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AIG: market working in a vacuum

AIG’s Australian CEO Chris Townsend is manning the phones talking to key stakeholders about the company’s excellent liquidity locally. From Argentina to Uganda, other regional managers of the giant American insurer’s far-flung operations are doing the same thing.

The trouble is, their efforts to reassure their markets are being undermined by what’s happening in the US.

As we reported last week and again today, AIG’s problems emanate from New York, where the parent has been bailed out by the US Government.

But what’s becoming obvious now is that it’s less than a bailout and more of a temporary reprieve. AIG and all its associated businesses will almost certainly be sold off over the two-year term of the government loan.

AIG’s problems stem from some of its exotic financial products, including some that insure debt and bonds against default. The value of these “credit default swaps” – essentially insurance coverage to protect investors against defaulting bonds or debt – have crumbled in the past year as the subprime market has collapsed.

The company had to be saved because it is deeply involved in so much of the US financial industry. It has 116,000 employees and does business in about 100 countries. No one knows what might have happened had AIG been left to collapse. The US Government didn’t want to find out. But they also knew a fire sale of AIG’s assets would result in very low prices.

In Australia, AIG has been losing business over the past week as brokers shift coverage to other insurers. How much has been moved is impossible to estimate, but for many clients the experience of HIH must still be a fresh and unpleasant memory.

While there are critics of brokers abandoning an insurer mid-term when the insurer is insisting there’s no reason to do so, it has to be appreciated that brokers are caught between a rock and a hard place.

As we report today, senior brokers attending the NIBA Convention in Darwin are advising brokers to tread cautiously. Obviously brokers have a duty to make their clients aware of the situation so they can decide what they want to do.

Brokers also should be advising on the impact of cancelling a policy mid-term. It raises questions about refunds, alternative cover and the impact on clients’ possible coverage rights in the future and retrospectively.

But they can’t advise their clients on the chances of AIG pulling through, because they can’t guarantee or warrant the solvency of an insurer.

They have to rely on the ratings agencies. It’s not worth getting into the details of the agencies’ role in this whole mess, but it should be noted that ratings are always heavily annotated with qualifiers. At present the agencies have AIG on their watchlists, even though it’s now 80% owned by a shareholder rated at AAA+.

APRA might be able to provide greater clarity on the local arm of AIG. It has to be assumed the authority is looking closely at the situation, but so far it has said nothing. To a market searching for credible information, its silence has been deafening.

Perhaps that’s because APRA has found nothing to be concerned about with AIG locally. Perhaps it doesn’t want to spook the market any more than it already is. Or perhaps it’s still looking at AIG – regulators do, after all, need time to do the job properly. Whatever is keeping the regulator silent would be nice to know.

 In the meantime the market is relying primarily on AIG’s statements to the market, because that’s about all there is. The insurer was slow at the start as it absorbed the implications of what was going on. As time has passed it has become more communicative.

But while the information being passed out by AIG is carefully factual, the market shouldn’t have to rely on the insurer to find out whether the policies placed and retained with it really are safe. An official assurance – or whatever – would be welcome.