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AIG Sells Alico to MetLife

Source: NY Times


Posted on 08 Mar 2010

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The American International Group (AIG) agreed Sunday to sell a second major insurance unit, this one to MetLife for about $15.5 billion, the two companies confirmed Monday. It was the second deal the insurer has struck in one week, raising about $51 billion to repay its taxpayer-financed rescue.

Now comes the hard part.

Even after wiping away $51 billion of debt, AIG will owe roughly $50 billion to the government. That amount is likely to keep slowly growing, because the government made large sums available — $182 billion in a number of forms — when it came to the rescue. The company has not drawn down that full amount, but every few months it taps a billion or two billion more, to finance its restructuring or bolster its insurance units.

The boards of both companies met Sunday and approved the sale of the AIG unit, the American Life Insurance Company, known as Alico, the people briefed on the matter said.

The two latest deals involve selling what the insurance giant has called its “crown jewels,” leaving it with no obvious pieces to sell off to raise big blocks of cash to pay the rest of the debt.

If the company continues to draw on its government assistance, it will have to make the value of its businesses grow even faster, in order to stay ahead.

“There’s a lot going on and it’s still uncertain,” said Bill Bergman, a senior equity analyst at the market research company Morningstar. He said the company’s revenue, in the form of insurance premiums, seemed to have stabilized in the fourth quarter, “and that’s helpful.”

But under the surface, he said it was hard to know how profitable the new insurance policies written by the company would prove to be. The insurance business is considered soft at the moment, with companies unable to raise their prices to increase profitability.

One way for AIG to repay the rest of its bailout would be to eventually convert the government’s existing holdings of preferred stock in A.I.G. into common shares that could then be sold over time, according to a person briefed on the matter.

But investors’ appetite for AIG stock is uncertain. AIG as not profitable in 2009. About $5 billion of its approximately $11 billion loss for the year stemmed from a one-time accounting charge. Setting aside additional money in reserve to pay future claims caused $2.7 billion of its loss, the company said, something Mr. Bergman called “a red flag.”

But the purchase of Alico by MetLife also carries uncertainties. A. M. Best, a ratings firm that specializes in insurance companies, said in February that it was reviewing MetLife’s ratings, with a negative outlook, in light of the possible acquisition.

“There is uncertainty with respect to the impact on MetLife’s balance sheet, capitalization and financial metrics,” A. M. Best said in a statement.

Under the terms of the deal, MetLife will pay about $6.8 billion in cash, with the rest of the purchase being made in a mixture of common and preferred shares. The first $9 billion in proceeds from the sale will go toward redeeming preferred shares in Alico held by the Federal Reserve Bank of New York, with the remainder to be used to reduce the New York Fed’s lending commitment to A.I.G.

For MetLife, the acquisition of Alico will give it instant access to dozens of international markets. Alico operates in more than 50 countries, with its largest operations in Japan and Britain. Other operations are in Latin America, the Middle East and other parts of Asia. It is expected to begin significantly adding to MetLife’s earnings per share in 2011, a person briefed on the matter said.

Stock analysts have said they will view MetLife’s foreign expansion favorably, because other big American life insurers like Prudential Financial and Aflac already have significant international presences. Through the sale, A.I.G. will initially hold about an 8 percent stake in MetLife, though it will essentially lack independent voting rights, these people said. As A.I.G.’s preferred shares are converted into common stock over the next few years, that stake could rise to more than 20 percent.

The deal is expected to close by the end of 2010, these people said.

The MetLife agreement came just a week after A.I.G. accepted an offer for its other big overseas life insurer, American International Assurance, from Prudential, a British company that is not related to Prudential Financial. The British company offered to pay about $35.5 billion for A.I.A., and the first $15 billion will be used to redeem another block of preferred stock held by the Federal Reserve Bank of New York. The remainder will reduce the Fed’s lending facility to A.I.G.

A number of steps remain before the New York Fed receives the full $50 billion from these two transactions. But if all goes as planned, the Fed’s lending commitment to A.I.G. will shrink to about $10 billion, from $35 billion, where it has stood since Dec. 1. The commitment was $60 billion before that, but the Fed reduced it by swapping $25 billion of the commitment for preferred equity in the two subsidiaries now being sold.

The company continues to take on fresh debt even now, more than a year after its government rescue. AIG still cannot roll over its commercial paper, even as most other large companies have been able to end their reliance on a special program set up by the Fed when the credit markets froze in the fall of 2008.

The Fed has been winding down that program, so AIG recently drew $3.1 billion from its lending commitment from the Fed and used the money to pay back the Fed’s commercial paper program.

That transaction increased A.I.G.’s borrowings from its New York Fed lending commitment to a total of $21 billion, from $17.9 billion at the end of the year.

Even after wiping away $51 billion of debt, AIG will owe roughly $50 billion to the government. That amount is likely to keep slowly growing, because the government made large sums available — $182 billion in a number of forms — when it came to the rescue. The company has not drawn down that full amount, but every few months it taps a billion or two billion more, to finance its restructuring or bolster its insurance units.

The boards of both companies met Sunday and approved the sale of the AIG unit, the American Life Insurance Company, known as Alico, the people briefed on the matter said.

The two latest deals involve selling what the insurance giant has called its “crown jewels,” leaving it with no obvious pieces to sell off to raise big blocks of cash to pay the rest of the debt.

If the company continues to draw on its government assistance, it will have to make the value of its businesses grow even faster, in order to stay ahead.

“There’s a lot going on and it’s still uncertain,” said Bill Bergman, a senior equity analyst at the market research company Morningstar. He said the company’s revenue, in the form of insurance premiums, seemed to have stabilized in the fourth quarter, “and that’s helpful.”

But under the surface, he said it was hard to know how profitable the new insurance policies written by the company would prove to be. The insurance business is considered soft at the moment, with companies unable to raise their prices to increase profitability.

One way for AIG to repay the rest of its bailout would be to eventually convert the government’s existing holdings of preferred stock in A.I.G. into common shares that could then be sold over time, according to a person briefed on the matter.

But investors’ appetite for AIG stock is uncertain. AIG was not profitable in 2009. About $5 billion of its approximately $11 billion loss for the year stemmed from a one-time accounting charge. Setting aside additional money in reserve to pay future claims caused $2.7 billion of its loss, the company said, something Mr. Bergman called “a red flag.”

But the purchase of Alico by MetLife also carries uncertainties. A. M. Best, a ratings firm that specializes in insurance companies, said in February that it was reviewing MetLife’s ratings, with a negative outlook, in light of the possible acquisition.

“There is uncertainty with respect to the impact on MetLife’s balance sheet, capitalization and financial metrics,” A. M. Best said in a statement.

Under the terms of the deal, MetLife will pay about $6.8 billion in cash, with the rest of the purchase being made in a mixture of common and preferred shares. The first $9 billion in proceeds from the sale will go toward redeeming preferred shares in Alico held by the Federal Reserve Bank of New York, with the remainder to be used to reduce the New York Fed’s lending commitment to A.I.G.

For MetLife, the acquisition of Alico will give it instant access to dozens of international markets. Alico operates in more than 50 countries, with its largest operations in Japan and Britain. Other operations are in Latin America, the Middle East and other parts of Asia. It is expected to begin significantly adding to MetLife’s earnings per share in 2011, a person briefed on the matter said.

Stock analysts have said they will view MetLife’s foreign expansion favorably, because other big American life insurers like Prudential Financial and Aflac already have significant international presences. Through the sale, A.I.G. will initially hold about an 8 percent stake in MetLife, though it will essentially lack independent voting rights, these people said. As A.I.G.’s preferred shares are converted into common stock over the next few years, that stake could rise to more than 20 percent.

The deal is expected to close by the end of 2010, these people said.

The MetLife agreement came just a week after AIG accepted an offer for its other big overseas life insurer, American International Assurance, from Prudential, a British company that is not related to Prudential Financial. The British company offered to pay about $35.5 billion for A.I.A., and the first $15 billion will be used to redeem another block of preferred stock held by the Federal Reserve Bank of New York. The remainder will reduce the Fed’s lending facility to AIG.

A number of steps remain before the New York Fed receives the full $50 billion from these two transactions. But if all goes as planned, the Fed’s lending commitment to AIG will shrink to about $10 billion, from $35 billion, where it has stood since Dec. 1. The commitment was $60 billion before that, but the Fed reduced it by swapping $25 billion of the commitment for preferred equity in the two subsidiaries now being sold.

The company continues to take on fresh debt even now, more than a year after its government rescue. AIG still cannot roll over its commercial paper, even as most other large companies have been able to end their reliance on a special program set up by the Fed when the credit markets froze in the fall of 2008.

The Fed has been winding down that program, so AIG recently drew $3.1 billion from its lending commitment from the Fed and used the money to pay back the Fed’s commercial paper program.

That transaction increased AIG's borrowings from its New York Fed lending commitment to a total of $21 billion, from $17.9 billion at the end of the year.


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