Today the financial news was pretty grim.
The Dow Jones Industrial Average dropped 300 points. American International Group (“AIG”) may need $30 billion more in federal money.
AIG’s troubles have nothing to do with its insurance companies. As recently as December we settled a substantial case with AIG with no fuss and payment within 2 days.
AIG is being dragged-down by financial guarantees which have nothing to do with the traditional business of insurance. Ironically, AIG’s insurance companies are safe, sound, and paying claims.
The various AIG insurance companies, such as National Fire Insurance Co. of Pittsburgh, PA, and New Hampshire Insurance Co., are traditional insurance companies which insure property and casualty losses, such as fires, property losses, construction accidents, and car accidents. These insurance companies are regulated by the various state insurance departments so that certain levels of liquidity, solvency, and reserves are maintained. The states have regulated insurance so that the insurers remain solvent and are able to defend and pay claims in the future.
In comparison, the financial guarantee market is unregulated. The parent company, AIG, jumped into guarantees of mortgages and other financial products held by third-parties. AIG bet the farm on these high risk guarantees. It lost. Now, the US taxpayer is footing the bill.
AIG insurance companies will be sold-off. AIG is looking to get a fair price for its insurance companies, but the potential suitors are keeping their purses tightly closed. It seems that only bargain hunters will be willing to pick-up the AIG pieces.
In the meantime, AIG is trying to convince its commercial insureds that its insurance companies are a safe bet. I read that its insurance companies are offering premium discounts and concessions to keep its commerical insureds. If the insureds flee AIG, then it is good bye.
The whole thing is a an American International mess.
Mark E. Seitelman, 3/2/09, www.seitelman.com.