The climate for climate-related insurance at AIG turns bleak

A debate about climate change was coming to a boil at the highest levels of American International Group in 2006. Leaders of the once-reigning insurance giant were wrangling over the company's position on human responsibility for the Earth's warming.

Some argued strongly against blaming man's fossil fuel use, concerned that the company's profitable arm insuring offshore oil rigs, pipelines and coal mines could lose high-profile clients. The scene in the Manhattan office of CEO Martin Sullivan revealed a deep divide about the company's direction, according to participants.

"Some people were concerned that if you took an advocacy position [on climate change], that might annoy -- that's a good word -- clients," said Joseph Boren, the former CEO of AIG Environmental, which provides insurance to utilities and other companies for pollution lawsuits.

Internally, critics had been casting doubt on the climate initiative for weeks in a series of working conference calls. The proponents would assert that climate change is real, is happening now, and is caused by people. The last chance for critics to derail the plan came in Sullivan's couched sanctum.

The critics failed. Sullivan would decide later to adopt the climate plan. It's unclear if he was swayed by Boren's slashing intercession during the meeting, in which he warned that AIG would appear as a "fool" if it denied mankind's role in altering the planet's behavior.

Within months, the company was accelerating toward its new goals by inventorying its greenhouse gases, collecting offsets for a year's worth of emissions, developing insurance policies for renewable energy providers, and brainstorming for financial instruments that would assist innovators in the green movement. AIG was crowned a leader on climate change.


Much of that, however, is now gone.

'Not actively pursuing climate change'

AIG disbanded its pioneering climate change office last month. It has stopped calculating its own emissions and abandoned efforts to reduce them by rescinding its Be Green program, according to sources.

The company's startling demise last year, spurred by its gambles with derivatives that left it vulnerable in a plummeting economy, has resulted in a cascade of layoffs and departures. There is also a new mission at the company that, sources say, leaves little room for climate initiatives: survival.

That reality will reveal itself on the Internet later this year, when the company participates in the voluntary Carbon Disclosure Project. The initiative was once a public relations dream for AIG, which gained praise from environmentalists and regulators for its actions against carbon dioxide. Not this year.

"They're going to have to say, 'We no longer do our greenhouse gas inventory, we no longer have our Be Green program. We no longer lobby for anything,'" said Alice LeBlanc, the company's first and only director of climate change. "There's really not that much they can say that's being done."

LeBlanc was laid off last month. She thinks the disappearing climate policies are mainly due to the government's takeover, and sees it as contradictory to the administration's efforts to fight emissions from power plants, cars and industry.

AIG's failures could have a deep impact on all insurers' ability to relieve climate change, says Richard Thomas, who left the company as a senior vice president about six months ago. That could be a scary scenario for environmental activists, who believe the massive industry, with $6.3 trillion in assets, can fortify emerging innovators and markets offering alternative energy and other climate fixes.

The intense focus on the industry by regulators and Congress, Thomas believes, will dissuade insurers from offering "financial instruments," like guarantees, to renewable energy producers and a host of other entrepreneurs and businesses. That could slow efforts to stem climate change.

"They're not actively pursuing climate change issues, because it's just not on the board as a priority within the narrow set of priorities for survival," Thomas said of AIG.

A spokesman for AIG, Joe Norton, did not refute allegations that the company, now called AIU Holdings, jettisoned its climate change office, no longer tracks its emissions and halted the development of certain insurance policies designed to stem global warming.

Norton, however, listed a host of existing policies for renewable energy producers and other climate-related enterprises. He said the company remains "committed to addressing the issues of climate change."

"This is still a very important initiative for us and there has been no change to the eco-friendly insurance products and (services) that we create and deliver to commercial customers," Norton said in an e-mail.

Insurers tripping over AIG's rubble

But former executives described several initiatives that they had begun, but never finished.

One of the products, as described by Thomas, could have helped wind turbine manufacturers sell more units. That means more renewable energy and less emissions.

Here's how it works. If a turbine maker could guarantee that its devices would produce a certain amount of power, those turbines would be more attractive to utilities. More might be sold. If the wind sputtered and the turbine failed to meet expectations, the insurer would pay for the replacement power from other renewable sources.

That's a guarantee that AIG will now never offer, according to Thomas. And the company's implosion might prevent other insurers from developing similar products.

"I think AIG's difficulties will retard the development of some of the financial instruments to address some of the issues in climate change," Thomas said. "AIG was a leader in that area, and now because of so much of what AIG did is in disrepute on the financial product side, I think that sends a chill through everyone."

But that "whole hog" approach doesn't ring true for Joel Ario, the insurance regulator of Pennsylvania and chairman of a national task force on climate change. Not all guarantees will be off-limits, he said, noting that insurers will continue to offer those that don't financially imperil the industry.

Still, he indicated that those guarantees have to be "financially sound," regulator lingo that indicates a sense of oversight that might hinder insurers' approach toward those products.

"I don't think we want, in the name of climate science, to encourage people to take bad gambles, so to speak, as AIG has done in the past," Ario said.

'The end' came quickly

Guarantees are more risky than insurance.

That's because companies can insure vast numbers of homes against fire, for example, knowing that only a handful will burn. More losses can occur with financial instruments, because with every transaction, someone loses and someone wins. And the numbers can be very big.

Florida, for instance, paid Berkshire Hathaway Inc. $224 million last year for the ability to access $4 billion in the event that a hurricane crushed one of its shorelines. The storm never came, but taxpayers still paid.

There are other ways to gamble. States, banks, and even insurers can play the odds on a major hurricane striking Miami. The payout is $1 billion -- for every $10 million anted up -- if mass destruction occurs. The German exchange Eurex is launching the product this week; it's called a hurricane futures contract.

AIG's fortunes are now heavily mortgaged. It owes about $180 billion to the federal government. Yet at least one pillar of its previous climate success is still standing.

Ironically, it is in the division that housed the critics of the climate plan in that pivotal meeting in 2006. The division, Global Marine and Energy, has some of the world's biggest polluters as clients. But it also has perhaps the company's most robust portfolio of renewable energy providers.

Overall, however, the company's dismantling has not spared its climate operations.

Late last year, Oakley Johnson, the former head of corporate affairs, who used his connections with top brass to advance the climate office, lost his influence. He was told to no longer report directly to the CEO, then Edward Liddy. Instead, he would take orders from the company's top lawyer, Stasia Kelly.

The climate office had been demoted.

"That's when I knew it was the end," said LeBlanc, the former climate director. "They just didn't care anymore."

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