The insurance business is all about risk—understanding it, minimizing it, pricing to compensate for it. But American International Group (AIG), the biggest insurance company in the world, seems to have had very little concept of the risk it held in its own businesses.
Now, AIG has emerged as the latest victim of the meltdown in the credit markets, reeling from a seemingly endless escalation in what it could owe on transactions involving mortgage-backed securitizations. On Sept. 15, management spent the day in a desperate bid to get help covering those obligations from government sources and other institutions. As the markets closed, its stock slid to $4.76 a share, down from a 52-week high of $70 a share, representing the evaporation of $176 billion in market value in less than one year. While regulators were racing to find some kind of capital infusion that could keep the company standing, ratings agencies slashed AIG's credit rating, making it much more expensive for the insurer to do business.
AIG—a company with $110 billion in revenues last year and $1 trillion in assets—has suddenly gone from being the gold standard in its industry to fighting for survival. The sheer speed of its descent has stunned employees, customers, and many in the industry. "It's staggering to see just how much has changed in a very short time," says David Schiff, editor of Schiff's Insurance Observer, and a longtime critic of the company. Even more staggering are the ever-rising estimates of how much capital AIG now needs to cover its obligations. "That's a scary thing. It can be that some things are just unknowable in the high-wire finance a lot of these companies are in."
Governor Paterson to the Rescue
Indeed, it's not clear how much capital AIG will need to get itself out of this mess and survive as a global insurance powerhouse. The $20 billion in capital that AIG has raised through stock and debt offers in May isn't enough. On Sept. 15, it was given access to another $20 billion when the governor of New York state, David Paterson, in an extraordinary move, agreed to relax insurance regulations to allow it to tap its subsidiaries' liquid assets.
Even that is not enough. Paterson said he hoped the state's move would be a foundation on which the federal government could build a bigger solution, either directly or by helping other companies invest in the insurer. Within hours, The Wall Street Journal reported, the Federal Reserve had asked Goldman Sachs (GS) and JPMorgan (JPM) to make between $70 billion and $75 billion in loans available to the company. It's hard to know if even that number will be sufficient to cover AIG's needs. "The short answer," says Donn Vickery, an analyst at Gradient Analytics, who's been writing critical reports on the company since February, "is they took on significant risk in their subprime obligations that they didn't understand. I don't think anyone really knows the risks, and if they say they do, they're fibbing."