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Chartis Taking Steps to Improve Disclosures After Regulator Finds Deficiencies

Source: WSJ

Posted on 30 Dec 2010

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Chartis Inc., American International Group Inc.'s Property/Casualty unit, said it has taken steps to improve disclosures about guarantees its subsidiaries provided to other AIG units, after a state regulator found "deficiencies" in its reporting.

The Pennsylvania Insurance Department in an October 4 report, which was released this week, said a recent examination of a number of Chartis units found that two of them under-reported guarantees to AIG insurance company affiliates by a total of $18.7 billion, or 12% less than the correct amount, for the year 2008.

The two businesses, called National Union Fire Insurance Co. and American Home Assurance Co., had reported a total of $138 billion worth of guarantees in their 2008 statutory filings to the state insurance regulator, whose examination later found the obligations should have totaled $157 billion.

"We have adopted a remediation plan to ensure that our disclosures are more accurate going forward," an AIG spokesman said on Wednesday. Chartis was informed of the issue before its units submitted their 2009 statutory filings, and was able to fix disclosures about the guarantees in its most recent financials, submitted in March this year.

The Pennsylvania Insurance Department conducted the examination of Chartis's units after AIG's near collapse and bailout by the U.S. government in late 2008. Regulators reviewed the companies' underwriting, loss reserves, pricing and executive departures, among other areas.

The department concluded that the Chartis businesses' loss reserves "were in the range of reasonable estimates" after the company raised its projections of losses in 2009. It also said the units' pricing of insurance policies was in line with competitors.

Some of the report's findings were earlier reported by Bloomberg News.

The main issue that concerned Pennsylvania insurance regulators were dozens of guarantees that Chartis's units previously issued to affiliated companies within AIG, some of them life-insurance businesses.

The guarantees, which were effectively intercompany backstops in case other AIG businesses couldn't pay claims on their insurance policies, were issued to help bolster the businesses' financial strength ratings from credit-rating agencies.

Since 1997, three Chartis units had issued 56 such guarantees, of which 45 have since expired or been terminated, the regulator said. The units so far haven't had to make any payouts under the guarantees, and their ultimate parent, AIG, has committed to backstopping them.

The under-reporting issue came about because Chartis collected incomplete or incorrect data from its sister companies when it was trying to document and report the various guarantees in 2008, according to a person familiar with the matter.

When the Pennsylvania Insurance Department examined the disclosures, it found deficiencies in the amounts of certain guarantees reported. A few amounts were found to have been over-reported by the units, according to the report. The regulator recommended that the Chartis units refrain from issuing guarantees for AIG affiliates without first notifying regulators, and that they take steps to terminate the remaining guarantees and improve reporting and disclosures about them.

In a letter accompanying the report, Chartis Chief Financial Officer Rob Schimek said the firm agreed with the report's conclusions. "We believe the guarantors have the appropriate controls in place to ensure more accurate disclosures regarding the guarantees they have issued."

The disclosure issue relating to the intercompany guarantees only affects the units' statutory filings, which differ from the financial statements AIG submits to the Securities and Exchange Commission for shareholder-reporting purposes.

"To the extent the report was critical, it said Chartis must improve its disclosures regarding guarantees, but that is only an issue in the notes to the financial statements and does not affect our reported balance sheet or our surplus position," AIG's spokesman said, adding: "We are not required to establish a liability for these guarantees in which the likelihood of payment is remote."