Is PA allowing dangerous AIG insurance risk?
NYTimes questions whether AIG's subsidiaries in Pennsylvania and elsewhere are properly insured
"One AIG subsidiary, the National Union Fire Insurance Company of Pittsburgh, shows what can happen by heavily relying on affiliates... At the end of 2008, more than a third of National Union's portfolio was invested in the stock of other AIG companies, which are not publicly traded. National Union might not be able to sell all of these shares, and it is not clear what it could get for them. Many states bar insurers from investing that heavily in related companies..
"National Union's biggest reinsurance partner is American Home Assurance, an AIG. subsidiary that has taken $23.1 billion of obligations off National Union's hands. In a New York filing, American Home reports total assets of $26.3 billion, but part of that consists of assets that cannot be used to pay claims, like furniture... In addition, American Home has 'unconditionally' guaranteed the obligations of 16 other AIG subsidiaries, bringing the total it might have to pay to $140.6 billion...
"Like New York regulators, Pennsylvania regulators say they do not see a problem. 'The insurance companies remain strong and are probably the most valuable assets within the AIG structure,' said Joel Ario, Pennsylvania's insurance commissioner. 'To the best we know it, we think the companies are sound.' "
Of course, if Commissioner Ario didn't think that, he'd have to take over National Union, AIG's lead U.S. property and casualty unit. Which would make for an interesting set of discussions with the Federal Reserve, which currently oversees AIG and the federal taxpayers' investment that keeps it afloat, and whose goal is to protect the financial system, while PA and other states are charged with protecting policyholders.
UPDATE: PA Insurance Commissioner Ario tells me he has two beefs with the Times story. One, he says state insurance examiners are well aware of AIG's internal investments. "In order to understand National Union, you have to trace their financial obligations all the way through. We do that."
Two, he says policyholders read these kinds of stories and worry their insurance policies will be worthless. But "the policyholders are the most protected group in here. They are first in line, if there were a problem, to be protected under the state (property and casualty insurance) guaranty fund." Which means small policyholders, at least, will get paid even if the company were to fail.