How much does reputation really matter? If one division of a firm runs into trouble, do consumers consider the entire company as poisonous? You might think that customers would continue to do business with the firm's other business units that had no problems and remain viable. But AIG shows that negative consumer sentiment contagion among divisions under one corporate brand is strong.
Bloomberg reports that AIG's life insurance unit's reputation is suffering from problems that were caused by its financial products division, which would have led to the firm's demise if the U.S. government hadn't stepped in.
American International Group Inc. suffered an 87 percent quarterly sales decline at its European life business as U.K. clients abandoned the firm, draining value from operations the insurer is selling to repay a U.S. bailout.
We aren't talking a minor 10 or 20 percent decline: their life insurance business is off 87 percent in Europe. That's disastrous. And remember, life insurance had nothing to do with the troubles at AIG. That business unit was functioning perfectly well while other divisions of the firm caused its collapse.
This shows just how difficult it might be for AIG to ultimately survive. It also suggests that the best approach might be for the firm to spin off its successful business units. That way, at least brand names could change and consumer psychology might rebound. The problem with that, however, is that it makes it far less likely that the government will get paid back for the bailout if there's debt left over unassociated with the spun off brands that didn't need assistance.
As the quoted blurb above mentions, this is quite bad news for the U.S. government. First, if AIG's successful business lines are having this kind of trouble, then the firm on a whole might not make it. But also concerning is that the recent debt-for-equity trade with the NY Fed might also fail to deliver. Even though those shares give to the NY Fed were in the American life insurance and international assurance arms, a less severe sales decline across all of its business units could still have a significant effect on those divisions' equity value.
Other than the spin-off option, all AIG can really do is hope that consumers' distaste for its brand fades with time. But that needs to happen pretty quickly, as the company can't sustain a whole lot more pain in the short-term.