AIG bailout package has increased in size, but the deal itself has many benefits for the US insurer.
See story: 'AIG will look after you'
It may sound alarming that the US Treasury has had to restructure its bailout package for AIG (again), but the deal this time is actually a sweet one for the US insurer. For starters AIG no longer has to panic about how it’s going to pay the original $85bn loan in just two years time. Instead it can ‘relax’ a while longer, five years to be precise, before it pays the taxpayer back a reduced loan of $60bn at a rate of Libor + 3%.
The $60bn is just the start of this revised bail out package, which is being withdrawn from the Treasury’s $700bn Troubled Asset Relief Programme (TARP). As part of the deal, the Treasury will buy $40bn of newly issued AIG preferred stock and will take on about $50bn of credit default swaps and mortgage-backed securities off AIG’s books, the toxic assets that the insurer underwrote.
The details of the rescue package were announced just as AIG revealed a net loss for the third quarter of $24.47bn amid huge investment losses and write downs. AIG said its third quarter results were negatively affected by financial dislocation in global markets, catastrophe losses and charges related to its ongoing restructuring related activities.
It’s still unclear what this means for AIG’s UK business, but with this $150bn cushion the likely scenario is that this arm will eventually come out of this smelling like roses. As Andrew Nixon, associate at law firm Thomas Eggar, points out: “Like everything that happens across the water there is a ripple effect; however, the effect is likely to be positive. With the company being stabilised and the insurance arm remaining key to the business you are likely to see the knock on effect in terms of lower premiums for UK customers. This potential premium lowering will also impact on rival companies who in turn will have to look at their own premiums."
However, the UK business still has a fight on its hands as rival insurers have been quick to snap up disgruntled customers. But AIG are moving fast too. A leaked internal document revealed that Lex Baugh, managing director of AIG UK, has already moved to reassure broking partners of the business’ durable capital structure and that policyholders’ interests will be fully protected. In all likelihood AIG UK will hit back by reducing premiums to keep current customers and attract new ones.
The UK business has been dogged by takeover rumours but this is unlikely to happen, unless paying back its billion dollar US Treasury loan becomes unrealistic again. The only part of the business likely to be disposed of is its life business, and AIG has admitted that this is the case, so that it can focus on its core general insurance business.
The road to AIG’s recovery is likely to be a bumpy one but if it has correctly calculated what it needed in terms of Treasury aid and is successful in securing a good deal on the sale of its life business it should get back on its feet again.
