Analysts see insurance rivals profiting from AIG's misfortune

18 September 2008

Insurance rivals stand to reap the benefits from the woes of American International Group Inc (AIG), snapping up assets AIG is forced to sell, while gaining greater pricing power as AIG is forced to withdraw from businesses around the globe. (See: $85-billion bailout for AIG)

UK insurer Prudential, Continental European giants Munich Re, Allianz, Swiss Re and Zurich Re, and Japanese and Australian insurers are all likely to register their interest, according to analysts. Insurance units are expected to go under the hammer, but AIG could also offload its aircraft-leasing business and fund management division.

"The first consequence we see is that it should be a positive for the P&C (property and casualty) industry," said JPMorgan 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 expected to fall by up to 20 per cent due to intense competition.

AIG has long been a dominant player in corporate insurance, with an 11 per cent share in the US market, as well as for other big-ticket risks such as the aviation industry, which is looking at the current situation with bated breath. GE and Warren Buffett's Berkshire Hathaway are considered potential bidders for this part of AIG's business. (See: AIG's woes sends tremors down the aviation industry's spine)

Now, intermediaries predict that although AIG will continue underwriting, it is likely to lose business clients. Among lines of business, insurers providing specialised commercial coverage, such as directors' and officers' liability, could pick up business as AIG scales back participation, said Goldman Sachs analyst Tom Cholnoky, in a note Tuesday.