The welcome news that AIG is to be bailed out by the Federal Reserve Bank through an $85 billion loan seems to have calmed fears in the markets, despite questions over whether this injection will be sufficient to stabilize the ailing insurer. For now, however, it seems that while the Fed was prepared to let Lehman file for bankruptcy, the demise of AIG was too much for it to bear.
AIG's reach across more than 100 countries, insuring both individuals and companies, means that its collapse would have a far greater impact on financial markets than Lehman's. However, three main questions remain: what happens next for AIG, what is the impact on its clients, and are any other insurers in a similar precarious position?
The future for AIG's businesses is still up in the air, and this could open opportunities for other insurance players. Prior to the Fed stepping in, AIG was looking for a buyer for some of its non-core businesses, such as asset finance and reinsurance, with names such as Hannover Re displaying apparent interest. Part of AIG's statement in response to the Fed was that the loan facility would "give AIG the time necessary to conduct asset sales on an orderly basis". Although the "orderly basis" implies that the market will not see the panic selling that was evident with Lehman and Barclays, players such as Prudential, Aviva or Axa would find much to pick from the bones of AIG that would complement their businesses.
For customers, an air of panic was unfolding around AIG investment products prior to the Fed's announcement. AIG Life in the UK suspended withdrawals from its bond fund as a response to the "unusually high number of withdrawal requests". Overall, the UK customer should be reassured by the steps the Fed has taken. The loan effectively shores-up AIG's investment and insurance products, and should boost confidence.
Although AIG's position as a household name is more a result of its sponsorship of Manchester United than its insurance presence in the UK, it is still a significant player. High street brands such as Argos and Boots are underwritten by AIG and its biggest UK subsidiary, New Hampshire, was the fifth largest general insurer in 2007, with premiums of over GBP2 billion, of which GBP806 million was liability insurance. The folding of this business would have created a major crisis in the global insurance markets.
As for the stability of other insurance companies, the situation is, as yet, uncertain. While the focus a week ago was on the banking community, AIG's problems have ensured that attention has now been turned to the insurance world. To counteract this, insurers including Aegon, Aviva, Swiss Re and Friends Provident have issued statements outlining their exposure to Lehman and, in some cases AIG, to try and reassure the markets that they have not suffered insurmountable losses. However, some big names remain notable by their decision not to give such announcements, and there may still be a rocky road ahead for giants of international insurance.