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9/19/2008 - Turbulant Times for Global Financial Markets
Steve Aronson
This is a very turbulent time in the US and global financial markets. Many long standing firms are finding themselves in trouble. Some have, unfortunately, failed. Others will survive. American International Group (AIG ) is one of the firms that found itself in a very difficult position.
It should be pointed out that the insurance segments of AIG, the world's largest insurance group, are financially sound. It is the "other" activities of the AIG holding company that found itself in an extremely dangerous liquidity position. As a matter of fact, the insurance segment was so strong that the NY state insurance commissioner allowed the holding company to take $20 Billion as a temporary measure. Despite this transaction the insurance segments of AIG were still able to maintain more than enough capital to satisfy all of their reserving (claims paying reserves) requirements.
On September 17, 2008, The Federal Reserve confirmed that the Federal Reserve Bank of New York will make an $85 billion bridge loan for 24 months to American International Group, secured by all the assets of AIG. This important news for the insurance industry and financial market underscores the perspective of the Federal Reserve Board that “a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance,” according the news release issued by the Federal Reserve. In return, the government will receive warrants giving it the right to buy a 79.9% stake in the company, and a veto right over the payment of dividends on the company’s common and preferred stock.
This action has solidified the financial stability of AIG, for now. It has allowed us to advise our clients not to panic.
AIG released a statement on the loan, describing it as “the best alternative for all AIG’s constituencies.” That followed an earlier statement aimed at addressing policy holder concerns that indicated that the insurance company businesses “continue to operate normally and remain adequately capitalized and fully capable of meeting their obligations to policyholders.”
No state or federal insurance regulators have raised concerns about the claim-paying ability of AIG.
A.M. Best's rating (for claims paying ability) is "A" ("Excellent"). While is has a "negative outlook/implication", a rating of "A" satisfies all criteria for an insurance company's financial ability to pay all claims.
To quote the NY Insurance Commissioner: "If you have a policy of insurance with an AIG insurance company, they are financially strong and solvent. They have the capability to pay on any claims, and our job is to ensure that they continue to have the ability to pay."
While we are prepared to take action if circumstances should change, at the moment, we do not foresee any reason to be seeking replacement policies or coverage at this time or in the near future.
We urge you to visit our website www.aronsoninsurance.com for updated information or call us if you have ANY questions or concerns about AIG, or any other insurance company's financial strength or condition. You may also find more financial information about AIG at A.M.Best: , www.cnn.com , www.msnbc.com and other financial sites.