As reported in the Daily NewsFlash, AIG announced the restructuring Monday, and said it will name a board of directors and management team for AIU Holdings Inc. which will "assist AIG in preparing for the potential sale of a minority stake in the business, which ultimately may include a public offering of shares, depending on market conditions," AIG's Monday press release said.
The news attracted little attention in light of AIG's revamped bailout by the federal government, announced at the same time. But the restructuring of AIG's commercial-insurance business could also have far-reaching consequences for the company. One industry participant who took part in a client conference call on the restructuring said the change seeks to free the company from AIG's debt and bad investments, and help retain key employees and customers.
"No one will leave now," said Andrew Barile, an insurance consultant in Rancho Santa Fe, Calif. "This will create a bonanza for employees. If you get in at the beginning, you get shares at the book value of that company."
AIG didn't immediately return a phone call asking for details on the plan.
Barile said the purpose of the call, which was sponsored by insurance broker Aon Corp. (AOC) for 1,000 of AIG's largest global insurance clients, was to reassure customers that the new unit's capital structure wouldn't be tied to AIG, and that the new unit would be in a stronger capital position than most competitors which were trying to lure away customers.
According to Barile, AIU Holdings executives John Doyle and Nicolas Walsh said, as a standalone, the new entity would have recorded $45 billion in 2008 revenue, which would rank it 54th among Fortune 500 companies and would make it the largest property/casualty insurer in the world.
Its policyholder surplus, a regulatory calculation of the capital an insurer holds above what it needs to pay off on claims, was $26 billion, higher than any of its competitors.
The new unit would consist of AIG's U.S. and international commercial- insurance businesses, and some of its personal-lines businesses, including its private client group, Barile said executives disclosed during the call.
Eventually, the new unit would raise capital through a public share offering or by raising private capital, though the new unit doesn't currently need capital and carries no debt of its own.
The separate structure could free AIG's worldwide commercial-insurance operations from the spreading worry over growing losses in AIG's other business units. If the new entity were sold or spun off in an initial public offering, current AIG shareholders will be eligible to share in the profits.
Terms of the spin-off were left vague, as was much of AIG's restructuring, which also involves placing its life-insurance businesses into a special-purpose vehicle which it will own jointly with the Federal Reserve Bank of New York, in return for around a $26 billion reduction in the amount AIG owes the U.S.