Insurance Quotes & Advice

Investment losses are beginning to take their toll on the insurance industry and Fitch Ratings Services has revised their ratings outlook for a dozen sectors in insurance and reinsurance globally.

The Negative Outlooks reflect the significant falls in global credit and equity markets, and unprecedented market volatility and uncertainty. Of greatest concern to Fitch are declines in the market value of investment holdings that have led to significant declines in economic capitalization and profitability for many insurers.

Ongoing market volatility means there is potential for significant further reductions in capital as market values further decline, and additional impairments are recognized. Declines in investment performance are impacting essentially all insurers, to varying degrees.

It’s really not surprising considering that stock markets around the world have taken a real pounding in recent weeks.  For years, investment income has made up the bulk of the industry’s profits but the current financial crisis has pretty much wiped out those gains.

Future credit downgrades will hamper already difficult access to capital markets and further constrain liquidity.  We may see additional insurers seeking government relief as was the case with American International Group, which was forced to seek out a Federal Reserve loan in order to avoid bankruptcy.

Whether or not the government will have to earmark money as it did for the banking system remains to be seen.  However with the world facing a long economic downturn, such a relief program may become necessary.

Hank Greenberg, Ex-CEO of American International Group(AIG) has been sharply critical of the Fed’s $85 billion loan agreement with his former company and it’s not surprising why.  He along with other shareholder stand to lose much the way things stand now.

At a minimum, Greenberg wrote, AIG should be afforded the same borrowing terms that other companies are now getting from the government. He said the Federal Reserve has recently been lending to other financial institutions on terms “far less onerous than those imposed on AIG.”

“The loan from the Federal government to AIG, as it is currently structured, will result in the liquidation of AIG, the loss of thousands of jobs, and the irretrievable loss of billions of dollars in shareholder value,” Greenberg warned in his letter to Liddy.

Despite him being a less than objective observer, there is some merit in his arguments because compared to the other instances of government intervention, AIG’s loan is substantially at a disadvantage.  On the other hand their should be some sort of penalty for coming to the government for handouts and putting taxpayer dollars at risk.

Yes, the shareholders will probably lose substantially but consider the other cases of government help, Bear Stearns, Fannie and Freddie, for the most part all their shareholders were also wiped out.  However was that the government’s fault or were the people running the companies are to blame.

This actually sets a bold precedent which states that companies can’t expect to act irresponsibly and because they are “too big” to fail, count on the government to bail them out at no cost.  Yes the Fed loan is harsh but if that’s what it takes to protect taxpayer interest then perhaps it is for the best.

The deepening financial crisis has forced the Fed to open it’s wallet once again to AIG in order for the company to settle it’s accounts with their counter-parties stemming from it’s credit default swap business.  The Federal Reserve released a statement that the New York branch would make available the additional liquidity in an effort to avoid further disruptions to financial markets.

Under this program, the New York Fed will borrow up to $37.8 billion in investment-grade, fixed-income securities from AIG in return for cash collateral. These securities were previously lent by AIG’s insurance company subsidiaries to third parties.

The fact that we still may not be at a bottom makes it not out of the realm of possibility that additional liquidity may be required by the company in the future.  The recent negative media coverage of alleged frivolous spending by the company doesn’t help matters.

The American people will not be sympathetic to a company that is receiving an amount nearly equivalent to 18% of the $700 billion the rest of the financial system is receiving.  Unfortunately the Fed really has no choice in the matter because the alternative is unthinkable.

A default on credit derivatives by AIG has the potential of setting into motion a chain reaction in the derivatives markets as a tidal wave of defaults could occur as it passes through counter party after counter party.  The market is so highly leveraged that some estimates have it’s notational value at over $40 trillion which for the most part is largely unfunded.

Many leading financial figures in the past have called this market a train wreck waiting to happen.  The fact that the market is pretty much un-regulated has let matters come to pass and it looks the American taxpayer will be the one eventually paying the price.