The ultimate viability of American International Group’s currently healthy life insurance units is a race against time, according to industry analysts and AIG officials.
They made their comments in the aftermath of the recent disclosure that AIG lost a historic $100 billion in 2008, forcing federal regulators to restructure for the 4th time the government support package fashioned last September.
In comments at the conference call following disclosure of AIG’s 2008 earnings and the government decision to provide up to $30 billion in additional capital to AIG on an as-needed basis, Ed Liddy, chairman and CEO, acknowledged that the task remaining for AIG to become a stable company with no government role will be difficult because of the size of the company and the poor economy.
“The measure of the health of the investment-sensitive portion of our industry is down 52% year-to-date as of last Friday, that’s two months,” he said. “And it is down over 70% since I became CEO of AIG in late September.”
He also said the company is aware that despite the challenges, it must move quickly if it wants to prevent further erosion in the company’s market share.
“The marketplace is a pretty crummy place to be right now,” Liddy said.
A new plan has emerged that calls for operating the successful and solvent insurance units, both life and property-casualty, as separate units. Under that plan, these units will be rebranded, and a share in them, at first up to 19.9%, will be offered to the public through initial public offerings.
In the life area, under the new plan, AIG is giving an ownership interest to the government in American Life Insurance Company and American International Assurance Company in exchange for paying off the $38 billion it owes the Fed under a credit facility.
This will reduce the company’s interest costs; in addition, the company will continue to manage this business.
Liddy justified giving an ownership interest to the government. “This will allow AIG to cap the intrinsic value of its insurance companies, to repay a portion of government credit facility, it will accelerate AIG’s restructuring plant and position these businesses as independent companies,” he explained.
At the same time, AIG has formed a “general insurance holding company”–AIU Holdings Inc.–to include its Commercial Insurance Group, Foreign General unit and other p-c operations.
In comments at a property-casualty insurers’ group meeting March 6, John Doyle, executive vice president of the AIG Property Casualty Group, as well as a senior vice president of AIG, said the company is making a “tragic” but necessary move in creating a corporate entity housing AIG’s healthy property-casualty operations separately from the parent firm’s “damaged brand.”
The launch of AIU Holdings is “the first step to create a new business separate from our parent company,” Doyle said.
AIU Holdings, encompassing 16 insurance entities, will have its own board of directors, management team and brand identity distinct from AIG, which initially will own 100% of the holding company.
Sometime next year, however, AIU hopes to diversify its ownership and raise capital by selling off a minority stake in the business–”probably 20%” of the new company, noted Doyle–perhaps via an initial public offering, depending on market conditions.
Besides the erosion in the market share of its worldwide businesses, particularly on the life side, both domestically and internationally, AIG has emerged as the poster boy for all that has gone wrong in the world economy over the last 18 months.
Despite that, “the insurance companies are excellent companies, they are the leading companies internationally, in both life and property-casualty,” said Cliff Gallant, an insurance analyst at Keefe, Bruyette and Woods in New York.
“You could see that in the fourth quarter operations,” Gallant said. “Foreign property-casualty sales only declined 3%, and foreign consumers are still loyal to the company.”
On the life side, he said, “there is a lot more deterioration, between 20% and 50%, both domestically and internationally.”