Wednesday, September 17, 2008

Wonderful Wall Street

Great news this morning from Wall Street.

There will be jubilation in the insurance industry as companies line up to snap up the bargains which will abound as AIG goes down the gurgler and sells off its few remaining assets and it's book of business. Policy holders should have little to fear, provided realistic reinsurance arrangements have been made.

Adolf was chatting to a morose colleague yesterday who asked, who is big enough to buy the largest insurance company in the world? The quick answer was 'It might have been the largest yesterday but today it is worth $70 billion less than it was yesterday."

By the way, it turns out that AIG was only the fourth largest insurer in the US. However, it's directors were imprudent enough to 'invest' heavily in the derivatives market and have been caught out with their sticky fingers in the sub prime cooky jar.

Thankfully, they are not being bailed out by the government.


Do not confuse AIG which is an American company with Australian insurance conglomerate IAG.


KG said...

Adolf, isn't the derivates market where carbon credits are scammed..err, traded, that is?

Anonymous said...

Adolf - Unfortunately you are wrong on a number of counts. policy holders have a lot to fear if AIG goes down.

First misconception: Reinsurance will cease if AIG falls over. There is no contract between the reinsurer and the insurance buyer. Those who have purchased insurance through AIG will lose their premiums and their cover if AIG goes under.

Claims that are under way will will run out of funds available for completion. That in itself is cause for concern for many sectors within New Zealand that have ongoing long tail claims.

On a global basis it also has serious ramifications for insurance buyers in New Zealand. The price of insurance like all market commodities is based on supply and demand. Supply side is determined by the amount of capital available. If AIG disappears, a serious amount of capital will go with it. That means an immediate spike in insurance prices (in an already hardening market) as demand outstrips supply.

The ripple effect from AIG going down will drown a number of smaller players.


Adolf Fiinkensein said...

paranormal, I think you are largely in error although I will concede my comments are mainly concerning the life industry.

The practical reality is that AIG will not fall over before it's book has been sold to other insurers at which time AIG will cease to carry the risk and the reinsurance contracts will pass to the new insurer. In the case of it's NZ operation, there will be significant cash reserves held, as required by the Govt Actuary and claims will continue to be paid provided client premiums are up to date.

The discounted sale of such a book will be very keenly sough after by other players for reasons of cashflow and economy of scale. As far as 'long tail' claims are concerned (such as income protection), these are accounted for in the negotiated sale price of the book. You can expect that discussion will already be under way.

The only serious victims will be the shareholders who will be up for any shortfall. That is the history of the industry over decades.

It is hard to see how the demise of a major player will do anything other than clear the way for smaller players to take up its market share.

Charmaine said...


I think you are wrong about IAG as they are underwritten by AIG and are in as much trouble. I did some checking yesterday on the travel insurance side and had it confirmed.

Anonymous said...

Aha Adolf, we come from different sides of the track. My comments relate to the Fire & General side. I'm not sure how Life reinsurance contracts work but certainly Fire & General reinsurance contracts cease to operate if the insurer becomes insolvent etc, and there is no direct link between the insured and reinsurer.

The long tail contracts I was referring to are the Liability covers (eg. Professional Indemnity)that AIG specialise in.

Charmaine - AIG and IAG are definitely quite separate companies.


Adolf Fiinkensein said...

The latest news a few minutes ago seems to indicate the US Government has bailed out AIG with an $80 bil rescue package. Extraordinary and highly controversial. I can only hope that the conditions of the bail out require an orderly sale of assets over a relatively short term in order for the gummint to extract itself from what should be the preserve of private industry.

Fanny Mae and Freddie Mac were a different story. They were quasi government organisations.

Adolf Fiinkensein said...

According to Fox it's an $85 bil 'loan' with the govt taking a $79% equity share in the business. Sound's a bit Irish, doesn't it?