Insurance Coverage Alert
April 28, 2009
Authors:
Update Regarding AIG Insurance Companies
John M. Sylvester
john.sylvester@klgates.com
+1.412.355.8617
Gregory S. Wright
gregory.wright@klgates.com
+1.202.778.9250
Scott A. Bowan
scott.bowan@klgates.com
+1.412.355.6714
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AIG continues to be a frequent subject in the news headlines because of its
significant financial problems. The federal government recently announced that, for
the fourth time since last September, it will be providing a cash infusion to AIG.1
Specifically, following AIG s $61.7 billion loss in the fourth quarter of 2008, the
government agreed to provide an additional $30 billion to AIG and to restructure the
terms of its prior loan.2 That transaction closed for $29.835 billion (which represents
the original $30 billion minus the $165 million that was recently paid by AIG as
retention bonuses to various executives)3 and raises to approximately $180 billion the
total amount of financial support that AIG has received from the federal
government.4
Before the federal government extended these most recent lifelines to AIG, there was
some speculation that AIG might consider filing for federal bankruptcy protection.5
Although those concerns appear to have been ameliorated, at least temporarily, by
the government s actions, it is reasonable for entities holding insurance policies
issued by AIG insurance companies to wonder what would happen if AIG did file for
bankruptcy.
Policyholders should first understand that AIG is a complex holding company
consisting of numerous subsidiaries. The financial issues at AIG reportedly have
been experienced at the holding company level and arose primarily from AIG s
Financial Products unit, rather than from AIG s individual insurance company
subsidiaries.6 Although one recent report questions whether AIG s insurance
operations are a house of cards resting upon inter-company reinsurance
arrangements,7 that report has been criticized as irresponsible and insufficiently
sourced.8 By contrast, other reports indicate that AIG s traditional insurance
subsidiaries are widely viewed as safe 9 and have not required any of the TARP
(Troubled Asset Relief Program) money that has been supporting the parent holding
company.10 Furthermore, AIG s insurance subsidiaries are subject to state insurance
company holding statutes that regulate the ability of AIG to dividend assets from its
insurance subsidiaries to the parent company.
1
See Andrew Ross Sorkin & Mary Williams Walsh, A.I.G. Reports $61.7 Billion Loss as U.S. Gives
More Aid, N.Y. Times, March 3, 2009.
2
Id.
3
See AIG Closes Deal for $30 Billion in New Federal Funds, Reuters, April 20, 2009.
4
See Martin Crutsinger, Treasury Completes $29.8B Boost to AIG Rescue, Associated Press, April
21, 2009.
5
See, e.g., Bankruptcy Experts Discuss AIG s Legal Options, BestWire Services, February 26, 2009.
6
See Ieva M. Augustums, Insurance Giant AIG Facing Possible Breakup, Associated Press,
February 28, 2009.
7
See Michael Hirsh, The Next AIG Scandal?, Newsweek Web Exclusive, March 18, 2009.
8
See Newsweek s Irresponsible AIG Story, Columbia Journalism Review, March 23, 2009.
9
See Augustums, surpa note 6.
10
See Interview with John Q. Doyle, AIU Holdings Inc.: AIG s Property-Casualty Solution, American
Agent & Broker, March 10, 2009 [hereinafter Doyle Interview].
Insurance Coverage Alert
Even if AIG s financial difficulties ultimately forced
the holding company into a federal bankruptcy
proceeding, AIG s regulated insurance subsidiaries
could not follow suit because domestic insurance
companies are ineligible for relief under the
Bankruptcy Code. Insolvencies of domestic
insurance companies are instead managed by
relevant state insurance departments. A bankruptcy
filing by AIG would not automatically place its
insurance company subsidiaries into state-supervised
insolvency proceedings because that is a matter
decided pursuant to state law by the insurance
commissioner in the state where the insurer is
domiciled.11 Some observers have expressed the
view that [i]f AIG needed to file for bankruptcy
protection, AIG s insurance subsidiaries are
separately capitalized and would continue to
operate. 12 There is precedent for insurance
subsidiaries to continue operating after their parent
holding company falls into bankruptcy. For
example, Conseco s bankruptcy in 2002 did not
include its insurance subsidiaries.13 Nevertheless,
AIG s insurance subsidiaries could be adversely
affected by a bankruptcy filing by their parent
company to the extent that such a bankruptcy colors
the public s perception of the financial stability of
all AIG-related entities and makes it more difficult
for AIG s insurance subsidiaries to generate new
underwriting business. A decline in new business
could, in turn, negatively impact the insurance
subsidiaries financial strength and credit ratings.
In this regard, AIG has been taking steps aimed at
further insulating its traditional property and
casualty insurance business from the financial issues
that have plagued the parent company namely,
AIG has announced that it has formed a general
insurance holding company, called AIU Holdings,
11
Four of AIG s major property and casualty insurance
subsidiaries are domiciled in New York or Pennsylvania.
12
See Augustums, supra note 6.
13
See Lilla Zuill, AIG s Claims Over Life Insurer Fragility Irk
Sector, Reuters, March 12, 2009; Chris Isidore, 5 Questions:
Why AIG Matters to You, CNNMoney.com, September 17,
2008; Neil Downing, Moneyline - Check on Health of LongTerm Care Policy, Providence Journal Bulletin, May 11, 2003;
Mark Jewell, Restructure Plan Filed by Conseco, Fort Wayne
Journal Gazette, February 1, 2003; Arthur D. Postal, Marketing
OK for Conseco Products, Insurance Accountant, December
30, 2003; Consumers Protected: Conseco Insurance
Subsidiaries Able to Meet Commitments, Regulators Say,
Hartford Courant, December 19, 2002.
Inc., that will include its Commercial Insurance
Group, Foreign General Insurance, and Private
Client Group units.14 It is expected that AIU
Holdings will have management that is independent
from AIG s board of directors, will rebrand itself,
and will take other efforts to distance the propertycasualty business from AIG.15 AIU Holdings would
have about 44,000 employees worldwide, with
equity of $43 billion and revenues of $40 billion.16
AIG announced recently that it is accelerating its
efforts to position AIU Holdings as an independent
entity by transferring the company to a specialpurpose vehicle in preparation for the potential sale
of a minority stake in the business and possibly a
public offering.17 AIG also announced that it will
buy back AIU Holdings stake in International
Lease Finance Corp., United Guaranty Corp., and
Transatlantic Holdings Inc., which will leave AIU
Holdings with only AIG s global property/casualty
businesses.18
Although A.M. Best Company downgraded the
financial strength ratings of several of AIG s major
commercial insurance company subsidiaries last
year from A+ (Superior) to A (Excellent)
including Lexington Insurance Company, Granite
State Insurance Company, American Home
Assurance Company, AIU Insurance Company, and
National Union Fire Insurance Company of
Pittsburgh, Pa. A.M. Best has not made additional
modifications to those ratings as of the time of this
writing. Further, A.M. Best announced last week
that it viewed the restructuring of AIG s propertycasualty business into AIU Holdings as a positive
first step, but made no changes to the financial
14
See AIG News Release, AIG to Form AIU Holdings, Inc., A
Global Property Casualty Holding Company for Its General
Insurance Businesses, March 2, 2009; AIG News Release,
AIG to Accelerate Separation of AIU Holdings, Inc., April 21,
2009 [hereinafter AIG 4/21/09 News Release].
15
See Doyle Interview, supra note 10. Indeed, AIG has taken
down its prominent AIG sign at its Manhattan offices. See
Lilla Zuill, AIG Starts Makeover, Changes Sign at NY Office,
Reuters, March 23, 2009.
16
See Doyle Interview, supra note 10.
17
See AIG 4/21/09 News Release, supra note 14; Judy
Greenwald, AIG Accelerates Spinoff of P/C Units, Business
Insurance, April 21, 2009.
18
See Lavonne Kuykendall, Update: AIG Moves to Split Off
Property, Casualty Operations to AIU, Dow Jones Newswires,
April 21, 2009.
April 28, 2009
2
Insurance Coverage Alert
strength ratings of the insurance companies at
issue.19
Policyholders should continue to monitor this
fluid situation by making themselves aware of the
status of the various AIG insurance subsidiaries
participating in their insurance programs and by
continuing to monitor the financial condition of
those subsidiaries, as well as that of the parent
company, AIG. Policyholders also may wish to
question their AIG account representatives,
specifically about the amount of claims reserves
and policyholder surplus being maintained by
each of the relevant AIG insurance subsidiaries
with which they do business and about any efforts
by the parent AIG to receive dividend payments
or other financial assistance from these insurance
subsidiaries.
K&L Gates is uniquely positioned to advise and
represent commercial entities regarding their
dealings with AIG, AIU Holdings and the
subsidiary insurance companies. On behalf of our
policyholder clients, we have successfully
litigated and settled claims against AIG insurance
companies for many decades, resulting in our
clients recovery of hundreds of millions of
dollars in insurance proceeds from AIG entities.
K&L Gates internationally renowned insurance
coverage practice group, consisting of well over
100 lawyers in cities around the United States and
abroad, only represents policyholders in coverage
disputes with insurers. As a result, we have been
free of any potential conflicts in aggressively
pursuing legal positions and strategies against
insurers, such as AIG, in an effort to maximize
the value of insurance coverages purchased by
our policyholder clients. In particular, we do not
represent AIG and its insurance company
subsidiaries, and thus we are free to represent
parties with interests adverse to AIG. Please
contact one of our insurance coverage lawyers if
we may be of assistance in matters relating to
AIG.
19
See Arthur D. Postal, A.M. Best, S&P See AIG P-C Units
Spin-Off As a Good Move, National Underwriter, April 22,
2009.
April 28, 2009
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Insurance Coverage Alert
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©2009 K&L Gates LLP. All Rights Reserved.
April 28, 2009
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