AIG to Spin Off Operations

AIG will spin off its major operations into independent companies in
what CEO Edward Liddy calls “the most extensive corporate restructuring
in American history.”

The financial services conglomerate is “too big” to reposition
as a single entity, and the company’s latest steps will maintain
its core businesses as it works to strengthen its capital base and repay
government debt, Liddy said during a web conference this morning. A key
part of its revised plan: new terms for the U.S. government’s investment
in the company, including a new US$30 billion equity capital commitment.

Under the new plan, AIG will create AIU Holdings, Inc., a general insurance
holding company that will include its commercial insurance group, foreign
general insurance unit and other property-casualty operations. Positioning
its P&C operations separately will prevent “erosion of the
franchise,” according to Liddy. The company is also considering
a minority offering of the general insurance business to the public,
he said.

The company will also establish its Asian and international businesses–American
International Assurance Company, Ltd., and American Life Insurance Company
(ALICO)—as separate units, and will put their equity into special
purpose vehicles (SPVs). While AIG will hold common interest in them,
preferred interest in the SPVs will go to the Federal Reserve Bank of
New York, as repayment for a portion—up to US$26 million– of its
credit facility.  Liddy said the structure is the “optimal
solution to maintain the value of these businesses and best position
them to enhance their franchises.” At present, the company is considering
acquisition proposals for AIA’s share capital, though it hasn’t
ruled out public offerings, he noted. AIG will also securitize its U.S.
life insurance business, and transfer up to US$8.5 billion in notes to
further reduce its FRBNY credit balance.

Liddy said the timeframe for the restructuring would be swift, though
he acknowledged it could take up to twelve months to complete. Its immediate
priority, he said, was debt reduction. He addressed industry chatter
over how quickly the company seemed to run through its credit facility,
noting that the company has only drawn on US$38 billion of its credit
line—much of which he said “passed through AIG to other companies
to post collateral and make repayments”– and still has access
to US$20 billion of the original credit facility. The latest infusion—a
five-year, US$30 billion capital facility—doesn’t reflect
the dire straits, he said, “we don’t need new cash, it’s
a back up to enhance our prospects.”

The company announced its strategy on the heels of heavy 2008 losses:
along with the restructuring plan, it reported a US$61 billion net income
loss for the fourth quarter, and a US$99 billion loss for the year. Liddy
stressed that the Q4 loss reflected efforts to wind down certain activities,
and “do not reflect the standing of our operations.”

The new plan doesn’t just benefit AIG, but the entire market,
Liddy said, noting how intertwined the company is with other financial
institutions worldwide. “If AIG were to fail, the impact would … undermine
an already unsettled global financial system,” he said.

This story was originally published by Canadian Insurance Top Broker.