AIG using bailout cash to undercut rivals' prices, critics claim
December 11, 2008 ET

(Reuters)— . . .

In the wake of its federal bailout, which last month swelled to more than $150 billion, industry executives say AIG has been rashly lowering prices, and at a time when market fundamentals show insurance rates need to rise.

"AIG has intensified its effort to increase its market share, or at least preserve it," said Edmund Kelly, chief executive of Boston-based rival Liberty Mutual.

"I think it's fair to say they're doing some very stupid things in the market," Mr. Kelly told investors on a quarterly conference call last month. "If (AIG units) are not reined in, it could be very destabilizing for the market."

The New York-based insurer denies it is cutting prices.

But in one example of its aggressive rate-cutting, a unit of its commercial insurance division agreed to provide coverage for the Las Vegas McCarran International Airport at a price 60% below what was charged for the same policy a year earlier.

Last year the airport paid $3.54 million to a consortium of seven insurers led by Travelers Group for a property, boiler and machinery insurance policy worth $1.7 billion, an airport spokesman said.

This year the airport got its coverage from Lexington Insurance Co, a large AIG unit, for just $1.4 million. The insurer agreed to take on the airport coverage with one other insurer, compared with the seven that had been on the program the prior year, leaving fewer carriers to shoulder any potential losses.

By selling policies for less while taking on more risk, AIG is raising the chances that it will be hit by large losses. It also makes it harder for other insurers to sell policies that are priced high enough to cover potential losses.

"Cutting rates at a time when rates should be strengthening is a quick way to going out of business," AIG's former chief executive, Maurice "Hank" Greenberg, a frequent critic of the company's management, told Reuters. . . .

"AIG has the money to do things that it could not do without it," said Thom Bradshaw, an insurance wholesaler in Monticello, Indiana. "With $150 billion of taxpayer money we could all be more aggressive, but a) it is irresponsible and b) it is unfair" to the rest of the industry, he added. . . .

Cliff Gallant, an insurance analyst with Keefe, Bruyette & Woods in New York, noted that AIG's insurance units are highly rated and not at risk of collapse.

But if that changed, "it would cause considerable strain on the industry," Gallant said.

It is also possible that the U.S. government, as AIG's majority owner, would feel obliged to step in with more financial support for the insurance subsidiaries if underwriting losses become a problem.

About $15 billion of a $60 billion government loan to AIG had already been consumed by its insurance units as of November 5, according to the company's latest quarterly filing.

"One way or another, I don't see how it is avoidable: The amount that the government will ultimately apply to AIG will exceed the amount that it has provided so far," said Donn Vickrey, an analyst with research firm Gradient Analytics.