American International Group Inc, the insurer deemed too important to fail, will get as much as $30 billion in new government capital in a revised bailout after posting a record fourth-quarter loss.
The loss widened to $61.7 billion from $5.29 billion in the year-earlier period, the New York-based insurer said on Monday in a statement. The government will also exchange its $40 billion in preferred stock for new shares that “resemble common equity,” the Treasury and Federal Reserve said. AIG was paying a 10 per cent dividend on the preferred stock.
The insurer, first saved from collapse in September with a package that grew to $150 billion last year, had to ask for help again after failing to sell enough subsidiaries to repay the US firms including banks relied on AIG to back more than $300 billion of assets through derivative contracts as of September 30, making the company a “systemically significant failing institution” that has to be propped up, the Treasury said.
“The government has accepted all the downside with little chance of upside,” said Phillip Phan, professor of management at the Johns Hopkins Carey Business School in Baltimore. “They are trying to protect the global financial system from a complete meltdown.”
AIG agreed to turn over two units, American Life Insurance Co and American International Assurance Co. AIG will pay down the federal loan, valued at about $38.9 billion on December 31, partly by putting the life units in trusts and giving the government rights to the cash flow from tens of thousands of life insurance policies.
More capital
The role of the US has shifted from that of short-term lender, entitled to interest at the 3-month London Interbank offered rate plus 8.5 per cent for a two-year loan under the first bailout, to a longer-term equity investor.
“We priced their capital punitively and forced them to sell things fast; that hasn’t worked either so we’re having to pump in more capital,” said Haag Sherman, who helps oversee $8 billion as chief investment officer of Houston-based Salient Partners.
“This probably won’t be the last time AIG has to come to the trough.”
AIG will also separate the unit that provides property and liability coverage for commercial clients and may sell a 19.9 per cent stake to the public within 12 months, a person familiar with the matter said. That business, which was previously intended to be the core of AIG after the US rescue, may get a new brand to distance itself from AIG, said the person, who asked not to be identified.
Aircraft leasing
AIG sought a revised bailout after the global decline in financial firms thinned the pool of potential buyers for units, increasing the chance that auctions wouldn’t raise enough money to pay back AIG’s loans. Under the new plan, AIG will be under less pressure to divest assets as it continues to seek buyers for operations including an aircraft-leasing business, an auto insurer, and a retirement-services operation.
The insurer had been in talks in the past week with regulators to restructure its bailout to stave off credit-rating downgrades that would have caused further costs tied to credit- default swaps. AIG got an $85 billion federal loan in September after credit-rating downgrades left the company facing more than $10 billion in potential payments to debt investors who bought swaps from the insurer to protect against losses.
Downgrades by Moody’s Investors Service and Standard & Poor’s would force AIG to post more than $7 billion in collateral to counterparties, the insurer said in a November filing. AIG’s units may also lose access to the US commercial paper programme if they are downgraded, the company said.
Chief Executive Officer Edward Liddy, appointed by the government to run AIG in September when the insurer agreed to turn over an 80 percent stake to the US, had struck deals to raise about $2.4 billion through asset sales. Under Liddy’s plan, revealed in October, AIG was to emerge as a firm mostly providing property-casualty coverage to businesses.
Road to recovery
Liddy said AIG was on the “road to recovery” after securing a bailout valued at $150 billion in November. That package included the $60 billion credit line, a $40 billion capital investment and $50 billion to wind down liabilities tied to mortgage-backed securities the insurer owned or backed through swaps. Liddy said then that terms of the original rescue, disclosed a day after Lehman Brothers Holdings Inc collapsed, were unsustainable.
AIG is winding down the trades and closing the unit that sold the swaps. The unit is under investigation by the US Department of Justice, the Securities and Exchange Commission and UK’s Serious Fraud Office. The US probes involve how AIG executives valued its swap portfolio and disclosed information about the contracts to investors, AIG said in a November regulatory filing.
Planes, ships
AIG, once the world’s largest insurer, operates in more than 100 countries, providing protection to individuals and businesses. It insures against some of the biggest risks, covering planes and commercial shipping and providing protection against terrorist attacks.
The biggest insurers in North America posted more than $150 billion in writedowns and unrealised losses linked to the collapse of the mortgage market from the start of 2007, with AIG representing more than a third of that total. The company has units that insure, originate and invest in home loans.
The US Senate’s banking committee has scheduled a hearing for March 5 to discuss AIG’s bailout and the government involvement. New York Insurance Superintendent Eric Dinallo and Donald Kohn, vice-chairman of the Federal Reserve Board of Governors, were scheduled to testify.
