Saving AIG

“This is no time to panic,” says the chief executive of one of the UK’s major brokers. “We are watching AIG closely and dealing with each of our major clients on a case by case basis.” The enormity of the meltdown in the global financial markets has finally taken its first insurance casualty and it just happens to have picked on the biggest player in the world. AIG’s reach spreads across the globe and in nearly every commercial line in the business, from professional indemnity insurance right through to gigantic tranches of accident, health and aviation business. But the US giant also sells bonds to entire countries; so there is no doubting the magnitude of its demise. AIG is the biggest seller of investment bonds in the UK to savers, as well underwriting the risk of business failures across the globe.

So the prospect that this insurance giant, which also controls over a $1trillion of assets, could face collapse has been inconceivable to the world’s governments and financers alike. The implications of such demise would have caused an avalanche of competing crises and failures, as AIG owns whole tranches of subsidiary insurance businesses in China.

The fact that the Fed has stepped in to save its soul is a shock but no surprise. As after all, if AIG had gone down, the bonds it has traded off for a generation would have been left worthless and thousands of organisations would have been left with enormous holes in their books.

And it has been these very organisations that have been flooding the phone lines of the UK’s leading brokers and asking them firstly, whether they needed to switch their premiums, investments and interests away from AIG? And secondly how much it may cost? These clients have all been turning to the best placed brokers to provide them with the insight and advice to guide them through the problem. All this week, brokers have been watching closely. Our chief executive continues: “In the upper tier of top brokers, we have all been talking to each other and taking stock. There was an awareness that if we all started to shift business away then it would have caused a whole new confidence problem that AIG just did not need at this point. You’ve got to remember that although they were downgraded they are still have an A grade rating, which is a lot stronger than some other insurers. But we all basically agreed that we needed to sit tight and try and support them as best we can, we didn’t want to be the terrorists on this occasion and create further woe.”

But of course these brokers will ultimately be dictated to by the needs and wants of their clients and if a client wants to move to a different carrier due to the fears of AIG going under then so be it. And the memories of the wounds inflicted at the hands of the collapse of Independent Insurance eight years ago are still vivid. So brokers have been forced to be ready to listen and give the best possible advice. And nobody is going to criticise a broker if they stop placing new business with AIG due to the doubts.

Insurers too have been following the crisis closely, firstly to assess where and if they have been exposed in the Lehman Brothers mess, but also how any AIG meltdown may hit them in the medium term. “Of course everybody is scrutinising their businesses to see where the exposures may arise,” says one leading insurer executive. “But this is also about opportunities for some too, for example, AIG’s high net worth clients are all very twitchy and wanting to switch to a different carrier. There will be quick wins for some out there; it’s about spotting the opportunities. But this approach may just pale into insignificance if, for example, the insurer involved must face down a gigantic claim say from a Lehman Brother business partner”.

And it is the breadth of its reach that makes the AIG saga so significant. The AIG story in recent times has turned into a corporate soap opera. The company, which was founded in Shanghai in 1919 was turned into an insurance giant by Hank Greenberg in the 1960s and by 2000 its market value was as high as £230bn. But from that time it was hardly ever out of the headlines. The regulators began an inquiry into its accounts, accusing Greenberg of false accounting, an allegation which was eventually dropped, but saw AIG restate its accounts and pay $1.6bn to settle the problem. Greenberg was succeeded by Martin Sullivan, a Brit, but he was ousted in the summer after AIG was exposed to the insurances it sold against sub-prime mortgages and the credit crunch began to unravel and the US housing market began to fall. During the first six months of this year AIG lost $13bn. Sullivan was succeeded by its then chair Bob Willumstad, who then steered AIG into this eye of the storm crisis and ultimately into the hands of the Fed and its 80% stake.

The broker chief executive concludes: “AIG has now been nationalised. And that’s surely the best guarantee I can give to my clients now, isn’t it?”