AIG will spin off units in order to reduce debt

Posted Jun 25th 2009 11:40AM by Mark Fightmaster
Filed under: Competitive Strategy, Amer Intl Group (AIG), Initial Public Offerings

Earlier this morning, embattled insurer American International Group (NYSE: AIG) announced that it is going to reduce its outstanding federal loans by $25 billion by giving a preferred stake in two spin-off units to the government. The two subsidiaries, American International Assurance and American Life Insurance, will be spun off into "special purpose vehicles" ahead of initial public offerings. The Federal Reserve Bank of New York will receive interests in the special purpose vehicles (SPVs), both of which will eventually become independent companies after the IPOs are complete.

The $25 billion breaks down like this: the Fed will receive $16 billion in preferred assets in American International Assurance and $9 billion in American Life Insurance. Reportedly, the outstanding debt for AIG will be cut to $15 billion thanks to this move. AIG now has as much as $182.5 billion in funding available from the government, extending the original offer of $85 billion from back in September.

These two spin-offs could make a decent amount of cash for the government, as it was not the insurance that got AIG into trouble; it was AIG's financial products. This branch underwrote "risky credit derivatives contracts," A.K.A. credit default swaps. AIG will continue to hold common and preferred stakes in the two SPVs and it will raise additional capital, which could go to reducing the government loans even more. AIG stated that the timing for the public offerings would depend on market conditions.

I like this idea. AIG identified what part of its business was strong, decided to spin it off, and is going to try paying off a major part of the government's loans in the process. This is one step that AIG has taken that I actually agree with. The company has made more than its fair share of mistakes, but this is a step that could garner a bit of goodwill from the investing community -- we shall see.

Tags: AIG, American International Assurance, American Life Insurance, government bailout, government loans, government repayment, inthenews, ipo, spin offs, spv

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Reader Comments (Page 1 of 1)

6-25-2009 @ 1:07PM

thedude said...

I suppose it is just coincidence that this announcement comes less than 12 hours after Obama discusses his health care plan on ABC. A plan which conveniently entails creating a Government/Public Health Insurance company.

Well now that the infrastructure is in place what are they going to do with it ?

Lets see GM was forced into bankruptcy and Hummer sold to China. Chrysler was sold to Fiat and Nissan (a Japanese car company) was given over $1 Billion of US tax dollars to build an electric car in Asia and then MAYBE come to the US.

I'm guessing this will go to India as they haven't gotten a huge piece of the American pie from the Obamachine yet.