We’re still writing new business and renewals – and have had one of the busiest weeks of the year, says AIG UK chief executive.
AIG UK launched its fightback this week, as chief executive Lex Baugh thanked brokers and clients for their “tremendous support” and insisted the troubled insurer was continuing to write new business and renewals.
In a statement to Insurance Times, Baugh said: “We are receiving tremendous support from our brokers and clients, both through the comments they are making publicly and in the many meetings that we have had with them. We have found them to be very considered in their response to the changing circumstances in which we find ourselves.”
Baugh said the previous week had been one of the busiest of the year, despite widely publicised concerns that brokers would pull business out of AIG UK following the $85bn rescue of its parent company by the US government.
As the drama unfolded on the other side of the Atlantic, the consequences were felt closer to home, with major brokers such as Bluefin ceasing to write new business with AIG at certain points in the week, and rival insurers picking up business at increased rates. At the time of going to press, Bluefin had restarted writing new business with AIG (see box).
Following the US government’s intervention, AIG’s share price rebounded significantly and its government-appointed global chief executive, Edward Liddy, was preparing for a quick disposal of non core assets to restore stability.
Baugh reiterated that there were no plans to sell the UK business. He said: “As our new chief executive Edward Liddy said in his address to staff, there are no intentions to sell either the US or foreign commercial general insurance businesses. He referred to these businesses as core, and described them as keepers.”
Speculation over the disposal of assets has centred instead on AIG’s aeroplane leasing business and US and Asian life insurance businesses.
Baugh added that the UK business was regulated by the FSA and had capital of more than £900m and a financial strength rating of A-plus.
He said: “The financial problems at the parent company were never about the insurance subsidiaries. In areas such as writing new business and paying claims, it is very much business as usual here in the UK. The strengths of this business remain the same today as they were before – underwriting, product development and our ability to meet clients’ need. None of that has changed, nor will it.
“In terms of claims; on average we pay out £4.5 million every working day, and the last week or so has been no exception. Our claims team has been working hard with policyholders affected by recent floods to get them back in business as soon as possible.
“Our ability to trade is undiminished by recent events and AIG UK is still generating significant positive cash flow.
“Our staff have been fantastic through what has been a very uncertain time, but they are now focused on doing what they are best at; helping clients with risks or claims. For example, we have new product launch this week that is going to help private companies and their directors meet substantial increases in liabilities. ”
Advisen: What went wrong
AIG is often described as an insurance giant, but the company also derives income from businesses unrelated to traditional insurance products. The crisis is driven in large part by losses on a type of financial instrument called a credit default swap (CDS) issued by AIG Financial Services, a unit separate from the insurance businesses.
AIG is one of the largest players in the CDS market, with almost 600bn dollars of gross notional exposure in super senior credit derivatives, including 80bn dollars tied to sub-prime mortgages. Its need for cash reached crisis proportions under the tidal wave of defaults under sub-prime mortgages.
As a precursor to the AIG situation, US government regulators seized mortgage giants Fannie Mae and Freddie Mac on 6 September. On 14 September, Lehman Brothers declared bankruptcy and Merrill Lynch, was acquired by Bank of America. On 11 September, S&P placed AIG Holdings credit ratings on negative watch forcing it to raise yet more cash.
The company was unable to raise enough to deal with these increasing obligations, and on 15 September the major credit rating agencies cut its ratings. The rating downgrades significantly exacerbated AIGs already dire situation, triggering contract provisions that required the company to post 14.5bn dollars in collateral. It then faced bankruptcy protection and Chapter 11 reorganisation, until the Fed stepped in.
Advisen is a financial analyst (see: www.advisen.com)