Monday, November 10, 2008

AIG Gets Expanded Bailout, Posts $24.5 Billion Loss

(Bloomberg) -- American International Group Inc., the insurer bailed out by the U.S., got an expanded government rescue package valued at more than $150 billion after posting a fourth straight quarterly loss.

The U.S. will reduce the original $85 billion loan that saved New York-based AIG in September to $60 billion, buy $40 billion of preferred shares, and purchase $52.5 billion of mortgage securities owned or backed by the company, according to the Federal Reserve. The insurer lost a record $24.5 billion, or $9.05 a share in the period ended Sept. 30, compared with profit of $3.09 billion, or $1.19, a year earlier, AIG said in a regulatory filing today.

The changes in the loan may give Chief Executive Officer Edward Liddy more time to salvage AIG, which needed U.S. help to escape bankruptcy after losses tied to home loans. Liddy's plan to repay the original loan by selling units stalled as plunging financial markets cut into their value and forced potential buyers to shore up their own balance sheets.

``It makes a lot of sense to renegotiate the terms,'' said Andrew Kligerman, a New York-based analyst at UBS AG, in an interview before the disclosure. By giving AIG more time to sell units, the government ``has a better opportunity to recover its capital,'' he said.

The insurer booked $7.05 billion in writedowns on the value of credit-default swaps, guarantees AIG sold to protect fixed- income investors, and marked down other holdings by $18.3 billion before taxes. Book value per share, a measure of assets minus liabilities, fell 35 percent from a year earlier to $26.46.

`Market Fragility'

The government, which allowed Lehman Brothers Holdings Inc. to collapse on Sept. 15, reversed its opposition to an AIG bailout the next day after the Federal Reserve concluded that the insurer's failure would ``add to already significant levels of financial market fragility.'' The U.S. than provided two more credit lines, worth a combined $58.7 billion, before restructuring the package.

The new rescue may fix two AIG operations that are draining cash with the collapse of subprime mortgage markets. In the first, the U.S. will provide up to $30 billion help buy the underlying assets of credit-default swaps that AIG sold to investors, including banks, the person said. AIG will contribute $5 billion. The insurer guaranteed about $372 billion of fixed- income investments through the swaps for counterparties, including banks, as of Sept. 30, compared with $441 billion three months earlier.

AIG also will receive as much as $22.5 billion for its securities lending program, which lost money on investments made using collateral from securities it loaned to third parties.

`A Nimbler Competitor'

``This plan contributes to stabilizing the financial system and provides the opportunity for the public to realize gains on its AIG investment in the future,'' Liddy said in a statement. ``These measures will also put AIG on track to emerge as a nimble competitor with good long-term growth prospects.''

The biggest insurers in North America posted more than $100 billion in writedowns and unrealized losses linked to the collapse of the mortgage market from the start of 2007 through Nov. 7, with AIG representing about half that total. The company has units that insure, originate and invest in home loans.

``AIG keeps getting hit square between the eyes by the housing-finance meltdown,'' said Bill Bergman, an analyst at Morningstar Inc. in Chicago, before the results were announced. ``Risk controls at the company were clearly inadequate.''

Industrywide Slump

AIG is struggling with writedowns at the same time prices are declining industrywide for commercial insurance as carriers compete for business. Rates fell 11 percent in the three months ended Sept. 30 from the same period a year earlier, according to the Council of Insurance Agents and Brokers.

AIG's property-casualty units, which Liddy has said he plans to keep, sell protection against some of the biggest risks, insuring planes and commercial shipping and providing coverage against terrorist attacks. The subsidiaries may have their ratings cut because of the departure of customers and employees, Standard & Poor's said Nov. 5.

Declining investments, hurricanes and falling property and casualty rates caused net losses at 14 of the 23 companies in the KBW Insurance Index that reported third-quarter results through last week. This year's Atlantic storm season was the worst since 2005, with Hurricanes Ike and Gustav costing insurers a combined $10 billion when they struck the Gulf Coast in September, according to preliminary data from Insurance Services Office Inc.

Planes, Reinsurance

Liddy, 62, plans to sell life insurance operations in the U.S., Europe and Japan, along with the firm's reinsurer, airplane lessor, consumer finance unit and asset manager, leaving what he called a ``nimbler'' company.

Liddy named former Safeco Corp. CEO Paula Rosput Reynolds on Oct. 23 to lead AIG's restructuring. She previously steered Safeco through its $6.2 billion sale to Liberty Mutual Group Inc.

Liddy, the former CEO of Allstate Corp., was appointed by the U.S. as a condition of AIG's bailout

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