Insurance Meltdown, Too? Not Exactly

With the financial tanking of AIG-a major aviation insurer-should owners flee to other companies? For now, the answer is no. AIG appears solvent, but not untouched.

The depressing drone of bad economic news yielded one little nugget that especially caught the attention of many owners last month: AIG, the insurance giant, was overleveraged and on the ropes. Deemed too big to allow to fail, the federal government engineered a hasty bailout package that has since ballooned in cost.

What does this have to do with the AIG policy on your Skyhawk? Or your USAIG policy on your Bonanza? Is the insurance business about to tank along with the stock market?

Not exactly, but thats not the same as saying AIGs well-regarded aviation insurance division hasnt been nicked by the credit crisis. It has, but only as a result of a general loss of confidence in certain businesses in general. For a detailed report on this, click on the podcast link at right, which appears on our sister publication, In that audio segment-no MP3 player required, by the way-you can hear an explanation from our aviation insurance guru, Jon Doolittle. But heres the summary:


First, lets get the players straight. AIG is the American International Group, which has four major lines of business: General insurance, life insurance and retirement services, financial services and asset management. The insurance segment casts a wide net and has traditionally included specialty markets such as aviation hull and liability insurance, a market it dominates.

As with other security houses, AIG got into trouble because it got upside down in a large volume of mortgage-backed securities whose value tanked with the bursting the real estate bubble. But the insurance segment operates independently and, according to Doolittles research, appears to be sound and profitable.

But that doesnt mean it has remained untouched. The company is now in the self-fulfilling-prophecy phase of the credit crisis. Beginning in September, brokers began hearing from their clients asking about AIGs solvency and the status of their policies. Was AIG still writing and paying claims? Yes to both.

The Great Flight

But acting on their own, some customers up for renewal with AIG opted to bail for other companies-we don’t know how many-and some may have been advised to do so by brokers. If that flight becomes large enough, AIG could conceivably bleed enough revenue to become marginally profitable or even insolvent for reasons unrelated to the credit crisis. If that sounds like garden variety panic, it is. Although many of the bank failures and mergers have caught outsiders by surprise, we havent seen anything to suggest that AIGs insurance unit is on the ropes and its business is carefully monitored by a handful of state insurance regulators.

A.M. Best, which tracks and rates insurance companies, gives AIG an A rating, having dropped it from A+ about a year ago, prior to the companys financial troubles. Relying on Bests evaluation, we don’t see any reason to flee AIG if youre happy with the premiums. AIG has generally rated highly on claims performance and we see no evidence that this has changed in the current financial climate.

By the way, USAIG is an entirely separate and unrelated company, although some owners may have assumed otherwise. Its sub-companies are rated A or better by A.M. Best.

We also checked with the industrys only direct writer, Avemco. The companys Jim Lauerman told us that other than a chill of buying/selling activity in the market due to tight credit, Avemco has not been directly squeezed by the financial crisis. As do most insurers, Avemcos earnings accrue directly from premium revenue, not funds invested in securities or other financial instruments.