American International Group Inc. made recapitalization official last Friday—paying back all its obligations to the Federal Reserve Bank of New York. The move signifies termination of the central bank’s concern in the insurer’s interests. On Friday, the New York Fed accepted $47 billion from a total of $85 billion AIG borrowed and terminated the credit line it extended to AIG as part of the September 2008 bailout.
Thanks to the funds it accepted as part of the Troubled Asset Relief Program, (TARP) the New York Fed has been AIG's largest creditor for the last two-plus years, and as a result, has had a heavy hand in the company's restructuring, with federal officials involved with the company's board of directors, and receiving regular updates on AIG’s financial strategies.
Of the sum repaid, $27 billion came from proceeds of AIG's recent asset sales, while $20 billion was drawn from the Treasury Department, reports the Wall Street Journal, which is expected to recoup that money when AIG completes sales of other assets that it has earmarked as not core to its primary businesses.
The Journal reports that in separate action, the Treasury exchanged $49 billion in preferred shares in AIG for common shares representing a 92.1% ownership stake that it intends to sell down over time.
According to analysts, the Treasury stands to profit from the sale of AIG shares if they sell above $28.70 apiece.
Investor focus is already turning to the first leg of the Treasury's AIG share sales and AIG's remaining businesses. On Friday, AIG shares fell 5.6%, or $3.19, to $54 in 4 p.m. New York Stock Exchange trading, notes the Journal. Shares are expected to trade in the $40s after the company distributes warrants to existing private shareholders late next week.
AIG and the Treasury are in discussions to name one or more Wall Street banks as the lead underwriter for its first stock offering. According to reports, CEOs from some of the world’s largest financial institutions appeared in person to make their case for what could be one of the 10 largest share offers ever. The sale has been touted by bankers as the "Re-IPO" of AIG, reports the Journal.
"Today truly marks a new beginning," AIG CEO Robert Benmosche said in a statement. "We recognize that we have to stand on our own and meet the expectations of the marketplace." Reports noted that Benmosche was in Washington on Friday, and had lunch with Treasury Secretary Timothy Geithner.
“Treasury remains optimistic that taxpayers will get back every dollar of their investment in AIG,” Geithner said in a statement.
In a follow-up statement on Friday, New York Fed president William Dudley said the repayment by AIG "concludes an important effort by the Federal Reserve to stabilize the financial system in order to protect the U.S. economy."
Not All Good News
For all the positive news surrounding AIG’s recapitalization, the insurer still has several roadblocks ahead, one of which concerns legal action being taken against the company for its alleged role in “lowballing” workers’ compensation premiums. The legal battle against AIG began in 2007 with suit filed by a pool of insurers in the National Council on Compensation Insurance group and a countersuit filed by AIG that claims other insurers under-reported their premiums as far back as 1986.
A recent move by Liberty Mutual, which had hoped to represent several other workers’ compensation companies in class action suit in federal court, was denied in federal court last week. Instead, seven workers' compensation companies asking for a $450 million settlement from AIG were allowed to intervene in a separate lawsuit against the wishes of Liberty Mutual Group and its subsidiaries Ohio Casualty and Safeco. Ace Ina Holdings Inc., Auto-Owners Insurance Co., Companion Property & Casualty Insurance Co., Firstcomp Insurance Co., Hartford Financial Services Group Inc., Technology Insurance Co. and Travelers Indemnity Co., have asked to intervene, making a motion to settle the case.
According to A.M. Best, the proposed settlement would have AIG agreeing to pay $100 million in fines, plus $46.5 million in taxes and assessments, to insurance regulators in all 50 states and the District of Columbia for under-reporting its workers' comp premiums before 1996 (BestWire, Dec. 23, 2010). Under the terms of the settlement, AIG will file restated financial statements to reallocate about $2.1 billion in premiums.