Capital Markets

AIG: A Bridge to Somewhere?

The ailing insurer gets approval to lend $20 billion to itself.
David KatzSeptember 15, 2008

Finance executives at the many companies whose assets are covered by AIG, the mortally wounded property-casualty insurance giant, can breathe a sigh of relief. To be sure, insurance company rules have been relaxed to enable the insurer’s holding company to use $20 billion of the assets of its insurance company subsidiaries. But there’s more than enough cash available in the trillion-dollar company to pay insurance claims, according to the New York State Insurance Department.

On Monday afternoon, New York Gov. David Paterson gave AIG the go-ahead to get its hands on a big chunk of its insurance units’ asset as a kind of bridge loan to itself. “I have directed our superintendent of insurance to provide the authorization such that AIG can access $20 billion of its assets through its subsidiaries for the purpose of posting these assets for collateral to provide liquid cash to allow day-to-day operations of the company,” said Paterson. New York Insurance Superintendent Eric Dinallo was significantly involved in the talks over the weekend aimed at shorting up the New York-based insurer, according to the Wall Street Journal.

The deal will be structured as an “asset swap,” Andy Mais, a spokesperson with the N.Y. insurance department told CFO.com. Under the arrangement, the parent company will be “taking more liquid assets out of the subsidiaries and replacing them with less liquid assets of equal or greater value.”

“AIG’s insurance companies are financially strong and capable of honoring policyholders,” he said, noting that the insurance companies’ claims are legally “walled off” from claims on the holding company’s assets. After all, Mais noted, the $20 billion is a small part of a company that has a trillion dollars in assets.

AIG public relations director Joe Norton said the insurer had no comment yet and could not say if the insurer’s chief executive officer, Robert Willumstad, would move up previously scheduled plan to announce actions he would take to allay the company’s problems.

Early on Monday, the Journal reported that the insurer, was assembling a survival plan that could includes selloffs of valuable assets, capital raising and going to the Federal Reserve for aid. The measures were geared to prevent a credit-rating downgrade by raising $40 billion. Reuters reported later that the New York Federal Reserve was hosting meetings on meetings involving the AIG situation that included U.S. Treasury officials, state rulemakers, and representatives of financial services companies.

Earlier this month, Norton brushed off a report that the company was thinking about a “bad bank/good bank” solution to its problems in which it would spin off a separate company that would hold some of its loss-laden subprime real estate securities, while holding on to its more solid insurance business. In the event, the company seems to be entering into another kind of “bad bank/good bank” structure, but one that doesn’t involve a spinoff.

On August 6, AIG, which has been accused by critics of venturing out of its depth into sophisticated financial products, reported a $5.36 billion second-quarter net loss that included a pre-tax charge of about $5.56 billion for an unrealized market valuation loss related to the its AIG Financial Products unit’s super senior credit-default swap portfolio. “We are conducting a comprehensive review of all AIG’s businesses with the objectives of improving results, reducing AIG’s risk profile and protecting our capital base. We are examining every business, as well as the assumptions underlying how we do business in the markets where we have a presence,” Willumstad said then.