AIG Pops Wall Street Bubble
By Robert Warne - February 4, 2003With the possibility of war in the near future, it doesn’t take much bad news these days to spook even the shrewdest investors. This would explain why when American International Group (AIG) announced it would take a $1.8 billion after tax charge to boost reserves, investors ran for cover Feb. 4 like a cruise missile had just touched down.
Even though company executives qualified the news as just a blip, the spin didn’t ease Wall Street’s tensions and share prices took their largest dip since 1987.
According to AIG Chairman M. R. Greenberg the fourth quarter charge was necessary because “the liability bubble has yet to contract in our economy.” It will protect AIG from irrational jury awards and liability inflation that could have not been anticipated in pricing he explained.
Greenberg also said that, “approximately 60 percent of the reserve increase will be applied to excess casualty loss reserves, including excess workers' compensation; 25 percent to directors and officers liability; and 15 percent to other casualty, including healthcare liability.”
But unlike many other carriers with extensive asbestos exposure, none of this charge will be applied to asbestos reserves, which the company reports as adequate at this time.
AIG touted that it’s new cash flow for investments from domestic general insurance operations reached a record level of over $800 million for January. And overall for 2002 AIG reported that it has over $58 billion in capitol and around $30 billion in general insurance loss and loss adjustment reserves.
Investors may hit the deck in fire drill fashion from time to time, but all said and done AIG’s 2002 performance makes the company a solid investment even during shaky times.
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