Scorecard: AIG Edward Liddy Wasn't Always So Generous

(MoneyWatch)  American International Group Chief Executive Edward Liddy has been valiant in his defense of a $165 million bonus package given to executives at the troubled insurer's Financial Products unit, the same unit that nearly brought AIG to bankruptcy and forced the government to offer the company a $170 billion bailout.

But as legislators pointed out in the House Financial Services Committee hearing yesterday, Liddy wasn't always so generous, and certainly not when he was CEO of Allstate, the country's largest publicly-traded property insurer, from 1999 to 2006. In one controversial cost saving move, he removed 6,500 agents from Allstate's payroll and turned them into independent contractors responsible for their own benefits.

In 2005 Liddy made what he later admitted was one of the worst decisions of his career: he didn't get Allstate a reinsurance policy for Louisiana. Reinsurance is "insurance for insurers," a policy that protects a home and business insurer against the possibility of catastrophic losses such as hurricanes and earthquakes. Liddy didn't think Allstate needed it. New Orleans hadn't been hit by a hurricane in nearly 50 years.

But on August 29, Liddy realized he'd made a bad bet. Hurricane Katrina socked New Orleans and the Gulf Coast, causing $43 billion in damage. Then Rita banged into Texas, followed by Wilma, which tore across Florida. As a result, Allstate sustained a $5.7 billion catastrophe loss for 2005.

Allstate shareholders kept Liddy on the job, and he acted quickly to shore up the company's defenses against another disaster. He bought reinsurance policies for the Gulf Coast, announced he was getting out of areas close to the shoreline, even as far north as New York, and launched a campaign for a National Catastrophe Fund that would protect hurricane-prone areas like Florida where home insurance had become excruciatingly expensive.

But many Gulf Coast homeowners saw Liddy as the enemy. Public officials castigated him. Caricatures of him grace websites such as allstateinsurancesucks.com, even though he's been retired from the company for more than two years. "Allstate...I've got a score to settle with you," reads one posting by an angry New Orleans resident.

A federal jury in Louisiana fined Allstate $1.5 million for failing to pay a Katrina claim quickly enough. Allstate also paid a fine to the Louisiana Department of Insurance for canceling more than 4,700 homeowner policies in the New Orleans area, often using the excuse that the homes weren't lived in or were too damaged to be repaired.

To be fair, some of Liddy's and Allstate's critics, like Mississippi attorney Richard Scruggs, are in jail and others, after making sufficient noise, have now reached a settlement. A year after Katrina, the Insurance Information Institute, an industry research group, said that about 90 percent of all homeowners in Louisiana and Mississippi were satisfied with their insurers.

Liddy's record, both before and during his AIG tenure, speaks for itself. He can be a tough CEO -- at least, when he wants to be.