AIG Renegotiates Federal Loan Terms To Buy More Time, Lower Interest Rates

He said the additional tools will make possible an "orderly" sale of company units to raise cash, and promised the company's "goal is to repay taxpayers in full with interest and emerge as a focused global insurer that will create meaningful value for taxpayers and other stakeholders."

In a conference call with analysts, Mr. Liddy said there is no change from prior announcements that all segments of AIG are for sale except U.S. commercial insurance, foreign general insurance and a majority interest in foreign life insurance operations. He said an announcement of the sale of some assets could come before the end of this year.

He said the renegotiated loan agreement would put AIG on track to emerge as "a nimble competitor with good long-term growth prospects."

Indeed, during the conference call, Mr. Liddy pronounced the renegotiated loan agreement a "win-win" for the company, stockholders and U.S. taxpayers, characterizing the deal as the "second milestone" in AIG's journey back toward profitability. "All investors should recognize that this will be a several-year process tied in no small part to financial recovery around the world," he said.

Mr. Liddy said the new loan terms would stabilize AIG and restore confidence.

Despite the turmoil the company has faced, executives at the firm said AIG continues to do well writing insurance business and in retaining customers, with Mr. Liddy citing signs that prices are stabilizing and gaining traction.

"All of our insurance businesses are making a concerted effort to get in front of customers and brokers to address their concerns," said Mr. Liddy. "Today's announcement should alleviate many of those concerns and put our businesses in a much better position going forward."

However, Liberty Mutual's chairman, president and CEO, Edmund F. Kelly–in his own conference call talking about his company's results–accused AIG of making "stupid" moves that threaten to destabilize the market in its pursuit of commercial insurance business.

Mr. Kelly said AIG had "intensified its efforts to increase market share, or at least preserve it," and was "doing some very stupid things in the market."

He said this was more than likely because members of the creditors committee that is managing AIG are "more concerned with its interface with government and capital, and are paying little attention to what is actually going on in the trenches."

Mr. Kelly said that if AIG is "not reined in" in its moves to grab market share, "it could be very destabilizing for the market."

However, Kristian P. Moor, president and CEO of AIG's property-casualty business, said that his company's commercial insurance segment is "not sacrificing underwriting integrity to retain market share. I believe that allegations of excessive price-cutting are coming from carriers frustrated by their inability to win significant market share from us."

Indeed, he said there has been misinformation about the performance of the company, stating that AIG's core insurance business is operating well. The company retains a significant surplus and conservative investment portfolio, and no portion of the p-c division is for sale, he said–although he noted that September's account retention was down 6.5 percent while October is down slightly on a year-to-year basis, but better than in September.

The company is continuing to win new business, and whatever accounts are lost are due to price competition from other carriers, he said–adding that customers are continuing to do business with AIG because of its superior standing in the industry.

He also conceded there is competition for AIG employees, but noted that while turnover stands at 6 percent, key employees are replaced as soon as possible.

Meanwhile, AIG also had to defend itself again after reports that it paid for a lavish resort junket even as it was arranging for a greater government bailout. AIG put out a statement denying any irresponsible spending for a financial planner seminar at the Pointe Hilton Squaw Peak Resort in Phoenix. ABC News Phoenix outlet KNXV characterized the meeting–which did not display AIG logos–as a "secret gathering" and reported they had hidden videos of AIG executives at pools and spas.

Mr. Liddy responded with a statement that the news reports "grossly mischaracterized" the AIG seminar for 150 independent financial planners–who, he stressed, "are not AIG employees. In addition, the cost to AIG for this event was minimal. More than 90 percent of the costs were paid either by sponsors or by the independent financial planners themselves."

The cost to AIG was less than $25,000, the company reported.

Mr. Liddy said it was essential for AIG to conduct such seminars "to keep independent financial planners abreast of investment products and services, including those offered by AIG. The financial planners are responsible for generating almost $200 million in revenue this year for AIG as of Sept. 30."

KNXV spoke with Rep. Elijah Cummings, D-Md., and quoted him on the station's Web site as saying that Mr. Liddy should resign–that AIG had come to the government and said "they were drowning and needed help. A person who is drowning doesn't jump up and start partying."

Under the terms of the new deal with the U.S. Treasury and the Federal Reserve, the government's original $85 billion bailout loan is reduced to $60 billion, while the company receives $40 billon from the government's $700 billion Temporary Asset Recovery Program.

A secondary $37.9 billion credit facility created to help bolster AIG's financial stability is being replaced with a $52 billion aid package. Taxpayers will continue to have a 79.9 percent taxpayer interest in AIG.

AIG's announcement of the latest arrangement said it would establish a durable capital structure for the company, as well as facilities designed to resolve the liquidity issues AIG has experienced in its credit default swap portfolio and its U.S. securities lending program.

Specifically, the new credit agreement calls for the U.S. Treasury to purchase, through TARP, $40 billion of newly issued AIG perpetual preferred shares, as well as warrants to buy a number of shares of common stock of AIG equal to 2 percent of the issued and outstanding shares as of the purchase date.

All of the proceeds will be used to pay down a portion of the Federal Reserve Bank of New York credit facility. The perpetual preferred shares will carry a 10 percent coupon with cumulative dividends.

In addition, the interest rate is being cut to the London Interbank Offered Rate (known as LIBOR, the rate charged by one bank loaning to another) plus three percentage points per year, down from the current rate of LIBOR plus 8.5 percentage points. The fee for available funds not yet drawn by AIG will drop to 0.75 percent from the current fee of 8.5 percent. The loan's term extends from two years to five years.

AIG will also continue to participate in the recently launched government program being used by many firms for sale of commercial paper. The Commercial Paper Funding Facility has allowed AIG to reenter the commercial paper market, the company said, authorizing AIG to issue up to $20.9 billion to the CPFF. AIG has currently issued approximately $15.3 billion in such securities.

Meanwhile, AIG reported a net loss of $24.5 billion in the third quarter due to the combination of financial market turmoil, catastrophe losses and charges related to its restructuring. The company reported third-quarter net income of $3.09 billion, or $1.19 a share, last year, compared to a loss per share of $9.05 this time around.

General insurance operations posted a net operating loss of $4.56 billion, compared with net operating income of $2.44 billion last year. Despite continuing soft market conditions, net written premiums for the quarter were down less than 1 percent to $11.7 billion.

For the first nine months, the company reported a net loss of $37.63 billion–$14.40 per share–compared to net income of $11.49 billion, or $4.40 share in the same period in 2007. The nine-month operating loss totaled $393 million, compared with operating income of $8.5 billion last year. Net premiums written remained virtually unchanged, at $36 billion.

AIG's combined ratio soared 23.44 points to 113.61 for the third quarter, while climbing 14.44 points to 102.7 for the first nine months of the year.

AIG said the combined ratio includes underwriting results of Mortgage Guaranty's second-lien business, which was placed in runoff in September. The results also reflected catastrophe losses from Hurricanes Ike and Gustav of $1.4 billion.

Fitch Rating service removed from rating watch AIG's financial strength rating on its commercial and mortgage insurance business that AIG plans to continue to own, while affirming the "double-A-minus" rating of those operations. However, the "A" rating on its life operations remain on rating watch.

A.M. Best Company said all AIG insurance subsidiaries were assigned a negative outlook with negative implications, although Best did affirm AIG's "A" (excellent) financial strength rating.

In a related development, a Securities and Exchange Commission filing confirmed earlier statements by AIG that former CEO Robert B. Willumstad turned down a $22 million severance to which he was entitled.

AIG's 10Q filing for its third-quarter results contained a letter from Mr. Willumstad to Mr. Liddy in which he noted that while it was determined by the board that he was terminated from his post "not for cause," and therefore entitled to a $22 million severance payment, he was not accepting the money for two reasons.

First, he said, in his three-month tenure in the post he was unable to execute the restructuring plan he was hired to do. Second, he added, "I prefer not to receive severance payments while shareholders and employees have lost considerable value in their AIG shares."

Mr. Willumstad was chairman of AIG when he was called on by the board in June to replace then-CEO Martin Sullivan, who was pressured to leave after AIG piled up billions in losses. Mr. Willumstad was replaced in September by Mr. Liddy after AIG secured its federal bailout loan.