It's a record! But what does it mean?

There are times when someone runs faster, jumps higher or throws something faster than anyone else and we all rejoice. This is sporting excellence. It will go into the records books with pride until another superlative performer comes along and surpasses it. But not all records bring joy. AIG has just reported a loss of $61.7 billion in the fourth quarter of 2008. This is a completely different kind of record. It is the largest fourth quarter loss ever recorded in the history of business in the US. This giant of the insurance world has made a loss in the last five quarters, losing more than $100 billion in total. The US Government has just agreed to put in a third slice of money to bail it out. It seems AIG is too big and important a player in US and international markets. It cannot be allowed to fail. Looking first at the taxpayers, what protection are they getting? AIG has agreed to make two of its units available as collateral for the latest “loan”. The two units are the American Life Insurance (Alico) and American International Assurance (AIA). AIG has been attempting to sell these units. Now the government will take an equity stake in both units.

What happens to the policy holders? Well, it is the usual good news and bad news. The good news is that all the policies issued by AIG and its subsidiaries remain valid and enforceable. The bad news comes in two parts. Because all the premium income has been invested until it is needed to pay out claims, the global falls in stock exchange values have wiped out a significant part of the company’s capital value and denied it investment income. It no longer has as much money to cover claims. Where policies have an investment element, those policies have lost value. The second problem is that AIG was a major player in the subprime mortgage market and was hit by the unusual number of hurricane damage claims over the last two years. It is therefore on the verge of bankruptcy because property values continue to fall and catastrophic weather claims have to be paid.

The majority of life insurance policies are sold with an investment element. The idea is simple. Over time, stock exchange values have risen, so investing a percentage of premiums in shares with different levels of risk attaching to them has always seemed a reasonably safe option. In historical terms, there is no doubt this recession will pass and share values will recover. In the meantime, death benefits will fall. You need to look at whether the likely amounts payable in the event of a death this year will meet your future needs. It may well be worth working that little bit harder to pay down your current debts or looking at the costs of restructuring your current life insurance cover. Any additional investments made now will represent better value as the economy recovers. If you have any disposable income available, it makes sense to talk over the options with your life company.