American International Group's insurance units are sound, but some may be sold to repay an $85 billion bridge loan from the federal government extended to help the conglomerate avoid bankruptcy, the company's newly appointed chief executive officer reportedly told state insurance regulators in a closed-door meeting last week.

Interviewed after delivering a closed briefing to the National Association of Insurance Commissioners meeting in Washington, AIG CEO Edward Liddy declined comment on whether AIG's insurance or airplane leasing units would be sold, or whether the number of policyholders dropping AIG as their carrier was increasing.

In an interview with CNBC, Mr. Liddy said the company's core insurance business was “sacrosanct” and would not be sold, but he did not define what that core business entailed.

However, Pennsylvania Insurance Commissioner Joel Ario said after the private briefing that the AIG insurance companies are among the units with the greatest value. He said some may be sold and that, in fact, Mr. Liddy had fielded a number of inquiries on that point.

“If there is an orderly disposition, competition for those [insurance units] will be fierce,” said Mr. Ario.

AIG announced last week that Mr. Liddy will “provide an update on AIG's future direction” at an investor conference call on Oct. 3 at 8:30 a.m. EDT. An audio webcast will be accessible online at www.aigwebcast.com.

Mr. Ario declined comment on whether there had been an uptick in policy cancellations, or whether in this situation, where the government has taken a 79.9 percent stake in the company, federal authorities could preempt state regulators.

Commissioners at Mr. Liddy's briefing said he had assured them that AIG's insurance units were sound.

In an interview with National Underwriter after the closed briefing, Mr. Liddy said the insurance units of AIG are “absolutely safe and extremely well capitalized.” A plan is being developed to sell assets, and it will be made public “as soon as we can.” He said he hoped to identify companies for sale this week.

One commissioner who sat in on the regulator briefing said that a number of plans were discussed.

Sandy Praeger, Kansas insurance commissioner and NAIC president, said in an interview that the briefing had given her the assurance that the units were safe. She said it would be up to management to decide what units are sold, as it is with any company, but if insurance carriers were sold, the only change policyholders would notice would be a different name on their contracts.

Ms. Praeger said there was no indication given during the briefing that there was an uptick in policy cancellations.

In a telephone conference call held last week by Marsh to provide an update on the global commercial insurance market in light of the turmoil in the financial markets, Marsh sought to clear up what it said were some false rumors that have been circulating, including one that clients are seeking midterm extensions or alternatives to their AIG casualty coverage.

Marsh said midterm replacement is the exception, not the rule, but the brokerage did note that clients who are up for renewal who would not have considered moving before are giving the idea some thought now.

With respect to property markets, Marsh said AIG subsidiaries exceed Marsh's minimum financial guidelines, but clients have been inquiring about their overall exposure to AIG.

Mr. Ario said the balance sheets of the insurance units haven't changed, and that “it is a victory for state insurance regulation because the strength of those operations had given federal officials the confidence that a solution should be developed for the company.”

In a separate closed briefing Mr. Liddy gave to state lawmakers, legislators expressed concern that fear over AIG's soundness would produce a “run on the bank,” according to one source in attendance. Those briefing regulators assured legislators that the companies are sound, according to an attendee.

Meanwhile, AIG shareholders will apparently get no say in the running of the company under the conditions of the loan the U.S. government is providing to help AIG get past its liquidity crisis, buying it time to sell assets.

Based on what information has been released about the agreement, an analyst who declined to be named while complete details remain unclear said that under the deal–which gives the government a 79.9 percent interest in the company–”shareholders have no more clout. It implies that existing shareholders are now holders of a minority stake in the company, and therefore the government has complete voting control of the company.”

He also observed that “this is a very expensive [loan] facility to have in place, let alone use. That will be another motivation to move quickly to reconfigure the company and then pay off the loan.”

Moreover, until it is reconfigured and repays its loan, AIG will have to pay 8.5 percent interest on the unused portion of the loan, and was forced to pay a 2 percent upfront commitment fee to the government in order to get the loan, according to details released last week.

On the $35 billion that AIG has borrowed so far against the government's $85 billion line of credit, the company will pay 8.5 percent on top of the prevailing LIBOR rate. (The London Interbank Offered Rate, which is currently about 3 percent, is the rate that banks charge one another for short-term loans.) Analysts at Credit Suisse calculated that the added costs related to the undrawn part of the facility will amount to an extra $4.7 billion of annualized interest expense for AIG.

Meanwhile, “it is unclear whether AIG would be able to access the debt or equity markets prior to a large amount of asset sales,” said Credit Suisse analysts Thomas Gallagher and Michael Zaremski.

The government was forced to step in after the credit markets became closed to AIG as it sought to raise new capital, needed to meet covenants under credit default swap contracts AIG had entered into with counterparties who sought insurance on financial instruments that were backed by subprime loans that are plunging in value.

The Credit Suisse analysts said the latest AIG statement appeared to doom an initiative by large outside investors in AIG to forge an alternative to the government loan. “There had been speculation that AIG could seek a private-sector solution, and thus avoid the government dilution, but the company indicated that this deal with the Fed represents its best option given the market turmoil,” said Credit Suisse.

Mr. Liddy confirmed this point specifically in commenting on the company's final deal with the government.

“AIG made an exhaustive effort to address its liquidity needs through private-sector financing, but was unable to do so in the current environment. This facility was the company's best alternative,” Mr. Liddy said. “We are pleased to have finalized the terms of the facility and are already developing a plan to sell assets, repay the facility, and emerge as a smaller but profitable company.”

Importantly, he added, “AIG's insurance subsidiaries remain strong, liquid and well capitalized.”

But Credit Suisse analysts voiced caution about the ability of AIG to remain an industry leader. “Given the heavily leveraged capital structure at present, it's highly likely that AIG will need a large equity infusion over the course of the next year if it does intend to operate certain core businesses as going concerns (and not sell them). Thus, the risk of further dilution is high, in our view,” said Credit Suisse.

In related developments, the Federal Bureau of Investigation confirmed that it has opened “preliminary investigations” into possible fraud involving AIG, Fannie Mae and Freddie Mac, and Lehman Brothers.

Last week, Securities and Exchange Commission Chairman Christopher Cox, testifying before a Senate Banking Committee hearing, said his agency is investigating insurers as well as other participants in the subprime mortgage business, which is at the center of the financial crisis.

Last week, AIG also announced that its board of directors has decided not to issue dividends on the firm's common stock.

AIG's last dividend of 22 cents a share was issued on Sept. 19. It was a 10 percent increase over the previous dividend, and the 23rd consecutive year that AIG had increased its dividend.

In addition, the Chubb Group of Insurance Companies and Travelers announced last week they will no longer participate as partners on co-surety bonds with AIG, according to a Marsh executive.

That news emerged during the telephone conference call last week by Marsh.

Mark Nickel, who is with Marsh's surety practice, said Travelers is not willing to participate on co-surety on any bonds not approved by Sept. 19.

Clients will need to replace either Travelers or AIG, he said. He added that, up until Nov. 19, in order to allow for an orderly transition, “Travelers is prepared to absorb AIG's share of the co-surety exposure if the client needs that additional time to find additional surety capacity or to replace either Travelers or AIG.”

The company will only consider participating with AIG if AIG can provide a third-party backstop acceptable to Travelers, Mr. Nickel said.

The situation with Chubb is similar, he added, in that the company will not accept co-surety with AIG as a partner.

Chubb is giving clients 30 days to make the transition, he said. “Chubb will, however, consider AIG clients in a joint-venture project, but this will depend on the complexity and duration of the project,” Mr. Nickel explained.

(Additional reporting by Phil Gusman.)

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AIG Insurance Units 'Sound,' But Some Might Be Sold To Repay Loan

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