With Fed’s $85 Billion Loan, A.I.G. Starts to Calculate a Measured Sell-Off By MARY WILLIAMS WALSH

September 18, 2008
With Fed’s $85 Billion Loan, A.I.G. Starts to Calculate a Measured Sell-Off By MARY WILLIAMS WALSH

A day after the Fed’s stunning takeover of American International Group, its new managers began contemplating a breakup of the insurer’s far-flung empire and selling it off in coming months.

They are not under pressure to act quickly and settle for fire-sale prices. The purpose of the Fed’s $85 billion loan, after all, was to buy time for A.I.G. so it would not have to dump its healthy companies in a chaotic market. Even so, A.I.G. is borrowing the Fed’s money on expensive terms, and it must pay it off within two years. So A.I.G. also has an incentive to sell off subsidiaries and pay off its costly loan early.

Many questions remain to be answered about the process. The Fed oversees the banking system and has no experience dismantling a gigantic insurance company with global reach.

A committee of state insurance regulators is being formed to oversee the sale of A.I.G.’s life and property-casualty insurance companies, considered the jewels in its crown.

The company also has a strong business in personal lines of insurance, like car insurance. The recent turmoil was mostly contained within A.I.G.’s financial products unit, which dealt in structured finance and derivatives. Its insurance businesses are generally considered stable.

“Any company that wants to buy market share would certainly want to look at this,” said Donald Light, an insurance industry analyst for Celent, a research and consulting firm in Boston.

The regulators’ committee will work closely with Edward M. Liddy, the former chief executive of Allstate who was installed as A.I.G.’s chief executive when the Fed announced its rescue package. Mr. Liddy, also a director of Goldman Sachs, 3M, Boeing and Kroger, is credited with shaking up Allstate’s hidebound culture, expanding Allstate into new businesses like banking and raising its profitability.

Mr. Liddy also showed at Allstate that he did not shrink from conflict. Shortly before he became chief in 1999, he told a roomful of the company’s 200 top managers that a number of them would be gone within the year. About 6,400 Allstate agents sued the insurer the next year, after Mr. Liddy reclassified them as independent contractors, ending their health and pension benefits. The lawsuit eventually collapsed.

A.I.G. was built into a colossus by Maurice R. Greenberg, who joined in 1960 and focused on making big acquisitions that took A.I.G. into areas considered unusual at the time, like insurance against kidnappings and environmental spills.

The company’s biggest block of business, general insurance, accounts for nearly half of the holding company’s $110 billion annual revenue. It also operates an asset management division, an aircraft leasing business with more than 900 planes and mortgage lending companies.

A.I.G. also has extensive holdings in Asia. Founded in Shanghai in 1919, it is now the biggest foreign insurer in Japan and China, Asia’s two richest markets. Of A.I.G.’s 116,000 direct employees, about 62,000 work in Asia, and about 40 percent of A.I.G.’s $54 billion in life insurance premiums and retirement services fees is from Asia, excluding Japan.

“China is a growth market, and their operations in China are certainly on the list of companies that potential acquirers would look at,” said Mr. Light, of Celent. “Whether A.I.G. wants to sell is the question. Whether A.I.G. is, maybe, forced to sell is more the question.”

Another factor pressuring A.I.G. to sell quickly is that many worried customers have shown how quickly they can pull their money out of A.I.G. subsidiaries, especially in Asia.

V. Sunil, the executive creative director of Weiden & Kennedy, a marketing agency in New Delhi, said that buying insurance from a company was just starting to catch on in India. Until a few years ago, the only retail insurer was backed by the government and was considered safe.

“Now people have extra salaries and they’re using insurance as a kind of investment,” said Mr. Sunil, noting that customers might be particularly skittish because the products are new.

If customers keep walking away from A.I.G.’s subsidiaries, they will lose value to prospective buyers. And the longer they stay on the market, the harder it may be to sell them.

“People are looking at and will continue to look at the assets,” said Kenneth A. Lefkowitz, co-chairman of the corporate department at the law firm Hughes Hubbard & Reed in New York.

Perhaps the first priority for A.I.G.’s new management will be to stop the bleeding in the financial products unit, where its liquidity crisis began. This will be expensive. A.I.G. will have to unwind derivatives contracts, a process that involves paying big termination fees. It will also probably have to sell mortgage-related securities at a loss, because their value will continue to fall until the housing slump ends.

“Everyone starts doing the math and they start seeing a shortfall,” said Eric R. Dinallo, the New York State insurance superintendent, who was active in the frantic efforts to rescue A.I.G. that began late last week.

The need to cover that shortfall will dictate how many companies must be sold, said Mr. Dinallo, who will lead the committee of insurance regulators. He said it would be the regulators’ job to make sure the companies changed hands at a fair price and were sold to new owners with adequate capital.

He said that in the worst case, A.I.G. could still end up in bankruptcy, where creditors might claim that the sales were improper and make the buyers give them back.

The regulatory committee’s vice chairman is to be Joel Ario, Pennsylvania’s insurance commissioner. A.I.G. has a large subsidiary in that state, American Home Assurance.

Other members of the regulators’ committee had not yet been named. The National Association of Insurance Commissioners is putting the committee together.

A.I.G. made no comment on a possible sell-off, beyond issuing a statement saying that the Fed’s loan would provide “the time necessary to conduct asset sales on an orderly basis.”