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Inside AIG's Garage Sale: "When American International Group announces earnings next week, Wall Street will expect a disaster. This week isn't so easy either. AIG is busy trying to sell off billions in assets to climb out of the onerous deal it made with Washington to escape collapse last fall.
This week there have been reports of two large potential transactions--ones with proceeds substantial enough to indicate that the insurer might be well on its way to settling its debts after a series of small deals, each under a billion dollars.
But if AIG (nyse: AIG - news - people ) decides that it isn't getting enough money, it has said it reserves the right to decline to sell at all. If it does that, it will almost surely have to rethink its plan to pay back its borrowings and its path to profitability.
AIG hopes to raise $20 billion selling off American International Assurance, its Asia-based crown jewel. Singapore's sovereign wealth fund Temasek Holdings, British insurer Prudential (nyse: PUK - news - people ) and Toronto-based Manulife Financial (nyse: MFC - news - people ) are all supposedly trying to get ahold of it.
Also on the block is international insurance heavyweight American Life Insurance Co. (Alico). MetLife (nyse: MET - news - people ) is rumored to have offered $11.2 billion for the whole shebang, and French insurer AXA is said to be interested in all but the unit's Japanese operations.
David Monfried, an AIG spokesman, confirmed that multiple bids are expected for the Asian business by Friday's initial deadline and that a few others will be given more time to pony up their offers. 'We'd rather give them a few extra days, than abide by some self-imposed deadline,' he said.
The Alico rumblings remain unconfirmed, but Monfried did say that 'if' $11.2 billion had been offered, as some news stories have speculated, it would have been based on old filings, and therefore Alico is probably now worth less, since earnings and investments have falling significantly since then."
Source: Forbes.com
01 March 2009
AIG PCI Head Opposes Additional Aid for AIG
PCI Head Opposes Additional Aid for AIG: "Providing additional federal aid to American International Group Inc. "could create unintended negative effects on consumers and the marketplace," said the head of the Property Casualty Insurers Association of America.
Insurers that are also bank or thrift holding companies may utilize the U.S. Treasury's Capital Purchase Program, giving them access to "cheap federal loans" that "allow unhealthy insurers to grab more market share in the short term at levels that are unsustainable in the long term," said David A. Sampson, president and chief executive of PCI, in a statement."
Source: Trading Markets
Insurers that are also bank or thrift holding companies may utilize the U.S. Treasury's Capital Purchase Program, giving them access to "cheap federal loans" that "allow unhealthy insurers to grab more market share in the short term at levels that are unsustainable in the long term," said David A. Sampson, president and chief executive of PCI, in a statement."
Source: Trading Markets
Beazley Hires ex-AIG's Reagan
Beazley Hires AIG Executive: "Thomas Reagan, formerly AIG’s vice president for national accounts, is joining London-based Beazley’s Technology, Media & Business Services professional liability group, the company said in a statement.
Reagan managed an underwriting team at AIG that provided professional liability, specialty management liability and network/data risk products for Fortune 1000 companies, Beazley said."
Source: insurancenewsnet.com
Reagan managed an underwriting team at AIG that provided professional liability, specialty management liability and network/data risk products for Fortune 1000 companies, Beazley said."
Source: insurancenewsnet.com
Mystic Re III cat bond from Liberty Mutual to launch soon
Mystic Re III cat bond from Liberty Mutual to launch soon: "Liberty Mutual are marketing their third catastrophe bond in the Mystic Re series. Mystic Re III is expected to be a $200m transaction providing Liberty Mutual with three years of coverage against U.S. hurricanes and earthquakes. The third catastrophe linked securitization of the year, this deal will take the cat bond market to $550m this year. The market is looking healthy and all deals so far have made efforts to increase investor appetite by seeking to enhance the structures with more robust financial backing"
Source: Artemis.bm
Source: Artemis.bm
AIG Bankruptcy Experts Discuss AIG's Legal Options
AIG Bankruptcy Experts Discuss AIG's Legal Options: "Amid speculation that American International Group Inc. may consider filing for bankruptcy protection as the company's stock price continues to slide, closing at 48 cents a share on Feb. 26, bankruptcy experts say if the insurer were to file, it could become the biggest and most expensive in U.S. legal history.
"The size of this is almost incomprehensible," said Paul Johnson, a partner with Pittsburgh law firm of Thorp Reed & Armstrong's bankruptcy and financial restructuring group.
Johnson said the massive scope of AIG "a global corporation with tens of billions of dollars in assets in highly regulated businesses" could be a brake on thoughts of letting the company go into bankruptcy. Even more compelling for federal officials, he said, would be the widespread impact on financial markets worldwide.
"The issue is, has the government gotten to the position where they realize that putting more money into AIG doesn't matter?" he said. "And if they have, then can they brace themselves for the financial freefall that an AIG bankruptcy could bring about? I think that?s what the people in the back rooms are thinking about right now."
The federal government provided an $85 billion bailout in September to prevent AIG from falling into bankruptcy. Later, a $150 billion program was instituted to keep the company solvent while it reorganizes and sells assets to repay the federal aid (BestWire, Feb. 24, 2009).
Media reports have said the company has been unable to attract a sufficient number of buyers with enough funding to buy the companies it is trying to sell to help pay off the federal aid. The week of Feb. 23, anonymous reports said plans were considered ranging from breaking up the company, with the federal government taking control of key units, to bankruptcy."
Source: AM Best's via Trading Markets
"The size of this is almost incomprehensible," said Paul Johnson, a partner with Pittsburgh law firm of Thorp Reed & Armstrong's bankruptcy and financial restructuring group.
Johnson said the massive scope of AIG "a global corporation with tens of billions of dollars in assets in highly regulated businesses" could be a brake on thoughts of letting the company go into bankruptcy. Even more compelling for federal officials, he said, would be the widespread impact on financial markets worldwide.
"The issue is, has the government gotten to the position where they realize that putting more money into AIG doesn't matter?" he said. "And if they have, then can they brace themselves for the financial freefall that an AIG bankruptcy could bring about? I think that?s what the people in the back rooms are thinking about right now."
The federal government provided an $85 billion bailout in September to prevent AIG from falling into bankruptcy. Later, a $150 billion program was instituted to keep the company solvent while it reorganizes and sells assets to repay the federal aid (BestWire, Feb. 24, 2009).
Media reports have said the company has been unable to attract a sufficient number of buyers with enough funding to buy the companies it is trying to sell to help pay off the federal aid. The week of Feb. 23, anonymous reports said plans were considered ranging from breaking up the company, with the federal government taking control of key units, to bankruptcy."
Source: AM Best's via Trading Markets
Berkshire Insurance Subsidiaries Valuation
Berkshire Insurance Subsidiaries Valuation: "The Rational Walk has posted the third installment of a multi-part series covering the Berkshire Hathaway 2008 Annual Report and Warren Buffett’s letter to shareholders. In this post, I will provide a valuation estimate for the insurance subsidiaries of Berkshire Hathaway. Insurance has long been the largest driver of intrinsic value for Berkshire and I view it as the primary “engine” that will drive future growth.
The valuation of the insurance subsidiaries consists of two major components: (1) Statutory surplus and (2) Present value of future cash flows derived from investing policyholder “float”. We will take a closer look at these two components."
Source and Full Article: The Rational Walk
The valuation of the insurance subsidiaries consists of two major components: (1) Statutory surplus and (2) Present value of future cash flows derived from investing policyholder “float”. We will take a closer look at these two components."
Source and Full Article: The Rational Walk
Cooper Gay: Premiums set to rise as reinsurers try to strengthen balance sheets
Premiums set to rise as reinsurers try to strengthen balance sheets: "Cooper Gay has published its 2009 Reinsurance Market Review, which states that reinsurers are intent upon restoring their diminished balance sheets following a period of weakening rates and plunging returns on investments.
Because of this backdrop financiers are insistent that many underwriters raise rates on a range of classes and areas.
Last year, as well as being horrendous in terms of the global banking crisis, was also the third most expensive for the insurance sector, according to the Review.
Cooper Gay’s Reinsurance Division chairman Seymour Matthews has said that last year’s man made financial catastrophe has had a profound effect on reinsurers."
Source: Insurance Daily
Because of this backdrop financiers are insistent that many underwriters raise rates on a range of classes and areas.
Last year, as well as being horrendous in terms of the global banking crisis, was also the third most expensive for the insurance sector, according to the Review.
Cooper Gay’s Reinsurance Division chairman Seymour Matthews has said that last year’s man made financial catastrophe has had a profound effect on reinsurers."
Source: Insurance Daily
Genl Re Settles with Ohio over AIG Case
General Re Settles with Ohio over AIG Case: "General Reinsurance Corp. agreed to pay $72 million to settle investors' claims, according to Ohio Attorney General Richard Cordray.
The lawsuit stemmed from transactions between General Re, a subsidiary of the Warren Buffett-controlled Berkshire Hathaway Inc., and American International Group, the badly wounded insurance giant that continues to struggle along even after receiving $150 billion in federal government money. Several Ohio pension funds claimed that they had lost money on AIG's stock.
According to the state's attorney general, Gen Re allegedly participated in a fraudulent $500 million reinsurance transaction with AIG that allowed AIG to improperly inflate its loss reserves, a key indicator of financial health to investors and insurance industry analysts.
'When the truth about this fraud and other AIG manipulations was made public, the price of AIG stock declined,' said Cordray. 'Investors, including Ohio's pension funds, had been deceived and suffered significant financial losses.'
The lawsuit was brought by the Ohio Public Employees Retirement System, the State Teachers Retirement System and the Ohio Police and Fire Pension Fund. It sought damages for investors purchasing AIG securities between Oct. 28, 1999 and April 1, 2005."
Source: CFO.com
The lawsuit stemmed from transactions between General Re, a subsidiary of the Warren Buffett-controlled Berkshire Hathaway Inc., and American International Group, the badly wounded insurance giant that continues to struggle along even after receiving $150 billion in federal government money. Several Ohio pension funds claimed that they had lost money on AIG's stock.
According to the state's attorney general, Gen Re allegedly participated in a fraudulent $500 million reinsurance transaction with AIG that allowed AIG to improperly inflate its loss reserves, a key indicator of financial health to investors and insurance industry analysts.
'When the truth about this fraud and other AIG manipulations was made public, the price of AIG stock declined,' said Cordray. 'Investors, including Ohio's pension funds, had been deceived and suffered significant financial losses.'
The lawsuit was brought by the Ohio Public Employees Retirement System, the State Teachers Retirement System and the Ohio Police and Fire Pension Fund. It sought damages for investors purchasing AIG securities between Oct. 28, 1999 and April 1, 2005."
Source: CFO.com
New York: Reinsurance Capital?
New York: Reinsurance Capital?: "The souring of Wall Street has been tough on New York--not just on the city but on the state as well. The solution? Muscle in on new financial business the Empire State formerly ceded to others.
'A vacuum,' is how New York state insurance commissioner Eric Dinallo describes the absence of a reinsurance exchange in the U.S. His proposed solution: a New York Insurance Exchange.
With his boss, Gov. David Paterson, facing a $14 billion budget gap, Dinallo is hoping the exchange will win away business from London and Bermuda, where insurance behemoths typically go to 'reinsure,' or lay off risk, to other insurers and investors.
Dinallo says New York has the potential to provide something to this multibillion-dollar a year business that distant locales can't--deep-pocketed money managers thirsty for new markets in which to trade 'that are not correlated to the investment market.'
Their presence, according to Dinallo, would provide much-needed liquidity to reinsure against catastrophes, like hurricanes and terrorist attacks. If all goes according to his plan, the New York Insurance Exchange will be up and running by 2010.
Sound familiar? New York last launched an insurance exchange in downtown Manhattan in 1980. It too aimed to join the world's top 10 reinsurance markets and one day rival giant Lloyd's of London.
Instead, that New York exchange gained a reputation as the dumping ground for less desirable business. Losses mounted and the exchange went belly up in 1987. (Lloyd's fared even worse in the late 1980s and early 1990s as members were forced to cover billions in losses stemming from toxic waste and asbestos liabilities in the U.S.)
If Lloyd's was the market to beat in the early 1980s, Bermuda's is the new target. In the last two decades, reinsurers based there have surpassed London in underwriting output. The 38 reinsurers registered with the territory's government write roughly $30 billion in premiums annually, or about 60% more than Lloyd's.
Their secret weapon is low taxes. Rating service Fitch estimates Bermuda's reinsurers pay an effective income tax rate 15 percentage points less than U.S.-based counterparts. Given New York's natural advantages as a financial capital it doesn't have to mimic Bermuda to win business, it merely has to narrow the tax gap, according to Dinallo.
'Doing business in Bermuda is incredibly expensive,' he says.
Dinallo says the U.S. insurers he's approached are interested in the concept. His bigger challenge will likely be assembling a critical mass of outside capital from hedge funds and others amid a credit crisis.
The lure for New York is the state's 2% premium tax on local insurance transactions. That helps explain why Paterson is firmly behind the plan. 'He totally understands what a huge opportunity this would be,' says Dinallo."
Source: Forbes.com
'A vacuum,' is how New York state insurance commissioner Eric Dinallo describes the absence of a reinsurance exchange in the U.S. His proposed solution: a New York Insurance Exchange.
With his boss, Gov. David Paterson, facing a $14 billion budget gap, Dinallo is hoping the exchange will win away business from London and Bermuda, where insurance behemoths typically go to 'reinsure,' or lay off risk, to other insurers and investors.
Dinallo says New York has the potential to provide something to this multibillion-dollar a year business that distant locales can't--deep-pocketed money managers thirsty for new markets in which to trade 'that are not correlated to the investment market.'
Their presence, according to Dinallo, would provide much-needed liquidity to reinsure against catastrophes, like hurricanes and terrorist attacks. If all goes according to his plan, the New York Insurance Exchange will be up and running by 2010.
Sound familiar? New York last launched an insurance exchange in downtown Manhattan in 1980. It too aimed to join the world's top 10 reinsurance markets and one day rival giant Lloyd's of London.
Instead, that New York exchange gained a reputation as the dumping ground for less desirable business. Losses mounted and the exchange went belly up in 1987. (Lloyd's fared even worse in the late 1980s and early 1990s as members were forced to cover billions in losses stemming from toxic waste and asbestos liabilities in the U.S.)
If Lloyd's was the market to beat in the early 1980s, Bermuda's is the new target. In the last two decades, reinsurers based there have surpassed London in underwriting output. The 38 reinsurers registered with the territory's government write roughly $30 billion in premiums annually, or about 60% more than Lloyd's.
Their secret weapon is low taxes. Rating service Fitch estimates Bermuda's reinsurers pay an effective income tax rate 15 percentage points less than U.S.-based counterparts. Given New York's natural advantages as a financial capital it doesn't have to mimic Bermuda to win business, it merely has to narrow the tax gap, according to Dinallo.
'Doing business in Bermuda is incredibly expensive,' he says.
Dinallo says the U.S. insurers he's approached are interested in the concept. His bigger challenge will likely be assembling a critical mass of outside capital from hedge funds and others amid a credit crisis.
The lure for New York is the state's 2% premium tax on local insurance transactions. That helps explain why Paterson is firmly behind the plan. 'He totally understands what a huge opportunity this would be,' says Dinallo."
Source: Forbes.com
Recipe for Disaster: The Formula That Killed Wall Street
Recipe for Disaster: The Formula That Killed Wall Street: "A year ago, it was hardly unthinkable that a math wizard like David X. Li might someday earn a Nobel Prize. After all, financial economists—even Wall Street quants—have received the Nobel in economics before, and Li's work on measuring risk has had more impact, more quickly, than previous Nobel Prize-winning contributions to the field. Today, though, as dazed bankers, politicians, regulators, and investors survey the wreckage of the biggest financial meltdown since the Great Depression, Li is probably thankful he still has a job in finance at all. Not that his achievement should be dismissed. He took a notoriously tough nut—determining correlation, or how seemingly disparate events are related—and cracked it wide open with a simple and elegant mathematical formula, one that would become ubiquitous in finance worldwide.
For five years, Li's formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels.
His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenched—and was making people so much money—that warnings about its limitations were largely ignored.
Then the model fell apart. Cracks started appearing early on, when financial markets began behaving in ways that users of Li's formula hadn't expected. The cracks became full-fledged canyons in 2008—when ruptures in the financial system's foundation swallowed up trillions of dollars and put the survival of the global banking system in serious peril."
Source and Full Article: Wired
For five years, Li's formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels.
His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenched—and was making people so much money—that warnings about its limitations were largely ignored.
Then the model fell apart. Cracks started appearing early on, when financial markets began behaving in ways that users of Li's formula hadn't expected. The cracks became full-fledged canyons in 2008—when ruptures in the financial system's foundation swallowed up trillions of dollars and put the survival of the global banking system in serious peril."
Source and Full Article: Wired
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