By DAN REYNOLDS, senior editor
The blows, when they began falling, were heavy and bone rattling. A first quarter 2008 loss, reported in May, of $7.81 billion, followed in August by another haymaker, the announcement of a $5.36 billion second quarter loss.
Those are horrific one-two punches for any business to take and by mid-September, American International Group Inc., the largest commercial insurer in the U.S., had no more legs under it. Both arms were draped over the ropes. Its right eye was swollen shut and it was bleeding from the mouth.
Into the ring stepped U.S. Treasury Secretary Henry Paulson with the spit bucket, the cut ointments and the towel in the form of an $85 billion federal loan to be paid off over two years at 11.5 percent. But where does that leave the risk managers, so many of whom have the involvement of AIG or a subsidiary on some level of their programs.
The federal government's lifeline gave everyone a minute to catch their breath, but just a minute. Depending on their renewal dates, some risk managers and their brokers had to get busy right away moving lines such as directors' and officers' and aviation coverage to other carriers.
Many were looking a couple years down the road, wondering whether with the buckling legs of AIG and its soured real estate investments, it meant the coming of the hardening event that the market had been watching for these past two to three years.
It wasn't his first thought, but here is how an executive with one major brokerage responded when asked to look long.
"I think you have to look at it this way," said Mike Crowley, the president of the Glen Allen, Va.-based brokerage Hilb, Rogal & Hobbs. "One, there is still plenty of capacity out there. I think had AIG declared bankruptcy and been unable to write coverage, it could have had an effect on capacity which could have had an effect on pricing."
But as Crowley pointed out, that's not the case--AIG is still alive. What the future will hold, many are trying to work out and no one really knows.
"Obviously, there is still a lot that we don't know about the AIG situation and the transaction that was announced last week and we are very sensitive to the fact that the situation remains fluid," said Stephen McGill, chairman and CEO of Aon Risk Services during a September 22nd update call on the AIG crisis with clients.
What is clearer, according to McGill, is that AIG's $85 billion loan at 11.5 percent is going to generate interest-only payments of about $10 billion per year for the U.S. government. That's some very expensive help.
"So it's quite clear to us that selling and divesting of assets is going to be a priority," said McGill.
And in the short term, rival carriers are going to be licking their chops and picking up risk management clients who don't want to be the ones who end up telling their superiors that they failed to take action when AIG's credit ratings were weakened to the degree that they have been.
"Certainly some buyers are exploring other options, that's a given," said HRH's Crowley.
One risk manager with a U.S.-based company with international operations said some issues will be more pressing than others for risk managers.
"It is sort of a coverage by coverage issue," this risk manager said. "Some are more sensitive than others. On the directors' and officers' side it is certainly pressing. But other issues now with the reported bailout are not as critical and we are evaluating our cancellation and rewrite costs," this risk manager said.
For its part, AIG has said what it won't do.
AIG executives have said publicly that domestic commercial and foreign general insurance are at the core of its business and won't be sold.
And many risk managers, particularly with big companies with complex towers and traunches of layer and excess layers, may not have all that much flexibility to just pull AIG wholesale out of their programs.
"The larger the account, the higher the market share and the more AIG entities that are involved in the programs," said Aon's McGill. "That point of emphasis does tend to play out in many of the international markets and in every category of commercial lines insurance AIG is a top-five market."
That being said, McGill said there are plenty of well-heeled competitors ready to step in.
"There is a substantial additional capacity available in the market place and clients have choices including with a number of carriers that are more highly rated than AIG," McGill said.
Bob Hartwig, the president of the New York-based Insurance Information Institute, said all he has to go on, like many of us, are AIG's statements of its intents at this point, bloodied and bowed as the company is.
"I have to take AIG's statement at their word, they are open, they are paying claims, they are developing new products for their customers," said Hartwig.
"And they intend to be a formidable competitor in the marketplace. They have stated that they are not going to lie down and let others cannibalize their business. So they have every intent of seeing this through to the end," said Hartwig.
Whatever that end may be, these are historic times in the financial sector, and not just because of AIG's situation.
"Seeing what we saw with Lehman and Merrill Lynch and AIG in such a short period of time and you know with the speculation with Washington Mutual and these are clearly unprecedented times," said HRH's Crowley.
October 15, 2008
Copyright 2008© LRP Publications