Feds buy two AIG units, plan IPO

American International Group (AIG) will reduce outstanding U.S. federal loans by $25 billion (US) by giving the federal government a stake in two big life insurance units.

The plan would eventually see American Life Insurance Company and American International Assurance Company spun off as publicly-traded companies.

In an effort to reduce debt, AIG also entered into an agreement with Mexico to sell 100% of its consumer finance operations.

AIG’s agreement with the Federal Reserve Bank of New York (FRBNY) is will also position two of AIG’s leading international life insurance franchises for initial public offerings. By placing the two units into special purpose vehicles (SPVs), ahead of planned initial public offerings, the FRBNY will receive preferred interests in the SPVs — which will eventually become independent companies.

“This action accelerates the move of ALICO toward greater independence and helps maintain the value of the franchise,” says Rodney O. Martin Jr., ALICO Chairman and CEO.

In 2008, AIG suffered losses totaling more than $99 billion (US) and received a number of government bailouts after suffering significant losses resulting from its financial business.

Critics were quick to point out that AIG was not hurt by its traditional insurance operations, but by its financial products business, which underwrote risky credit derivatives contracts known as credit default swaps — essentially insurance contracts protecting an investor against default on an underlying investment, such as mortgage-backed securities.

AIG’s bailout is currently valued at $182.5 billion (US). In the last year, AIG has failed in its quest to find a buyer for its life insurance units. Buyers are aware of the company’s need to repay taxpayers. This new agreement with FRBNY represents an important step in repaying taxpayers, while preserving the values of both AIA and ALICO.

In this new deal, AIG, in exchange for preferred and common interests in the special-purpose vehicles that will eventually be sold to the public, will contribute to the equity of both AIA an ALICO. AIG will continue to hold common interests in ALICO and benefit from the fair market value. The FRBNY will have “preferred stakes” of $16 billion (US) in AIA and $9 billion (US) in ALICO. The $9 billion (US) will assist in reducing the debt owed to FRBNY by AIG.

AIG currently has an outstanding balance of $40 billion (US) under the FRBNY credit facility and remains unclear if the company will be able to successfully repay its debt to the government.

“The agreements further the goals of enabling AIG to fully repay the assistance that it has received from U.S. taxpayers and advancing the company’s global restructuring process,” says a representative from the FRBNY. “The exchange of senior secured debt for preferred equity interests reduces AIG’s financial leverage and facilitates the independence of key subsidiaries.”

This transaction is still subject to customary closing conditions, but is expected to officially close by the end of 2009.

(06/25/09)