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 $30 billion US 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 other international businesses — American International Assurance Company, Ltd., and American Life Insurance Company (ALICO) — as separate units and will put its 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 $26 million US — 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 $8.5 billion U.S. 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 12 months to complete. AIG’s immediate priority, he said, is debt reduction. He addressed industry chatter over how quickly the company seemed to run through its credit facility, noting that the company has drawn on only $38 billion US 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 $20 billion US of the original credit facility. The latest infusion — a five-year, $30 billion US capital facility — doesn’t reflect dire straits, he said. “We don’t need new cash; it’s a backup to enhance our prospects.”
The company announced its strategy on the heels of heavy 2008 losses: along with the restructuring plan, it reported a $61 billion US net income loss for the fourth quarter and a $99 billion US 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 benefit just 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.
(03/03/09)