AIG Will Have to Sell Big Insurance Units

American International Group ( AIG), the insurer that received $173 billion in taxpayer money to avoid bankruptcy, will probably be forced to sell its main insurance units as interest payments balloon to half a billion dollars a month and investment losses skyrocket.

AIG, the largest U.S insurance company, owes the Federal Reserve annual interest and fee payments of about $6.4 billion. Fourth-quarter results, which are scheduled to be published next week, will include fees of more than $2 billion payable to the government, according to AIG. The insurer, which had delayed the release of its results, will post a loss of $0.45 a share, analysts estimate. TheStreet.com Ratings forecasts the loss will exceed $10 per share.

The insurance company, which originally intended to divest only non-core businesses, is facing a combination of high interest payments, limited success in selling group companies and investment losses. In the third quarter, five of the 10 worst investment performances by insurers were AIG companies. Investment losses totaled $23.6 billion.

AIG is in discussions with the government to secure additional funds. The company, which has hired a bankruptcy lawyer, according to CNBC, will assemble for a board meeting Sunday. AIG said it's evaluating "potential new alternatives" for addressing its financial challenges.

AIG's single disclosed sale amounted to $60.5 million for some oil and gas rights earlier this month. That's less than four days interest and fees on the government funding. Below is a chart of the company's divestment program.

AIG Divestment Announcements
Date
Business
Transaction
Purchaser
Amount
Closing or Expected
13-Feb-09
AIG Financial Products Corp.
Sale of assets - oil & gas rights
Undisclosed
$60.5 million
13-Feb-09
5-Feb-09
AIG Retail Bank AIG Card
Sale
Bank of Ayudhya PCL
$58.7 million subject to adjustment
1-Apr-09
13-Jan-09
AIG Life of Canada
Sale
BMO Financial Group
$308 million
1-Jun-09
22-Dec-08
HSB Group
Sale
Munich re
$742 million
31-Mar-09
3-Dec-08
Tenaska Marketing Ventures,Tenaska Gas Storage, Tenaska Marketing Canada
Sale of 50% holding
Tenaska, Inc.
Undisclosed
2-Jan-09
1-Dec-08
AIG Private Bank
Sale
Aabar Investments
Undisclosed
Undisclosed
26-Nov-08
Unibanco AIG Seguros AIG Brazil Companhia de Seguros
Sale and repurchase of crossholdings
Unibanco AIG Seguros, AIG Brazil Companhia de Seguros
Undisclosed
Undisclosed
SOURCE:

Calls made to AIG by TheStreet.com Ratings weren't returned.

AIG's problems are unprecedented in the industry. If eventually forced into seeking bankruptcy protection, the company's failure would by far exceed that of any previous insurer.

In the event that AIG has to be broken up, it would unlikely be a catastrophe for the country, as was initially suggested in September. Backed by government funding, the company's group insurers could be sold to competitors in an orderly fashion, and a substantial number of existing employees could be retained. Policy holders would find little difference in their accounts. Even in a worst-case scenario, guarantee funds would kick in to limit risk.

Choices now include asking the government to swap debt for equity, which would dilute the stock but may save the company. This is the path Citigroup ( C) could take. In such a scenario, AIG's bankruptcy could be avoided, but its breakup would be all but assured.

A balance of $39 billion was available in undrawn loans in November. Since then, AIG has not said how much it owes. A $6.4 billion annual cost for interest and fees amounts to $17.5 million a day.

In September, after it became clear AIG was seeking help from the Federal Reserve, the company's stock plummeted from $22.76 to $2.05. As investors wait for fourth-quarter financial results, the shares have fallen another 78%, trading at less than $1.

Gavin Magor joined TheStreet.com Ratings in 2008, and is the senior analyst responsible for assigning financial strength ratings to health insurers and supporting other health care-related consumer products, including Medicare supplement insurance, long-term care insurance and elder care information. He conducts industry analysis in these areas. He has more than 20 years' international experience in credit risk management, commercial lending and analysis, working in the U.K., Sweden, Mexico, Brazil and the U.S. He holds a master's degree in business administration from The Open University in the U.K.

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