AIG What's Happening At AIG ?

While the news headlines will focus on the $61B Q4 2008 loss, American International Group, Inc.(AIG) today announced  a broad restructuring that includes the intention to form a General Insurance holding company, with a board of directors, management team and brand distinct from AIG. The establishment of  the new holding company, including its Commercial Insurance Group, Foreign General unit, and other property and casualty operations, is to be called AIU Holdings, Inc.

AIU Holdings, Inc. will assist AIG in preparing for the potential sale of a minority stake in the business, which ultimately may include a public offering of shares, depending on market conditions.

To reiterate what has been said before, AIG's troubles have been caused by the AIG Financial Products subsidiary that wrote naked credit default swaps. Most press reports agree that the core insurance operations of AIG have been well run profitable entities.

“AIG is executing one of the most extensive corporate restructuring programs in history,” said Edward Liddy, Chairman and Chief Executive Officer, AIG in a press release posted on the AIG website. “The formation of AIU Holdings, Inc.will help protect and enhance the value of these key businesses, and position them for the future as more independently run, transparent companies.” When formed, AIU Holdings, Inc. will be a unique leading franchise with more than 44,000 employees and 500 products and services serving 40 million commercial and individual customers in 130 countries and jurisdictions.

Certain other AIG subsidiaries will be placed in Special Purpose Vehicles which will reduce AIG’s debt and interest carrying costs, while allowing AIG to continue to benefit from its ongoing common interests in the SPVs. 

The United States Treasury and Federal Reserve said “The steps announced today provide tangible evidence of the U.S. Government’s commitment to the orderly restructuring of AIG over time in the face of continuing market dislocations and economic deterioration. Orderly restructuring is essential to AIG’s repayment of the support it has received from U.S. taxpayers and to preserving financial stability. The U.S. government is committed to continuing to work with AIG to maintain its ability to meet its obligations as they come due.”  It seems to say it all about the government's intentions to support AIG doesn't it?

Highlights of the new and restructured AIG deal with Treasury

• Improved terms of existing U.S. Treasury preferred investment: The terms of the U.S. Treasury’s preferred stock investment in AIG will be modified to make these preferred securities more closely resemble common equity and improve AIG’s financial leverage.
• New standby equity capital facility: The U.S. Treasury will provide AIG with a new five-year equity capital facility, which will allow AIG to raise up to $30 billion of capital by issuing non-cumulative preferred stock to the U.S. Treasury from time to time as needed.
• Repayment of the FRBNY credit facility: AIG will transfer to the Federal Reserve Bank of New York (FRBNY) (or to a trust for the benefit of the FRBNY) preferred interests in American Life Insurance Company (ALICO) and American International Assurance Company, Ltd. (AIA) in return for a reduction in the outstanding balance of up to $26 billion of the FRBNY senior secured credit facility. AIG also expects to transfer to the FRBNY securitization notes of up to $8.5 billion representing embedded value of certain of its U.S. life insurance businesses in return for a further reduction in its outstanding FRBNY credit facility balance. Securitization is a capital management strategy and will not affect the day-to-day operations, sales activities, or customers of these businesses.

• Reduced cost of FRBNY credit facility: The FRBNY will remove the LIBOR floor on the senior secured credit facility. This will save AIG an estimated $1 billion in interest costs per year, based on the current level of LIBOR and the current facility balance.
• Maintain availability of FRBNY credit facility: AIG will continue to have access to the FRBNY credit facility. Following the repayment of the outstanding amount on the facility with the preferred interests and securitization notes, the total amount available to AIG under the facility will remain at least $25 billion.

While none of the press releases specifically mentioned structured settlements, the financial statement said that "AIG’s capital contributions to its fleet (includes among them current structured annuity issuers American General Life, American International Life Assurance Company of New York and former issuer VALIC) have enabled them to maintain ratios of approximately 315 percent (of the minimum amount of capital required by regulators).

Risk-based capital is a method developed by the National Association of Insurance Commissioners (NAIC) to measure the minimum amount of capital that an insurance company needs to support its overall business operations. Risk-based capital is used to set capital requirements considering the size and degree of risk taken by the insurer. As the current measurement stands there are four major categories of risk that must be measured to arrive at an overall risk-based capital amount. These categories are:

• Asset Risk - a measure of an asset's default of principal or interest or fluctuation in market value as a result of changes in the market.
• Credit Risk - a measure of the default risk on amounts that are due from policyholders, reinsurers or creditors.
• Underwriting Risk - a measure of the risk that arises from under-estimating the liabilities from business already written or inadequately pricing current or prospective business.
• Off-Balance Sheet Risk - a measure of risk due to excessive rates of growth, contingent liabilities or other items not reflected on the balance sheet.
  

"As long as the ratio is over a certain threshold, regulators deem a company to be adequately capitalized," said George Hansen, managing senior financial analyst and actuary at A.M. Best Co., in an article published March 2, 2009 in The VIrginian-Pilot. Hansen was said to have noted that many of the nation's large life insurers currently have ratios between the high 300s and the mid-400s, which works out to a healthy 3.5 to 4 times the minimum amount of capital required by regulators, Hansen noted. The article cites Lynn Santimauro of SNL Financial who states " if its risk-based capital ratio drops below 200, regulators often ask a company to file a plan for improving its capital. And when the ratio sinks to 100, "that's when regulators step in".