AIG's plan to spin off prized ops all about timing

Tue Apr 28, 2009 6:09pm BST

By Lilla Zuill - Analysis

NEW YORK (Reuters) - American International Group Inc (AIG.N) may not get the highest possible price from a rushed public sale of its prized property-casualty business, but it cannot afford to wait long.

AIG said last week it is speeding up plans to sell its global property-casualty operations, most likely via an initial public offering, as it looks to repay the roughly $80 billion it owes the U.S. government.

It is a lousy market to sell any financial asset, but the longer AIG waits, the higher the risk that the business becomes more tainted by the rest of the insurer's troubles.

"Over time, people just get AIG fatigue. A buyer of insurance just doesn't want to deal with: Is AIG bankrupt? Are they solvent? Are they going to be around?," Chief Executive Edward Liddy said last month at a congressional hearing.

"And if I can't turn this situation around, we run the risk that that business does atrophy," Liddy added.

That appears to already be happening.

AIG's property-casualty businesses contributed close to half of the company's overall $83.5 billion in premium in 2008. But since the insurer's federal rescue last September, business has slipped, and numerous high-level executives have quit, joining rivals seeking to pick off AIG's customers.

The general insurance operations saw net written premiums decline 22 percent in the fourth quarter, and the company warned that it was seeing fewer new customers and had lost existing business partly because of concerns over AIG's financial strength.

When AIG reports earnings next month, investors may learn of more weakness in the insurance operations.

"We are expecting revenue to be down in the quarter as premiums written were already down pretty significantly in the last quarter," said Pete Larson, an analyst with independent research firm Gradient Analytics.

Larson also expects AIG to be hit by more losses in 2009 from soured mortgage investments and on derivative guarantees that drove much of its $100 billion in losses over the past year.

AN EXTRAORDINARY CHALLENGE

AIG wants to sell at least part of its 90-year-old property-casualty insurance arm, recently renamed AIU Holdings, in an initial public offering. Under a best-case scenario, an IPO of the business could be valued as high as $58 billion, Bernstein Research analyst Todd Bault estimated in an April 23 note, based on the price-to-book multiple of peer Chubb Corp

But the ultimate value for an AIU IPO would be determined by investors, who in this market are already skittish after large losses from the credit crisis.

AIU holds AIG's commercial insurance, foreign general insurance and private client divisions.

"The longer it remains under the umbrella of AIG the worse its prospects will be, since AIG is toxic," said Francis Gaskins, president of research firm IPOdesktop.com.

"If they want to maximize the value, it would be better for them to do this sooner rather than later," Gaskins added.

But AIG would be selling into a difficult IPO market. There have been four IPOs on U.S. exchanges so far this year, and the same number of registrations, while 27 companies have gotten cold feet and pulled plans to raise a mere $4.8 billion, according to Thomson Reuters data.

In a financial presentation last month, AIG said it expected IPOs would provide better valuation for larger assets than outright sales.

The company is also cordoning off some of its international life insurance operations, giving the federal government a preferred stake, as part of a broad plan to reduce its debts. A public offering is also a possibility for these assets.

Bernstein's Bault estimates that an IPO of AIU under current market conditions could value the entire business at closer to $38 billion -- $20 billion less than his best-case estimate.

"If AIU comes to IPO sometime in 2009, betting on a normal market seems optimistic," Bault wrote in a research note last week.

But it may be the only way, since selling businesses to competitors has itself proved thorny. AIG recently sold HSB Holdings to giant reinsurer Munich Re (MUVGn.DE) for $739 million, far below the $1.2 billion it paid when it acquired the business in 2000.

And second-round bids just received for AIG's aircraft lessor came in under $5 billion, short of the division's $7.6 billion book value at the end of last year.

So far, a dozen small asset sales have generated proceeds of only about $4 billion.

"AIG is still an extraordinary challenge," U.S. Treasury Secretary Timothy Geithner told the Economic Club of Washington last week, when asked whether the government would get back the money it has invested in the insurer.