3rd update: AIG will sell businesses in a tough market
06-OCT-2008 Intellasia | CNN Money
Oct 6, 2008 - 7:00:00 AM
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Now that American International Group Inc. (AIG) has unveiled which assets it will sell to bail itself out of its massive capital shortfall, the next question is whether the sales will raise enough money and if customers and employees will stick around long enough to find out.
"Dozens and dozens" of would-be buyers have expressed an interest in its assets, but none have made a definitive offer yet, said Edward Liddy, AIG's newly named chair and chief executive, during a Friday conference call.
Although AIG's announcements sent its share price skyrocketing by more than 20% in early trading Friday, official verdicts on the plan were more ambivalent. In afternoon trading Friday, AIG was unchanged at US$4.00.
The biggest single item on its for-sale list could be its US life and retirement business, which Fox-Pitt Kelton analyst Gary Ransom estimated might bring US$20 billion or more.
But the household names that are potential buyers of that business have suffered in recent weeks, as investor worries have brought down shares of life-insurance companies.
Standard & Poor's on Friday revised the CreditWatch status of its A-rating on AIG to negative from developing, partly due to what it sees as risks around the execution of the plan, including the difficulty AIG might have in getting good prices for its businesses in the current credit-market disruption.
AIG said Friday that all of its non-insurance businesses are for sale, as expected. But the insurer will also dip substantially into its insurance empire, selling off its US life, retirement and pensions businesses, preferably to one name-brand buyer.
Also going is its US personal-lines insurance business, though it will keep its private-client business that services high net worth customers.
Outside the US, AIG wants to keep at least a majority stake in American International Assurance Co., which sells life insurance and retirement products in China, Thailand, Korea, Australia, New Zealand, Vietnam, Indonesia and India. On the block is its American Life Insurance Co., a foreign life insurer whose largest operations are in Japan, though it also does business in Europe and other countries.
After the sales are over, the company's core business will be its US and foreign commercial property-casualty insurance business and the portion of its foreign life-insurance businesses it keeps.
Ransom estimated that AIG's aircraft-leasing business might go for US$10 billion, its 59% stake in Transatlantic Holdings Inc. (TRH) and personal lines insurance together might go for US$4 billion to US$5 billion. Along with Ransom's US$20 billion estimated price tag for AIG's US life and retirement business, Rob Haines of CreditSights values AIG's Japan and other international life and retirement business at US$74 billion and its other Asia life and retirement businesses at US$59 billion.
Those totals are set against the US$61 billion AIG has already drawn against its two-week old Federal Reserve credit line, which S&P called "much larger than we had previously anticipated," in a Friday note. Liddy said the company might need even more, as frozen commercial-paper markets aggravate its liquidity problem. The company has two-years to pay the money back.
As AIG sells off its non-insurance businesses around the world, CEO Liddy acknowledged that it had to work hard to retain customers and employees. A transparent sales process will help, Liddy said.
"We want to protect our policyholders from announcement through closing," Liddy said during the call.
But Liddy acknowledged that some business lines are suffering. One is its directors' and officers' coverage, a part of its liability coverage, which Liddy said "may have slipped 6 or 7 or 8 points from what it used to be."
Insurance rating agency A.M. Best called potential customer erosion a factor in its decision to keep AIG's rating on review Friday. Near-term profitability at AIG may be less robust, given that some policyholders are "seeking to diversify some risk away from AIG," AM Best said in a report.
That, along with softening insurance prices, generally weaker insurer performance industrywide, and the damage to AIG's reputation, raises the "possibility of erosion of franchise value and employee departures, which would have a detrimental impact to profitability."
So far, AIG has announced only one deal, the sale of its 50% interest in London City Airport to its partner in the venture, Global Infrastructure Partners. It bought the stake as a joint venture with GIP in 2006 for a total price estimated to be around US$1.4 billion. The companies didn't disclose terms of the deal.
The government stepped in mid-September, as AIG was on the brink of bankruptcy due to rising losses in its credit derivatives business. Investors had been increasingly concerned about the New York company's ability to raise capital.
The passage of the Treasury Department rescue plan will also aid AIG, Liddy said, in helping to establish better prices for its mortgage-backed securities.
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