AIG's Hartford Sale Shows Repaying U.S. Loan Not Guaranteed

By Hugh Son and Zachary R. Mider
Bloomberg News
December 23, 2008

Dec. 23 (Bloomberg) -- American International Group Inc.'s first sale of an entire insurance unit since its $150 billion bailout signals the company's divestiture plan may not raise enough money to settle its debts with the U.S. government.

AIG, which is auctioning about 70 percent of the company to repay a $60 billion federal loan, agreed yesterday to sell Hartford Steam Boiler, an insurer of factories and power plants, to Munich Re for $742 million. That's about a third less than the New York-based firm paid for the unit eight years ago.

"If that is at all representative of the market opportunities out there, the value of a lot of other things AIG is selling will be fairly discounted," said Gary Ransom, an analyst at Fox-Pitt Kelton Cochran Caronia Waller. "It's bad news for the American taxpayer."

AIG's biggest planned asset sales, including life insurance units in Asia and North America, may miss its goal because potential bidders have been hobbled by plunging stock markets. Chief Executive Office Edward Liddy would be able to raise about $100 billion by liquidating the entire firm, 17 percent less than three months ago, said Ransom, who rates AIG "in-line."

Liddy told CNBC yesterday that asset sales may cover loans by the end of next year, and that the firm's subsidiaries are "incredibly valuable." Spokesman David Monfried said today that the prices AIG fetches will "reflect the brand power and the nature of these companies."

'Remain Skeptical'

"We remain skeptical that AIG will generate enough asset sales to fully repay this obligation," said Cathy Seifert, a Standard & Poor's analyst, in a note to investors yesterday.

AIG sold Hartford Steam for about 1.25 times book value, said a person with knowledge of the unit's finances. That's less than half the ratio the company paid in 2000 and may be more than what AIG can get for the life insurance divisions, based on the valuations of publicly traded competitors.

U.S. life insurers plummeted this year on concern that assets tied to mortgages will decline and the firms will have to compensate annuity customers for stock-market losses. Prudential Financial Inc., the second-largest U.S. life insurer, trades at about 62 percent of book value, or assets minus liabilities. MetLife Inc., ranked first, trades at about 94 percent.

The book value for AIG was $71.2 billion as of Sept. 30, according to a Nov. 10 filing.

Planes, Car Insurance

"You need to get something resembling book value for those life companies to pay off the government and have enough left over to keep generating some earnings," Ransom said. "You can't rule out the possibility that they don't make it."

AIG is also peddling its plane-leasing unit and a U.S. auto insurer.

The sale of Hartford Steam "highlights how difficult it will be for AIG to recognize anything close to full price for the units it is trying to sell," said Kathleen Shanley, an analyst at Gimme Credit LLC, yesterday in a note.

Hartford Steam Boiler, based in the Connecticut city of the same name, was publicly traded when AIG bought it in 2000 for $1.2 billion in stock. The unit's book value grew to $594 million from $387 million in 2000, said the person familiar with its finances, who declined to be identified because AIG doesn't publish those details in regulatory filings.

"This is 2008, it's not 2000," said AIG's Monfried. "To compare anything to the financial markets in 2000 is a little unreasonable."

Brazil, Middle East

AIG, which is getting advice from Blackstone Group LP on its asset sales, has also secured agreements to sell a stake in an insurance joint venture in Brazil for $820 million. AIG Private Bank, a unit catering to wealthy clients in Asia and the Middle East, will be sold to Abu Dhabi-based Aabar Investments PJSC for 307 million Swiss francs ($282 million).

Wrong-way bets tied to credit-default swaps AIG sold drove the insurer to the brink of bankruptcy on Sept. 16, when it was bailed out by an $85 billion Federal Reserve loan. The government later boosted the aid package to about $150 billion, including about $50 billion to buy assets insured by AIG or held by its securities-lending unit in an effort to reduce losses at firms that did business with the company. AIG has five years to pay back the loans by selling assets.

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