AIG Round Two…
What a difference twenty four hours makes…
The Federal Reserve just kicked in with an $85 billion loan. You can read about the details here. The bad loans, the CDS sideshow and everything else can be found there, in part at least. I just don’t think it’s relevant and it just won’t work in the long term.
My take on the AIG mess and how this may not get better…
They’re primarily a property and casualty company who just got kicked in the ass by a market they, for the most part, ‘just dabbled in’. I’m pretty sure the personal and commercial insurance lines are the only income stream AIG have left, outside of plane leasing and lift ticket sales, and I’m just not sure how high confidence is in that market at this point. Insurance is more an act of faith than a business contract when all is said and done.
AIG resides in Texas, which was just devastated by Hurricane Ike. They’re the primary insurer, either through themselves or subsidiaries, in that area and are going to be on the hook for huge payouts in the next few months. That’s just the tip of this ice burg though.
Maybe the Federal Reserve is already busy hacking up the property and casualty lines, shifting the risk around to different companies… but no company in their right mind is going to take on Ike’s damage willingly and they honestly have no reason to. Given the lack of care given to the financial market end of the company, I don’t see Allianz or ING believing for a second that any care was given to the property and casualty lines. Any company that does try to take these risks on is going to get jackhammered by Standard and Poor as well, since their rating is based partly on how well the company could respond, if at all, in the event of catastrophic loss. The more risk you take on when measured against profit, the lower your rating goes and most policies do not turn a profit for upwards of ten years, home and auto insurance being the longest.
At best, they’re asking a lot of companies to buy a book of business, or a part thereof, with highly dubious merits, while at the same time wiping out AIG’s ability to make money. Seeing as how the Fed just bailed them out, the other major insurers in the world really don’t have a horse in the race anymore… at least for the time being… and it’s not like you can coerce or force foreign companies into a shotgun wedding. Maybe there’s enough of a domestic market to absorb the policies, but AIG got where they were by buying out most of the domestic market.
At worst they keep the policies, then start defaulting or even refuse to pay for a few months and that income stream starts to dry up anyways. Maybe there is cash on hand to take care of the claims, maybe the Fed will just print more money to do it for them. Between Ike and the winter months being a serious ‘burn season’ for any insurer though… and they were the largest.
That’s a helluva lot of ‘maybes’ for an industry that functions entirely on trust between the insurer and the insured.
For what it’s worth, the people saying that it’s still solid and profitable are pretty much getting paid to say that. It’s like they’re so caught up in the bad loans and credit crunch aspect of the business and trying to bail that out, they’ve forgotten what AIG actually does or how it actually works. They’re telling people how absolutely screwed the company is and that they’re hacking it up while at the same time asking them to remain confident in them and keep on making those monthly payments.
Shorter: I stand by my previous words yesterday, if you have paper with AIG on it, CUT THE FUCKING CORD. Protect yourself, your family and your investments/property. I know words like ‘meltdown’ and ‘apocalyptic’ are scary as fuck, but don’t let them terrorize you into blind loyalty of a company that just betrayed you. Get yourself a quality broker or CFA you can trust and discuss your options, in depth.
Things I done stole, seriously, what the christ!?!