AIG to Repay TARP; 'Glimpsing Sunshine'
October 11, 2010 by Meg Green
| Copyright: | A.M. Best Company, Inc. |
| Source: | BestWire Services |
| Wordcount: | unknown |
American International Group Inc.’s top officer said the company is “glimpsing sunshine” as it announced plans to repay its debt to the federal government, plus said it would sell two Japanese life insurance companies to U.S.-based life insurer Prudential Financial Inc. for $4.8 billion.
“You’ll recall that in early August, we said we could see the light at the end of the tunnel,” said Robert Benmosche, chief executive of AIG, in an audio statement on the company’s website. “Today, we are glimpsing at a lot of sunlight — an awful lot of sunlight.”
He said the announcement marks a momentous step forward for AIG, “and a new beginning for all of us.”
AIG Star Life Insurance Co. Ltd. and AIG Edison Life Insurance Co. Ltd. will be sold to Prudential Financial (NYSE: PRU) for $4.2 billion in cash, and Prudential will assume $600 million in third-party debt under the agreement.
Under the plan to repay its government bailout, AIG would pay back $20 billion in senior secured debt under the Federal Reserve Bank of New York Credit Facility through parent company resources and proceeds from the disposal of AIG assets, including the planned initial public offering in Hong Kong in late October of its Asian life insurance unit, AIA Group.
AIG said it expects AIA to generate at least $2 billion in operating profit for the fiscal year ended Nov. 30, 2010, ahead of AIA’s IPO. AIG has moved forward with its IPO plans for AIA after a proposed $35.5 billion sale to U.K.-based Prudential plc fell through in June (BestWire, Sept. 28, 2010).
AIG also said its pending $15.5 billion sale of American Life Insurance Co. to MetLife Inc. would help fund the repayment.
The insurance group will also seek to return the FRBNY’s $26 billion holding of preferred interest in two AIG-related special-purpose vehicles through proceeds from future asset monetizations.
AIG said it would also convert the remaining $49.1 billion in Troubled Asset Relief Program preferred shares outstanding into stock to be held by the U.S. Treasury. With that exchange, Treasury will own 92.1% of AIG’s common stock. AIG said the conversion will not take place until after the FRBNY credit facility is repaid in full, and the U.S. Treasury is expected to sell its stake in AIG on the open market.
Industry watchers had warned that if the shares are sold too quickly, it could dilute the value of the company and its stock.
Although these actions will result in a streamlined and — through the reduction of debt — strengthened AIG balance sheet, the company’s ratings have been heavily based on the U.S. government provision of support, including availability of significant liquidity, A.M. Best Co. commented. With the removal of this support, AIG will need to stand on its own, re-establish itself in the capital markets, restore shareholder confidence (particularly with institutional investors) and demonstrate its ability to maintain sufficient liquidity, which is no longer accessible through government sources, A.M. Best said.
Most AIG insurers have current Best’s Financial Strength Ratings of A (Excellent). A.M. Best said AIG’s issuer credit rating of bbb is unchanged following the announcement and that the rating outlook remains negative.
As of Sept. 20, AIG (NYSE: AIG) still owed the U.S. government about $128.2 billion in debt (BestWire, Sept. 20, 2010).
Japan is “a market we know well. A market where we’ve had great success and momentum over the last 30 years,” said John Strangfeld, chairman and CEO of Prudential Financial, in a conference call Sept. 30.
Strangfeld noted Japan is the third-largest economy in the world, and the second-largest life insurance market. The acquisition of the AIG companies will allow Pru to broaden its distribution and “significantly increase the scale of our operations in Japan.”
The AIG Star and AIG Edison transactions are expected to close in the first quarter of 2011, subject to regulatory approval and other closing conditions.
The transaction is expected to result in a $1.2 billion pretax goodwill impairment charge on AIG’s third-quarter results.
Shares of AIG were trading at $37.93 the morning of Sept. 30, up 1.28% from the previous close.
Shares of Prudential were trading at $54.10, down 4.30%. Prudential Insurance Company of America currently has a Best’s Financial Strength Rating of A+ (Superior).
(By Meg Green, senior associate editor, BestWeek: Meg.Green@ambest.com)
