News Weekly Wrap Up For Period Ending June 26, 2009

Advisen

WEEKLY NEWS WRAP-UP

VOLUME 8

Week 26 (June 22, 2009 – June 26, 2009)

This Week’s Focus:

1. AIG

2. Reinsurance

3. Regulation

4. Markets and Producers

AIG

AIG Spins Off 2 Units to Cut Debt. American International Group Inc. said it will reduce outstanding U.S. loans by $25 billion by giving the government a preferred stake in two life insurance subsidiaries – American International Assurance Co. (AIA Group) and American Life Insurance Co. (ALICO). The Federal Reserve Bank of New York will receive preferred interests worth $16 billion in AIA Group and $9 billion in ALICO, which will eventually be independent companies once a public offering is completed. The stakes will cut AIG's outstanding debt to $15 billion from $40 billion, and reduce the size of the credit facility available to AIG from the bank to $35 billion from $60 billion. AIG, which first discussed a possible spinoff or outright sale of the two divisions in March, will continue to hold common and preferred stakes in the two SPVs. It will raise additional capital, which could be used to further reduce the government loans, once it sells common shares in the two life insurers. AIG added the timing for the public offerings would depend on market conditions. AIG has previously said it also plans to spin off AIU Holdings, its property and casualty insurance business. (Source: “AIG moves to spin off 2 units, reduce US debt,” Associated Press, 06/25/2009)

Four Companies Freed From AIG Shareholders Suit. Delaware Chancery Court Judge Leo Strine dismissed claims against Berkshire Hathaway Inc.; its General Reinsurance Corp. subsidiary; Marsh & McLennan Cos.; and Ace Ltd. that accused them of helping American International Group Inc. deceive investors in overstating its finances. Strine wrote, "In this context there is no societal interest in making sure that each party gets its 'fair' share of the conspirators' societally unfair bargain. Last year, Strine approved a $115 million settlement between plaintiffs in the suit and former AIG head Maurice Hank Greenberg and other former AIG officials. One former executive of AIG and four from General Re, a member of the Berkshire Hathaway Insurance Group, were convicted in connection with a fraudulent finite reinsurance transaction between Gen Re and AIG. (Source: “Several Companies Dismissed From AIG Shareholders Suit,” BestWire Services, 06/22/2009)

Reinsurance

Upcoming Reinsurance Renewals Dimmed by Global Financial Crisis. The global reinsurance market’s critical negotiating season leading up to January 1 renewals will kick off at Rendez-Vous in September, but as reinsurers and insurers head into Monte Carlo, they may well be less certain of the ground they stand on than in any season in recent memory. Reinsurers and primary insurers don't appear to have any leverage over each other as both sides have been hammered by investment losses since the global recession took hold last year, putting a premium on underwriting performance. The currency effect can be seen among Lloyd's reinsurers, where the deprecation of the British pound against the U.S. dollar since mid-year 2008 has created problems for Lloyd's reinsurers with a lot of dollar-denominated business. About 60% of Lloyd's total business is written in U.S. dollars, while capital requirements have to be met in British pounds. While market capital was up slightly in sterling terms for 2009, capacity fell by about 24% in U.S. dollar terms. The outlook for pricing has improved in recent months as the pound regained some ground, but volatility is still the worry as banking problems, government actions and a possible deepening of the recession all can send the pound plunging. While catastrophe events are always a big potential factor affecting reinsurers, uncertainties over government-backed hurricane pools and the weather itself mean the market will just have to wait and see what happens. This year, reinsurers may be more at the mercy of the global financial crisis than anything else this year, and hence less in control of their own fates. The crisis has had a "considerable effect" on reinsurers' capital positions, which were down by 15% to 20% coming into 2009, according to Andrew Appel, chief executive of reinsurance broker Aon Benfield. This impact was "far greater" than any catastrophe loss in 2008, Appel said told BestWeek Europe. (Source: “The Global Financial Crisis Is Clouding the Picture for Upcoming Reinsurance Renewals,” BestWire Services, 06/22/2009)

Offshore Reinsurance Tax Debate Heats Up. As Congress prepares to break at the end of June for the July Fourth holiday, the insurance industry is bracing for the possible introduction of legislation that could change how offshore reinsurers are taxed. The Coalition for a Domestic Insurance Industry supports the legislation, saying it would close a tax loophole that favors U.S. companies that set up affiliated reinsurance operations overseas. Otherwise, they say, other U.S. companies will establish offshore affiliates to move premiums out of the United States, which could threaten the future of the domestic insurance market. The coalition is made up of 14 U.S. companies, including W.R. Berkley, Berkshire Hathaway, Chubb Cos., Hartford Financial Services Group, Liberty Mutual, Markel Corp., Safeco Corp., Travelers Cos. and Zenith Insurance Co. On the other side, the Coalition for Competitive Insurance Rates says the proposal would be bad for consumers. They say it is a punitive tax that would result in a reduction in capacity and higher insurance prices. The Coalition for Competitive Insurance Rates includes the Risk and Insurance Management Society and consumer groups such as the Florida Consumer Action Network, as well as international organizations such as the Association of Bermuda Insurers and Reinsurers and insurance companies including Fireman's Fund Insurance Co., Munich Reinsurance America, XL America and Arch Capital Group Ltd. U.S. Rep. Richard Neal, D-Mass., introduced the legislation, H.R. 6969 last year, which would have limited deductions for related-party reinsurance cessions to the average percentage of premium ceded to unrelated reinsurers. The bill died when Congress adjourned last year, but Neal is expected to introduce it again this June, said Bradley Kading, president and executive director of the Association of Bermuda Insurers and Reinsurers. While Berkley says the bill would level the playing field for insurers, Kading said it would be a bad thing for insurance buyers. He quoted a study by the Brattle Group that estimated that under the similar Baucus plan, the reinsurance supply would dwindle by 20% and have an overall impact of increasing costs for consumers by $10 billion to $20 billion. If introduced, the bill likely is to have a long road to follow, Kading said, due to the bill's opposition plus the other items already on Congress' agenda. (Source: “Offshore Reinsurance Tax Debate Is Heating Up,” BestWire Services, 06/18/2009)

Regulation

Global Insurance Regulators Said to be Eyeing New Solvency Rules. In an effort to prevent crises like what happened to American International Group Inc. (AIG) last year, global insurance industry regulators are set to begin talks this week on creating the first common rules on solvency requirements for international insurers. At a three-day meeting in Taiwan scheduled to start Wednesday, the International Association of Insurance Supervisors is expected to hammer out a detailed schedule to come up with requirements for major insurers' solvency margin ratios. The move is in line with a mandate handed down by leaders of the G20 countries last November triggered by a U.S. Federal bailout of the country's biggest insurer that now tops $180 billion in overall value. In addition to AIG, international insurers like Prudential PLC (PUK), MetLife Inc. (MET) and Tokio Marine Holdings Inc. (8766.TO), could be affected, while big European players, which will likely become subject to tighter regional rules in coming years, may be less involved. Sources say that the goal is to build a framework to enable regulators to examine things without being hindered by regulatory differences among countries and grasp risks in the global insurance system. Though non-binding and likely to take years to finalize, given that the IAIS represents insurance regulators from around 140 nations, observers say new rules on solvency margins would carry significant weight. Many details of possible new rules still need to be worked out, they say, but one element that will be central to any changes that the solvency ratio requirements will be applied to all group companies of insurers, including non-insurance businesses, rather than just the insurer itself. (Source: “Global Insurance Regulators Eye New Solvency Rules – Sources,” Dow Jones News Service, 06/23/2009)

Federal Reserve Answers Concerns on Systemic Risk Regulation. Treasury Secretary Tim Geithner said, in testimony before the Senate Banking Committee, that the administration has no current plans to designate insurance companies for systemic risk oversight, but defended the choice of making the Federal Reserve the U.S. systemic risk regulator, a significant piece of the administration's new regulatory reform overhaul. He said the Fed proposal is "not so sweeping and broad a net" as some fear, but that insurance companies and other nonbank financial entities could be added down the line if the proposal becomes law. The new plan, which requires congressional approval, includes Federal Reserve oversight of large holding companies deemed systemically significant due to their size, leverage and interconnectedness. The Federal Reserve would have the authority to set capital, liquidity and other requirements, including mandatory set-asides of additional reserves. Some committee members on both sides of the aisle expressed strong concern with adding more duties to the Federal Reserve. The Obama plan has a "grossly inflated view of the Fed's expertise," said ranking Republican Richard Shelby, R-Ala. The Federal Reserve has no built-in experience in overseeing insurance, hedge funds or other nonbank entities, he said. American Insurance Association President and Chief Executive Officer Leigh Ann Pusey said she has some concerns about the logistics involved in having the central U.S. bank potentially oversee elements of an industry with which it otherwise has no involvement. Such a partial measure would not be as proficient as a broad-based federal regulator would, she said. (Source: “Senators Cite Concerns Over Federal Reserve as Systemic Risk Regulator,” BestWire Services, 06/18/2009)

Markets and Producers

Brit¹… International commercial-insurance provider Brit Insurance Holdings PLC (BRE.LN) withdrew its all-share takeover offer proposal to Lloyd's of London insurer Chaucer Holdings PLC (CHU.LN) after failing to get support from the target's board. The deal would have valued Chaucer at about GBP220 million.

Prudential² … Prudential Financial Inc., the second biggest U.S. life insurer, has exercised the option to sell its minority stake in the retail brokerage formerly known as Wachovia Securities to Wells Fargo & Co., the bank that owns most of the business.

Ironshore³ … Bermuda-based specialty insurer Ironshore Inc. said it is receiving equity financing of up to $300 million, and will use the funds to expand Ironshores specialty insurance business. GTCR Golden Rauner LLC has committed to purchase $200 million of newly issued equity of Ironshore, while existing Ironshore shareholders are expected to purchase the other $100 million.

Sources:

1. “Brit Insurance Withdraws Offer For Chaucer,” Dow Jones News Service, 06/23/2009

2. “Prudential Financial Exercises Option to Sell Brokerage Stake to Wells Fargo,” Bestwire Services, 06/19/2009

3. “Ironshore Gains $300 Million Private Equity Infusion,” BestWire Services, 6/24/2009

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