AIG insurance "house of cards"
a risk to Thai financial markets?
By Jon Fernquest |
A "house of cards" is one metaphor Nobel Laureate economist Joseph Stiglitz used to describe the latest events in the US Subprime crisis this week (Read Guardian article and Economist View blog, and see photo of a house of cards on the right).
American Insurance Group (AIG), the world's largest insurance company, became the latest casualty of the US subprime financial crisis yesterday when its share price fell 60% (Read an explanation of recent events and an explanation of the unregulated credit default swap market (basically insurance against loan defaults) that AIG is a central player in, also read Economist View on the psychology of financial panic and bank runs as well as Wikipedia, and how similar derivatives have made Thai economic policy more difficult).
In the end the US central bank (Federal Reserve) provided AIG with an $85 billion loan in exchange for an 80% stake in the company.
This means that the US government now owns 80% of the largest insurance company in the world. (Read NY Times article cited in Economist View blog).
AIA Thailand, a Thai subsidiary of AIG, is the largest life insurance company in Thailand "with a market share of over 50% and over 5.8 million life insurance policies outstanding." The company was founded in 1938.
Possible effect on AIA Thailand and the Thai economy
As Finance Minister Surapong Suebwonglee noted yesterday AIA Thailand "has reserves many times that required by Thai law," so insurance policy holders in Thailand should be insulated from events in the US:
"AIA is regulated under Thai law and as of July, had reserves of 286.67 billion baht, more than enough to cover its liabilities. Mrs Chantra said the reserves were separate from its parent AIG.Total assets as of July for AIA were over 383.06 billion, with retained earnings of over 70 billion baht. Capital funds totalled 69.24 billion baht, or 1,107.67% of the legal capital minimum.
Mrs Chantra added that under Article 32 of the Life Insurance Act, any profits or fund transfers to shareholders, including any possible transfer from AIA to its overseas parent, must first be approved by local regulators.
The law also requires life insurance firms to maintain a major portion of investment assets in the country, predominantly in low-risk, long-term securities."
Sounding a dissenting voice Voravan Tarapoom, president of the Association of Investment Management Companies, warned that there was "no explicit guarantee given for policyholders. Customers might believe that their funds are 100% safe, but they are not."
AIG Retail Bank in Thailand is also a subsidiary of AIG. The banks finances and liquidity are strong. The bank's capital ration of 24% is far above the sector average of 15%.
(Source: Bangkok Post, front page, 17-09-08, POST REPORTERS, temp-link)
Vocabulary:
house of cards - 1. a game where the players stack playing cards on top of each other, building a house, being careful to not let it fall down, 2. also an expression for a system built on a shaky foundation that will collapse easily (See Wikipedia)
a metaphor - describing one thing by comparing it with another, "language that directly compares seemingly unrelated subjects, that describes a first subject as being or equal to a second object in some way. Thus, the first subject can be economically described because implicit and explicit attributes from the second subject are used to enhance the description of the first. This device is known for usage in literature, especially in poetry, where with few words, emotions and associations from one context are associated with objects and entities in a different context" (See Wikipedia)
Joseph Stiglitz - Nobel Prize winning economist and critic of the IMF (See Wikipedia and website)
American Insurance Group (AIG) - the largest insurance company in the world based in New York City (See Wikipedia)
a casualty of Y - harmed and damaged when bad event Y happens
a bank run - when the public suddenly loses confidence in a bank or banks, runs to the bank, and tries to withdraw their money (See Wikipedia)
panic - a sudden strong feeling of fear and confusion (See glossary)
derivatives - futures, options, swaps, etc (a financial asset that "derives" it value from other financial assets such as stocks, bonds, commodities, interest rates, exchange rates, and stock price indices; See Economist Glossary and Wikipedia)
a credit default swap - a transfer of credit risk through a derivative instrument, insurance against loan default (See Wikipedia)
US subprime financial crisis - a financial crisis that started in the US from low quality home loans and has now become a global financial crisis (See Wikipedia on the crisis and a timeline)
Federal Reserve - the US central bank (See Wikipedia)
a stake in a company - owning part of a company
American International Assurance (AIA) - a large Asian insurance company, "an insurance company based in Hong Kong. It has offices in Asia-Pacific region including China, Australia, New Zealand, Japan, India, Malaysia, Macau, South Korea, Thailand, Singapore and Vietnam. It is a member of American International Group (AIG)" (See Wikipedia)
AIA Thailand - the Thai subsidiary of AIA (See website)
a subsidiary - a company owned by another company, part of another company (the parent company)
life insurance - a contract to pay money if someone dies, used to protect a family against the loss of income of a parent, a life insurance policy holder pays monthly premiums to receive this insurance (See Wikipedia)
life insurance policies outstanding - how many people are insured, have life insurance policies
policyholders - people who pay monthly premiums for life insurance
reserves, bank reserves - the percentage of total deposits that a bank holds as deposits at central bank, plus currency physically held in bank vaults, the central bank sets minimum reserve requirements (See Wikipedia)
insulated from Y - protected from negative effects of bad event Y
capital funds - money invested in a business for use in conducting the operations of the business
the Life Insurance Act - Thailand's laws on life insurance in the country
sounding a dissenting voice - give the opposite opinion that most people are giving
explicit - openly and clearly stated (opposite of "implicit")
implicit - not stated directly, indirect, must use inference
a guarantee - promise that something will happen
a explicit guarantee - clearly stating and promising that something will happen
AIG Retail Bank - the largest local retail bank in Thailand, still a lot smaller than full-scale commercial banks (See Wikipedia)
liquidity - have necessary cash on hand to continue business operations
