AIG - Scared new world

When the president of the United States needs to ask congress to ratify a $700bn government bail out of the banking system, you know that the world's economy is in trouble. AIG, HBOS, Merrill Lynch and Lehman Brothers have all been high-profile victims of the sub-prime mortgage crisis and the credit crunch, which is now hurting the 'real economy' (see the PB Sentiment Survey on pp.41-48 for your reactions to the credit crunch).

Contrast

AIG's problems come despite former chief executive Martin Sullivan telling PB's sister title Reinsurance in June: "The fundamentals of this business are very secure. The franchise is very much intact. Morale is good. The company has shown tremendous resilience and I have no doubt that our best years are yet to come." That was Sullivan's last interview before leaving the company and the US Federal reserve has since bailed out AIG with a $85bn loan for an 80% stake in the company. Lex Baugh, chief executive of AIG UK, spent the week trying to reassure brokers that their customers' policies were protected, even taking time to plug a new product called PrivateEdge, which helps private companies and their directors meet substantial liability increases.

The upheaval in AIG's fortunes has led brokers such as Marsh to warn that clients may not be happy renewing their policies with the US giant.

Stuart Reid, chief executive at Venture Preference, said: "We place a substantial amount of business with them (AIG). We have had them on credit watch through our security committee. We are offering alternatives on every renewal and keeping the client informed. We took a hard stance initially and have softened it since. If the situation changes, we are ready; it depends on the clients if business moves." Meanwhile, Jelf has confirmed it will not write new business with the insurer.

Closures

The impact of the financial crisis is set to hit the high street and the real economy soon. Statistics from the Ministry of Justice have shown that 3,000 companies in England and Wales wound up in the second quarter, an 11% increase over the same period last year. Reid warned: "Clients are struggling and we are seeing more insolvencies and reductions in sums insured. It is having an impact on our clients and our business. One would argue that the insurers will have no alternative to put up rates in six months time: we cannot be far away. Insurance is underpriced."

As PB went to press, sources at AIG suggested that a restructure announcement was due for 3 October.

AIG's future outlook Lex Baugh, chief executive at AIG UK, spoke to PB.

What has been the impact from brokers and insureds?

"We are tremendously grateful to our brokers and clients for the support that they are showing us. We have found them to be considered in their response to the changing circumstances in which we find ourselves and keen to hear from us. There are two issues that concern them: what financial protection is in place and what the strategy is going forward.

"We have a financial strength rating of A+ from a major rating agency. AIG UK is regulated by the Financial Services Authority and it has capital of over £900m; it continues to comply with all applicable regulatory requirements."

As for future strategy, our new chief executive Edward Liddy has referred in public to the fact that the US and foreign commercial general insurance are "core to the business" and described them as "keepers".

Would you describe the situation as business as usual?

"The financial problems at the parent company were never about the insurance subsidies. In areas such as writing new business and paying claims it is business as usual. The strengths of this business remain the same today as they were before: underwriting, product development and our ability to meet clients' needs. None of that has changed.

"Obviously, in the week that the Federal Reserve loan was agreed, business dipped slightly. However, sentiment has definitely come back in our favour and we are seeing the expected levels of both new and renewed business."

What are your targets for the future?

"Our ability to trade is undiminished by recent events and AIG UK is still generating significant positive cash flow. Our staff has been fantastic through what has been a very uncertain time. We have an ongoing pipeline of new products and most recently we launched significant enhancements to our PrivateEdge policy, helping private companies and their directors meet substantial increases in liabilities."