American International Group Inc. is selling a cornerstone of its business, Asia-based life insurer AIA Group, in a government-approved $35.5 billion deal. The sale to British insurer Prudential PLC could reduce by nearly one-fifth the amount of federal bailout money still invested in struggling AIG.
But officials and analysts say it's not clear whether taxpayers will eventually recoup all the money AIG drew from a $182.5 billion rescue package the government committed to at the height of the 2008 credit crisis. In return for that package, the government got a nearly 80 percent stake in the insurer.
The sale is another step in AIG's ongoing attempt to restructure its business, become profitable and repay the government. Exactly how it plans to do that remains unclear.
The AIA deal will give AIG $25 billion in cash and $10.5 billion in securities. The cash portion would allow AIG to pay back nearly 20 percent of the almost $130 billion in bailout funds that are outstanding. Together with an anticipated sale of American Life Insurance Co., or Alico, to MetLife Inc., the sale could net enough to eventually cover the Federal Reserve Bank of New York's $47.9 billion investment in AIG.
AIG debt to the government also includes $47.3 billion owed the U.S. Treasury and has $34.5 billion in outstanding assistance tied to the value of investments the New York Fed bought to prop up AIG.
A Treasury official who spoke on condition of anonymity said it's not yet clear whether all the taxpayer money will be returned. The official asked not to be identified because plans for AIG's future are still being developed.
Many analysts are skeptical that all the funds will be returned.
"It's probable we are not going to get our money back," said Morningstar analyst Bill Bergman. "There's a sense of lost confidence that has affected business operations as well as their value in the market place."
On Friday, New York-based AIG reported an $8.87 billion fourth-quarter loss that was due in part to weakness in its insurance businesses.
AIG has been working for the past year and half to sell assets and streamline operations to help it repay its debt. The sale of AIA to Prudential marks the 20th unit sale or asset transaction that AIG has completed since receiving government bailout funds — and by far the largest.
Since the fall of 2008, other sales have netted the company at least $5.6 billion, AIG spokesman Mark Herr said.
Last month, MetLife confirmed that it was in talks with AIG to buy Alico. Treasury officials said AIG is very close to announcing a deal worth around $15 billion.
Assuming the AIA and Alico sales go through, Treasury officials believe the markets will have a clearer picture of AIG's future. They say the sales will make it easier for investors to decide what the company's stock, currently trading at $25.78 a share, is worth. That matters because the Treasury must sell 79.9 percent of AIG's common shares. And its sales must be done carefully so the sale does not cause AIG's already depressed stock to lose value, which would cut into the government's returns.
The expected $15 billion for Alico along with the $35.5 billion from the AIA deal, will be more than enough to eventually pay back the $47.9 billion owed to the New York Fed. The Treasury won't be repaid any of the $47.3 billion it is owed until after the New York Fed is made whole, due to the structuring of the loans, Treasury officials said.
The largest recipient of taxpayer bailout dollars, AIG remains under strict supervision by Treasury and the New York Fed.
All negotiations around AIA and Alico have been monitored by representatives from the New York Fed and Treasury, said officials from both agencies. They have participated in every key call and meeting between directors about the deals, and discussed the available options with AIG's executives, according to officials familiar with the process who spoke on condition of anonymity because they were not authorized to publicly discuss the negotiations.
"The New York Fed supports the AIG Board of Directors' decision to sell AIA to Prudential PLC," a New York Fed spokesman said in a statement. "This transaction represents an important next step in AIG's restructuring and its eventual repayment of U.S. taxpayer assistance."
If completed, the sale of AIA helps bring down AIG's outstanding assistance from the government to $104.3 billion, down 19.3 percent from their balance of $129.3 as of Dec. 31.
Of that outstanding assistance, AIG owes the government $69.76 billion in loans and interest, a 26.4 percent decrease from the end of the year. The remaining $34.5 billion in outstanding assistance is tied to the value of investments the government bought from AIG. As those investments pay off or rise in value, the government recoups more money.
AIA was the cornerstone of the conglomerate that became AIG. So the sale of AIA is tantamount to General Motors Co. selling its first division, Buick.
AIA dates back to 1919, when AIG founder Cornelius Vander Starr started his first insurance company, American Asiatic Underwriters in Shanghai. He also created a separate company, Asia Life Insurance Co., and continued doing business in Asia through wars and revolutions. When China became Communist in 1949, Starr moved the company's headquarters to Hong Kong.
It returned to China in 1992 as the country was increasingly opening itself up to foreign companies.
AIG's next key sale could be Nan Shan, a Taiwanese company.
AIG is expected to keep Chartis, its larger property and casualty insurance company; two additional Japanese life insurers, and a handful of smaller, U.S.-based companies. They are very unlikely to be sold, according to a Treasury official. He said the after AIA, Alico and Nan Shan, the remaining pieces will likely be retained by "new AIG."
Morningstar's Bergman said it also is possible AIG could sell off some of its real estate. And there is still AIG's giant aircraft leasing company, International Lease Finance Corp.
On Friday, when AIG announced its fourth-quarter loss, CEO Robert Benmosche said his company it is continuing to address funding needs and explore options for restructuring ILFC and its American General Finance Inc. division.
The deals bring into focus a picture of the future AIG as a smaller, more focused company.
"Mr. Benmosche has been clear that we're going to be a more compact company with an important property and casualty and domestic life and financial services presence here in the United States," said AIG spokesman Herr.
Investors appeared pleased with the deal. They bid AIG's shares up $1.01, or more than 4 percent, to $25.78.
AIG's shares have risen 42.6 percent since the company did a reverse split of the stock in July. By then AIG's shares plunged more than 90 percent since originally receiving bailout funds. The company said that a higher price may attract institutional investors who wouldn't typically buy shares that trade for less than $5.
"It looks good, and has improved a little, but it's a very, very, very uncertain situation and a very volatile stock," Bergman said.