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Posted On: Sep. 21, 2008 12:00 AM CST

NEW YORK—American International Group Inc. may have been rescued from the brink of collapse last week, but big questions still hang over the insurance giant, including uncertainty about what operations AIG will retain in the long term.

Some expect AIG to survive, albeit in much diminished form. Others, though, say the company is unlikely to remain an independent entity as the federal government seeks quick repayment through asset sales of funds that are drawn down from the $85 billion revolving credit facility the Federal Reserve Board provided AIG last week to prevent its bankruptcy.

The Federal Reserve Board will receive a 79.9% equity interest in the insurer in return for extending a two-year loan of up to $85 billion (see related story). AIG was forced to seek the loan after Lehman Bros.' bankruptcy sparked a dramatic decline in AIG's stock price in a stock market panic and AIG failed to raise sufficient private capital to prevent fatal downgrades by rating agencies.

The Federal Reserve credit facility removed the imminent threat of bankruptcy for the company, although AIG Financial Products' actual exposure to the estimated $450 billion of credit default swaps—the root of AIG's financial problems—remains unclear.

The Federal Reserve Board also pushed aside Chairman and Chief Executive Officer Robert B. Willumstad, naming former Allstate Corp. CEO Edward M. Liddy to lead the company. Mr. Willumstad had been installed in June after the ouster of former chief Martin Sullivan.

Meanwhile, the Wall Street Journal reported Friday that "major" shareholders are exploring an effort to help repay funds borrowed from the Fed. The paper, citing a person familiar with the matter, said the shareholders are seeking to prevent government ownership of the company.

Observers agree there will likely be eager buyers for AIG's operations that are put up for sale. There are concerns, though that AIG's operating units, although still financially healthy, may have trouble retaining both staff and clients (see related story).

AIG senior executives said last week that the insurer does not intend to sell its U.S. and foreign commercial property/casualty businesses.

"Domestic commercial insurance and foreign general insurance are core, and we have no plans to sell those," said Kristian Moor, AIG executive vp and chief executive officer of AIG Property Casualty Group.

"Our insurance companies remain in strong financial condition," said John Doyle, CEO of AIG Commercial Insurance, the commercial lines division of AIG Property Casualty Group. The financial problems at the parent company "were never about the insurance subsidiaries."

New York-based Moody's Investors Service, which announced last week it will maintain present ratings for now (see story, page 31), said AIG's management is "working vigorously" to demonstrate its insurance units have sufficient liquidity and capital to support existing and new business. "It will take time to determine the extent to which recent events may have weakened the companies' standing in the market," the rating agency said.

While some believe AIG will be able to retain at least some of its core businesses, others contend most everything will be up for sale.

John Wicher, of John Wicher & Associates Inc. in San Francisco, said, "It's been long viewed by many that AIG was too big and too complex to be manageable."

"Starting with the assumption AIG viewed itself as primarily an insurance company providing property/casualty, life and annuity-type products worldwide," strategic questions must be asked as to which assets "may be desirable to retain, and may be complementary, but aren't critical to your mission. Those will be sold off, but they have two years to do it," Mr. Wicher said.

"Two years from now, AIG is going to be a smaller company, $85 billion smaller," he said. Commercial insurance, which accounts for about 40% of its general insurance operations, is "going to be there" although "it may be a freestanding entity, which has been spun out from the holding company," Mr. Wicher said.

Analyst Bijan Moazami, with North Arlington, Va.-based Friedman, Billings, Ramsey & Co. Inc., said in a report AIG "will likely emerge a smaller and more focused company than before." He estimates AIG's breakup value at "well over" $150 billion.

But AIG may no longer be the global presence it has been in the past, said Thomas Noack, an insurance analyst with bank WestLB A.G. in D¸sseldorf, Germany. "Perhaps they have to say goodbye to certain areas of the world."

Fitch Ratings, which revised its ratings view on AIG and its units to evolving from negative, said in a statement it believes AIG "will likely sell a significant number of its operating company subsidiaries, and that these sales may include subsidiaries that Fitch had previously viewed as core operations."

Standard & Poor's Corp., which revised the rating status of most AIG units to developing from negative, said in a statement that the amount drawn from the $85 billion borrowing facility will inform decisions on which businesses might be sold.

Stewart Johnson, a portfolio manager with Philo Smith & Co., a Stamford, Conn.-based boutique investment bank that specializes in insurance, said, "You start by selling the financial businesses," including AIG's airplane leasing business, International Lease Finance Corp.

"You hope to be able to repay the money borrowed for the government with those sales, but if you can't—and that's probably the case—then you start selling the property/casualty and the life businesses, and what's left, I don't know."

Sean Egan, president of Wynnewood, Pa.-based Egan-Jones Ratings, a ratings agency, said, "AIG will be under severe pressure to downsize its operations because of the cost of the government loan being north of 12%, and you're likely to see" a much smaller AIG in the future that is "possibly ultimately owned by another insurance firm.

"It's fairly difficult to go from a largely broadly based, highly rated insurance company to a smaller entity, and therefore it wouldn't be surprising if ultimately the corpus were purchased by another of AIG's stronger competitors," said Mr. Egan.

John L. Ward, chief executive officer of Cincinnatus Partners L.L.P. in Cincinnati, said "virtually everything" will be up for sale. "My sense is they probably do plan to divest most of the operating assets" and "that was part of the deal with the Fed," said Mr. Ward.

Cliff Gallant, an analyst at Keefe, Bruyette & Woods Inc. in New York, said, "I think it's all going to be sold, and I think it'll happen pretty quickly."

"I don't think there's any mandate to have AIG re-emerge someday. I think the idea is to liquidate the assets as quickly as possible," possibly in a matter of weeks, said Mr. Gallant.

Unlike some others, Mr. Gallant does not foresee a scenario where units that are considered noncore are first sold before the insurer turns to its core operations.

"They're going to sell them as they get offers," he said. "The idea that they would try to save the core businesses within AIG, or the international, I think, is somewhat naive because they owe so much money right now.

"I think they're going to have to borrow the full $85 billion and somehow pay them back, and the only way to do that is to start selling things," Mr. Gallant said.

Regis Coccia contributed to this article.