July 29, 2009
American International Group Inc, the insurer dismantling itself to repay US loans, used $2.4 billion from asset sales to shore up a property-casualty unit instead of paying down its government credit line.
Proceeds from the two biggest business divestitures New York-based AIG announced so far were left with Chartis Inc, formerly known as AIU Holdings Inc, to improve the firm's capital. AIG was required to hold the funds by regulators and rating firms that monitor the insurer's ability to pay policyholder claims, said Mark Herr, a company spokesman.
The insurer's need to retain some sale proceeds may draw questions from lawmakers about whether AIG can repay loans within its government bailout, which ballooned to $182.5 billion. AIG's debt on a Federal Reserve credit line exceeded $40 billion most of this year, even after the company announced $6.7 billion in asset sales since being rescued in September.
"The taxpayer should not have been exposed to these risks," said Representative Brad Sherman, a California Democrat on the House Financial Services Committee. "We're going to lose something on the AIG bailout, let's hope it doesn't have too many digits."
Chief Executive Officer Edward Liddy has said AIG would repay its debts, which include the credit line and $40 billion from the Troubled Asset Relief Program, within five years if economic markets don't worsen. The company plans to hand over stakes in two non-US life insurance units in exchange for a $25 billion reduction of its Fed debt.
The $1.9 billion sale of auto insurer 21st Century to Zurich Financial Services AG and $500 million from the $1.1 billion public offering of shares in reinsurer Transatlantic Holdings Inc will go toward improving the "quality of capital" at Chartis, the insurer said in statements this month and in June.
"Many factors affect each asset sale and how the net proceeds are applied," Herr said. "Proceeds have been applied to maintain appropriate levels of capital in AIG's insurance subsidiaries, as is required by AIG's state regulators and ratings agencies, while some proceeds have been paid to the government."
The trustees managing the majority US stake in AIG declined to comment, said spokesman Peter Bakstansky, as did the New York Fed, said spokeswoman Deborah Kilroe.
Core operations
Liddy has said Chartis, which sells property-casualty coverage to corporations and high-net worth individuals in 160 countries and jurisdictions, will have the core remaining operations after AIG sheds a plane-leasing unit, consumer lender and asset manager.
The company gave the unit a separate brand, AIU Holdings, which was renamed Chartis on Monday, as management positions it for a public offering or sale of a minority stake. The subsidiary is "well capitalized" and had net written premiums of $36 billion last year, said Kristian Moor, president of Chartis, in an April statement.
"In effect, the Federal Reserve has decided to reinvest those proceeds" in Chartis, said William Poole, former president of the St Louis Fed. "How do we know whether the Fed will get a decent return when the funds go that way, rather than repaying the Fed right now?"