After methodically looking through 17 American International Group (AIG)-insured structured transactions, S&P has reached a new ground on defining terminology that may prove to lessen the difference between those policies issued for capital market transactions by multiline insurers and those issued by monoline insurers.
Earlier this year the AIG subsidiary Lexington Insurance refused to honor its insurance policy on two downgraded film-backed deals (see ASR 3/19). On May 21, the Court of Appeal ruled that the policies behind both film deals did not constitute capital markets financial guarantee, a ruling that had, to date, supported AIG's line of defense.
S&P's response to the situation has led the agency to conversations with AIG senior officials to ensure that there is an understanding to pay in a timely fashion that goes beyond the written policy. The review of the 17 transactions addressed what terms and conditions the company would need to set in order to pay up immediately. It concentrated on possible reasons AIG would have for not meeting obligations and upon reaching this common ground the policies in each of the transactions were regarded as financial guarantees and not as an insurance policy.
Upon reaching this stage, AIG was asked if they understood the terms and conditions and precedent to make a timely payment; the group acknowledged an agreement and now is expected to handle the policy as a capital market guarantee, said the S&P analyst. "Multilines who choose to get into the capital markets business will have to treat it in the same fashion as monolines; if the policy reads by 2PM Thursday, then it must be paid within that time frame," added the analyst. "AIG has agreed to terms and will affirm the payment."
The 17 deals affirmed are: GMACCM HealthFund I series 1999-2 and 1999-1, seven tranched of the series 1999 GMACCM Mortgage Trust 1 1999,Kidamall Grand Rapids LLC, Team Classic Golf Services, World Omini 1999-A automobile lease securitization trust Class A-1 to A-4; Wilshire Investors, Wilshires Louisiana Advisers, Wilshire Louisiana Partners II, Wilshire Partners and Wilshire New York Partners 111.
"Our policy is: if an insurance company fails to honor an acknowledged policy - meaning that they have acknowledged it is being utilized in a capital market transaction for credit substitution purposes - if it fails to honor the obligation or is inconsistent with the terms of the policy, we will take rating action on the insurance company," explained Clifford Griep, Chief Credit Officer at S&P. "That will depend on the extent of the damage we think the company could do, the financial impairment that could result, the negative impact that could result, and the negative impact it could have on that particular business line."
According to AIG, the capital markets reprimand this year was unwarranted because based on the prior ruling, it had done nothing wrong - the court had determined that there were indeed terms and conditions that needed fulfilment before a policy is obliged to pay.
Therefore, the insurance policy would be treated as a regular insurance claim where the insurer, AIG, is entitled to see if there has been any breach of the policy or the policy schedule. A financial guarantee is an obligation to ensure that principal interests are met in a timely fashion, regardless of what the reason behind the claim is.
"We wanted to make sure that it was understood what a capital markets guarantee entitled," explained an S&P analyst familiar with the situation. "We looked and we let the market decide whether it looked like an insurance policy or a financial guarantee. But AIG continued to address it like an insurance policy and used the legal case to back its claim."
Despite AIG's allegations that it in fact issued an insurance policy, it was apparent to many market participants that the wording suggested any claims would be handled as a financial guarantee, leading some to speculate how trustworthy any future multiline financial wrap might be. "If a claim were to be submitted we would expect the insurance company to what they said they would do," said the analyst. "The financial market requires timelines."