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AIG makes dent in debt with sale of prized unit

$35.5 billion deal viewed as precursor to other dispositions

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AIG makes dent in debt with sale of prized unit

NEW YORK—American International Group Inc.'s move to sell its Asian life insurance unit to London-based Prudential P.L.C. for $35.5 billion will help build momentum for AIG to sell its remaining noncore assets, putting it in a better position to repay its government debt, say observers.

Observers point out the sale price is significantly more than the unit, AIA Group Ltd., would have fetched only several months ago, and describe it as a ringing validation of AIG President and CEO Robert M. Benmosche's policy of not rushing to dispose of its noncore assets.

It remains unclear, however, how many more assets New York-based AIG will have to sell or spin off to repay its government debt and whether it will be able retain its Chartis Inc. property/casualty unit. Late last week, though, AIG was reportedly close to agreement on the sale of another life insurance unit, American Life Insurance Co., to MetLife Inc. for $15 billion.

In addition, last week AIG said it will sell its remaining ownership in reinsurer Transatlantic Holdings Inc., which analysts say could bring up to $500 million. AIG said it owns roughly 13.8% of Transatlantic and it would sell its shares in a public offering by March 9.

According to AIG's 2009 10-K, of the $182.3 billion government package, which includes $87.5 billion of debt and $94.8 billion of equity, there is a remaining balance outstanding to be repaid by AIG of $94.76 billion as of Dec. 31.

The federal government took a nearly 80% ownership stake in AIG in September 2008 after the company came close to collapse because of deals made by its financial products unit. Since then, AIG has been selling off operations to repay the government's financial assistance, with plans to retain its core property/casualty operation, Chartis, and domestic life and retirement services operations, SunAmerica Financial Group (see related story and box).

AIG and Prudential announced a definitive sale agreement last week. Under the terms of the deal Prudential will pay $35.5 billion in cash and stock for Hong Kong-based AIA, which is one of AIG's most-prized assets. Prudential, which is a major U.K. life insurer and is not affiliated with the U.S. firm Prudential Financial Inc., said it would finance the cash component of the deal through a $20 billion rights issue and a $5 billion debt issue.

AIG said $16 billion of the cash from the sale, which is the largest so far in AIG's ongoing restructuring efforts, will be used to redeem the Federal Reserve Bank of New York's preferred interest in AIA, and it will use the remaining $9 billion in cash to pare down its outstanding debt under the New York Fed's credit facility. AIG plans to monetize the remaining $10.5 billion in face value of Prudential securities over time, and those net proceeds also will be used to repay its outstanding debt under the credit facility.

Observers praised the deal. John L. Ward, CEO of Cincinnati-based Cincinnatus Partners L.L.C., said, “It's a fabulous deal for AIG, and adds tremendous momentum to their divestiture program.” AIG received double the price it would have gotten a year ago, he said.

Cathy Seifert, an equity analyst with New York-based Standard & Poor's Corp., said, “The terms were reasonably attractive,” considering the marketplace, the poor economic environment, “and the fact that everyone knew AIG pretty much has to sell assets.”

AIG's situation has “improved from the dire situation a year ago,” she added. “I don't think the coast is totally clear, and I think there's a lot more work that has to be done, but I think this sale has given the company some breathing room and some credibility,” said Ms. Seifert.

The amount of proceeds, if the deal is completed, is “clearly a very good step in the right direction to restore them to financial health and pay back the loan to the government,” said Kevin Ahern, a credit analyst with S&P.

John Wicher, of John Wicher & Associates Inc. in San Francisco, said, “The fact that they showed patience and held onto their assets and didn't yield to pressure and sell” last year has “served the taxpayers well.”

The deal is a validation of Mr. Benmosche's decision to go slowly on asset sales, say observers. Ms. Seifert said, “The fact that Mr. Benmosche was able to execute a deal of this size and on these terms gives him a lot of credibility.”

But, with the sale, AIG no longer will benefit from AIA's income stream, observers point out. Cliff Gallant, an analyst with Keefe, Bruyette & Woods Inc. in New York, said, “It's a major contributor to the company's earnings, particularly because it did hold up relatively well, so no question, something is being lost here.” AIG has not separately reported the operating results of AIA, which has more than $60 billion in assets.

As the funds are being used to pare down AIG's federal debt, it won't be able to invest the money in the business, said Myron Picoult, an independent consultant.

Meanwhile, noted Ms. Seifert, AIG had to boost Chartis' reserves by $2.3 billion, while it posted a net premium decline for 2009. The company reported a 13.9% drop in premiums from 2008, to $30.66 billion.

Business is being hurt by a weak economic environment and a soft insurance market, said Ms. Seifert. While AIG was once the beneficiary of the flight-to-quality characteristic of soft markets, it is now negatively affected by it, particularly in long-tail lines.

Mr. Ahern said, however, “Our sense is they've been doing a pretty good job with business and management retention, and now it's just a matter of them starting to return to some level of profitability” in terms of combined ratios.

The question remains, however, whether AIG eventually will be able to repay its federal debt. Ms. Seifert said, “There's a lot of uncertainty regarding” this, although the AIA sale is “a step in the right direction.”

It also remains unclear whether AIG ultimately will have to sell or spin off its Chartis unit. Mr. Ahern said, “The expectation is, they're viewing this as a core operation, so to the extent they continue to have success with their asset dispositions, we expect that Chartis will remain part of the AIG family.”

“I can't say with certainty that (AIG) will survive, but I think it will,” with its property/casualty operations intact, said Bill Bergman, an analyst with Morningstar Inc. in Chicago.

Mr. Gallant said, “You need some kind of ongoing business because I don't think asset sales alone are going to be enough to pay back the government.”

Mark Rouck, Chicago-based senior director at Fitch Ratings Inc., said, “I think the plan is to kind of streamline the operation” and focus on AIG's core operations. However, “our concern is that there still is a significant amount of debt outstanding...and they also have the ongoing runoff of the financial products group.”