Founded primarily to do business in China by Cornelius Starr (by all accounts both a good person and terrific businessman), insurance giant AIG has long been among the largest property and casualty insurers in the world.
That history may have a final chapter, written this week. Some reports indicate AIG may not make it past Thursday. At this moment the stock is trading at $12 a share, down 30% today and 83% from its 52 week high. The share price is now trading well below the company’s (reported) book value of $29 a share. That book value appears to be highly suspect, as it includes $20 billion in subprime mortgage securities, carried on the books at a discount of 31%.
The fall of AIG has a human dimension that is rather close to home; I worked at AIG in the mid-eighties, and know a number of individuals who continue to get their paychecks from the company. Most have a good chunk of their savings in the company’s heretofore terrific employee stock plan – savings that have all but disappeared as AIG craters. AIG’s senior management is rough, brutally competitive, arrogant – and historically very successful. That success has been delivered by the company’s 116,000 employees, many of whom now find their previously rosy financial future has been destroyed.
To show how fast things move, AIG stock is now at $5.89, fifteen minutes after I started this post.
The trigger for a collapse would be the threat by ratings agencies to downgrade AIG’s credit rating – a move that would allow AIG’s counterparties to pull their capital and business out of the company. Many of AIG’s insureds require the company to maintain an “A” rating from AM Best or similar rating agency, and if the rating declines the policyholders have the right, and in some cases the legal obligation, to cancel their coverage and move it to an A rated firm.
2008 has been awful for AIG – the company lost over $18 billion so far, due in part to the drop in value of the company’s investments in mortgage-backed securities and other credit-related investment declines. The credit market collapse – which has affected several big banks, Merrill Lynch, and Lehman Brothers, is also hammering AIG.
I’ll be thinking about the potential implications of this mess more later today, especially for what it may mean for the soft market and what parts of the company may be sold off by an acquirer.
In the meantime, it may well be that a collapse of AIG would cause the insurance market to harden rather quickly, as current policyholders scramble to obtain coverage, brokers push their clients to buy only from insurers with very low credit risk exposure, and insurers raise rates to add capital to bolster their financials.
Sep
15
good stuff