The Proposed Government Takeover Of AIG And The Repurcussions For It’s Insurance Units
American International Group(AIG), the world’s largest insurer and a financial giant with over a $1 trillion in assets has seen it’s fortunes diminish in the face of huge losses from the subprime collapse. While most of these losses stem from it’s finance division, it is also having severe repercussions to it’s still profitable insurance units.
A survey by Insurance Journal of 1,000 insurance producers including 782 who say they have accounts with AIG found that 343 producers have had clients ask them to move their account out of AIG. That’s 43.8 percent of producers with AIG accounts.
“Since the rating agencies apply the same financial rating to the subsidiaries as they assign to the parent, it really doesn’t matter where the subsidiaries stand financially - they fall with the parent,” said Chris Boggs, associated editor of MyNewMarkets.com. “Also, and not to deride any person or their opinion, some of this has to do with a misunderstanding of the complexity and size of AIG. To some agents, like to some clients, AIG is AIG, and if AIG is in trouble that’s all they hear. Anything said in defiance of the agent’s or client’s opinion is just spin in the view of some.”
It’s a rough time for AIG right now, there’s blood in the water and the sharks are circling. A lot of people can’t jump ship fast enough.
Much of this has to do with the complexities of most financial companies, insurance companies aren’t just insurers and banks aren’t just banks anymore. Insurance is supposed to be regulated by the individual states but asking a state commissioner to regulate a company as complex as AIG is pretty much impossible.
Having severe liquidity problems, AIG was forced to ask the government for a loan but it’s far from a bailout. At 8.5% above the LIBOR, it’s a very expensive loan and with the government to take an 80% equity stake in the company it is unlikely to have a happy ending.
The government plans to take control only to see to the orderly breakup of the huge company but until that is completed, all of it’s subsidiaries no matter how profitable are being painted by a single brush. While it’s insurance units may have little connection to the subprime meltdown, their fortunes will be tied to their parent holding company.
