The US Federal Reserve comes to AIG's rescue
At the time of going to press the dust had not yet settled over the £48bn rescue of American International Group (AIG) by the US Federal Reserve but industry analysts are already seeing the situation for the insurer and UK markets in a more positive light.
In basic terms, the rescue plan entails the Fed taking a 79.9% stake in the insurer and using this security to create a 24-month secured credit facility so AIG can meet its obligations. The insurer will then sell off parts of the business to repay the loan which will accrue interest at an astonishing 850 basis points above the three-month London Interbank Offered Rate.
While it is not yet certain, the present management will remain in place, the board said that the loan will "give AIG the time necessary to conduct asset sales on an orderly basis." It added: "We expect that the proceeds of these sales will be sufficient to repay the loan in full and enable AIG's businesses to continue as substantial participants in their respective markets."
The ratings agencies were first to review the situation, with Fitch Ratings revising its outlook for AIG to "evolving" from "negative". "Evolving" means a changing outlook with the ability to be positive. It noted AIG would use the loan facility sparingly given the high costs of drawing on it. Even so the insurer will need to sell a number of operating subsidiaries, including core business.
Before the rescue, Standard & Poor's ratings services lowered its long-term rating on AIG to 'A-' from 'AA-' and its short-term credit rating on AIG to 'A-2' from 'A-1+'. This re-rating has in part been blamed for deepening the crisis AIG found itself in. It has not changed this view post rescue but Randal Clark, credit analyst for Standard and Poor's, said the situation was "at least manageable in the near term."
Meanwhile European insurance analysts at investment bank Keefe, Bruyette & Woods think a number of UK-listed insurers could potentially be large beneficiaries of recent events. Greig Paterson, analyst at Keefe, Bruyette & Woods, said: "The post 2003 solvency regime and associated change in risk culture have left these companies relatively well capitalised, with any exposure to the toxic asset classes manageable and transparent."
He says the weakening of AIG should help Prudential and RSA. Prudential benefits in Asia, where it is number two in the market and in the US, while RSA, could do well in UK commercial non-life and Asia. On the other hand, other UK insurers have a new risk. Paterson said: "We still do not like those companies with large UK domestic market life exposure where a very large competitive player Scottish Widows/Clerical Medical/Halifax Life may be established."
Picking out Legal & General, Standard Life and Friends Provident as "fully valued" Paterson said: "The proposed combination of Scottish Widows/Clerical Medical/Halifax Life would create a very competitive giant (18% market share 2007), more than swamping the impact of a weaker AIA life business (8% market share)."
So once again what looked initially like a catastrophic situation has turned out to have a glimmer of a silver lining.
