These last days have been wild on Wall Street. One of the companies front and center in the news has been the insurance giant AIG. The US government has come to its rescue with an $85 billion loan and sucked up 80 percent of its stock as collateral. AIG has significant assets that will have an impact on the travel industry. We’ll take a look at them.
At least four main areas of AIG come into play — travel insurance, liability insurance, aircraft leasing and limited resort ownership. Fortunately, for the travel industry each of these sections of the company have their own values and should not be horribly impacted by the disintegration of the AIG investments portfolio and their securities arm.
Let’s look at travel insurance. In every case insurance companies are regulated by states and they come under very conservative rules and regulations. The insurance side of AIG is a big money maker for the company, plus it is for the most part solvent because of state regulations. The Baltimore Sun explained the insurance product protection well.
Every state has guaranty funds for life and health as well as property and casualty insurance, and they step in if insurers are declared insolvent. Maryland, like most states, caps payments to consumers at $300,000 for most insurance policies – life, health, auto and home. Annuities are capped at $100,000 of present value.
AIG Travel Guard spokeswoman Carol Mueller sent an e-mail to the WSJ Terminal with additional clarification about the solvency of their insurance products:
AIG Travel Guard’s policies are underwritten by American Home Assurance Company and National Union Fire Insurance Company. Both are member companies of AIG Commercial Insurance (AIGCI), whose substantial capital position is independent of its parent. AIGCI companies remain well-capitalized with a statutory surplus of $26.7 billion and invested assets exceeding $70 billion.
AIGCI’s capital is protected by regulators, ensuring that policyholders’ interests are paramount. AIGCI has ample resources to underwrite business and to pay the claims of our policyholders. Regardless of actions taken by our parent company, AIGCI’s capital position will remain intact and available to underwrite policies.
This insurance side of AIG has more than an impact on only travel insurance policies. Its biggest impact on resorts, airlines and cruise lines themselves is in terms of liability insurance. AIG is perhaps the biggest liability insurer in the world. In the ski resort industry, I’m told AIG provides liability insurance for 70 percent of the ski areas in the US.
These policies will remain in place and are safe, however with the liquidity crunch, these travel industries will certainly be faced with higher premiums going forward.
Few people know about AIG’s massive investment in aircraft leasing. They own the largest aircraft leasing company in the world, International Lease Finance Corporation (ILFC). The original founder of ILFC, Steven F. Udvar-Hazy, still runs the operation for AIG and is working feverishly to buy back the company that he sold to AIG 18 years ago. I expect that he will be successful and the purchase price will be poured in the payments on the government bailout.
According to the Wall Street Journal (Tuesday, May 13, 2008, Page C1), in 2007 ILFC earned revenues of $4.73 billion and income of $604 million, with a staff of only 170 people.
Ironically, the strength of AIG that allowed ILFC the highest bond ratings now is gone. With increased carrying costs, ILFC would not be anywhere as profitable as it has been in the past. Arguments now indicate that the leasing company would get far better lending rates as a stand-alone company.
Expect both Airbus and Boeing stock to get hammered while ILFC works through their ownership issues. Domain-b.com’s Aviation and Aerospace reporters outline the dangers of a spillover of AIG’s woes into its subsidiary’s operations for the aviation industry.
Analysts say that any unwanted change to ILFC’s credit quality would be a major risk for aircraft manufacturers, since weakening of credit would force the lessor to pay higher prices for the new planes. That in turn would result in involuntary cancellations.
That scenario would pressure the already stressed aviation industry, impacting manufacturers who are reeling from the winding down of the current aircraft-order cycle. Analysts suggest that by 2009, aircraft manufacturers’ book-to-build ratio would come down below 1, with more planes being built than replaced in the industry’s backlog.
Finally, we come to resorts. Here, AIG owns Stowe Mountain Resort in Vermont. This has always been an investment that seemed out of place in the AIG portfolio. Even in the dark days of the ski industry when resorts were losing money and property values were falling, AIG held onto the resort and provided stability to the resort and the surrounding community.
Basically, the former CEO liked the idea of owning a ski area, so the company never really entertained any serious offers. But now that will change. Expect the resort to be part of the assets to be unbundled from the AIG balance sheets. Even though it is only a blip on the AIG books, it will have to go. From Barre, Vermont, the Times Argus explores the ramifications of AIG’s demise for the skiing industry and Stowe.
“There’s no question AIG’s assets are up in the air,” says economist Thomas Kavet, a paid advisor to the Vermont Legislature. “They’re desperate for cash, and the way to get cash is to sell anything that’s worth something.”
Bill Stenger, president of Jay Peak Resort, says the resort is likely a moneymaker for the troubled insurance giant. He says the area has earned national renown as one of the premier ski destinations in the East and will likely retain that label whether it remains under the auspices of AIG or not.
Though the sale of a ski resort is rarely a traumatic event for a community, few resorts are so woven into the fabric of a region as in the case of Stowe. Simply changing ownership is easy. For the Stowe Mountain Resort the unusual concentration of homeowners and condo owners with their net worth closely tied to the value of AIG stock means the heightened possibility of foreclosures of existing vacation properties and an abandonment of planned purchases in the new mountain village that is about half finished.
My score sheet on AIG impact on the travel industry stands as follows:
* Travel insurance — no change, business as usual
* Liability insurance — expect premiums to significantly increase
* Aircraft leasing — dramatic fallout for airplane manufacturers and higher leasing costs in the future
* Stowe Mountain Resort — going up for sale and sold by next ski season, plus a local Stowe recession
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