Insurance rivals stand to reap the benefits from the woes of American International Group, snapping up assets AIG is forced to sell while gaining greater pricing power as AIG pulls in its claws.
Zurich Financial Services and other insurance rivals are the possible winners say analysts who see AIG emerging from its current troubles with less weight to throw around.
“The first consequence we see is that it should be a positive for the P&C (property and casualty) industry,” said JP Morgan analysts in a research note.
“This effectively represents a withdrawal of capacity (or capital) from the marketplace …Pricing in the P&C market is driven by capital — the less capital, the less pressure there is for prices to fall.”
The likely withdrawal of billions of dollars of AIG capital from the sector will put a brake on the slide in prices in the commercial insurance market, where premiums had been forecast to fall by up to 20 percent due to intense competition.
AIG has for a long time been a dominant player in corporate insurance, with an 11 percent share in the U.S. market, as well as for other big-ticket risks such as aviation.
Now, intermediaries predict that although AIG will continue underwriting, it is likely to lose business clients.
“In our view, ZFS is probably the clearest winner,” said JP Morgan.
One senior executive at an insurance broker who spoke on condition of anonymity saw others benefiting as well: “Zurich and ACE are likely to be the beneficiaries, maybe even AXA. Anyone with a multinational network will be a winner.”
“It’s still early days, but it’s my view that AIG is a wounded animal. It will be hard for us to say to clients ‘We’ll place your business with a company who we have no idea what its ownership or management structure will look like in six months’ time,’” said the broker.
AIG’s rescue calls for the U.S. Federal Reserve to lend up to $85 billion to AIG for two years in exchange for a 79.9 percent equity stake.
AIG will pay interest at a steep 8.5 percentage points above the three-month London Interbank Offered Rate, equal to about 11.4 percent. That gives AIG a big incentive to embark on a massive asset sale programme to pay back the loan quickly.
Insurance rivals are set to jostle to pick up attractive parts of the AIG empire, assets which include profitable aircraft leasing arm International Lease Finance Corp (ILFC).
AIG’s stake in reinsurer Transatlantic Re, its market-leading operations in central and Eastern Europe and Asia would all be attractive assets, analysts say.
Munich Re has registered its interest in picking up AIG assets, but it is likely to face stiff competition, with Japan’s well-capitalised and acquisitive insurers and Australia’s QBE also seen as potential bidders.
Analysts say Canadian life insurance company Manulife Financial Corp., the biggest life insurer in North America by market value, might consider acquiring AIG’s U.S. variable annuity business, and Manulife executives have said they would like to enter the Japanese and Chinese wealth-management markets.
“If you take out all the financial services business, AIG had a classic life and property/casualty insurance business and it was very profitable. They made good money,” said Thomas Noack, insurance analyst at WestLB.
“This… represents an opportunity for those companies either with cash, or with access to cash (via leverage), to build out their portfolios,” said JP Morgan.
“AIG has some attractive assets in our view. We are now undoubtedly in a buyer’s market in our opinion, although we expect a lot of competition for the assets.”
(Editing by Jason Neely)