Insurance giant AIG fights for survival

American Insurance Group, the largest U.S. insurance company and a major financial services provider, needs a $75 billion infusion of capital to stave off collapse.

News about AIG's dire situation surfaced on the same day that venerable Wall Street investment house Lehman Brothers said it would file for Chapter 11 bankruptcy protection and Merrill Lynch agreed to a $50 billion buyout from Bank of America.

A failure at AIG would have ripple effects around the world because it is so ingrained in facilitating financial transactions, in addition to providing insurance products to individuals and corporations.

AIG provides all types of business insurance, including cargo liability insurance, hull protection and indemnity insurance for vessels and crews, and marine liability insurance for transportation providers and port facilities.

AIG subsidiary Lexington Insurance Co. this summer began offering liability insurance for truck brokers who match shippers with available motor carrier capacity after courts ruled that brokers that didn't perform adequate background checks on carriers could be liable for accidents caused by the truck driver. It also introduced an insurance product in conjunction with the Marsh brokerage firm to protect shippers from disruptions to their supply chains caused by strikes, pandemics, loss of a supplier, transportation bottlenecks and other events.

Major marine terminal operator Ports America is owned by an AIG subsidiary called Highstar Capital, but as an infrastructure investment fund it has many investment partners and would be largely insulated from any fallout at AIG.

The crisis at the three major U.S. financial institutions stems largely from taking on too many risky securities tied to the housing market, which has tumbled in value during the past year and has seen an epidemic of foreclosures. AIG took on water because it underwrote complex deals to bundle packages of mortgage-backed subprime securities. Those investors are now losing money amid a rash of mortgage defaults and AIG has been forced to write down the value of its mortgage guarantees. It has lost tens of billions of dollars in the past year.

AIG's stock fell 61 percent in Monday trading as ratings agencies cut the firm's debt rating and investors worried whether the company had sufficient funds to cover a run on its capital. On Monday, the state of New York said it would allow AIG to borrow $20 billion from its subsidiaries to shore up its capital levels, but the ratings agencies said that move was not sufficient to protect its creditworthiness.

Several news organizations reported that AIG asked the Federal Reserve for an emergency loan guarantee and is in a race against time to sell assets and raise additional capital. The ratings downgrades allow partners in complex financial deals to seek an additional $14.5 billion in collateral or exit contracts, and make it more difficult for AIG to borrow money.

AIG views the request to the Federal Reserve as a temporary bridge loan to give it time to sell of assets and other private equity groups are prepared to inject cash into AIG if the Fed backstops AIG's restructuring plan.

Analysts say it is unlikely the Fed will bail out AIG, business news outlets cited sources that said the central bank has asked Goldman Sachs and J.P. Morgan Chase to open a $70 billion to $75 billion line of credit for the insurance giant.

AIG likely would sell its domestic automotive business and its annuities unit, and is considering the sale of its aircraft leasing unit, International Lease Finance Corp, the Wall Street Journal said.

AIG is also considering selling its Transatlantic Holdings reinsurance group, its consumer finance group, its financial products division a leasing unit, according to the Financial Times.

The immediate impact on AIG insurance customers is likely to be minimal, according to a insurance industry executive. If AIG doesn't have enough surplus money to cover claims and goes into liquidation, insurance boards in states where its subsidiaries are registered would use special funds to manage payouts to policyholders. Eventually, the fund would probably be replenished by fees on other insurers in the state. Protections for policyholders can vary by state.

Although AIG may still have financial obligations to policyholders if it stays in business or the contracts are turned over to regulators, the larger concern for corporations may be a deterioration in customer service as AIG's resources shrink, the executive said.

Source: American Shipper