AIG's Uphill Battle

When sputtering insurance giant AIG next announces earnings, analysts expect more financial losses and further government intervention

American International Group (AIG) is starting to try a lot of people's patience. On Sept. 16, when the New York Federal Reserve gave the listing insurer its first emergency loan of $85 billion, it was the biggest government bailout in history. The size of the rescue was shocking, as was the speed with which it had become necessary.

That was just the beginning. AIG has since gotten a total of $150 billion in government aid of one sort or another. And now analysts expect that when the company announces its next set of earnings, expected by Mar. 2, there will be tens of billions more in writedowns, financial losses, and further government intervention. "AIG currently is just too big to fail," explains Sean Eagan, a founder of Eagan Jones Ratings, a credit and research firm.

Recent trends will make it harder for AIG to repay the government. Employees are leaving and customers are fed up. Asset sales that were supposed to be the basis of repayment are slow and may be postponed further. And the company itself has few illusions about what an uphill road it confronts. "Those are all risks," says Nicholas Ashooh, an AIG senior vice-president. "Though we have five years to repay the government, no one wants to wait that long."

Even some in the government are losing patience. On Jan. 30, Representative Spencer Bachus (R-Ala.), the ranking member on the House Financial Services Committee, and Representative Paul Kanjorski (D-Pa.), the chairman of the subcommittee on capital markets, insurance, & government sponsored enterprises, sent a letter to the U.S. Government Accountability Office seeking an investigation into the federal rescue package and its impact on the insurance market. Among the things the representatives are looking for: a determination of whether the rescue package has "resulted in measurable progress."

Significant Employee Departures

Employees seem to be voting no. A steady stream of AIG underwriters have handed in their resignations in the past few months, particularly bad news in a business built on relationships. The most high-profile departure: longtime executive Kevin Kelley, who had been running AIG's profitable Lexington Insurance reinsurance businesses. He left in December to become chief executive of Bermuda-based property insurer Ironshore. But he's just the tip of the iceberg, says insurance recruiter Gary Jacobson. With unemployment in the insurance industry at just 3.5%—and even lower levels for underwriters—there's plenty of opportunity for AIG staff to jump. "I think [AIG is] going to have a very difficult time executing [its] strategy because of the talent drain," says Jacobson.

Reports cropping up in the past two days that AIG may have a loss of as much as $60 billion this quarter have left customers tired of the bad surprises from the company, too. "In the last 48 hours, I think clients have lost their patience on the topic," says Neil Krauter, whose insurance brokerage, Krauter & Co., does business with AIG. "A lot of buyers said originally, 'Let's try to help them, be good partners.' I think that patience has really gone away."

The government's bailout of AIG has taken a number of different forms. First is a five-year, interest-bearing $60 billion line of credit, of which AIG has currently drawn $36 billion, in return for which the government holds an 80% stake in the company. The government also used $40 billion of TARP money to buy preferred stock in AIG that earns a 10% dividend.

The New York Federal Reserve Bank has also set up two limited partnerships called Maiden Lane II and Maiden Lane III that have taken on more than $100 billion in asset-backed securities once on the company's books.

Even so, as of its most recent quarterly filing with the Securities & Exchange Commission last fall, AIG and its financial products business had $107.8 billion of commercial and residential mortgage-backed securities and collateralized debt obligations on the books. It also had a sizable securities lending business. Problems with this type of lending have contributed to AIG's financial pressures.

Big Writedown Could Hit Credit Rating

A big writedown of some of those assets could very well force the rating agencies to reconsider AIG's credit ratings, triggering more collateral calls and financial problems for the company. "That's too large to ignore if you're Standard & Poor's (MHP) or Moody's (MCO)," says Ernst Csiszar, insurance industry director for Bridge Strategy Group. "It's a real mess."

From the beginning, AIG has argued that its core insurance businesses are healthy and just need to be broken off from their bad investments in order to thrive. But with employees and customers heading for the exits, that's now looking a lot less certain. And the money that was supposed to repay the government from other asset sales? That's not materializing, either.

Though AIG has been actively trying to divest businesses to raise money to repay the government, with the help of restructuring advisers at Blackstone Capital (BX) and investment bankers, the company has completed only a handful of smaller deals to date. Selling off its Thai credit-card business, life insurance operations in Canada, a stake in a Brazilian financial firm, and Hartford Steam Boiler have raised a total of just $2.8 billion at this point. Ashooh blames AIG's slow asset sales on severe weakness in the broader economy.

The bigger businesses on the block—particularly the company's life insurance business and its Asian operations—have yet to attract an acceptable offer. Bids for the Asian business, AIA, are still expected, says David Monfried, an AIG spokesman. However, "if we don't get full and fair market value for the properties, we simply won't sell them at this time," Monfried says. "This is the worst possible environment in which to be selling these fine businesses." AIG received at least one offer for its life insurance business that was less than half the asking price, according to a person familiar with the bid.

AIG, says Monfried, is in daily contact with the Federal Reserve, and the bank "understands the environment in which we're operating." But some in Washington have criticized the bailout as prolonging the time it takes AIG to sell off assets. "Private capital will wait on the sideline until the government comes up with some cohesive plan with an exit," says one critic.

Unfortunately, that exit seems to be getting further away.

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