AIG Names Inside Hire to Head Mortgage Insurance Unit

American International Group (AIG: 1.65 -0.60%) this week picked Eric Martinez Jr. to take over the CEO position at the firm’s United Guaranty Corp., a mortgage guaranty insurance provider.

He replaces William Nutt, whose reasons for leaving the company were not disclosed before this story went to press.

In his months since joining AIG in January, Martinez negotiated the disposition of several properties, including AIG’s prime real estate holding in Japan for $1.2bn. He previously served in executive roles at Safeco and AGL Resources, an insurance provider and energy services company, respectively.

Martinez’s new role will place him at the helm of AIG’s financial services businesses just as the company faces continuing political and public criticism over its damaging financial products division.

The chief restructuring officer at AIG, Paula Rosput Reynolds, in a media statement described Martinez as well-suited for the challenge of developing a strategy for United Guaranty in the face of AIG’s ongoing realignment.

In the latest loss to the company’s stability, chairman and CEO Edward Liddy said in May he would leave the company as soon as a replacement can be found.

AIG, Uncle Sam and Sharia

A federal judge in Michigan has declined to dismiss an ex-Marine's lawsuit that insurance giant AIG is using tax dollars to promote Islamic Sharia law and charities that may be funneling money to terrorist organizations.

Just when you thought the government's massive bailout of AIG couldn't get more complicated or controversial.

The facts of the case "raise a question of whether the government's involvement with AIG has created the effect of promoting religion and sufficiently raise Plaintiff's claim beyond the speculative level," U.S. Dist. Judge Lawrence P. Zatkoff ruled.

The judge's ruling, a surprise to many legal scholars who think the suit will never go to trial, adds a troubling religious dimension to an already troubling economic crisis. It also shines a spotlight on Sharia-compliant financing, a growing part of the $1 trillion Islamic banking industry.
Sharia, or Islamic law, encourages trade and investment, but bans interest and prohibits investments in certain areas such as gambling, alcohol, pornography, abortion, human cloning, conventional banks or insurers, and most forms of entertainment. Under Sharia, making money from money, such as charging interest, is usury and therefore not permitted. Western banks and investment companies have established Sharia-compliant accounts overseen by imams and Islamic scholars.

According to the lawsuit, filed by the conservative Christian Thomas More Law Center, at least a portion of AIG's $40 billion federal bailout has been used to support Sharia-compliant financial products. The suit claims that violates the First Amendment's establishment clause. "It is outrageous that AIG has been using taxpayer money to promote Islam and Shariah law, which potentially provides support for terrorist activities aimed at killing Americans," Richard Thompson, President and Chief Counsel of the Thomas More Law Center, said in a statement.

The federal judge hasn't ruled on the merits of the case, but he did acknowledge that "at least two of AIG's subsidiary companies practice Sharia-compliant financing, one of which was unveiled after the influx of government cash." He also noted "That after the government acquired a majority interest in AIG and contributed substantial funds to AIG for operational purposes, the government co-sponsored a forum entitled "Islamic Finance 101."

Many legal experts doubt that such actions constitute a violation of church (or mosque) and state.

"The government no more cares about advancing Sharia through the AIG bailout than my local Ralphs supermarket cares about advancing kosher laws by selling products that are certified kosher," UCLA law professor Eugene Volokh, who expects the case to be thrown out, wrote in his Volokh Conspiracy blog.

Robert Tuttle, constitutional law professor at George Washington University, told Fox News that he doubts the case will go to trial: "The question is whether the government has funded religion, not whether the religion is good or bad that the government has funded. Then the next question is whether the government is responsible for what AIG has done. I can't imagine any court saying, under existing law, that the government will be responsible for what AIG does."

Anti-Islam conspiracy theorists will have a field day with this one, regardless of what happens to the lawsuit. But the case does raise some interesting questions about the application of Sharia law in western democracies and economies.

Are companies that pursue religious clients endorsing that religion? Can and should every faith group have its own financial products? Can democracy accommodate any aspect of Sharia? Could capitalism survive without interest?

For now, I'll go with On Faith panelist and Interfaith Alliance chief Welton Gaddy's bottom line on Sharia in the West: "If a conflict arises between American law and religious laws, the Constitution prevails."

Ex-AIG CEO Hank Greenberg launches new insurer

Maurice "Hank" Greenberg, one-time CEO of American International Group and one of the insurer's largest shareholders, is reuniting with some of his former colleagues for a new insurance venture.

Greenberg's firm, C.V. Starr & Company, has launched Iron-Starr Agency Limited, a joint venture with Ironshore Inc. Iron-Starr Excess will act as a specialty lines insurance and reinsurance managing general agency, domiciled in Bermuda, according to an announcement from C.V. Starr.

Initially, Iron-Starr Excess will focus on the production of excess financial and commercial lines insurance and reinsurance products through U.S. insurers, Bermuda or other offshore carriers, including catastrophic excess casualty insurance for Fortune 2000 and other clients. It will issue policy limits up to $75 million.

"There are significant opportunities in this market, and C.V. Starr together with Ironshore has the team to get the job done," Greenberg said in a statement.

Kevin Kelley, Ironshore's CEO who used to work under Greenberg at AIG's Lexington Insurance subsidiary, said in a prepared statement that the partnership allows his company to enter the excess casualty market "with additional backing and support to offer larger limits, consistent with the needs of these clients."

"We look forward to developing a long-standing relationship with C. V. Starr and are excited about this new venture," he said. "This arrangement will assure customers that during these challenging times, they have a syndicated alternative that understands their needs and has the experience to be a long-term solution on Finance."

Ironshore also features six former AIG employees as its executives.

Greenberg has been a frequent critic of the $150 billion federal bailout of AIG, the company he left in 2005 amid money mismanagement claims by former New York Attorney General Eliot Spitzer.

In November, Greenberg told IFAwebnews.com that while the impact of the relief funding will take years to realize, he believes AIG will be minimized to a worldwide property-casualty company with "some modest life remaining assets, but it is hard to tell."

Greenberg has also been skeptical of the government's 79.9% ownership role in the insurer, as it could hurt raising capital in the future.

C.V. Starr is an independently owned holding company with insurance agencies and a portfolio of global investments. Through its insurance operations, C.V. Starr writes specialty lines covering aviation, marine, energy, excess casualty and property, accident and health, including risks with international exposures.

Madoff torts likely to plump up some insurance prices

Frenzy of litigation could strain liability lines already stretched thin by subprime mess; ‘lot of links in the chain’

Madoff’s alleged $50 billion fraud is likely to produce substantial insured losses and put additional pressure on the industry’s already battered professional liability lines, observers say. 

Aon Benfield estimates the direct insured losses resulting from the investment fraud at $760 million to $3.8 billion, with a best estimate of $1.8 billion, according to a preliminary analysis released recently by the Chicago-based reinsurance brokerage. 

Suits against money management firms that sent investors to Bernard L. Madoff Investments Securities have mounted since last month, when federal prosecutors charged the Wall Street fund manager with running a massive Ponzi scheme. 

Claims are being directed at financial institutions, investment funds and money managers who dealt with Mr. Madoff; some lawsuits extend to include parent companies, accounting firms and auditors tied to the investments, said Kevin LaCroix, a partner with executive liability intermediary OakBridge Insurance Services in Beachwood, Ohio. 

For example, a suit against investment adviser Ascot Partners—which invested nearly $1.8 billion in assets with Mr. Madoff—also named Ascot’s auditor, BDO Seidman. 

“Basically, anyone who stood in between the investor and Madoff” could be targeted, Mr. LaCroix said. “There are a lot of links in the chain” and “burned investors will be examining all the relationships as they try to recover their losses.” 

The size and scope of this scheme “will add up to a lot of liability somewhere” said Greg Flood, the New York-based president of IronPro, a professional liability division of Bermuda-based Ironshore Insurance. “Industry-wide claims costs between $1 billion and $2 billion would be very easy to imagine,” he said. Mr. Flood said he was not aware of any Madoff-related exposure at Ironshore. 

Lawsuits are likely to focus on the due diligence performed by the institutions that invested clients’ money with Mr. Madoff. Other allegations could include negligence, mismanagement and breach of fiduciary duty, legal experts say. 

New York-based Fairfield Greenwich Group, a large institutional investor in Madoff funds, faces a $7.5 billion suit by investors. In the suit, plaintiffs argued the hedge fund managers collected millions of dollars in fees while failing to carry out due diligence that would have uncovered the fraud. 

Claimants primarily will call upon firms’ errors and omissions and directors and officers liability policies, but other types of coverage also may be sought to pay for the losses, including crime insurance and fidelity bonds, observers say. 

Subprime loan-related claims already have generated an estimated $3.5 billion worth of D&O claims for financial institutions and pushed up prices for liability coverage for financial institutions by as much as 100%, according to market experts. 

D&O rates for financial institutions have risen for the past five quarters year over year and, given the Madoff impact, “we expect that trend may continue,” said Michael O’Connell, New York-based managing director of the financial institutions practice for Aon Risk Services, a unit of Aon Corp. 

“It’s certainly something the E&O and D&O lines are bracing for,” said Michael White, senior vice president and financial institutions industry leader for the executive risks practice for Willis HRH in New York. He noted that recent renewal negotiations for financial institution coverage have featured a heightened interest by underwriters in clients’ potential exposure to Mr. Madoff. Industry observers also say they would not be surprised to see insurers writing Madoff exclusions into policies. 

Among the leading providers of financial institution insurance generally are American International Group, Chubb Corp., ACE Ltd. and XL Capital are likely to face the highest claims, observers say. AIG and ACE declined to comment, while Chubb and XL did not respond to requests for comment. 

The final cost to insurers may depend on the amount of coverage the institutions bought, but losses could be restricted because money management firms typically cannot purchase high limits, observers say. 

“Most of the firms would not have adequate limits of coverage to indemnify the people who would sue,” said Marshall Gilinksy, a shareholder in the New York office of Anderson Kill & Olick. He noted that typical E&O policy limits for financial advisory firms might be about $15 million to $20 million and available up to $30 million. Limits for financial institutions are more difficult to generalize, he said. 

“It would not be unusual for a money management firm to have limits of $10 million” for E&O liability, Mr. LaCroix said. 

Defense costs, which are expected to be “significant,” are likely to erode policy limits because liability coverage typically includes defense costs inside limits, legal experts say. 

Insurers also may be looking closely to see whether the allegations raised trigger coverage exclusions, particularly those around conduct resulting in personal profit or gain, said Mr. LaCroix. 

But Willis’ Mr. White said he thinks “it’s going to be difficult (for the carriers) to try to deny coverage” broadly due to the nature of the investors’ claims.