Fitch’s latest annual survey of the leading players in the credit derivatives market revealed a 40% increase in the amount of credit protection bought by banks in 2004. AIG Financial Products drove an increase in net protection selling by insurance companies.
Banks were net buyers of $427 billion of credit protection. Insurers and financial guarantors sold $556 billion of protection. The global insurance industry sold $319 billion net, with AIG contributing $269 billion, just over 84%, of that total.
“Being late to the table has worked in AIG’s favour,” says Ian Linnell, managing director, Fitch Ratings. “Lots of insurers moved in just at the wrong time and were exposed to the record US defaults of 2001 to 2003. AIG has sold when spreads were high, and now spreads have come in 60%.” This suggests that other insurers and reinsurers could be ready to return to the market. “AIG made a lot of money,” says Linnell. “Swiss Re and others exited. Will they come back?”
Because Fitch doesn’t rate hedge funds, they are not included in its survey. Nevertheless, the gap between the net protection bought and sold, together with feedback from broker-dealers, suggests that hedge funds and high net-worth individuals bought in the region of $120 billion of credit protection.