Threats to World’s Largest Insurer Exist Beyond Subprime Market
While many investors express concern about the health of American International Group Inc. as it relates to exposure in the rocky subprime mortgage market, some say there may be other areas of concern that warrant just as much attention.
AIG is a major participant in the business as a mortgage investor and lender, and as a seller of mortgage insurance, but its subprime exposures look contained. In fact, the insurer’s third-quarter earnings, due to be reported after close of today’s market, may reveal that AIG’s core insurance businesses could be battling a host of challenges from other sources.
The report comes just days in the wake of an announcement by former chief Maurice R. "Hank" Greenberg, who retired in 2005 as AIG was under investigation for its accounting, that he was declaring his interest in "strategic alternatives" for the firm. Greenberg controls a substantial quantity of AIG shares and appears to desire a shake-up of sorts.
Hard markets are so-called in the insurance industry when policy prices climb and capital flows into the industry in pursuit of rising profits, the opposite of perilous "soft" markets, when the resulting competition drives prices down. Softening prices seem to be setting in for some lines of commercial insurance -- such as directors and officers' coverage. Pressures to retain market share and invest growing piles of cash often tempt carriers to sell policies too cheaply or with loose terms. Ultimately insurers pay the price when claims roll in, sometimes years later.
Competition is also intense abroad, which can reduce profits in areas where potential for growth is greater than it is in the mature U.S. market. A prime example is Japan, where domestic and foreign insurers alike, including AIG, are jockeying for position in the life insurance and retirement services market, seeking to serve a wealthy, aging population.
Furthermore, the threat posed by natural catastrophes cannot be discounted. Two years of gentle hurricane seasons have helped boost insurer profits, but just one major event could be costly. For example, in third-quarter 2005 when Hurricane Katrina hit, AIG posted a 36 percent drop in net income.
Published on November 7, 2007
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