More than a decade on, the consequences of the financial crisis continue to haunt AIG. The insurer gambled recklessly in the credit default swaps market. In 2008 those multibillion-dollar wagers nearly brought down the business and the global financial sector along with it. AIG then required a near-$200bn bailout from the US government, eventually relisting its shares as it shed extraneous lines of business.
AIG has just announced another split. The group plans to separate its life insurance unit from its broader property and casualty business, a move that had been long demanded and long resisted. The life insurance business accounts for about a third of group revenue. The company’s market capitalisation has shrunk to just $27bn. AIG now seems to acknowledge a turnround that had been promised for years simply will not occur.
Poetic justice, perhaps. One reason for the malaise is rock-bottom interest rates that resulted from the global meltdown. Those have severely crimped the investment returns of insurers who wrote policies designed for an era of higher spreads. As a result of coronavirus, central banks are poised to keep interest rates low all the way to the far distant horizon.
Five years ago, AIG had a book value of $73 and just over 66,000 employees. Today, its employee count is down to 46,000 and its book value per share is under $72. AIG’s stock price is about $31, having fallen 40 per cent this year.
In rosier times, AIG was a sprawling, gluttonous powerhouse. But like other legacy insurers, its cost structure and underwriting practices were not prepared for slow growth and a liquidity-drenched economy.
Fellow insurance titans MetLife and Prudential Plc have in recent years announced their own substantial break-ups. Private equity firms have jumped into the sector hoping to buy up distressed books of business and then redeploy customer assets into riskier loans and bonds. Start-ups such as Lemonade have tried to use technology and the lack of a legacy underwriting business to reinvent the insurance sector.
AIG will, just have to keep muddling along. Like an old soldier, it will not die, just slowly fade away.
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