Shock to the heart

It’s over. Finally, after months of bad news and worse speculation, AIG as we know it has ceased to exist in the UK.

After announcing the biggest loss in US corporate history – $61.7bn (£43.9bn) in the fourth quarter of 2008 – AIG revealed a massive restructuring under which AIG UK, together with other foreign general and property and casualty businesses, will be hived off into a new holding company.

This operation, AIU Holdings, will have a separate brand and management team.

So what does this mean for AIG UK? The insurer has been limping since last September, when the US government gave the first $85bn handout to its parent company. Led by chief executive Lex Baugh, AIG UK has insisted that it is business as usual, despite numerous staff departures and widespread allegations of unsustainable rate cutting.

For Baugh, speculation about the future of the UK business has become familiar – and he has become adept at soothing the market’s fears.

At the end of last week, when rumours began to circulate that AIG was going to announce a record loss, he fired out a reassuring email to brokers. “We will of course keep you informed of AIG’s results when they are announced, as well as any other relevant news,” he wrote.

“In the mean time, nothing has changed at AIG UK – we continue to be well capitalised and our ability to pay claims remains undiminished. We have capital and reserves of over £1bn, which is in excess of four times the estimated FSA minimum capital requirements for our operations. We are separately regulated by the FSA in the UK.”

AIG UK is indeed a separate entity, domiciled in this country and with capital ringfenced to meet its claims obligations. But the market cannot see it in isolation from its parent company.

“How much more of this?” said one leading broker, on hearing of the loss and restructuring. He added, however, that he would continue to renew and place business with AIG, taking comfort in the American government’s continued backing. His company would warn clients when placing new business and keep a “watching brief” on the insurer, he said.

Aside from the ructions in New York, it is the effect on the insurer’s reputation that may do for it in Britain. AIG UK has incurred the wrath of peers by allegedly dropping its rates in a bid to hold on to business. Insurance Times has seen documents that detail a range of risks, with AIG quoting up to 40% less than its rivals. One typical risk showed AIG UK offering a £150,000 premium, compared with £200,000 from its competitors.

Multiple insurers and brokers claim AIG UK has been pricing its risks dangerously low in an effort to stay afloat, but the insurer has repeatedly insisted that this is not true. Asked again whether AIG UK has cut rates since September, Baugh says: “It is a very difficult question to answer.”

But he adds: “I do not think it would work because it would be a very short-term plan and I do not think clients would be impressed by it.”

For every five risks in which competitors claim AIG UK has undercut them, Baugh says he could produce five where competitors have undercut his company.

As well as battling external perceptions, AIG has to reassure its staff too. It’s been difficult. Insurance Times has spoken to a number of former employees who are angry at seeing the AIG brand tainted by a remote part of the business, the financial products division now being investigated by the Serious Fraud Office.

There has also been a financial impact on staff, with the share price of AIG falling from $70 to $2 in little more than a year. Senior managers at AIG UK who received annual share options in the New York-traded stock have lost a lot of money. One staff member recalls how “hugely upsetting” it was for people.

Baugh says, however, that any staff who have left or who plan to leave would only have received a “modest” number of stock options.

“They would not have faced a significant loss from that standpoint. Among senior people there is a realisation that if there is a time to be in the organisation, in terms of opportunity to build wealth, it would be when the company is down in terms of valuation.”

AIG UK has lost a significant number of employees in the past six months. Last week Insurance Times revealed that Allianz had poached six members of its professional indemnity team, including senior underwriters Renette Pretorios, Matthew Lamplugh and David Cable.

In the same week, AIG UK confirmed that it had lost three senior underwriters to Torus. In January Ace poached Jeff Carr, AIG’s client relationship manager.

These are the losses that worry brokers most. As one says: “AIG UK has been massively depleted in professional indemnity and financial lines … It is a major concern.”

Another senior broking executive describes the company as “bleeding staff”.

Baugh disagrees. “In an environment when the spotlight is on AIG, what might be a normal level of turnover looks like something exceptional,”

he said last week, before the US results were announced.

The rest of the market might not have agreed with him then. Now it’s facing more shocks. Can the UK business limp on for much longer?