It was just a short time ago that the American International Group (AIG) name riddled the papers and news columns with updates on the insurance giant’s troubles and whether they would survive the economic downturn with severe capital issues. They received the biggest bailout in history and seemed to barely get by. Now, a few short months later, they must plan how they will re-pay their TARP money. We now have a clearer vision of exactly what assets may be auctioned off and what the new landscape of the financial sector may be. The next few months for AIG will vastly change its balance sheet and hopefully purge some of its debt owed to the U.S. government. Is it possible for this giant to stay alive, yet alone return to its past prominent state?
AIG’s New Face
AIG has started the process to become a very different company than the down-trodden one of the past year. AIG first got into trouble when not only its traditional operations struggled, but its involvement in the credit default swap markets backfired. Leadership will now look to get back to the basics, stripping away non-core assets and focusing on its fundamental core. It has committed to an entirely different future by selecting six new candidates for its Board of Directors in addition to its present cast. This group AIG hopes will guide this new looking AIG to brighter future. AIG has yet to announce if any of the current board members are up for re-election. There has been a great deal of change in leadership in recent times, with both the long time CEO Martin Sullivan stepping down as AIG’s CEO, and later his successor Robert Willumstad losing his job. Even now, the current CEO, Edward Liddy, has recently announced that he will step down once a suitable successor is found. Hopefully the ever changing group should be able to progress without the ties to extreme bonus pay despite TARP funds and other public pressures. AIG has no imminent capital issues, as it still has roughly $30 billion in an untapped TALF fund that could be used for any pressing needs as well as the ability to borrow up to another $60 billion from the government. However, CEO Liddy also stated that he wished to get the company more liquid, and not need to rely on any funds given through TARP.
There have been several cases of AIG trying to shave off some of its debt by selling assets in the past months. In March, AIG transferred some ownership of AIA and ALICO, its foreign life insurers, to the Federal Reserve for a reduction in the balance AIG owes the government. AIG, however, will continue to manage the firms. AIG also agreed to sell one of its Japanese buildings to Nippon Life Insurance. This building served as the headquarters for AIG in Tokyo, and is expected to fetch $1.2 billion in cash. However, despite these recent sales, AIG continues to have to utilize the cash given to it by the government. This is sustainable for now because there is still $30 billion in credit line left with the government aid. AIG has tried to reduce its reliance on the TARP money by these recent sales. Currently, AIG is continuing to auction off several more assets hoping to further reduce its debt.
AIG has also decided to auction its asset management unit, AIG Investments. There are currently a few suitors, with Religare Enterprises Ltd. from India and Macqarie Group from Australia leading the race. The bids are expected to close within about 3 weeks and the asking price is reportedly $500 million. AIG is also currently trying to sell its Taiwan life-insurance unit to raise capital. They hired Morgan Stanley (MS) to sell the unit, Nan Shan Life Insurance. Nan Shan has an estimated book value of $2.6 billion and is the second largest insurer by gross premiums.
It also plans to offer AIA Group, its main Asian asset in an IPO sale by 2010. This deal would exclude any of AIG’s key Japanese assets. The company is expected to be worth around $25 billion, but advisers are recommending AIG only sell a smaller stake that would raise roughly $5 billion. This is in response to a weak market where Liddy was not impressed with any of the offers for the unit. This may have been because other companies were trying to strongarm the capital-strained insurer or the other companies themselves had their own capital issues. AIG leadership feels that an IPO will bring the greatest capital to the firm. This is a great call on their part, for it will buy a little more time for AIA to gain some additional value as well as get a true market price. This asset is an extremely valuable one that has been very successful in Asia, and truly its one weakness in the past year was that it was tied to AIG’s name and bailout history.
Despite all the positive attempts by AIG's brass to right the ship, they continue to take punishment by the rating services. Recently, AIG’s ratings were cut drastically. Fitch lowered their life insurance and retirement units to A-, down three spots. Also, the air-craft leasing, international operations, and American General Finance units all received cuts in ratings to BBB, BBB, and BB respectively. This was determined to be due to struggling sales in the traditional insurance business as well as the investment losses. The balance sheets of AIG also took a recent hit, as its total value as determined by the fed fell $9.4 billion to $36.4 billion. This has been extremely tough news for AIG, and they are now forced to try to sell assets that continue to lose value.
The position held by the AIG execs is not an enviable one. They must figure how to keep a business operation consistent and growing, while trying to strip away nonessential assets, in addition to trying to figure out how to pay back $173 billion with a company that is worth about $36.4 billion. AIG has had a rough past 12 months, and is now facing credit cuts on top of everything. The size of its losses has decreased drastically, but AIG is still posting losses. They are taking all the necessary steps, trying to retain as many employees and holdings as possible while chipping away at its vast debt. However, I just don’t see how this insurance giant can ever stabilize with the vast amount of liabilities. It just seems to be unlikely for this company to ever regain stability, let alone prominence. AIG is currently being sustained by the respirator known as the taxpayer, and it is the taxpayer that will ultimately be disappointed.