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September 21, 2008 at 04:00 PM
An insurance analyst called the meltdown of American International Group, New York, a “staggering development, noting that the Federal Reserve Board statement that AIG will pay off its loan from the sale of businesses suggests that the majority of the company may be sold off in pieces.
Specifically, said Thomas Gallagher and Michael Zaremski of Credit Suisse research in New York in an investment note, it implies “that the formerly largest global insurance company will potentially be unwound through a 1 to 2 year auction process.”
Moreover, AIG’s problems means that there will be plenty of “high quality businesses for sale, notably international life insurance, foreign general, and the domestic retirement business sold through the Variable Annuity Life Insurance Company (VALIC), a unit of the American General unit of AIG, Gallagher and Zaremski said.
“We suspect that some of the big foreign players (Chinese, Canadian, European, and Australian insurers) may be interested buyers along with the usual large cap suspects domestically on both the life and P&C sides,” they added.
They also foresee a “fairly swift execution of sales of businesses,” because that will be important to avoid substantial erosion of franchise value, since customer lapse rates and withdrawals should remain elevated following the publicized difficulties at the company.”
They added that book value is likely to be hit hard by “both bigger asset impairments and DAC charges associated with AIG likely moving to liquidation based valuation methodologies vs. the prior going concern asset valuations.”
At the same time, Gallagher and Zaremski as well as Joshua Shanker of Citi research, New York, said the decision of the Fed to provide the bridge loan is likely to stabilize AIG’s market share because competitors had been using the turmoil over the liquidity problems of AIG’s parent to grab market share in both the property-casualty and life businesses.
“This obviously has the potential to improve [AIG's] competitive landscape in several markets, notably in commercial P&C, several foreign life insurance markets (including Japan), and domestic life insurance, where AIG has been among the largest players for years,” Gallagher and Zaremski said.
Shanker added that, “Tuesday, we argued that many insurers would benefit from AIG’s turmoil.
“To some extent, its withdrawal from the marketplace has been foreshortened,” he said. “However, we expect the government will not aim to give AIG marketplace advantages.
“Nevertheless, the implicit government association likely carries the seal of protection,” Shanker suggested. “We would expect the strong outperformance of the p-c sector to retrace some of Tuesday’s gains.”
State insurance regulators will also play a major role in overseeing the company going forward.
New York Insurance Superintendent Eric Dinallo will oversee a National Association of Insurance Commissioner’s task force created to expedite approvals of sale of AIG assets.
Creation of the task force, by the NAIC, Kansas City, Mo., was approved by commissioners in a 5 p.m. conference call Sept. 16 as federal and state regulators worked with the Treasury Department to design a solution to AIG’s liquidity crisis, according to David Neustadt, an Insurance Department spokesman.
That implied, as it is with Lehman, that prompt action to sell the AIG assets and pay off the government bridge loan is necessary in order to get best value for the government and shareholders.
