The AIG Myth – It’s Not To Big To Fail – It May Be To Big To Save

We have all heard the the myth repeated – AIG is to big to let it fail. What bunk.

AIG was the largest insurer in the world. It’s insurance operations, outside of the Financial Services Unit, were considered as an example of best run companies in the world – the very best. That opinion is and was correct.

Did that make AIG to big to fail? Certainly not.

Will AIG survive? The present plans do not call for AIG to survive at the end of the day. All of the successful insurance units are currently on the sales block. The liabilities are being liquidated.

Unfortunately for the American Taxpayer – the value of the units being sold will never come close to repaying the $180 Billion invested by the Governemnt into AIG todate. The value of the assets will approximate, at best, $100 Billion dollars, an $80 Billion loss if the Government doesn’t spend another dime. The market place knows the which units are for sale and it is, therefore, “a buyers market”.

A dismissal outlook considering the Government isn’t done pouring money into the “black pit” known as the AIG Financial Services Division.

The Scare Tactic:

You’ve heard it time and time again, “If AIG had failed you wouldn’t have been able to get insurance on your car, your house or your life. Eveything would have frozen”

These claims are simply unfounded.

Had AIG been allowed to enter bankruptcy, at zero cost to the American Taxpayer, other Insuarnce Carriers would have filled any gap and replaced the existing AIG coverages. There may have been a small and temporary increase in premiums while the market settled, but the remaining carriers have and had the capacity to write the AIG business.

How many commercials do you see every week asking you to let some company “qoute” your business – online or in person?

AIG as an Auto Insurer 

AIG is currrently trying to sell its American Auto Unit to Zurich Insurance Company for approximately $2 Billion.  This move came after AIG dropped the “AIG” name from its dircet auto business  

Compare the suggested net worth of AIG’s US Auto business ($2 Billion) with the annual premium volume of the largest US auto insurers in 2007; State Farm at $29.2 billion, Allstate at 14.7 Billion, GEICO at 11.1 Billion, Nationwide at 3.5 Billion. AIG’s presence as an auto insurance company in the US, while not insignificant, isn’t an indispensable player in this market place. AIG has Auto insurance operations elsewhere in the world, but in those other Countries AIG is not the “main player” either. Having a small piece of many different pies can certainly add up. There are thousands of auto insurance companies around the globe available to replace AIG as an auto carrier of choice.

AIG’s Life Insurance

AIG’s US Life Insurance  Company, American General Life, has also been packaged for sale. , , , ,

At the end of 2007 AIG’s American General Life had $36 Billion in assets and $30 Billion in liabilities, leaving net capital of $6 Billion. 

Compare those numbers to say, John Hancock Life, with $59 Billion in assets. , or Traveler’s with $19 Billion in assets (Traveler’s was purchased by Met Life – $229 Billion in assets – from Citi Group for $11.5 Billion – , or Prudential Life with $256 Billion in assets, or Transamerica Life with $103 Billion in assets, or say Lincoln National Life with $87 Billion in assets. . While AIG’s role as a life insurer is not insignificant – AIG is not an indispensable player in any one market. There are thousands of global Life Insurance companies ready and willing to divide up AIG’s book of life insurance.

AIG as a Property & Casualty Insurer  

AIG’s  Annual Property & Casualty Insurance premiums can be estimated at $30 Billion dollars.   The Global total of P & C  premium in 2007  was $1.7 Trillion dollars.

The US accounted for $651 Billion of this amount or 39%. (Note we have “bailed out” AIG to the tune of $180 Billion and counting, roughly equivalent to 1/4 of the annual P & C volume for the entire US market. If AIG had been allowed to “fail” short term market disruptions may have occurred, in terms of pricing, etc, but the world market place would have absorbed the liability in rather short order. AIG’s precentage of the Global P & C market is only 1.7%.

A good deal of the Global P & C Business is written in “pooled” agreements. You might recall the insurance issues surrounding the World Trade Center. 13 separate insurance companies and several re-insurance companies shared this risk. If any one of those companies were to enter “reorganization” the available options would be to either redistribute that carrier’s pro-rata share of the exposure with the remaining pool members or to seek a new member to join the group to assume the liability. Frankly, these types of activities take place every day. When AIG is asked to consider writing a risk, AIG is not the only Company asked to do so. AIG must compete for every risk it writes in an open market place.  AIG’s seat at the negotiating table would be filled by one of it’s competitors very quickly.

AIG as a Home Insurer

Many of the auto insurance companies listed above not only offer Home Owners Insurance, but the product is offered at a substantial discount when it is combined with an individual’s auto Policy. While AIG is a “player” in the Home Insurance market, it is not an ”indespensible” player. The AIG share of the private home insurance market is roughly equivalent to it’s share of the auto insurance market.

AIG as a Reinsurer 

The top 10 Global Reinsurers wrote $119 Billion in premium in 2007. Two of the top 10 (Munich Re & Swiss Re) accounted for 50% of that total. AIG wrote approximately $3 Billion in reinsuarnce premium.

AIG as a Surplus Lines Carrier

AIG is a significant surplus lines carrier with approximately $8 Billion in writings. Again, while this is a  significant amount, it does not make AIG indispensable to world markets.  

Effect Of An AIG’s Failure On The Market Place

AIG’s Insurance Companies are and have alsways been fully funded and have met all Natoinal, State and Local Capital requirements.

These same companies are being packaged for sale at this time. The stated goal of the sale – to use the funds from the sales to repay the Governments $180 Billion bailout. (Unfortunately, the assets are only worth $100 Billion, at best – $80 Billion short of expenditured     todate).  There is no “survival plan” for AIG. There is no plan for an AIG at the end of the day. The liabilities are being liquidated – the assests are being sold off. You might describe what is being done as a “disorganized, unpackaged, Government supervised, taxpayer funded, bankruptcy”. But I digress – if AIG’s Financial Services Business would have been allowed to fail the Insurance Divisions could have been sold to lessen the loss or, if the marketplace would not purchase those assets (the standard insuarnce divisions), the Insurance Marketplace could have absorbed the AIG book of business in very short order.

Contrary to the scare tactics being used to justify the bailout, no one would have gotten up in the morning to find they could not secure auto insurance or home insurance or commercial insurance for their business. Any claim to the contrary is pure fiction.          

 AIG accused of reckless price cutting to keep business

Dec. 12, 2008 – Officials for American International Group (AIG) are cutting insurance premiums to win new business and boost market share at the possible detriment of the United States taxpayers who are the unwilling investors of nearly $153 billion in the struggling insurer, according to critics and competitors who say now is the time to raise rates and not cut them.

Some critics cite the recent drastic rate cut an AIG subsidiary gave to Las Vegas’ McCarran International Airport when it cut the organization’s commercial insurance premium by 60 percent.

The competition is out there, using AIG’s current financial difficulties in their marketing attempts to “take” AIG business away. AIG has had to respond with “price cutting” to retain business while it tries to sell off its business units/assets. The actual marketplace contradicts the dire scenarios depicted by the alarmists. AIG’s competitors are trying to dismantle the Insurance Divisions through competition rather than purchase.

One Response

  1. Auto Insurance is important to have… but what about refunding our unused premiums… Guess that’ll never happen! LOL

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