American International Group Inc. is slashing prices to win new business, industry insiders say, raising concerns that taxpayers could again be left to pick up the tab.
AIG, once the world's biggest insurer by market value, was rescued by the U.S. government in September as the cost of meeting counterparty obligations on bad mortgage bets left it close to bankruptcy.
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," 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 percent 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.
'A QUICK WAY TO GOING OUT OF BUSINESS'
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.
Greenberg, who left AIG in 2005 and now runs several private insurance and investment firms, said there is little cross-over between his business and AIG, but where there is, his staff say AIG is beating down the market.
"In some classes that we do compete in, they are cutting rates to hold on to business," Greenberg said in an interview.
The rate cuts come even as many analysts say deep investment losses and rising claims from a range of events, including hurricanes and lawsuits against financial executives, mean insurers are now widely expected to start charging more for many types of coverage when policies are renewed throughout 2009.
"Rate increases are necessary to make the returns commensurate with risk," said Jeanne Hollister, managing principal of consulting firm Towers Perrin's Americas property/casualty insurance practice.
IRRESPONSIBLE AND UNFAIR?
For AIG to fight the trend could potentially weaken its own business as well as rivals.
"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.
To be sure, it is possible for insurers to sometimes use modeling techniques and other risk tools to price policies more competitively, but critics says in many cases AIG is simply driving down prices to win business.
When losses lead to an insurance company's collapse, rivals often have to foot the bill through insurer-funded guaranty funds formed by many U.S. states and some countries.
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 Nov. 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.
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