AIG - 1

As the Wall Street Journal headlined this weekend, September 14-20, 2008 represents "The Week That Changed American Capitalism". How did the events of the past seven days impact structured settlements?

This S2KM blog post, which begins S2KM's analysis of the structured settlement landscape following September 14-20, is part of an S2KM series titled "Growing the Structured Settlement Market".

For this author, the winds of change began last Sunday afternoon, September 14, when the tail of Hurricane Ike, with gusts up to 75 miles per hour, shredded greater Cincinnati. Without any precipitation, Ike shut off power in 700,000 homes - many for the entire week. For those who experienced Ike's devastation, the weather storm last Sunday foreshadowed the financial storm that followed.

For the structured settlement industry, including thousands of structured settlement annuity recipients, the financial storm hit home on Monday when AIG publicly announced it was seeking $70 billion from the United States government. For AIG's structured settlement agents and annuity recipients, Monday's announcement represented a belated example of the "new" AIG initiative Ismael Acevedo announced at the NSSTA 2007 Winter meeting: to make AIG's structured settlement program "more transparent".

On Tuesday, United States Treasury Secretary Henry Paulson announced the federal government had seized control of AIG in an $85 billion bailout. Paulson stated AIG had been only "hours from bankruptcy".

Where does one begin to analyze the AIG debacle?  One perspective, as NSSTA spotlighted during its 2007 Winter meeting: "Who does your client trust"?

From the perspective of AIG's policy holders and agents, thank you AIG for your transparency and advanced notice.

Thanks also to the financial rating agencies - especially those rating agencies which also gave Executive Life superior ratings prior to its 1991insolvency. As AIG faced a potential collapse last week, the major rating agencies downgraded AIG's financial status to variations of "excellent".

As part of its transparency initiative, AIG quickly communicated its "excellent" financial condition to its agents.

So, as structured settlement stakeholders, who do you trust?  How comforted are you to know:

• Rating agencies do not necessarily learn from past experience - or avoid conflicts of interest;
• AIG communicates positive financial news quickly?

What about the structured settlement intermediaries who sell AIG annuities?

• How many of you contacted your customers and clients in March of 2005 when A.M. Best first placed AIG under review "with negative implications"?
• What information or advice have you provided to existing AIG structured settlement recipients (your customers) since March 2005?
• How many of you utilized the negative 2005 A.M. Best announcement about AIG's financial condition (or the September 2008 AIG bailout) to discuss with your clients and customers IRC section 5891 and the state structured settlement protection laws?

As an "agent", of course, your first loyalty must be to your principal (AIG) not to your "customers and clients". What would AIG have done to you if you had communicated in 2005 (or today) negative A.M. Best's announcements and downgrades for AIG?

From a recipient or policyholder perspective:

• How trustworthy are you as an annuity agent?
• When actual or potential conflicts of interest arise, do you have the professionalism to recognize and communicate the conflict to your clients and customers?
• When a conflict exists, can you be trusted to identify and protect the best interests of your clients and customers?

S2KM will continue its strategic analysis of the AIG bailout and how it impacts the structured settlement industry in subsequent blog posts.