An insurance analyst, calling the meltdown of AIG a "staggering development," said the Federal Reserve Board statement that the carrier will pay off its federal loan from the sale of businesses suggests the majority of the company may be sold off in pieces over the next 24 months.
Specifically, the latest developments in the AIG debacle imply that "the formerly largest global insurance company will potentially be unwound through a one-to-two-year auction process," Thomas Gallagher and Michael Zaremski of Credit Suisse research in New York said in a note to investors.
Moreover, AIG's problems means 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, a unit of the American General unit of AIG," Mr. Gallagher and Mr. 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 [property-casualty] 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 versus the prior going-concern asset valuations." (By DAC, they were referring to deferred charges–a prepaid expense that is recognized on the balance sheet as an asset until it is used.)
At the same time, Mr. Gallagher and Mr. Zaremski, as well as Joshua Shanker of Citi research, said the decision by 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," Mr. Gallagher and Mr. Zaremski said.
Mr. 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. However, we expect the government will not aim to give AIG marketplace advantages."
He added that "nevertheless, the implicit government association likely carries the seal of protection. We would expect the strong out-performance of the p-c sector to retrace some of Tuesday's gains."
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