Troubled insurer American International Group Inc. (AIG) on Monday received a new lifeline from the federal government of up to $30 billion in equity capital commitment, aimed at preventing the company's collapse after it reported a hefty net loss for the fourth quarter of $62 billion, the largest loss in U.S. corporate history. The Federal Reserve will also reduce a $60 billion credit facility in exchange for taking a preferred interest in AIG's two international life insurance subsidiaries and will ease the interest rate it charges the company for tapping the credit line. Additionally, AIG announced that its plans to spin off part of its property-casualty business, to be named AIU Holdings Inc.
AIG, which was once the world's largest insurer, was saved from going bankrupt last September after receiving an initial $85 billion U.S. government bailout package. The Federal Reserve and Treasury have already provided over $150 billion of aid to AIG and the federal government currently owns 79.9% of the company.
Monday's revamped bailout marks the third time the government has stepped in to rescue the beleaguered insurer. AIG is deemed too important to fail as the collapse of the company would wreak havoc on the entire financial system and be disastrous for the U.S. economy. The company had hoped to sell certain of its businesses in order to repay its loan commitments. However, AIG had not been able to find buyers for parts of its business amid the deterioration in the credit markets and the global slowdown.
Revamped Bailout
AIG said that the U.S. Treasury Department will create a new five-year equity capital facility, which allows the company to raise up to $30 billion as needed over time in exchange for non-cumulative preferred stock to the Treasury. The additional finds are expected to come from the second half of the U.S. government's $700 billion Troubled Assets Relief Program, or TARP.
The Treasury noted that AIG has agreed to issue on March 4 shares of convertible preferred stock equaling a 77.9% equity interest in return for the new government money. The shares will be held in an independent trust for the sole benefit of the U.S. Treasury.
The Treasury will also exchange its existing $40 billion cumulative perpetual preferred shares in the company for new preferred shares with revised terms that will more closely resemble common equity and thus improve the quality of AIG's equity and its financial leverage. The new terms will provide for non-cumulative dividends and limit AIG's ability to redeem the preferred stock except with the proceeds from the issuance of equity capital.
AIG will not have to pay the 10% dividend it has to pay on preferred stock in the event that the preferred stock is converted into common stock. The company does not pay dividend on common stock.
The Treasury Department said, "Given the systemic risk AIG continues to pose and the fragility of markets today, the potential cost to the economy and the taxpayer of government inaction would be extremely high. AIG provides insurance protection to more than 100,000 entities, including small businesses, municipalities, 401(k) plans, and Fortune 500 companies who together employ over 100 million Americans."
The revised bailout also includes key revision to the terms of the $60 billion five-year revolving credit facility that was created by the Federal Reserve Bank of New York, or New York Fed. The line of credit will remain at least $25 billion in exchange for the giving the New York Fed a stake in AIG's two life insurance subsidiaries. The common stock of the two AIG units will be held in special purpose vehicles, or SPVs, which will allow AIG to jeep control of them, but will give the Fed rights to protect its ownership interest. The Fed will also ease the interest rate it charges the company for tapping the credit line.
Edward Liddy, Chairman and Chief Executive Officer of AIG said, "AIG is executing one of the most extensive corporate restructuring programs in history at a time when the global economy and capital markets are in turmoil. While we have made meaningful progress, we have concluded, along with Treasury and the Federal Reserve, that additional tools are needed to enable success. The measures announced today provide the necessary U.S. government support for a plan to establish separate capital structures, including outside ownership, for certain AIG companies."
AIG said it will transfer to the New York Fed preferred interests in American Life Insurance Co., or ALICO, and American International Assurance Co. Ltd., or AIA, in return for a reduction in the outstanding balance of up to $26 billion of the credit facility. AIG intends to contribute the equity of AIA and ALICO into SPVs in exchange for preferred and common interests in the SPVs. This will enable the New York Fed to receive preferred interests in repayment of a portion of the credit facility.
Liddy added, "Given the importance of AIA and ALICO to repaying our obligation to the U.S. government, we think this structure is the optimal solution to maintain the value of these businesses and best position them to enhance their franchises."
AIG also expects to transfer to the New York Fed securitization notes of up to $8.5 billion representing embedded value of certain of its U.S. life insurance businesses in return for a further reduction in its outstanding New York Fed credit facility balance. The company noted that it will continue to have access to the New York Fed credit facility.
After the above transactions, the total amount available to AIG under the credit facility will remain at least $25 billion following the repayment of the outstanding amount on the facility with preferred interests and securitization notes. The Treasury said that the facility will continue to be secured by a lien on a substantial portion of AIG's assets, including the businesses AIG plans to retain.
AIG said that the New York Fed will remove the existing LIBOR floor on the credit facility. The interest rate on the Facility, which is three-month LIBOR plus 300 basis points, will be modified by removing the existing floor of 3.5% on the LIBOR rate. AIG noted that the move will save the company an estimated $1 billion in interest costs per year, based on the current level of LIBOR and the current facility balance.
AIG said that businesses such as ALICO and AIA will continue to review their divestiture options, which ultimately may include a public offering of shares, depending on market conditions.
AIG also confirmed that it had received proposals to acquire all or part of the share capital of AIA. The company noted that these proposals are preliminary and are being reviewed along with AIG's consideration of a full or partial IPO of AIA. In addition, AIG has decided to retain Philam Life, together with the operations of AIA.
Fourth Quarter Results
Separately, AIG reported net loss for the fourth quarter of $61.66 billion, or $22.95 per share, compared to net loss of $5.29 billion, or $2.08 per share, in the year-ago quarter. The loss for the quarter marks the fifth straight loss reported by the company.
The continued severe credit market deterioration, particularly in commercial mortgage backed securities, and charges related to ongoing restructuring activities contributed to a record net loss for the fourth quarter, the company said.
During the quarter, AIG wrote down the value of assets including credit-default swaps and commercial mortgage-backed securities by $25.9 billion and had costs of $6.7 billion tied to related-restructuring activities. The company also took a charge of about $21 billion related to taxes and intangible assets.
Adjusted net loss for the fourth quarter was $37.93 billion, or $14.17 per share, compared to adjusted net loss of $3.20 billion, or $1.25 per share, in the year-ago quarter.
On average, eight analysts polled by Thomson Reuters estimated the company to report a loss for the quarter of $0.37 per share. Analysts' estimates typically exclude special items.
The company noted that despite challenging conditions, insurance premiums and other considerations declined only modestly by 1.9% for the fourth quarter compared to the year-ago quarter. General Insurance net premiums written for the quarter were $9.2 billion, down 16.3% from the same period last year. General Insurance net premiums earned for the quarter declined 5.9% to $10.98 billion from $11.67 billion a year ago.
The company's operating loss for the latest quarter was $5.35 billion, compared to operating income of $2.02 billion in the previous year.
Fiscal Year 2008 Results
For fiscal year 2008, AIG's net loss was $99.29 billion, or $37.84 per share, compared to net income of $6.20 billion, or $2.39 per share, in the prior year.
Adjusted net loss for the year was $52.05 billion, or $19.91 per share, compared to adjusted net income of $9.31 billion, or $3.58 per share, in the previous year. Analysts expected the company to report a loss for the year of $4.02 per share.
Premiums and other considerations for the year grew by 5.3% from a year ago. General Insurance net premiums written for the year were $45.23 billion, down 3.9% from $47.07 billion last year. General Insurance net premiums earned increased 1.2% to $46.22 billion from $45.68 billion a year ago.
As of December 31, 2008, shareholders' equity was approximately $52.7 billion. The company's consolidated assets at December 31, 2008 were $860.4 billion.
General Insurance holding company
AIG also announced that it intends to form a General Insurance holding company, including its Commercial Insurance Group, Foreign General unit, and other property and casualty operations, to be called AIU Holdings Inc., with a board of directors, management team and brand distinct from AIG.
The company noted that the establishment of AIU Holdings will assist it in preparing for the potential sale of a minority stake in the business, which ultimately may include a public offering of shares, depending on market conditions.
Kristian Moor, currently President and CEO of AIG Property Casualty Group, will be President of AIU Holdings Inc. Nicholas Walsh, currently President and CEO of AIU, will be Vice Chairman of AIU Holdings Inc. A chairman will be named at a later date.
John Doyle, currently President and CEO of AIG Commercial Insurance, will assist in the formation of AIU Holdings Inc. by assuming additional responsibility for the Domestic Personal Lines Division.
When formed, AIU Holdings, Inc. will be a unique leading franchise with more than 44,000 employees and 500 products and services serving 40 million commercial and individual customers in 130 countries and jurisdictions.
AIG also said it is considering combining its domestic life and retirement businesses to enhance market competitiveness. The company noted that with combined assets of $246.8 billion, 17 million customers, and nearly 300,000 licensed financial professionals, the combined companies would be operating from a position of significant strength and business diversification.
Other Developments
In February, the company said that it would sell all its businesses, except the U.S. property and casualty business, foreign general insurance, and an ownership interest in some foreign life operations. On February 5, AIG said it agreed to sell AIG Retail Bank Public Co. Ltd. and AIG Card (Thailand) Co. Ltd. to Bank of Ayudhya Public Co. Ltd. The Wall Street Journal reported last month that AIG was in talks to sell its personal car insurance business, 21st Century, to Zurich Financial Services (ZFSVY.PK, ZFSVF.PK) for over $2 billion.
Earlier this year, AIG agreed to sell its Canadian life insurance unit, AIG Life Insurance Co. of Canada to BMO Financial Group (BMO.TO) for about C$375 million, or about US$308 million, in cash. The deal is expected to close by June 1, 2009. AIG in December agreed to sell its wholly-owned subsidiary HSB Group, Inc. to the world's largest reinsurance company, Munich Re Group, for $742 million or EUR 531 million, in cash.
The government's efforts to support AIG comes just days after regulators moved to rescue troubled bank Citigroup Inc. (C). On Friday, Citigroup received a lifeline from the U.S. government, reaching a deal that allows the government to exchange up to $25 billion in bailout money for a bigger stake in the bank. Citi said it would issue common stock in exchange for preferred securities, which would substantially increase its tangible common equity, or TCE, without additional U.S. government investment.
Stock Quotes
In Monday's regular trading session, AIG is trading at $0.48, up $0.06 14.31% on a volume of 24.67 million shares. In the past 52 weeks, the stock has been trading in a range of $0.38-$49.50.
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