The following article was originally published on TheStreet.com on March 2American International Group's ( AIG) competitors have found it more complicated than imagined to take advantage of the troubled insurance giant while its down. The competition smelled blood in the water amid massive losses, a government bailout and a major restructuring plan. But AIG rivals are grumbling the company is using its leading position and government support as tools to drastically undercut prices. AIG declined to comment on those charges, but sources inside and outside the firm say the accusations are merely a tactic to kick the insurance giant while it's down. Despite its struggles, AIG is still a leader in the insurance world. It holds the top position for life insurance, commercial lines and workers' compensation insurance and the No. 2 spot for property & casualty insurance, according to the Insurance Information Institute. It remains within the top 10 for passenger and commercial auto insurance. Overall, AIG was the No. 2 insurer in 2007, underwriting a total of $37.7 billion in premiums and investments, topped only by State Farm, which underwrote $49.4 billion, according Highline Data. Its leading position engendered bitterness among sales reps from other insurers, who were frustrated by AIG's constant one-upsmanship, and harbored ill will toward boastful AIG sales reps, according to Joseph Paduda, a former marketing director at AIG. When AIG's struggles first came to light last fall, he says, those with sour grapes felt the company was getting what it deserved. "The attitude was, 'They're a greedy bunch of people and we're glad to see them fall apart,'" says Paduda, now a principal of managed-care consulting firm Health Strategy Associates. "They were arrogant, cocky and very self-confident and a lot of their competitors spent a lot of time complaining about it, and now they're happy they're getting their comeuppance."
AIG's weaker position has also placed its credit ratings at risk. Though Moody's, Fitch and S&P affirmed most ratings earlier this month, following AIG's loss and restructuring announcements, they also provided an uncertain outlook for the firm, given its escalating losses, massive restructuring plan and expanded government ownership. Such an outlook could create big opportunities for competitors to capture business. For instance, some mid- and large-size companies can only buy workers-compensation insurance from "A"-rated carriers -- meaning they must be confident that investment-grade ratings are safe. A recent report from Bank of America equity research highlighted ACE and Chubb as beneficiaries from woes at AIG. Analyst Jay Cohen noted that "a significant number" of ACE's senior executives once worked at AIG and understand its model well enough to "know which businesses to target." But AIG is aware of the danger and has only redoubled efforts to retain clients. The firm has been touting strength in core areas like property, casualty, life and workers-compensation insurance as uncertainty surrounding its future has shaken existing customers and scared off new business. It is unclear whether AIG is purposefully pushing down prices to retain and expand its customer base, but such a tactic could hurt dozens of competing firms like Allianz ( AZ), AXA ( AXA), MetLife ( MET), Travelers ( TRV), Prudential ( PRU), Chubb ( CB), Hartford Financial Services ( HIG), ACE ( ACE), Aflac ( AFL) and Conseco ( CNO). AIG's earnings report on March 2 provided some evidence of trouble across several core businesses, though it's unclear whether they stem from pricing or customer flight.
Net premiums written in AIG's general insurance business declined 16.3%, while premiums, deposits and other considerations in its life insurance and retirement division dropped 38.5%. General insurance -- which includes commercial, catastrophe, workers compensation and foreign insurance, as well as investments related to those businesses -- posted an operating loss of $2.8 billion, vs. a profit of $2.1 billion a year ago, excluding capital gains and losses. Operating income from AIG's life insurance and retirement business plunged 73% to $742 million from $2.7 billion. "They're struggling to retain confidence both with employees and with customers," says Bill Bergman, who analyzes the company for Morningstar. "And competitors are concerned that this is irrational pricing, in their minds." AIG spokesman Peter Tulupman disagrees, saying the company's commercial insurance operations, were remarkably successful, given the situation for AIG and the broader markets. AIG rolled those operations into a new entity called AIU Holdings, which recorded $4.4 billion in net premium underwriting in the fourth quarter, and $21.2 billion for the full year. Tulupman also notes that AIU's statutory policyholder surplus -- a mandatory reserve that insurers must hold against claims -- rose by 1.1% and is higher than all U.S. competitors, and cites AIU's "excellent" financial strength ratings, which were affirmed by AM Best, S&P, Moody's and Fitch on Monday. "Given the economic environment, market conditions and AIG's ongoing issues, commercial insurance performed well in 2008," Tulupman said. He characterized it as a "well-capitalized businesses that holds substantial liquidity and
has not required capital funded through AIG's agreement with the U.S. government to support its financial strength."
Still, a leading industry group charges that those seemingly limitless government backstops have allowed AIG to cut better deals for customers. Competitors, whose difficulties do not pose enough systemic risk to warrant extensive aid, say they are hard-pressed to challenge AIG's pricing prowess. In a letter to Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke, Leigh Ann Pusey, president and CEO of the American Insurance Association expressed concern that "private market distortion" has accelerated along with government bailout initiatives. The feds extended another $30 billion credit facility to AIG on Monday, and eased up on terms of an existing $150 billion in aid to keep the firm afloat. Members of AIA, who underwrite $123 billion in property-casualty insurance premiums each year, have been complaining of pricing distortions in recent months. "
It appears that such significant government financial support of AIG has facilitated market behavior that is detrimental to other property-casualty insurers and to the taxpayers," Pusey said in her letter. She later adds that the government "has an obligation to those companies and to their customers to provide assurances that AIG does not use federal dollars to weaken market competition or for other improper purposes." Robert Hartwig, an economist and president of the Insurance Information Insitute notes that commercial insurance is a fiercely competitive market in which pricing had been trending downward since about 2004. Due to added risk from economic pressure and a limited capital base, those prices actually started to firm up toward the end of 2008. The trend makes accusations that AIG is purposefully softening prices questionable, but not unreasonable, given the financial chaos of 2008 and AIG's current position. "Since AIG's problems emerged six months ago, there's no doubt that AIG has lost business and lost personnel to competitors," says Hartwig. "There are accusations that AIG has been competing very aggressively, perhaps more so than you would see in a competitive market, to hold onto business ... But even before the crisis began there were always accusations of Company A undercutting Company B, who was undercutting company C. And that's because it's a very competitive market." While AIG's crisis may have seemed like a big opportunity for competitors, so far the only winners may be patrons who have scored attractive deals.