Posted on May 25, 2011 by Sergio Ulloa
On Tuesday, American International Group Inc. (AIG) sold its first new stock offering since its near-collapse and ensuing United States government bailout in 2008, moving 300 million shares priced at US$29 each, to raise a total of US$8.7 billion for the insurance giant.
The AIG sale included 200 million shares held by the US Treasury, which picked up US$5.8 billion for the Federal Government, lowering American taxpayers' stake in AIG to 77 percent from a previous 92 percent. AIG's other 100 million shares, sold for US$2.9 billion, according to a company statement.
Treasury Secretary Timothy F. Geithner said that the offering was "an important milestone" for the Obama Administration in its efforts to sell its stake in AIG and recover bailout capital.
"The decision to provide this assistance was exceptionally difficult, but it's clear today that it was essential to stopping a financial panic, preventing a severe economic collapse and helping save American jobs," Geithner added.
The US Federal Government turned a small profit of around US$60 million from the sale. That amount could rise if the underwriters from the stock offering exercise their option within the next month to purchase up to an additional 45 million shares from the government's AIG holdings.
AIG was left devastated by the global economic crisis. Fueled by risky bets on subprime-mortgage securities, the insurer reported the largest quarterly losses in US corporate history in the fall of 2008 and posted almost US$100 billion in net losses for the entire year.
A Federal bailout effort was necessitated after international trading partners demanded payment on derivates contracts.
AIG was declared a "systemically significant failing institution" by the US Treasury and was the only company to receive bailouts through a special facility created for such classified firms.
Starting in September 2008, AIG was rescued by the US taxpayer to the tune of US$182 billion through a complex, multi-step bailout package issued by the US Treasury Department and the Federal Reserve. Governmental assistance came through a US$60 billion Federal credit facility, a Treasury investment of up to US$69.8 billion and a further US$52.5 billion limit to buy mortgage-linked assets held or backed by AIG.
The New York-based insurer has been gradually repaying the Fed as it restructures its operations and sells off some of its global assets,
chiefly its large non-U.S. life insurance companies, including Japanese insurance arms AIG Star Life Insurance and AIG Edison Life Insurance to US insurance rival, Prudential Financial.
However, while AIG continues its streamlining, it has retained its profitable Asian arm, the American International Assurance Group (AIA), which has remained the leading life insurer in the lucrative Asia-Pacific region.
AIG has also sold off some of its domestic holdings, such as its Alico subsidiary to US rival Metlife for US$16.2 billion
and 21st Century Insurance Co., an auto insurance arm that AIG sold to Farmers Insurance Group in Los Angeles two years ago for US$1.9 billion.
AIG still owes the Treasury Department US$53.1 billion. In addition, the Federal Reserve holds US$23.6 billion in loans tied to the AIG bailout, which is backed by the company's remaining assets. The Treasury plan to continue selling stock to eventually recoup all the money given to AIG but have agreed not to trade any additional shares for the next 120 days. The remaining shares need to sell at an average of about US$28.73 apiece to break-even on the remaining US$47.5 billion investment.
In November last year, the Congressional Budget Office projected that the Treasury Department could lose up to US$14 billion from the AIG bailout. Obama Administration officials, however, remain optimistic that taxpayers would eventually break even.
Tim Massad, the Treasury Department's acting assistant secretary for financial stability, told reporters there was no "specific timetable" for disposing of the rest of AIG's shares. The official remained confident that taxpayers' investment will be recovered. "Two and a half years ago, nobody thought we'd get a dime back, so we're very happy," Massad said. "We didn't make these investments to make a profit in the first place.½ We're hopeful we can recover all the investment we made, but whether we can will depend on market conditions going forward."
"We're going to sell in a way to maximize value to the taxpayer," Massad added.
The rebounding US economy has enabled The Treasury Department to unwind bailouts from 2008 and 2009 that were neccesary to rescue the banking sector and protect American jobs. The government has already cut its stake in auto-manufacturers GM and Chrysler and sold its remaining Citigroup stock for US$10.5 billion in December, making over US$12 billion on its investment in the New York-based bank, counting dividends. AIG has thus far been the only insurer that hasn't repaid its government bailout.
In January, Treasury Department concluded a deal with AIG to begin unwinding the US government's tenure of ownership over the insurer. The agreement involved converting most preferred shares the Treasury received as part of the bailout package into nearly 1.7 billion shares of common stock.
That move helped recapitalize AIG so it could begin repaying the US$47 billion it owed to the Federal Reserve Bank of New York. The Treasury Department is now left with US$20.3 billion in preferred stock and an additional US$47.5 billion worth of common stock. Before Tuesday's share sale, AIG had already redeemed US$9 billion of its preferred stock.
AIG Chief Executive Officer Robert Benmosche told shareholders at the company's annual meeting on May 11 that the insurer may begin to repurchase stock as early as next year. AIG, once the world's largest insurer, delivered improved results for 2010
and could ultimately emerge from its government rescue in a sound state.
Insurance Companies Mentioned
The American International Group is a leading international insurance organization with operations in more than 130 countries and jurisdictions globally.
AIA is a Hong Kong-based life insurance company doing business across Asia that has been in business since 1919. They service over 20 million policies through 23,000 employees and 300,000 agents throughout markets in Asia, including; Vietnam, Thailand, Taiwan, South Korea, Singapore, Philippines, New Zealand, Malaysia, Macau, Indonesia, India, Hong Kong, Mainland China, Brunei and Australia.
Possessing over 140 years of insurance expertise, MetLife aims to be an innovator in the field of international Life insurance. Globally, MetLife is able to offer its clients accident and health insurance, life insurance, disability income protection, and retirement and savings products.
Alico provides a broad and innovative range of insurance and savings products to individual customers, corporate clients and high net worth customers. With products to support every aspect of their customers' lives, and provide comprehensive cover for the employees and commercial needs of their business clients.
Prudential has been in the insurance and financial services business since 1848. Today they operate throughout the UK, US and Asia offering international health insurance and retirement planning services, supported by 27,000 employees worldwide.