AIG Talks The Market Walks - Not!

One thing for sure, if AIG says to go left, I say right. If they say up, I go down. If they things are doing well, I sell left and right. This is a company that spent the better part of a century building up $100 billion only to blow it all in one year. And now, mesteriously, they claim to be able to repay the tens of billions of government support. So, one might ask, how the hell how can they do this?

http://www.bloomberg.com/apps/news?pid=20601087&sid=aSLUz5uq_wgY

Seriously, how can they do this? Rumor has it that AIG is drastically cutting premiums and stealing customers to bring in cash. This, if true, brings in cash on the front end and loses money on the back end as losses mount. Insurance companies have this little thing called a loss ratio. If they pay out less in losses than the premium they collected, then their loss ratio is less than 100. If they pay out more in losses than premium, their losse ratio is over 100. Many companies can make some money even if their loss ratio approaches 100 if their investments make money. Obviously, most companies did not make money the past couple of year on investments. Moreover, capital for the insurance market has dissappeared, so in short order insurance premiums should be going up, as in what is called a hard market. Not happening yet due to companies like AIG selling policies at stupid prices to bring in cash, but it will happen. And what happens when a company sells insurance policies a stupid prices? You figure it out.

I will have a lot more to add over the weekend but am rather busy right now. Still, AIG's demise was somewhat celebrated in the industry as they were not viewed as the best company in the country by their peers. In code, they were hated by the other companies in their sector. I will not explain why, but they earned their reputation. Yet, we taxpayers are spending tens of billoins bailing them out. Nice.

Disclosures: My company is in some remote respects in competition with AIG.