Posted on 02 Mar 2010
American International Group Inc. (AIG) took its biggest step yet on Monday toward repaying money it got from the U.S. government's massive bailout of the insurance giant with the sale of its Asian life insurance business AIA to the U.K.'s Prudential PLC for roughly $35.5 billion.
The deal is the largest insurance acquisition ever, according to Thomson Reuters data. It gives AIG about $25 billion in cash that can be used to quickly repay some of the government's support.
More importantly, the deal may also buy AIG Chief Executive Robert Benmosche more time to build equity value for the insurer's shareholders before the government withdraws support.
"The Administration supports the board of directors at AIG in its decision to sell and recognizes this is a major step in the AIG restructuring plan to de-leverage, de-risk and pay back taxpayers," a Treasury spokeswoman said in a statement. She declined to comment further.
CreditSights, an independent fixed-income research firm, called the AIA sale the "biggest single step in repaying U.S. taxpayers."
The sale price was higher than CreditSights' mid-range estimate and adds to the firm's sum-of-the-parts valuation of AIG.
AIG is also reportedly negotiating the sale of Alico, another large Asian insurance business, to MetLife Inc. for roughly $15 billion.
Including proceeds from that deal and the AIA transaction, along with AIG's remaining businesses, the insurer's assets are now worth more than its outstanding senior debt of almost $64 billion, CreditSights estimated on Monday. Even in a worst-case scenario, there would be close to 100% asset coverage, the research firm said.
The price of AIG credit-default swaps dropped to 450 basis points on Monday from an equivalent of more than 550 basis points at the end of last week, according to CMA DataVision. That suggests investors are less concerned about the insurer defaulting on its debt.
Still, even if AIG is able to repay all the money it owes the government, some analysts and investors are concerned that there could be little left for equity holders.
AIG shares climbed 5.7% to $26.17 during afternoon trading on Monday. But the stock is down 13% so far this year and has lost 95% since the financial crisis erupted in the summer of 2008.
Catherine Seifert, an insurance analyst at Standard & Poor's Equity Research, reckons AIG's stated book value includes a lot of intangible assets with values that may not be fully realized.
Still, the AIA deal "should provide AIG and its new leadership team with important credibility as it continues to restructure," Seifert wrote in a note to investors on Monday.
If the government is satisfied enough with the progress AIG is making reorganizing and selling businesses, it may leave support in place for longer, giving CEO Benmosche and the insurer's other managers more time to build equity value.
Before the AIA deal was announced Monday, AIG had sold more than 20 businesses since September 2008, raising more than $10 billion in proceeds.
If AIG is forced to sell more assets to repay the government quickly, there's less chance that equity investors will get any value.
But if AIG starts to generate steady profit again in coming years, the insurer may be able to use deferred tax assets from massive losses suffered in 2008. Companies can only use these assets if there's a good chance they will make a profit in their next fiscal period.
The prospect of earnings and lower taxes could attract new investors. That might help AIG to sell new common stock and replace the preferred shares currently owned by the Treasury Department.
Despite Monday's AIA deal, AIG has a long way to go. The insurer reported almost $95 billion in total support from the federal government at the end of 2009.