AIG Speeds Up P-C Unit Spin-Off

American International Group announced last week it was accelerating the spin-off of its major property-casualty insurance units into a separate company so it can sell off a minority share to the public.

The decision, undertaken with the strong support of the Federal Reserve Bank of New York, was the first component of a revised resolution plan unveiled when AIG announced a huge loss March 2.

At that time, AIG disclosed that the government had agreed to the third revision of the AIG resolution plan. That plan included a $30 billion additional line of credit for AIG.

Currently, total capital injected into AIG stands at $182.5 billion, according to figures released by the General Accounting Office. AIG said it now owes the government roughly $80 billion–$40 billion of capital funded through the Troubled Asset Relief Program and $40 billion drawn from a $60 billion credit facility funded by the Federal Reserve.

The spun-off unit will be AIU Holdings and will include its commercial insurance, foreign general insurance and private client group units. It will result in AIU Holdings' having a board of directors, management team and brand distinct from AIG.

AIG will make it an independent entity by transferring the company to a special purpose vehicle in preparation for the potential sale of a minority stake in the business, the company said.

“This ultimately may include a public offering of shares, depending on market conditions,” said AIG.

Under the special purpose vehicle arrangement, AIG will contribute the equity of AIU Holdings into an SPV in exchange for preferred and common interests in the SPV. AIG also said it intends to purchase from AIU Holdings its equity interests in International Lease Finance Corporation, United Guaranty Corporation and Transatlantic Holdings Inc.

A.M. Best said the actions would not prompt it to change the “A” ratings of the p-c companies. “While capital and surplus will remain unchanged, the quality of capital in these subsidiaries is expected to improve as these investments in these AIG affiliates will be exchanged for high-quality, liquid assets of equal value,” the Oldwick, N.J.-based rating firm added.

A spokesperson for the Federal Reserve Bank of New York said: “This action is an important next step in the company's efforts to place key business units in the best position to optimize their operations and maximize their value. It is in the best interests of the American taxpayers, the company, and its customers and employees that these efforts succeed.”

The AIG decision was announced only hours after a Congressional Oversight Committee on TARP grilled Treasury Secretary Timothy Geithner. Data revealed at the hearing disclosed that AIG had received more TARP cash than anyone else–$70 billion. The rest of the aid to AIG came from other facilities, including purchase of troubled assets.

In opening remarks at the hearing, Rep. Jeb Hensarling, R-Tex., a member of the oversight panel, had noted that “most people are unimpressed with the Treasury's management of AIG.” He did not elaborate.

LIDDY'S HOLDINGS DRAW IRE

Separately, days earlier, Congressman Elijah E. Cummings, D-Md., reiterated a demand that AIG Chief Executive Edward Liddy resign in the wake of a disclosure that he has a substantial interest in Goldman Sachs.

AIG paid $12.9 billion to Goldman with part of the taxpayer funds AIG used to cover credit default swaps and other derivative obligations.

In an April 6 filing with the Securities and Exchange Commission, Goldman Sachs revealed that as a previous director at Goldman Sachs Mr. Liddy received 18,244 shares of restricted stock offerings worth more than $2.2 million for compensation for his service. He resigned the position in September of last year after agreeing to take over as AIG CEO at the behest of then Treasury Secretary Henry Paulson.

Mr. Cummings said in a statement renewing a previous call for Mr. Liddy's resignation that the holdings raised the question of whether Mr. Liddy was acting in the best “interests of AIG or of his stock in Goldman.” Even the appearance of conflict of interest “is a reason for alarm,” he said.

It is important, the lawmaker said, that people have confidence in what is being done with taxpayers' funds, and investors need confidence in the markets. Also, because the company has received as much aid as it has, Congress and the American people need confidence in AIG's management, he said, adding that Mr. Liddy's failure to reveal his financial interests is undermining that confidence.

Congressman Alan Grayson, D-Fla., who is a member of the House Financial Services Committee, in an interview with National Underwriter said at the very least Mr. Liddy should recuse himself from any decision regarding Goldman Sachs, but came up just short of calling for his resignation.

“Given the fact that his $1 per year compensation was disingenuous, I would not be sorry to see him go,” said Mr. Grayson.

Mr. Grayson was also critical of Mr. Liddy's failure to name the people responsible for AIG's dilemma in the financial products division during his testimony before the committee.

“He refused to tell me the names of the people responsible for this $100 billion-plus payout by the taxpayers, and I find that unwillingness to answer a simple question to raise even deeper questions about whether he is the right person for that job,” Mr. Grayson said.