Lex Baugh argues the case for AIG's commerical insurance arm

AIG UK chief executive Lex Baugh has reassured commercial clients that the firm’s insurance operations are separately capitalised and insulated from the parent's financial problems.

In an interview with StrategicRISK, he said: ‘AIG operates its insurance businesses around the world through a collection of regulated entities, those entities are separately capitalised, ring fenced and separately regulated, the entity here in the UK has a standalone rating of A+. I think as the news broke that wasn’t clear amongst our distribution partners and our insured and it has been a campaign to get out there and get that message across. That remains our challenge today.’

Asked if he was sure that the parent would not sell off the UK insurance arm in an effort to repay the massive $85bn loan from the US government, Baugh said: ‘There have been no announcements from AIG in terms of its intentions about what it’s going to keep and what it’s going to sell off beyond what was stated by Edward Liddy (AIG’s new chief executive), which was that the property/casualty division was at the core of the business and he described that as a keeper.’

What does he think about suggestions from rival insurers that they will steal AIG’s business? ‘We operate in a fiercely competitive market and it’s their job to get their proposition out in front of clients. And if this gives them an opportunity to get in front of some clients that they couldn’t get in front of before that’s our loss and their gain.’

But Baugh said it’s more likely clients will reconsider their policies with AIG when it comes to renewals rather than exercising short term cancellations in their policies. He said AIG was committed to maintaining the same level of service and the same underwriting philosophy. ‘We’ll deal with it renewal by renewal.’

Was AIG’s risk appetite too big? ‘I don’t see at this point a reason to generalise that outside of the Financial Products division,’ he said.

AIG’s liquidity problems were mainly a result of its US division, AIG Financial Products, which through credit default swaps assumed many of the risks associated with subprime mortgages.

‘The rest of the businesses have continued to perform well. I don’t think that this was a generic problem across AIG.’

“The terms and conditions of the deal are such that I don't see it giving the insurance companies any access to inexpensive capital or something that would give them an advantage in terms of the market.

AIG UK chief executive Lex Baugh

In a conference call with buyers and brokers, John Doyle, chief executive of AIG commercial insurance in the US told a similarly upbeat story: ‘The events were never about the insurance companies themselves they remain well capitalised. Our insurance companies were never contemplating filing for bankruptcy. They are in many ways better than the last time you renewed your policies with us.’

Is it fair on the market that AIG competes with backing from Washington? 'The terms and conditions of the (bail-out) deal are such that I don’t see it giving the insurance companies any access to inexpensive capital or something that would give them an advantage in terms of the market. I think it was a very considered deal and structured in such a way that it maintains the right incentive for the group to get on with its asset disposal and for the insurance entities to go ahead and continue to trade.’

He was cagey when asked about the rating agencies inability to spot liquidity problems earlier. ‘The rating agencies were not the only ones who didn’t see some of this ahead of time. There’s plenty of blame to go around,’ he said.

‘We build our models around what has happened historically and unfortunately history is not the best predictor of what’s around the next corner. Conventional wisdom was that Americans don’t default on their mortgages.’

What effect will the crisis have on the wider insurance market? ‘I think we are already seeing signs that it will not be limited to the financial sector. For the insurance business, that means usually higher losses arising from increased rates of arson both on the home owner’s side and on the commercial side.’

Liability claims as well are likely to hit the insurance business although there will be a lag before this hits, giving companies time to manage the risk, he said.

‘Insurance is also vulnerable to what is happening in the financial markets in terms of investment income, so we’re likely to see pressure in that area as well. I don’t think there’s going to be a big bang, I think there’s going to be erosion in terms of margins coming from a number of different sources.’

Baugh expects a reasoned approach from the regulators in terms of their response to the crisis. ‘There may be some degree change but I doubt we will see a wholesale change in terms of their direction,’ he said.