Friday, April 22, 2011

Car and Auto Insurance: AIG Insurance review

American International Group, Inc. (“AIG”) founded in 1919, is a holding company for numerous financial services business operating in over 130 countries. AIG owned and operated the largest collection of United States and foreign-based property-casualty insurance companies – offering coverage for both businesses and individuals. It also owned one of the largest US and foreign-based group of life insurance companies, and many retirement services and other financial services and asset management companies.

Until recently AIG was one of the largest, and was regarded as one of the strongest, insurance and financial services companies in the world. As it said with pride at page 13 of its 2005 Annual Report, “Because of our diverse business mix and substantial capital base, we are not overly dependent on or vulnerable to conditions in any single region or on a particular string of events.” It turns out that AIG was both arrogant and wrong.

As result of a series of incredibly bad bets – including its guaranteeing credit of hundreds of billions of dollars worth of mortgage bond-like securities -- AIG would have gone insolvent during the week of September 15, 2008. It was temporarily saved by an unprecedented Federal Government promise to infuse up to $85 Billion into AIG to give new management at AIG time to try to straighten out the situation.

Although each of the separate insurance companies that AIG controlled is separately regulated, and each is legally required to adhere to financial standards and solvency requirements of various insurance regulators on its own, the perceived strength of AIG itself bolstered the standing of each of the separate insurance companies.

The US-based AIG insurance companies were evaluated by the insurance rating agencies as a whole and the same rating was generally assigned to all companies in the AIG group, based on the implicit assumption that AIG would stand behind and support each of them should it need capital. Since AIG itself barely averted bankruptcy – and its future remains uncertain -- that assumption was unfounded.

The management of has no special insight into the financial condition of any of the AIG companies. However, given the numerous interrelationships between AIG and its subsidiaries, and the various arrangements amongst the subsidiaries, the possibility exists that AIG may have inappropriately allocated liabilities and/or certain assets amongst its insurance companies and this may create some risks to policyholders.

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