The government hiked the amount of help it’s giving troubled insurance company American International Group today. Now taxpayers could put out as much as $173.4 billion for the company across five different programs, some of which offer the government some collateral. It’s the latest increase in a series that began Sept.10 when the government extended AIG an $85 billion line of credit.
The move wasn’t based on AIG’s improving performance. The company lost $24 billion in the third quarter, results also announced today.
So is AIG, a company still hemorrhaging remarkable quantities of red ink, going to be able to repay all this?
AIG’s third quarter loss came mainly from marking to market asset declines at its financial products unit, AIGFP, and from major losses in investment income across its insurance units. Also contributing: restructuring costs and catastrophic insurance losses on hurricanes Ike and Gustav. The new deal will help stem the mark-to-market losses, but investment declines and business losses are beyond its scope.
Gradient Analytics analyst Donn Vickrey is worried by losses at AIG’s core businesses including an $899 million loss in its General Insurance unit, excluding investment declines, and a 59% drop in income at is Life and Retirement businesses. Losses at the operating level forced AIG to contribute $26 billion in loans and capital to these subsidiaries and other units have maxed out credit facilities totaling over $11 billion, he notes. “If the operating companies were doing well the parent company would not have had to contribute capital,” Vickrey argues.
Keefe, Bruyette & Woods analyst Cliff Gallant, on the other hand, thought AIG’s insurance businesses performed ok in the quarter, with its international businesses especially strong. What concerns Gallant is the fact that these numbers don’t capture much of the period since AIG really started to hit the ropes. The third quarter ended Sept. 30, less than three weeks after things really started to fall apart for AIG. “The industry wants to see what happens to their market share over the next 2 or 3 quarters,” says Gallant. Especially important: how AIG fares on January 1 when many corporate customers renew policies.
Gallant is also watching whether AIG is able to hang on to its best people, the key conduits to customers and an easy way for competitors to pick off business without having to do a full-on acquisition. On that front, bad news is already starting to mount. Key AIG talent has already walked out the door, reports Business Insurance magazine.
Today’s government deal should increase the chances that AIG can make good on its borrowings. For one thing, it lowers the interest rate on the money AIG has already borrowed. AIG paid $2 billion in interest and fees on that money in the past two months. And gives it longer to pay off, extending the loan’s term from two years to five.
More importantly, the Federal Reserve Bank of New York is helping to fund two entities that will help AIG move off its balance sheet some of the derivatives which have been sucking up its cash. According to AIG’s SEC filings, those two limited liability corporations will take on some of the company’s most toxic residential mortgage backed securities and collateralized debt obligations AIG insured with credit derivate swaps.
That should limit the damage they can do to the insurer in the future, though Gradient’s Vickrey worries that the deal doesn’t cover a whole other category, commercial loan derivatives, that could begin to blow up on AIG next.
AIG will pay off much of its borrowings by selling off pieces of itself, a plan CEO Ed Liddy outlined October 3. Promising to be disciplined about selling AIG’s “remarkable assets”, Liddy said he expects to announce “several key dispositions this year proving good deals can get done in this market place.” But management couldn’t announce a single major asset sale today. Liddy argued that had more to do with the challenges of getting any deal financed in the current credit environment than with AIG in particular.
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