather sharp handling of reinsurers in the past carries with it the risk that reinsurers will be less than sympathetic to their problems.  Because of AIG’s difficulties, reinsurers will be more likely to try to deny claims while AIG is weak.  And like the parable of the unjust steward, some AIG employees might be inclined to compromise at levels fairer to the reinsurer.  After all, opportunities at AIG are ebbing, but having friends in the industry is always an aid when looking for work.

Here’s a table listing the size of the net reinsurance reserve credits by subsidiary relative to the size of the surplus.

Subsidiary2008YE Surplus

Reinsurance Reserve Credit / Surplus

AIG National IC

17

1300%

Am Int IC

374

1006%

Am Int Specialty Lines IC

726

742%

AIU IC

726

407%

Am Int IC of Delaware

48

319%

UG Mortgage Indemnity Co of NC

128

260%

AIG Excess Liability Co.

1,438

179%

Lexington IC

4,263

162%

AIG Hawaii IC

64

144%

Landmark IC

155

143%

American General LIC

5,185

101%

New Hampshire Indemnity Co

140

100%

United Guaranty Residential IC

1,106

97%

21st Century IC

747

96%

American Life IC “Alico”

3,900

93%

AIG Premier IC

144

92%

AIG Centennial IC

305

83%

AIG LIC

360

70%

Audubon IC

39

69%

UG Residential IC of NC

200

45%

Hartford Steam Boiler IAIC

443

41%

F book

23,314

22%

American General L&A IC

488

18%

Delaware American LIC

25

16%

SunAmerica LIC

4,653

13%

Am Int LIC of NY

371

12%

First SunAmerica LIC

544

6%

AIG SunAmerica LAC

1,271

5%

AIG Auto IC of NJ

21

2%

A few notes: 1) The higher the reinsurance reserve credit is relative to surplus, the greater the risk if the reinsurers can’t or won’t pay.  2) AIG reinsures many of their risks internally through intercompany P&C pools, but the reinsurance credits from those agreements should net out of the net reinsurance credit figure. The reinsurance pools spread out risk within AIG, but do not reduce the risk within AIG.  Plus, say an insurance commissioner trying to keep an OIS afloat in his state might take actions that keep that OIS safer, but that would push risks to other OISs in other states.  3) There is one odd entry called “F book.” Five OISs share one statutory book for all of their reinsurance – National Union Fire IC, American Home Assurance Co, Commerce and Industry IC, New Hampshire IC, and AIG Casualty Co.  Those OISs are 5 of the 6 largest, ranked by 2008 year-end surplus.   Though large, there is not much reinsurance credit exposure there.

Whether internally or externally reinsured, the size of reinsurance credits relative to surplus raise solvency risk issues if reinsurers can’t or won’t pay.