Insurance giant needs to sell off its profitable parts quickly.
Wall Street is in turmoil but amid the collapses and government bail-outs is some good news for the industry. The nationalisation of AIG will create a wealth of opportunities for insurers.
The near-collapse of the insurance giant as it struggled to raise collateral to support its derivatives obligations has not caused wider panic among investors in insurance stocks. It appears investors have seen the distinction between AIG’s business model, under which it insured financial instruments for the banking industry, and the strategies of other insurers.
With the exception of a few credit default swaps at Swiss Re, European insurers have not been engaged in this type of activity. Indeed, Citigroup notes that as AIG struggled for survival, European insurance stocks were down only 4% against a broader market decline of 3%, while US property and casualty stocks actually rose 6%.
Investors are already beginning to look ahead to the shape of the insurance market after the AIG crisis. Meanwhile, insurers are circling, looking for opportunities to win business from AIG. Global corporate business could move as buyers assess their risk concentration and key underwriting partners. Zurich in particular could benefit from this. Investment bank Keefe, Bruyette & Woods has estimated that Zurich could raise its group operating profits by about 3% on the back of business won from AIG. RSA is also a potential benefactor from the movement of any large UK commercial risks from AIG.
Lloyd’s insurers could be even bigger winners from the crisis, particularly those operating in higher-risk markets, such as the US excess and surplus lines business.
High-hazard clients are particularly sensitive to an insurer’s rating, so AIG’s downgrade will have a disproportionate effect on these clients, which may look for a more sound insurer. The Lloyd’s market, which enjoys an A+ rating from S&P and is the second-largest writer of US excess and surplus lines business after AIG, is reportedly seeing an upturn in requests for quotes.
“There are a lot of fantastic opportunities in terms of people and business,” notes one senior insurance executive.
Beyond the potential to win business from AIG, insurers will also be eyeing up the embattled insurer’s business units for purchase. Edward Liddy, AIG’s new chief executive,
is looking to repay the government’s loan as quickly as possible through asset sales. The break-up value of AIG could be well over $150bn (£85bn), according to analysts.
AIG’s Asia business units are seen as particularly attractive and would appeal to the likes of RSA and Aviva. Munich Re and Allianz could make a move for AIG’s reinsurance operations. What is on the block has yet to be confirmed, although the noises coming from AIG indicate the insurance businesses are “core” and will not be disposed of. Some suggest that the magnitude of AIG’s liabilities mean that some insurance assets will need to be sold.
One issue for potential buyers is how to pay for any acquisition. The US government wants to be paid in cash not shares, so suitors will need to raise large amounts of money to buy the most valuable assets in AIG’s portfolio, which may be beyond many companies in the current climate.
More generally, the AIG crisis could precipitate a hardening of rates and boost industry profitability. AIG was also a tough competitor and the movement of clients to other markets could see rates edge up. Big-ticket UK commercial insurers could well benefit in this regard. The movement of capacity through the sale of assets could also help lift rates although the market is overcapitalised, which would tend to limit this.
michael.faulkner@instimes.co.uk
Key points
• Insurance stocks have not been tarnished by the AIG crisis as investors can distinguish its business model from that of other insurers.
• There will be opportunities for insurers to win business from AIG. Zurich, RSA and Lloyd’s insurers could be major winners in the UK.
• Insurers could have the opportunity to buy valuable AIG assets, but there are question marks over whether they can raise the money to do so.
• Rates could harden in some lines as competition from AIG is reduced.
