AIG, insurance in general taking a public battering

Investors have finally become acquainted with the name of the world's largest insurer.

But it turns out that isn't a good thing. In fact, the rest of the insurance industry hopes to elude the spotlight of that notoriety.

American International Group Inc. (AIG) has seen its stock tumble 20 percent in value this year due to high-profile accounting misconduct probes by the Securities and Exchange Commission, the Department of Justice and New York regulators.

To dig out of its hole, it must correct its financial statements by $2.7 billion, or 3.3 percent of its net worth. Furthermore, longtime chief executive Maurice "Hank" Greenberg retired abruptly and its chief financial officer was fired.

Other insurers have stumbled into its hole.

Most notably, General Reinsurance Corp., owned by Warren Buffett's Berkshire Hathaway Inc., recently put two executives on paid leave because they made contracts with AIG for nontraditional "finite" coverage that's used when traditional coverage is unavailable or too costly.

"Because of all the current headlines, the whole industry is being painted negatively with a broad brush," said Michael Dion, insurance industry analyst for Sandler, O'Neill & Partners L.P. in New York. "However, some of these issues are confined within a few companies that are larger in size than the majority of the firms in the industry."

After the 9/11 terrorist attacks, costs to insurers spiraled. However, this served to improve profitability and reserves because it gave a solid reason to boost premiums. It also provided an opportunity for many new insurers who weren't burdened with 9/11 payouts to successfully enter the market.

Calamities, whether natural such as hurricanes or caused by man in the case of terrorism, can improve industry prospects.

Bad publicity, however, hurts the industry. Some observers believe its stock prices have been unduly battered even though the insurance industry is in one of its strongest financial positions in years after record profitability in 2004.

Even AIG, with its problems, has redeeming traits.

"For all its bad press and the fact that a lot is still unknown, AIG is a very strong company," said Karen Horvath, vice president of the property/casualty rating division of A.M. Best Co. in Oldwick, N.J., which lowered AIG's financial strength rating from A++ to A+. "It has a reputation as a good underwriting company and a product innovator that brings those products to market quickly."