Risk Management

AIG Spins Off Units to Government

The crippled insurance conglomerate gets more federal help — this time through a $30b revolver, plus better terms on previous loans and a new stake...
Sarah JohnsonMarch 2, 2009

The government’s latest capital-lifeline plan for AIG involves the company turning two of its subsidiaries into special purpose vehicles.

In effect, AIG’s American International Assurance Co. and American Life Insurance Co. will now be owned by the New York Fed — which will receive up to $26 billion in preferred interest from its investment — although the two units are still controlled by AIG. In exchange, the New York Fed has cut the interest rates for a credit revolver created in September, and reduced the amount AIG owed on the facility — an amount from which AIG had reportedly drawn down $38 billion.

The move is one of many changes that AIG announced today as it posted a $61.7 billion loss for the fourth quarter and acknowledged it will receive an additional $30 billion from the U.S. government, almost six months after the Federal Reserve took over 80 percent of the faltering insurance giant through its initial $85 billion loan as the credit markets took a dire swan dive.

Worsening market conditions since the first bailout led the Treasury and Fed to deepen their investment in AIG, the agencies said in a joint statement today: “Given the systemic risk AIG continues to pose and the fragility of markets today, the potential cost to the economy and the taxpayer of government inaction would be extremely high.”

Indeed, AIG’s $61.7-billion loss last quarter compared to a $5.3 billion loss during the same quarter in 2007, is reportedly the largest quarterly loss in corporate history. The insurer blames the poor results on the credit crisis, its ties to mortgage-backed securities, and charges related to its ongoing restructuring efforts. AIG’s net loss in 2008 was $99.3 billion, or $37.84 per diluted share. The previous year, the firm had reported a $6.2 billion profit.

Under the latest terms, Treasury and the Fed have reduced the amount that AIG owes the government in interest and have made $30 billion of Troubled Asset Relief Program funds available to the firm. The funds are designated for a new five-year equity capital facility.

In addition, Treasury will exchange $40 billion of preferred stock holdings for new preferred stocks whose new terms will more resemble common stock and will provide for non-cumulative dividends.  

For the amended terms of the revolver held by the New York Fed — which affects the AIG subsidiaries mentioned above — the government is authorizing the agency to benefit from securitization. The N.Y. Fed can make up to $8.5 billion in new loans for the SPVs. The loans would be repaid from net cash flows realized from blocks of existing life insurance policies.

AIG says the changes to its subsidiaries will turn them into independent organizations and, in turn, “improve AIG’s capital structure, protect and enhance the value of its key businesses, and position these franchises for the future as more independently run, transparent companies”