NU Online News Service, Dec. 1, 12:19 p.m. EST

American International Group, Inc. announced it had completed two previously announced transactions to reduce the debt AIG owes the Federal Reserve Bank of New York by $25 billion.

The announcement followed a drop in the company stock yesterday of nearly 15 percent after a Sanford C. Bernstein analyst said the company's property and casualty business had an $11.9 billion reserve deficiency.

AIG's positive statement today included a caution that it faces "continued volatility" ahead. In morning trading, the company's stock gained more than $3 on the New York Stock Exchange.

Its debt reduction announcement said FRBNY reduced the amount the company owed after taking preferred equity interests in two newly formed life insurance subsidiaries.

The company said it is positioning American International Assurance Company, Limited (AIA) and American Life Insurance Company (ALICO), for initial public offerings or third-party sale, depending on market conditions and regulatory approvals.

According to company spokesperson Christina Pretto, the government would have a liquidation preference stake of $16 billion in AIA and $9 billion in ALICO. The exact percentage of the government's stake in the fair market value of the companies has not been disclosed, she said.

AIG said the $25 billion debt reduction, AIG's outstanding principal balance under the FRBNY credit facility is now approximately $17 billion, down from approximately $42 billion, excluding interest and fees and the total amount available under the credit facility loan arrangement has been cut from $60 billion to $35 billion.

Bob Benmosche, AIG chief executive officer, said in a statement that the announcement "sends a clear message to taxpayers: AIG continues to make good on its commitment to pay the American people back."

"Moreover, these transactions position AIA and ALICO, two terrific, unique international life insurance businesses, for the future," he commented.

Mr. Benmosche noted that AIG would take an incremental charge related to its prepaid commitment asset (the recorded value of the credit facility on its balance sheet) in the fourth quarter in connection with the reduction in the total amount available under the FRBNY credit facility resulting from the closing of the AIA and ALICO transactions.

The prepaid commitment asset was booked as $23 billion on Sept. 16, 2008 to represent the value to AIG of the initial $85 billion of credit provided by the FRBNY in exchange for a 79.9 percent taxpayer interest in the company.

Since the inception of the FRBNY credit facility and through Sept. 30, AIG has recognized a total of $11.7 billion of amortization expense, and expects to recognize an additional amount of $5.7 billion in the fourth quarter, including $5.2 billion of accelerated amortization related to these transactions, the company said.

The charges, it explained, reflect the reduction of the company's debt from the initial amount of $85 billion to $35 billion as well as periodic amortization.

It was noted that after the FRBNY facility is fully repaid, the government with its preferred stock holding in the company will continue to hold a preferred voting interest, now at approximately 79.8 percent.

"We continue to focus on stabilizing and strengthening our businesses, but expect continued volatility in reported results in the coming quarters, due in part to charges related to ongoing restructuring activities, such as the previously announced loss that we expect to recognize in the upcoming quarter related to our announced agreement to sell our Taiwan-based life insurer Nan Shan," Mr. Benmosche said.

The AIA and ALICO transactions involve AIG contributing the equity of each of AIA and ALICO to separate special purpose vehicles (SPVs) in exchange for interests in the SPVs.

Under the terms of the transactions, the FRBNY receives preferred interests with a liquidation preference in the AIA SPV of $16 billion and with a liquidation preference in the ALICO SPV of $9 billion.

The liquidation preference of the preferred interests represents a percentage of the estimated fair market value of AIA and ALICO.

AIG holds all of the common interests in the AIA and ALICO SPVs and will benefit from the fair market value of AIA and ALICO in excess of the value of the preferred interests as the SPVs monetize their stakes in these companies in the future.

Until AIG divests a majority of its common interests in AIA and ALICO, AIA and ALICO will continue to be consolidated in AIG's financial statements, the company said.

Special Reports /

AIG Cuts Debt By $25 B, Sees Volatility Ahead

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