Marking one of the more significant
developments in its disinvestment programme, American International
Group (AIG) is to sell its Japan-based life insurance subsidiaries,
AIG Star Life Insurance and AIG Edison Life Insurance, to US
insurer Prudential Financial in a deal worth $4.8bn. AIG will
retain its general insurance business in Japan.
AIG Star and AIG Edison offer life,
medical and annuity products to individuals and groups through
captive agents, some 5,500 independent agents, corporate and bank
channels. Together, the companies have about 10,400 employees,
including about 7,800 company career agents.
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As a result of the sales, AIG
expects to take a non-cash pretax goodwill impairment charge of
about $1.2bn in the third quarter of 2010. In the second quarter of
2010, AIG Star and AIG Edison generated a combine operating profit
before tax of $216m.
The $4.8bn consideration to be paid
by Prudential comprises about $4.2bn in cash and $0.6bn in the
assumption of third party debt. Prudential expects “substantially
all” of the $4.8bn to be repaid with excess capital of the acquired
entities.
Payback time
Simultaneously with the
announcement of the deal with Prudential, AIG released details of
an agreement-in-principle with the US Treasury and the Federal
Reserve Bank of New York (FRBNY) designed to repay all loans
extended to it and enable the government to exit as its major
shareholder. The government was left with an 80% stake in AIG
following the $182bn bailout of the crippled insurer in 2008 and
2009.
Step one in the process will be
repayment of about $20bn in senior secured debt owed to the FRBNY.
Under the plan, AIG expects to repay the entire amount and
terminate the FRBNY senior secured credit facility with resources
from its parent and proceeds from a variety of asset
disinvestments
underway.
These disinvestments include the
initial public offering of its Asian life insurance business,
American International Assurance (AIA), and the pending sale of its
foreign life insurance company American Life Insurance Company
(ALICO) to US insurer MetLife for $15.5bn, of which $6.8bn is in
cash and the remainder in MetLife equity.
Step two will be repayment of $26bn
held by the FRBNY in two AIG-related special purpose vehicles
(SPV). To achieve this AIG will draw up to $22bn under the Troubled
Asset Relief Program (TARP) and purchase equal amounts from the
SPVs which it will transfer to the Treasury as payment.
AIG anticipates that the balance of
the amount to be repaid to the FRBNY will be covered by the sales
of AIG Star and AIG Edison.
To retire the Treasury’s preferred
interests in the SPVs, AIG intends to use proceeds of future asset
sales, including its remaining equity stake in AIA and the equity
securities of MetLife that AIG will own after the sale of ALICO to
MetLife closes.
As the third and final step, the
Treasury will receive 1.655bn ordinary AIG shares in exchange for
$49bn AIG owes under TARP.
This will leave the Treasury with a
92.1% stake in AIG’s ordinary share capital which the Treasury will
sell in the open market, as AIG puts it, “over time”.
AIG expects to repay and terminate
the FRBNY credit facility and complete the issuance of common stock
to the Treasury before the end of the first quarter of 2011.
However, CEO Robert Benmosche is
reported by US media to have stated in an interview that the
agreement-in-principle will not be completed until AIG regains a
high rating from credit agencies and proves that it has the ability
to raise money from the private sector.
“The Treasury wants to assure itself it’s investing in a company
with the strength to be competitive in the marketplace,” Benmosche
is reported as saying.
