Hey, friends.  My piece on AIG is done, and I will be posting over the next few days, and resume a more normal posting schedule.  Here it is:

Summary

Aside from the mortgage insurers, the P&C subsidiaries were basically sound, though with some issues such as capital stacking, affiliated assets, etc., as mentioned below.  The non-mortgage P&C subsidiaries didn’t have a great 2008, but they would have survived as standalone entities.

The life and mortgage subsidiaries are another matter.  Without the help of the US Government, many of them would have failed.  Even now, given the levels of affiliated assets, capital stacking, deferred tax assets, etc., they are not in great shape now should there be another surprise.  Profitability is likely to be lower in the future than in the banner years of the middle of the 2000s decade.

Introduction

When the economic history books get written about the crisis at the end of the 2000s decade, the difficult analyses will involve Fannie, Freddie, Lehman, AIG, and the large banks that failed.  The degree of leverage employed, both explicit and implicit, will be quite a tale, as will the abandonment of underwriting standards.

This piece is meant to deal with the company that I view as the most complex, and the most levered - AIG. There have been many attempts to explain the problems at AIG, with most of the attention paid to AIG Financial Products.  This analysis is meant to be complementary to those analyses, because I will focus on AIG’s regulated US Life and P&C subsidiaries.  I have gone through the Statutory books for these subsidiaries, and there is an interesting tale to be told.  (A better story than how I got the Statutory data, even.)

Flashing back

Several incidents shaped my perception of AIG over the years.  Working there in the domestic life companies from 1989-92, I heard the AIG mantras:

• 15% return on average equity is the golden rule of AIG. Subsidiaries and divisions that cannot meet that will be eliminated.
• We exit business lines that cannot meet our return goals.
• Keeping the AAA rating is of utmost importance.
• Our accounting should be conservative.
• Keep expenses low.
• Few people make it past five years at AIG, but if you can survive that long, you will be a lifer, and you will be rewarded.
• We didn’t take over The Equitable because we couldn’t get to the 15% target.