AIG Draws $2.2 Billion More From Treasury to Bolster Units

AIG Draws $2.2 Billion More From Treasury to Bolster Units


March 17 (Bloomberg) -- American International Group Inc., the insurer rescued by the U.S., drew $2.2 billion more from a Treasury Department facility to bolster property-casualty units that will be the core of a scaled-back company.

AIG used the cash to redeem securities held by insurance subsidiaries, improving liquidity and a measure of capital adequacy watched by rating firms and regulators, said Mark Herr, a spokesman for the New York-based firm. The company owes more than $70 billion on Federal Reserve and Treasury facilities.

“AIG still needs to be cognizant of where the rating agencies stand on their solvency,” said David Havens, managing director in credit trading at Nomura Securities International Inc. in New York. The insurer may have requested the funds after “getting feedback from the rating agencies that the regulatory capital within the operating companies doesn’t muster up.”

Chief Executive Officer Robert Benmosche has said he would rebuild businesses needed to repay loans included in the firm’s $182.3 billion rescue. Most of AIG’s revenue will come from selling property-casualty coverage to corporations after it agreed this month to divest two life insurance divisions. AIG set aside more reserves for casualty claims last year, a move that caused a $2.3 billion fourth-quarter charge.

AIG redeemed the securities as part of a plan announced in April 2009 to have the property-casualty division “divest itself of investments in non-core affiliates and, therefore, improve the company’s business profile and strengthen the quality of its statutory capital,” Herr said in a statement late yesterday.

Plane Leasing

The insurer’s subsidiaries owned stock in other AIG units, including that of its plane-leasing business, at the end of 2009, said Jennifer Marshall, an analyst at rating firm A.M. Best Co. in Oldwick, New Jersey. AIG, once the world’s largest insurer, requested the Treasury funds last quarter, the firm said in a February regulatory filing. Meg Reilly, a Treasury spokeswoman, declined to comment.

“A company that has private securities of an affiliate, by replacing them with other assets, generally speaking, would improve its capital ratios,” Marshall said.

AIG may also draw on its other main source of available bailout funds, a Federal Reserve credit line, by as much as $2.3 billion next month to repay maturing commercial paper from two entities tied to the insurer’s derivatives unit, the company said in its annual report in February.

The company may need more than a decade to repay all of its U.S. bailout obligations because divestitures are insufficient, said Rafael Villarreal, a BNP Paribas SA analyst, yesterday in a research note.

Long-Term Investment

“It is increasingly clear that the investment of the U.S. taxpayer in AIG is going to have to be long term,” Villarreal wrote. “Future operating cash flows, most of which are cyclical, would need many years to service and repay debt.”

Fitch Ratings said last month that the fourth-quarter charge to cover claims from policies sold in prior years caused concerns about the “reserve adequacy and underlying profitability” of AIG’s property-casualty operations. Competitors including Chubb Corp. and Liberty Mutual Group Inc. have said AIG slashed prices to levels that may be inadequate to cover claims.

AIG has said it is charging appropriate rates. Joel Ario, the Pennsylv1ania insurance regulator, said he expects to complete by the first half of this year an examination of AIG’s rates. Rosanne Placey, a spokeswoman for Ario, declined to comment on the Treasury draw or AIG’s use of the funds.

Asset Sales

The insurer owes about $25 billion on a Fed credit line, after paying it down by about $25 billion in December by handing over stakes in the life units, AIA Group Ltd. and American Life Insurance Co. AIG secured deals to sell the units to Prudential Plc and MetLife Inc. for a combined $51 billion. The sales will close by year-end, the companies have said.

AIG, bailed out in September 2008 to prevent a U.S. economic collapse, got a rescue package that includes a $60 billion Fed credit line, up to $52.5 billion to buy mortgage- backed securities owned or backed by the insurer, and a Treasury investment of as much as $69.8 billion in two facilities. AIG has already drained its initial $40 billion Treasury program.

The second Treasury facility, which AIG got in March 2009, was initially for $30 billion. The government reduced the line by $165 million, the approximate amount AIG handed out in March 2009 to derivatives employees, after a public backlash against the bonuses.

Bailed Out

AIG first tapped the $29.8 billion facility in May when it accessed about $1.2 billion to shore up its U.S. life insurance operations. In November, AIG said it would draw about $4.2 billion from the Treasury to buy shares of its plane leasing unit from an insurance subsidiary and to restructure its unprofitable mortgage guarantor.

AIG owes about $7.5 billion on the second Treasury facility in addition to the $25 billion on the Fed credit line and about $40 billion from the first Treasury program.

The company has struck deals to raise $63 billion by selling assets after its rescue. The largest agreements were for AIA, with customers in nations including China, India and Vietnam, and Alico, which operates in more than 50 countries including parts of Europe, Latin America and Japan.

source: businessweek.com