AIG Unit Keeps $2.4 Billion From Sales as U.S. Waits (Update2)

By Hugh Son
Bloomberg News
July 28, 2009

July 28 (Bloomberg) -- American International Group Inc., the insurer dismantling itself to repay U.S. loans, used $2.4 billion from asset sales to shore up a property-casualty unit instead of paying down its government credit line.

Proceeds from the two biggest business divestitures New York-based AIG announced so far were left with Chartis Inc., formerly known as AIU Holdings Inc., to improve the firm's capital. AIG was required to hold the funds by regulators and rating firms that monitor the insurer's ability to pay policyholder claims, said Mark Herr, a company spokesman.

The insurer's need to retain some sale proceeds may draw questions from lawmakers about whether AIG can repay loans within its U.S. bailout, which ballooned to $182.5 billion. AIG's debt on a Federal Reserve credit line exceeded $40 billion most of this year, even after the company announced more than $7.3 billion in asset sales since being rescued in September.

"The taxpayer should not have been exposed to these risks," said Representative Brad Sherman, a California Democrat on the House Financial Services Committee, in an interview. "We're going to lose something on the AIG bailout, let's hope it doesn't have too many digits."

Chief Executive Officer Edward Liddy has said AIG would repay its debts, which include the credit line and $40 billion from the Troubled Asset Relief Program, within five years if economic markets don't worsen. The company plans to hand over stakes in two non-U.S. life insurance units in exchange for a $25 billion reduction of its Fed debt.

'Quality of Capital'

The $1.9 billion sale of auto insurer 21st Century to Zurich Financial Services AG and $500 million from the $1.1 billion public offering of shares in reinsurer Transatlantic Holdings Inc. will go toward improving the "quality of capital" at Chartis, the insurer said in statements this month and in June.

"Many factors affect each asset sale and how the net proceeds are applied," Herr said. "Proceeds have been applied to maintain appropriate levels of capital in AIG's insurance subsidiaries, as is required by AIG's state regulators and ratings agencies, while some proceeds have been paid to the government."

The trustees managing the majority U.S. stake in AIG declined to comment, said spokesman Peter Bakstansky, as did the New York Fed, said spokeswoman Deborah Kilroe.

Liddy has said Chartis, which sells property-casualty coverage to corporations and high-net worth individuals in 160 countries and jurisdictions, will have the core remaining operations after AIG sheds a plane-leasing unit, consumer lender and asset manager.

Reinvesting Proceeds

The company gave the unit a separate brand, AIU Holdings, which yesterday was renamed Chartis, as management positions it for a public offering or sale of a minority stake. The subsidiary is "well capitalized" and had net written premiums of $36 billion last year, said Kristian Moor, president of Chartis, in an April statement.

"In effect, the Federal Reserve has decided to reinvest those proceeds" in Chartis, said William Poole, former president of the St. Louis Fed. "How do we know whether the Fed will get a decent return when the funds go that way, rather than repaying the Fed right now?"

Under the terms of a credit agreement signed days after the New York Fed first rescued AIG with an $85 billion credit line in September, AIG is required to use net cash proceeds from asset sales to repay its loan within five days after the close of a transaction. Net proceeds exclude funds from regulated insurance subsidiaries that could be downgraded if the capital were removed. AIG has to seek permission from regulators to move the proceeds, according to the document.

Preservation Plan

"You want to preserve the company's ability to pay the debt down the road," said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware in Newark. "There will be problems if there's a need for capital in a subsidiary and the asset value falls."

AIG will pay back its loans with sale proceeds "to the extent we can get out of the insurance companies whatever's been sold," Liddy said in a May 13 hearing in Congress.

The two overseas life units, American International Assurance Co. and American Life Insurance Co., have a value of about $25 billion and $18 billion, and Chartis is worth as much as $38 billion based on assets minus liabilities, Liddy said at the hearing. The values give taxpayers "great opportunity" to be repaid, he said.

AIG said today that it sold a so-called premium finance business, which makes loans to wealthy life insurance buyers, to Wintrust Financial Corp. for about $679.5 million. Wintrust, based in Lake Forest, Illinois, may buy additional assets for $61.2 million, the statement said.

AIG Policyholders

Two New York-regulated subsidiaries of Chartis, American Home Assurance Co. and Commerce and Industry Insurance Co., owned parts of 21st Century and marked the asset as part of their surplus, said Hampton Finer, deputy superintendent for the New York Department of Insurance. AIG hasn't asked permission to move the funds, he said.

"Simply losing that surplus is not necessarily the best thing for policyholders," Hampton said.

AIG and the government repeatedly underestimated the funds needed to prop up the insurer and the amount of time to turn around the company. The company's bailout was revised three times as declines from mortgage linked assets mounted, causing almost $100 billion in net losses last year. The U.S. lowered the interest rate charged on its loans and extended the credit line to five years from two.

The bailout includes a $60 billion credit line, as much as $70 billion in TARP funds and $52.5 billion to buy mortgage linked assets owned or backed by AIG.

Firms including Goldman Sachs Group Inc. and JPMorgan Chase & Co. have repaid TARP money to free the companies from compensation limits.

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